Six Ways to Reduce Medical Practice Operating Expenses

There are two paths to increased net income at medical practices:  higher revenue and lower expenses.  Medical office expenses deserve more attention as potential sources of net income than they usually get, because operating expenses are substantial and the practice has more direct control over costs than revenue.

Here are six steps to lower medical office operating expenses:

1. Know current costs.
An actionable picture of current costs requires a thoughtfully constructed chart of accounts that groups expenditures logically at a reasonable level of detail.  For instance, a single account labeled “Office Expenses” is not very useful.  The same is true of a large number of very detailed accounts, like “Paper Clips.”  My rule of thumb is that, according to your logic, the items posted to a single account should be similar to one another in function, and each account should represent enough activity or dollar volume to be worth your attention.

An accurate picture also requires that activity be accurately and timely posted.  This task can be delegated to an employee or a bookkeeper, but someone must do it faithfully.

2. Identify an account to look into closely.
Do not try to address everything at once.  Start with the account that meets both of the following criteria:
• You can change your sourcing of the product or service within three to six months.  (If you have three years to go on your office lease, your time is better spent looking at other items.)
• The account represents the biggest expenditure that meets the first criteria and you have not already looked into it.
Since the criteria are simple, this task can be retained by the physician or easily delegated.

3. Identify and analyze alternatives.
If possible, delegate this function because it involves research and leg work.  Staff may be able to do it, or you may need to engage a surrogate, aka consultant.  In the case of really big expenditures, there are companies that perform the function and are paid by the ultimately successful vendor.  The best example of this situation is a tenant's agent for leasing.
Analyzing an alternative requires compiling:
• Costs - price, discounts and switching costs;
• Benefits - convenience, reliability, productivity gains, incentives, and other relationships.

For equipment purchases and leases, costs and benefits also include cost of capital, maintenance, expected functional life, residual value, and incentives.

4. Make a decision.
Once someone else has acquired and organized all of this information, the best decision should be apparent.  Be sure to retain the supporting documentation.  That makes it possible to compare expectations with subsequent reality, improving the quality of future analysis.  Including promises in any formal agreements also makes it possible to hold the vendor accountable.

5. Act.
Pull the trigger; make it happen.  The practice will always be busy, and there will always be a very good reason to stick with the status quo until things slow down.  If you decide to wait, especially in perpetuity, all of the effort to find a better solution will have been wasted.

6. Repeat steps two through five until you have looked at each significant set of expenditures.
A friend of mine left an academic setting a year ago and joined an established practice where she is individually responsible for most of her direct operating expenses.  Her initial need was to get everything in place quickly so that she could begin to see patients.  There was no time for comparison-shopping or analysis. 

Over the last year she has been systematically looking at her expenditures.  She has been both disheartened to see the money she had been wasting and delighted to identify some very significant savings, including $10,000 on her annual malpractice premium.

Other than insurance, some fruitful categories to look at include overtime, postage machines, payment discounts, transcription services, service contracts as opposed to ad hoc maintenance on equipment, record retention/destruction, and outsourcing.