Data Mine: The administrative burden of operating a medical group

Practice executives understand operating a medical group is a complex undertaking and that their systems are becoming more complicated.

With increased complexity comes increased practice overhead. As leaders examine their organizations, increased staffing levels, multifaceted information systems and new medical technologies combine to increase administrative costs.


While patients benefit from improved clinical services, practice administrators struggle to constrain the costs of providing care. Five-year trend data from MGMA DataDive Cost and Revenue shows what has changed in practice costs: They are increasing at a rate that could jeopardize the existence of even the best-managed practice.


Figure 2 displays key financial metrics reported by physician-owned multispecialty groups with primary and specialty care. These practices represent the aggregate of primary care, surgeons and medical subspecialties, so the data offer a good view of the industry.

The most important metric in Figure 2 is median total operating cost per full-time-equivalent (FTE) physician, showing a 29.3% increase in practice overhead — from $620,098 to $801,938 — over the past five years. The two components of total operating cost reflect this change with median total support staff cost increasing 19.3% and median total general operating cost increasing 32.7%.

Fortunately, these practices reported increases in total medical revenue per FTE physician reflecting new services, increased productivity and minor increases in payment levels. Unfortunately, revenue increased at a smaller rate: 16.6% over the five years.

Looking beyond operating costs, median total nonphysician provider (NPP) compensation and benefits per FTE physician increased 52.1%, indicating that practices increased the number of physician assistants and nurse practitioners and are paying these professionals higher salaries. Median total physician compensation and benefits per FTE physician increased, but the relatively meager 10.2% increase over five years is the result of practice overhead increasing at virtually twice the rate of practice revenue.

Putting these changes in perspective, the U.S. Consumer Price Index compiled by the U.S. Bureau of Labor Statistics — to reflect the changes in a broad market basket of products and services — had only a 5.2% increase. The small increase in national inflation shows how other industries have much lower cost changes than medical practices. Medical group costs have increased at a rate almost six times the national average.

Overhead increases are not unique to multispecialty groups. Figure 1 shows what has happened with single-specialty practices. Gastroenterology practices reported similar cost increases as the multispecialty practices, and pediatrics also reported an increase of more than 20%. Cardiology, OB/GYN and orthopedic surgery practices reported lower increases in cost. Single-specialty practices generally have operating cost advantages since these organizations can focus staffing and other resources on the specific needs of their specialty. They frequently gain better economies of scale and more efficient use of resources than multispecialty groups.

As practice overhead costs continue to increase, what should practice administrators do? Successful practices follow three strategies:

1. Increase productivity
2. Reduce costs
3. Improve revenue cycle performance

The increase in productivity has a direct effect on a practice’s bottom line as the growing number of services are proportional to the increase in revenue. However, since most practice costs are fixed, there are significant increases in marginal profits. Since most practices continue to focus on reducing operating costs to the lowest level and cost increases related to improved clinical services are unavoidable, there may only be minor opportunities to improve efficiency. Fortunately, there are often opportunities to improve revenue cycle performance through more favorable contracts, better charge capture and improved collection practices.

In light of these cost trends, practice executives will continue to face challenges. If the trends in revenue and operating cost continue, only the most productive and efficient practices will survive. Fortunately, good management can make a difference, and there are many excellent examples of practices thriving in today’s difficult environment.

Even as costs continue to increase, these organizations will be well positioned to continue to provide quality care to their patients and a good financial return for their owners and employees. 

Additional resources

• MGMA DataDive is the premier data benchmarking tool in healthcare. Access the industry’s largest benchmarking datasets in topics such as Compensation, Operations and Cost and Revenue. For more information on how MGMA DataDive can help your organization, contact sales@mgma.com or call 877.275.6462 ext. 1801.
• MGMA Consulting provides practices with solutions to their operational issues, including physician compensation models and examining revenue cycle to improve financial performance. Learn more: Call 877.275.6462, ext. 1877, or email consulting@mgma.com.