Growing Your Practice? Consider Cost Per Encounter

In an era of administrators and CFOs being asked to do more with less, is expanding your patient roster the obvious solution for growing your medical practice? Here’s why it’s important to measure the impact on your bottom line.

In an era of administrators and CFOs being asked to do more with less, expanding your patient roster may seem like an obvious solution for bolstering revenue. But before your medical practice commits to any growth initiative, consider the other side of the equation: your cost per encounter.

What is Cost Per Encounter?

Your cost per encounter is essentially your cost of doing business. Without a good understanding of it, you’re operating your medical practice, financially speaking, in the dark. Knowing what it takes—on average—to see a patient gives you a way to see if your practice will truly benefit from growth or other revenue-generating initiatives. What’s more, it allows you, as an administrator or CFO, to identify areas of your practice where costs could be reduced. Even if your practice is profitable, knowing your cost per encounter is key to answering this question: Are you leaving money on the table?

Your cost per encounter should account for all costs associated with a patient visit, from office check-in to labs and even billing activities. Generally, these will fall into one of two categories: fixed or variable.

Examples of Fixed Costs:

• Rent (unless your growth requires you to expand your space)
• Business insurance
• Utilities
• Occupancy (e.g., housekeeping)
• Administration and upper-level management staff

Examples of Variable Costs:

• Medical supplies, drugs, vaccines, and equipment
• IT equipment and personnel
• Providers and nursing, billing, and coding staff (i.e., any staff with a direct
  relationship to a patient bills or charts)
• Provider tax, if applicable (Minnesota medical practices must pay a 2
  percent provider tax on any non-governmental health care receipt)
• Malpractice insurance (for additional practitioners)
• Outsourced billing or management company (fees are based on a
  percentage of practice revenue)

How do These Costs Affect My Bottom Line?

While a heftier patient roster isn’t likely to affect your practice’s fixed costs, it will almost surely increase your variable costs. For instance, if you bumped up each provider’s workload by 10 patients per week, would you need to augment your front desk or nursing staff to accommodate the uptick? If so, would the newfound revenue be enough to cover your additional staffing costs? And just because fixed costs won’t typically fluctuate with your patient load, beware of calling them “sunk costs.” They still have the power to detract from your profitability.

What’s the Best Way to Measure Cost Per Encounter?

For a rough calculation of your cost per encounter, compare each area of your financial statement to the number of patient encounters. Dividing your expenses by the number of patient encounters will give you a starting point. Of course, a patient visit for a routine exam is less costly than one for an outpatient surgical procedure—you’re looking for an average.

Your accountant can assist you in calculating your true cost per encounter, as well as in helping you understand the composition of your expenses. With a benchmark for your practice, you’ll be in a position to thrive.