Dear Doctor: It’s Not About Overhead Anymore

A colleague and I were discussing recently how we think physicians must have watched the cartoon series Southpark where school counselor Mr. Mackey tells the children about the evils of drugs by endlessly repeating the mantra: "Drugs are bad, OK." Physicians repeat this mantra as: "Overhead is bad, overhead is bad." Since overhead is "bad," it must be reduced. Guess what doctors; it’s not about overhead anymore.

Overhead isn't the enemy

A good deal of disagreeable behavior exhibited within medical practices can be traced back to money – and overhead is an easy target because everyone understands it (and it's always "too high"). As such, instead of concentrating on increasing the practice’s top line (i.e. revenue), most physicians take the easy way out and cut overhead unnecessarily instead in order to prop up practice profits.

I as a consultant should not be able to come in to ANY medical practice and be able to make a recommendation to cut out significant amounts of overhead. By now, practice overhead should be at a manageable level. If I can find overhead reduction opportunities, then management needs to be fired on the spot in my opinion. In today’s declining reimbursement environment, sitting on excess overhead shows a total lack on effective office management. However, if a physician or physicians won’t make the hard decisions necessary to reduce overhead (i.e. the administrator’s ability to reduce overhead is compromised), then he, she, or they need to start whining about practice cash flow and their own compensation.

Recently I did an assessment of a medical group where the overhead was "allegedly too high" and found that a majority of the physicians were in fact producing below the 30th percentile compared to national surveys. Blaming it on the overhead is a typical way of distracting the discussion of production.

My experience is that medical practices with higher overhead generally report higher physician incomes. To paraphrase management guru Tom Peters: Your ability to cut costs is limited, but your ability to increase revenue is unlimited.

Almost any practice in financial trouble can trace it's problems back not to overhead, but rather to problems on the revenue side. Physicians need to focus on negotiating better contracts with payers; they should focus on improving collections; they should focus on learning to code better; they should focus on being more efficient with their time; they should focus on adding other revenue sources. In other words, quit fretting so much about the overhead.

I regularly ask physicians if they would invest in a new ancillary service that would produce a guaranteed $1 million in revenue with 80% overhead and always find several who say no — the overhead is too high.

Many large, successful enterprises in this country provide a nice return to shareholders by seeking out a pretty modest profit margin. Physicians need to remember this concept. If a service is revenue-positive, it's revenue-positive. Twenty cents on the dollar is better than zero cents on the dollar.

Faux Indicators

Overhead percentage is the most overrated and overused tool for evaluating medical practices. Overhead percentage doesn't reflect overhead, it reflects the ratio of overhead to revenue. Without looking at both revenue and overhead you get a very much distorted view.

I'll never forget the surgeons and internists we were merging a few years ago. "We can't merge with you," the surgeons said, "your overhead is 60% and ours is only 40%. You're too inefficient." The surgeons got real quiet when I pointed out that, in terms of real dollars, the overhead of the two groups was virtually identical – it was the revenue that was different.

You would expect the procedural nature of a surgical practice to have higher revenue than internists. That's the distortion in looking only at overhead percent – when your revenue goes up, your overhead percent magically goes down even though the overhead didn't change.

An obvious solution

When you pay attention to profit instead of overhead you are looking at the glass half-full, instead of half-empty.

The bottom line for physicians who want to see a better bottom line is to work on the bottom line by negotiating better contracts, terminating poor contracts, exploring joint ventures, improve coding and collection rates, improve office processes, develop services that will generate additional revenue, and look at all other avenues for practice expansion.

In the words: CONCENTRATE ON YOUR TOP LINE – The overhead will take care of itself.