Whether you’re thinking of starting a medical practice or you want to optimize your current medical office operating expenses, you should know what costs to include in your calculations.
Many physicians choose to avoid the high costs of owning a private practice by working in salaried positions at established medical offices. However, having your own physician’s practice operations gives you more freedom to choose how you operate and what kind of patient experience you offer.
Keep reading to learn more about the average operating expenses for a medical practice and how you can use modern medical technology to increase your profit margin.
The Average Medical Office Operating Cost
Medical practice expenses tend to increase every year as necessary costs steadily rise, such as staff health insurance premiums, medical technology, and third-party services like billing and documentation. A medical practice’s overhead costs can be between 60% and 70% of its revenue.
In one example, a medical practice spent a total of $1.2 million on operating expenses. By far the largest expense for this practice was staff costs, including wages, taxes, health insurance, and retirement for all employees, which added up to $947,070. The next highest cost was rent at $110,128, then office supplies for $57,408.
On average, annual expenses for medical practices sit between $600,000 and $800,000.
Breakdown of Operating Expenses
It’s essential to consider every potential operating expense when calculating your medical costs and optimizing your budget. In this section, you can find a breakdown of operating expenses for medical offices, split up into several major categories. We’ll list types of costs for each category and provide examples of a few fixed and variable expenses you can expect as a private medical practice owner.
Building and Occupancy
The following are typical capital expenditures related to your medical office building:
- Rent, operating lease, and leasehold improvements for the medical office building
- Interest expense on loans for medical practice real estate
- Utilities include water, gas, electricity, heating, etc.
- Housekeeping and maintenance equipment
- Medical office building repair, maintenance, and security
- Furniture and equipment in reception areas, treatment and exam rooms, and admin areas
The cost of rent depends on the location and square footage of your medical office, with the ideal size being 1,200 to 1,500 square feet.
You’ll also have to account for the cost of redesigning the space for your practice. For a typical medical office design, tenant improvement can cost between $100 to $120 per square foot. If your building is 1,300 square feet, you could be looking at an improvement cost of $156,000.
You should also include depreciation costs for your building, furniture, and equipment.
Here are a few examples of health information technology expenses for your medical office:
- Phone and internet service providers
- Computer and telecommunications equipment, hardware, and software
- Repair and maintenance of IT equipment, hardware, and software
We found that 30% of medical providers spend more than $1,000 per month on patient communication software. For more research findings, read our free 2023 Healthcare Business Insights Report.
However, upfront costs can be much higher. Purchasing and installing an electronic health record (EHR) software ranges between $15,000 to $70,000, including costs of hardware (computers, laptops, printers, etc.), IT contractors needed for implementation and maintenance, and training staff to use the EHR system.
Salaries and Benefits
You’ll be responsible for staff compensation, including payroll, salaries, bonuses, and benefits. The specific salary amounts for each position depend on your practice’s location and the experience of the employees.
You also need to pay for your staff’s health insurance and retirement plans, which can range from three to six percent of your practice’s revenue. Premiums increase annually, but it can be possible to negotiate prices with your provider.
As the most expensive operational cost by far, the indirect costs of staff are some of the first areas private practice owners look at to reduce overhead expenses. You should carefully determine how many employees you actually need to avoid unnecessary costs.
However, don’t underestimate the benefits of having internal administrative workers and additional advanced medical staff, such as nurse practitioners, in your office.
Supplies and Equipment
Below are several variable costs related to supplies and equipment for your medical office:
- Drugs and vaccines used for medical care inside the practice
- Medical or surgical supplies and equipment used in providing patient care
- Radiology and imaging
- Laundry and linens
- Administrative supplies (books, postage, stationery, printing, etc.)
- Employee outings (dinners, entertainment, etc.)
- Business vehicles
The cost of medical supplies and equipment varies depending on your medical area and whether you buy your equipment new or used. For a dental practice, the average cost of medical instruments is $7,501, while obstetrics/gynecology clinics average around $2,991.
As for the cost of pharmaceuticals, equipment, or supplies that patients use outside the practice, such as prescription drugs, hearing aids, and optical products, you shouldn’t count those expenses toward your medical office operating costs.
Insurance costs include premiums for malpractice and liability insurance for physicians and other employees at your practice. You might also have expenses for fire, flood, theft, general liability, and other types of insurance.
The cost of your insurance depends on your location. For example, a Florida physician might be paying between $50,000 to $70,000 annually for malpractice insurance, while doctors in Minnesota have much lower costs at $4,000 to $15,000 per year.
Marketing and Advertising
Marketing is essential for building your presence online and in your community, helping you attract new patients and become more profitable. Here are a few marketing and advertising-related expenses for a typical medical practice:
- Advertising and promotion
- Email marketing
- Patient newsletters
- Booklets, flyers, brochures, etc.
- Public relations or marketing consultation
- Open job position advertising
If you want an employee dedicated to marketing, you’ll have to consider how much their salary adds to your operating costs. The average marketing manager salary is around $70,000.
Billing, Payment Processing, and Collection
Depending on your budget and circumstances, you might have full-time billing and collections employees, which would factor into your staff salary expenses. However, you could outsource your billing and collections to external agencies.
The cost of medical billing services can be between three to ten percent of your practice’s monthly collections.
Hiring professionals to handle management and financial tasks is optional, but typically worth the investment for the long-term success of your medical practice. Professional fees may include:
- Legal fees for attorneys who aren’t practice employees
- Consultation fees for management, financial, and other consulting services
- Accounting services
Continuing Education and Training
With the constant development of medical technology and research, it’s vital for workers in healthcare organizations to receive continuing education and training. While traditional classroom training is an option, it’s generally more expensive than purchasing online courses for your staff. Online training is also more convenient, allowing your employees to do lessons on their own schedule, wherever they want.
The costs of continuing education depend on the provider and can range from free to more than $1,000 per course.
Licenses and Permits
When you start your medical practice, you’ll have to pay initial fees for registering your business and trademarking the name and pay local fees for licenses and permits that a physician needs to practice in a specific state or county. As an example, the Colorado Medical Board charges $412 for their license fee.
Medical practice owners must pay business taxes every year, including an extra self-employment tax. How you pay taxes depends on the type of organization your medical practice is, whether it’s a sole proprietorship, partnership, S corporation, or limited liability company (LLC).
For example, physicians have unlimited personal liability in a sole proprietorship, and the owner doesn’t get a W-2. On the other hand, S corporations have protections against personal liability, only file income tax returns, and the owners do get W-2s.
Calculating How Much Your Practice Needs
You can calculate how much your practice needs to operate by adding together all the expenses we listed under the Breakdown of Operating Expenses section, including recurring expenses and fixed cost expenses. It’s crucial to meticulously track your expenses so you can compare them to your operating income and adjust your finances to keep your medical practice growing each fiscal year.
Calculating Average Revenue per Patient Visit
The formula to calculate your revenue per patient is: gross annual revenue / number of annual exams. You can choose to calculate this per comprehensive patient exams or per all patients.
How Weave Bundles Your Expenses To Save and Earn More Money for Your Practice
Bundling your office solutions with Weave Plans lets you save money and increase ROI. The following are operational expenses that Weave bundles into one platform, including details about how they help save you money or increase your revenue.
Weave’s phone system has all the features of a typical medical practice telephone service, plus added features that make the lives of your staff easier. It allows you to have multiple lines to keep business and personal calls separate and includes call recording and tracking, long-distance calls, and caller ID that shows a patient’s personal information when they call.
Our software can also serve as your payment processing solution, including secure, contactless payment options that allow patients to pay however they want.
You don’t have to worry about paper billing expenses when you have Weave, because you can allow patients to pay with their card in the office or their phone through text-to-pay, and you can keep their cards on file for quicker payments.
To cut down on paper costs even further, Weave allows you to build your own digital forms, such as patient intake forms, which you can send to patients through text or email. The software also saves you time spent printing, scanning, and transcribing data into your patient management system.
With Weave, you cut down on marketing expenses by using the included email marketing tools. Even non-tech-savvy people can use Weave to create custom email templates for newsletters, holiday greetings, and promotions.
Automated Reminders and Messages
The amount of time your administrative staff spends on communicating reminders to patients can take up a significant portion of their day. Weave enables you to set up automated appointment and payment reminders so your staff can be more productive, which leads to higher revenue and a lower administrative expense.
Practice management software like Weave helps reduce billing errors, which can have a significant impact on revenue lost each year. With fewer errors, it’s easier to maintain the profitability of your medical practice.
Weave’s simple two-way texting allows your practice to stay in contact with patients easily, increasing your recall appointments and patient loyalty. You can set up missed call texts that automatically message patients when you miss their phone call, allowing them to set up an appointment or ask questions without your staff having to call them back.
A full-time public relations or marketing specialist can significantly add to your overhead costs, but Weave can help you simplify some of their duties. One of these tasks includes managing and monitoring online reviews, which helps your practice maintain an outstanding reputation online and in your local community.
One of the best ways you can save your staff time and significantly increase productivity is to introduce team chat into your medical practice. Your staff can message each other from their phones or computers from anywhere, speeding up how quickly information gets from one person to another.
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Cut Down Operating Costs and Increase Revenue for Your Medical Practice
Weave can help you reduce your medical office operating expenses by combining a number of the healthcare tools and services you need for your medical practice, including phones, marketing, and practice management. Our convenient and easy-to-use platform can increase productivity and engagement, helping you provide a better experience and improved patient outcomes.
Sign up for free and try the Weave demo today.