There are many reasons for a solo provider to expand into a group practice. To name a few, perhaps you…
- Are interested in better collaborative care
- Love working on a team
- Are tired of referring out and helping others build their practice
However, once a group practice is started, there is one particular question that has to be addressed in order to make it financially viable: what is the profit margin per provider?
The profit margin per provider can be found by understanding which providers are generating revenue, how much revenue they are generating, and what the expenses are for each.
What is a Revenue-Generating Provider?
A provider is anyone rendering services from which the business is actually collecting revenue. Non-revenue generating work (which may have other benefits for the practice) has no financial impact on the business’ bottom line.
What is Revenue Per Provider?
To start understanding your revenue model, first take a quick look at our previous blog post, Financial Metrics 101.
The total revenue per provider is the number of encounters multiplied by the reimbursement rate for each encounter during a certain time period.
If a provider had 25 revenue-generating client sessions per week for 48 weeks last year, the total number of encounters would be 1,200.
If that provider has an average reimbursement rate of $100 per encounter, then the total revenue brought in by that provider last year would be $120,000.
With the right practice management software in place at your practice, determining these figures by capturing and aggregating your revenue data should be very easy.[DEMOCTA]
What are the Expenses for each Provider?
Provider expenses are the costs that your practice pays out as a result of the provider working for you. Each provider expense typically falls into three main categories
- Provider Payroll
- Employer-paid Payroll Taxes
- Provider Benefits
Provider Payroll: a provider is paid $50 per encounter. This results in a total payroll expense of $50 per 1,200 encounters totalling $60,000.
Employer-paid Payroll Taxes: The employer payroll tax varies greatly from state to state, so let’s say the practice is required to pay 8% tax on the $60,000. This results in a payroll tax of $4,800.
Provider Benefits: Employee benefits vary greatly across organizations. Let’s say your provider receives medical, dental, disability, and life insurances along with a retirement plan benefit. Those benefits each carry a monthly and yearly cost to your practice to provide for them, which need to be added up per month and calculated for the full year, too. In our example, let’s assume a monthly benefits total of $825, which adds up to $10,500 over 12 months.
The true expense to the practice for our provider in this example is Payroll plus Taxes plus Benefits: $60,000 + $4,800 + $10,500 = $75,300
What is the Total Provider Margin?
Provider Margin = Provider Revenue – Provider Expenses
Based on above the examples above, the margin for this provider is $44,700, based on $120,000 less $75,300. So for the last calendar year, our provider not only covered their expenses, but brought in an additional $44,700 to the practice.
It’s extremely helpful to know and understand the aggregate margins across all providers at your practice. This profit margin calculation can be ultimately used for multiple purposes:
- To pay non-revenue generating employees such as admin staff, IT, directors & managers, as well as executive leadership
- To cover fixed expense such as rent/mortgage, computers, furniture, utilities
- To track towards your profit goals
At the end of the day, if your aggregate margins per provider are not greater than the other expenses, the practice isn’t a viable business yet. By understanding profit margin per provider, projections can be sharpened and informed decisions can be made more readily. Margin per provider also allows for proper financial incentives and reinforcement to be put in place for the providers who are having the biggest impact on the business.
Do you know your practice’s profit margin per provider? How are you trying to maximize your margins? Integrated practice management software can help! Learn and take action to better your margins with tools to improve your efficiency and reduce hours spent on non-revenue generating administrative work.[DEMOCTA]