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American Association for Physician Leadership
American Association for Physician Leadership

The Tyranny of the Practice Overhead Debate

by Daniel K. Zismer, PhD | Gary S. Schwartz, MD, MHA

August 8, 2022


Summary:

Although effective management of practice overhead is always prudent, real practice overhead ratios explain very little of the net financial yield performance, or potential of a medical practice.



Abstract:

Physicians working in a medical practice often use the term “overhead” to refer to the proportion of collected revenues they don’t take home in the form of cash compensation or other direct benefits. Practice administrators always feel pressured to reduce overhead to improve the financial returns to the providers, whether they be owners or employees of a practice. Although effective management of practice expense is always prudent, “overhead,” properly defined, makes up the smaller proportion of the accounted practice operating expense burden. If improved financial yield for the providers is a goal, the best path is rarely the reduction of overhead. Management’s time and effort would be more effectively directed to the economic productivity, and related variations, of the providers’ preferred clinical practice style, and all effects on operating revenue productivity, direct operating expense allocations, and productivity performance on fixed assets—facilities, for example. Medical practices are composed of individuals who together create a clinical model that translates to a business model. That business model creates an operating economic signature that drives the financial performance of the practice. Every medical practice, regardless of clinical specialty, is uniquely created by the providers’ preferred practice style. The solution to an apparent compensation problem usually is found in the economic productivity performance of the providers’ preferred clinical practice models.


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Daniel K. Zismer, PhD

Daniel K. Zismer, PhD, is co-chair and CEO of Associated Physician Partners, LLC, and endowed scholar, professor emeritus, and chair of the Division of Health Policy and Management at the University of Minnesota School of Public Health.


Gary S. Schwartz, MD, MHA

Gary S. Schwartz, MD, MHA, is a practicing ophthalmologist in Stillwater, Minnesota, and is president of Associated Eye Care, LLP, and co-chair and executive medical director of Associated Physician Partners, LLC.

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