Six Ways to Reduce Expenses at Your Medical Practice

Net income, the bottom line, is the first place owners and partners look when reviewing a practice's profit and loss (P&L) or income statement. Last week's blog presented four specific ideas for increasing income.  Today I will suggest six tactics for reducing expenses.

1. Be conscious of two special characteristics of expenses.
More than income can ever be, expenses are within your practice's control. The HIPAA Security Rule mandates secure data, for example, but the actual costs of compliance depend upon choices made by your practice.  On the other hand, income depends largely upon the actions of people and entities outside your practice.

Net income increases by the full amount of any decrease in an expense, provided the expense reduction does not reduce capacity below what is necessary to meet demand.  The same is rarely if ever true for an increase in income, because there is almost always a direct cost associated with producing the income.

2. Look first at the expenditures with the most potential for short- to mid-term cost reductions.
The idea is to maximize realized savings, which is a combination of the size of the expense and the short-term ability to change vendors or renegotiate.  More is better than less and sooner is better than later, and an effective choice requires considering both.

3. Begin to examine your options in plenty of time before a contract auto-renews or a lease expires.
Set up a system to alert you several months before any contract for services is set to expire.  Many contracts have provisions for automatic renewals (often they are referred to as evergreen contracts) and these contracts cannot be canceled without penalty after certain dates have passed. 

It is usually prudent to give notice, during the appropriate time frame, of an intention not to renew.  Vendors are typically only too happy for you to change your mind and renew after all.

If the lease for the office has another four years to run, under ordinary circumstances, there is no point in beginning now to look seriously for alternative, less expensive space. On the other hand, it is important to begin examining alternatives if the lease is up within two years.

4. Shop current vendors.
Even if you are satisfied with the status quo, never renew a contract or lease without examining alternatives.  Marketplaces change radically in a relatively short period of time, and a fair price in 2010 may be exorbitant in 2014.  Features and typical services change, too. 

It is always worth getting proposals from two to three vendors in addition to the incumbent.  It is never good to tell a vendor that he has no competition.  At the same time, make sure that the projected savings associated with switching vendors more than generously exceeds the cost of a transition.

5. Never choose a "brand name" vendor without seeking alternatives.
These are the vendors that are generally acknowledged as "owning" their markets. They are the first company that comes to mind when a buyer thinks about that product or service.  For instance, Kleenex is the first brand to come to mind when facial tissue is mentioned.

These vendors can provide excellent and well-priced products and services.  They can also be significantly over-priced, and 30 percent seems to be typical.  You will never know without some comparison shopping.  However, to continue the analogy, you may not spend enough money on facial tissue to care that you are paying a premium for Kleenex.

6. Pay close attention to overtime.
Overtime should be reported on the P&L as a separate line item from base salaries.  Not only is overtime expensive, excessive overtime is a symptom of a variety of operational problems.  Those problems are bound to be increasing other costs, as well as practice risk.

Reducing expenses is not usually nearly as exciting as growing income.  It can, however, have an even more significant effect on net income, which is what is left to the partners and owners.