Dear Mary Pat: What is the Difference Between Fixed and Variable Expenses in a Medical Office?
Operating expenses fall into two categories: fixed and variable. Your fixed expenses are the same from month to month regardless of whether you are seeing patients or not. Your variable expenses change from month to month based on the volume of business you do and what is needed to support that volume of business. Purchases that fall under the operating expense category are less than a pre-determined amount – maybe less than $500 in a practice or less than $1000 in a hospital. Any purchase over that amount will be a capital expense (defined as having a usable life of more than one year) and will appear on your monthly expense statement as depreciation.
Fixed Expenses
Rent/Mortgage
Utilities: electricity, water, garbage, cable, alarm system
Janitorial and Groundskeeping
Computer System: monthly maintenance
Phones: monthly maintenance
Leases: copiers, transcription equipment, some medical equipment
Malpractice Insurance
Other Insurance: general, business interruption, directors & officers, umbrella
Depreciation
Variable Expenses – Typically when you are looking at reducing expenses, you will look first at your variable expenses, seeing what you can cut down on or eliminate, or what you can renegotiate.
Payroll: staff wages, tax match, retirement plan match, bonuses, annual raises
Benefits: health insurance, life insurance, dental insurance, vision insurance, disability (long term, short-term), worker’s compensation, unemployment
Computer System: additional licenses, charges for claims, statements, eligibility
Phones: repair, new lines, new jacks, voice mail changes, cell phone plans, pager plans, answering service, Yellow Pages (hopefully minimal),
Inside: pest service, plant service
Medical equipment: small instruments, exam room lamps, Mayo trays
Laundry: gowns, sheets, towels, shorts, lab coats
Consumables: (medical – built-in to the price of the service) table paper, syringes, x-ray film, lab supplies
Consumables: (medical – charged separately to the patient) allergy serum, durable medical equipment
Consumables: (office) copy paper, toner, kitchen and bathroom supplies, pens
Printing: encounter forms, appointment cards, Rx pads
Education: (staff) continuing education, license renewal, CPR, coding updates, dues, subscriptions
Perks: uniform allowance, parking, lunches, holiday parties, birthday gifts
Purchased Services: transcription, radiology over-read, accountant, lawyer, consultant, auditor, inspector, outsourced billing, collection agencies
Marketing: advertising (print, TV, radio, direct), sponsorship of events, meet & greet with referrers, holiday gifts, website
Posted in: Finance
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There are some fundamental mistakes in these definitions of variable expenses. Fixed expenses are any expense that does not change as production increases. Therefore, consumables would indeed be a fixed expense because as a practice sees more patients, more consumables are used and the expense will vary from period to period thus, “variable.”
However, if the practice decides to engage in a marketing plan, that plan will have a cost that is unrelated to production. E.g. The practice has four partners and they see 100 pts per week. They then decide to advertise on TV and that costs $10,000 for the TV spots. That cost is fixed. If it brings in 100 new pts, the cost remains $10,000. Likewise a salaried employee in the business office is a fixed cost. Temporary nursing help during a busy season or overtime paid to handle increase pt. load would be variable because the increased production increases the cost. This is a concept that is frequently misunderstood and can cause many internal problems when partners who who do not have equal patient loads allocate practice costs.
I disagree – my response is above!
Thanks for your comment,
Mary Pat
** Correction:
“Therefore, consumables would indeed be a fixed expense because as a practice sees more patients, more consumables are used and the expense will vary from period to period thus, ‘variable.’”
I meant to say consumables are a Variable Expense NOT fixed.
Hi MD/MBA,
You are defining marketing very precisely using the old-school meaning so I can see why you take objection. A physician or group would set a budget for marketing and that figure is expected to be static.
Marketing today, however, is very fluid and cannot be considered a fixed expense. It is not unusual for a practice to add a service line or a new provider throughout the year that was not planned at budget time. These decisions will significantly impact marketing. Marketing is changing from print, radio and TV (a friend of mine calls this “hardware”) to social media (the same friend calls this “software), which is measured by time or labor. If your website is a marketing tool, the more patients visit and ask for more interactivity (you’ve read the stories), the more you may spend.
Thanks so much for your comment!
Best wishes,
Mary Pat