How Do I Determine The Practice Operating Overhead Rate?

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How Do I Determine The Practice Operating Overhead Rate?
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How Do I Determine The Practice Operating Overhead Rate?

Description:

Shows how much it costs to run your practice in relation to revenues generated.

Why is This KPI Important?

As Pediatricians manage their practices, they need to track the amount of money it costs to provide their services. Due to seasonality, $30,000 in one month may not be enough money to cover all the expenses of another. Therefore, this KPI provides guidance by comparing the expenses for a period of time along with the expenses incurred. Most practices usually run this KPI without any provider compensation included in the Total Operating Cost. 

The goal of this metric is to figure out how much it costs to provide care for a child BEFORE provider compensation.  As such, be mindful to remove all salary/bonus/benefit costs for providers when entering the "Total Practice Operating Cost" in the calculator.

PMI Recommended Frequency to Run This KPI:

Monthly

Formula:

Total Operating Costs / Total Revenue Generated

Show the Math:

$400,000 / $690,000 = 57.97%

How Should I Track It?

This KPI can be tracked using an Excel spreadsheet by Practice and/or Department if you categorize expenses properly.

Approach #1

This is the simplest approach to determining the practice overhead.  Simply divide all reported expenses by revenue.  While appropriate for most businesses, this is not how the overhead rate is typically determined for pediatric practices as it is important to isolate the provider expenses and this approach does not really tell us the cost to provider care for a child.  

 

Approach #2

This approach takes a few steps closer to determining a pediatric practice's overhead rate.  It sets aside all provider wages to move use closer to determining the cost to provider care to child before provider compensation- which is a better approach than the one above.

 

Approach #3

This approach is the best for pediatric practices.  It sets aside the provider expenses along with vaccine drug expenses (and revenue).  By setting aside the cost for providers and vaccine drugs, it is a much more reliable number of the CONTROLLABLE cost to provide care for a child and can easily be used in subsequent analysis to examine the profitability of a provider in a practice.  

 

 

Picture of Paul Vanchiere, MBA

Paul Vanchiere, MBA

For over 15 years, Paul has dedicated himself exclusively to addressing the financial management, strategic planning, and succession planning needs of pediatric practices. His background includes working for a physician-owned health network and participating in physician practice acquisitions for Texas's largest not-for-profit hospital network, giving him a distinctive insight into the healthcare sector. Paul is adept at conducting comprehensive financial analysis, physician compensation issues, and managed care contract negotiations. He established the Pediatric Management Institute to offer a wide range of services tailored to pediatric practices of all sizes and stages of development, with a focus on financial and operational challenges. Additionally, Paul is actively involved in advocacy efforts to ensure healthcare access and educational opportunities for children with special needs.

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