Determining appropriate overhead allocations
Medical Practice Management, Physician Compensation Models
Nov 21

Determining appropriate overhead allocations


Question. We have an OB/Gyn group. The founding partner wishes to no longer be on call nor handle OB. In computing her share of the practice expenses, she will be charged a percentage of fixed overhead and a different percentage of variable overhead. There is a disagreement between the partners’ CPAs as to what constitutes fixed overhead, especially as it relates to salaries. Do you have any information on this matter?

Answer. What constitutes “fixed” versus “variable” overhead in a compensation plan is
negotiated by the physicians who are party to the plan, within parameters that are more or less well accepted. Fixed expenses include:

Depreciation and equipment repair and maintenance charges

Interest expense or similar charges, like leasing

Legal accounting, retirement plan administration

Occupancy costs: rent, utilities, insurance, maintenance, cleaning

Salaries area different story – some practices rarely considered solely fixed overhead, although in surgical practices in particular they may be partially fixed and partially variable. For example, one common approach is to treat 50% of salaries as fixed and 50% as variable. Another approach is to identify positions and allocate them to fixed or variable. The office manager or practice administrator would typically be part of fixed overhead, while nursing or reception staff could be fixed or variable.

Admonition: When a physician cuts back on hours, if other physicians do not pick up those
hours, there may be less patient volume and therefore a need to cut back on staff salaries.

About Reed Tinsley, CPA

As a top advisor to physicians, I help increase practice profits by delivering hands-on, expert medical accounting/tax support, practice counsel, and revenue-building strategies. Read more →