Low overhead

Low overhead

Low overhead practice is a practice that has figured out how to deliver care at lower expense. In doing so, the revenue left over after expense (margin) increases. One benefit of this practice style is the ability to get off the productivity hamster wheel, see fewer patients per hour. It is this decompression of the work that has made it possible for low overhead practices to achieve breakthroughs in patient-centered collaborative care.[1]

Is there a trade-off between low overhead and profit margin?

In any market and with any payer mix, low overhead practice has a financial advantage over high overhead.

But aren’t there data demonstrating improved revenue with increased staffing?

Because overhead is so closely tied to staffing, it is theoretically possible to hire more staff to increase throughput (number of patients per hour per provider) and thereby increase revenue.

There are many examples of practice with higher staffing ratios achieving much better revenue, but there is the common perception that at some point the increased flow of patients leads to degraded outcomes. Given the paucity of data on quality of care, it is impossible to compare outcomes.[2] Without data, clinicians are prone to the “Lake Woebegon” fallacy: Because I really do care about my patients my outcomes must be above average.

Given the overwhelming data on poor quality of care in the U.S., any discussion of revenue generation and margin must take the quality of care into account.[3] Ideal Micro Practices (IMPs) have demonstrated ability to achieve quality outcomes in a low overhead model.[4] We eagerly await comparable quality data from high flow practices.

Low overhead principles

Keep it small

One of the known major pitfalls in setting up practice is to have too much space. We have witnessed the failure of several practices based on too much rent and not enough volume. Some practices have not failed, but the burden of rent has significantly eroded the income of the provider.

Several IMPs have started in a too-large space and then have moved to a less expensive location. The pain of moving for them was less than the ongoing pain of the rent.

The least expensive rental arrangement we have seen to date is the “rent a room” model. Find a friendly specialist with extra unused space (surgeons are great for this). You might have to avoid the office on their heavy office day, but the rest of the time you might be paying a very small rent for a room with bundled utilities, waiting room, and the added security of having other people around.

Keep the toys and supplies to a minimum

There is an entire industry set up to sell toys to doctors. Many of these borders on Ponzi schemes – giving the false impression that “if you only buy in on this expensive piece of equipment, you will triple your income in less than a year.” If it sounds too good to be true, trust your instincts.

In the developmental state of just opening a practice, the last thing you need is the complexity of figuring out how to use the toys and bill & get paid for that use. Unless the lack of a piece of equipment leaves your patients without an essential component of their care – DON’T BUY THE TOYS. You can always buy them later when you actually have the cash flow and the clear need.

This next bit has to be tailored to your community and your patient population:

I do not need an EKG machine, nebulizer, phlebotomy or spirometry equipment. All of these things are available in the community in a way that is not perceived as obnoxious by our patients. If someone comes to the office with a clinical condition that is urgent bordering on emergent, we call 9-1-1.

I did not purchase a wall-mounted oto/ophthalmoscope. If you have the old one from medical school, as yourself the question “Why do I need two of these expensive tools?” Watch out for the expensive toys that purport to clean patient ears (they’re pretty lame in my opinion).

As you start up your practice you will be writing checks left and right and will receive no revenue at all until you see patients and get paid for the work. Stick to the basics, get open, see patients and get to work. Only when you perceive the critical need for a tool should you go out and purchase one. Get on line with colleagues first to get some opinions before you buy.

I don’t mean to imply that the toys are all bad. You may get to the point where you can clinically justify a piece of equipment that will obviate the need for more expensive care in the rest of the health care “system.” If this is clearly based on clinical need (and not just a weakly justified attempt to ramp up revenue), then go for it. Because the billing for procedures tends to be more complex, I suggest that you not add to your initial learning curve – wait a bit to get your feet firmly planted on the ground.

[1] Moore LG, Wasson JH, Johnson DJ, Zettek, J. The Emergence of Ideal Micro Practices for Patient-centered Collaborative Care. Journal of Ambulatory Care Management Vol 29, No 3, pp. 215-221

[2] Anne-Marie J. Audet, M.D., Michelle M. Doty, M.P.H., Ph.D., Jamil Shamasdin, and Stephen C. Schoenbaum, M.D., M.P.H. Measure, Learn, and Improve: Physicians' Involvement in Quality Improvement. Health Affairs May/June 2005 24 (3) 843-53

[3] McGlynn EA. Asch SM. Adams J. Keesey J. Hicks J. DeCristofaro A. Kerr EA. The quality of health care delivered to adults in the United States. New England Journal of Medicine. 348(26):2635-45, 2003 Jun 26.