The Hidden Margin Crisis in Medical Practices—and Why Operationally Disciplined Organizations Are Pulling Ahead
Many independent practices are seeing more patients than ever and keeping less of what they earn. Volume is steady or growing. Providers are busy. Yet the margin keeps shrinking, and nobody can point to a single cause.
That is what makes it a hidden crisis. No one event causes it. It is the slow mismatch between costs that rise every year and reimbursement that does not.
Why margins erode even when volume holds
Most businesses respond to rising costs by raising prices. Medical practices mostly cannot. You set your charges, but payers set the allowable amounts and the rules, and government rates move on their own schedule.
Meanwhile, the costs keep climbing:
Staff wages and benefits
Rent escalators
Technology subscriptions
Supplies
The result is a structural squeeze. MGMA's David Gans frames the response as three levers:
Produce more with the same resources.
Reduce the cost of each unit of work.
Collect more of what you have already earned through a stronger revenue cycle.
Practices that protect their margin work all three, deliberately and continuously.
What the better performers actually look like
MGMA's 2022 Better Performers report evaluated more than 4,000 medical groups using 2021 data. The profitability gap between better performers and everyone else was not small. Per FTE physician, revenue after operating costs was higher by:
About $100,000 in primary care
About $131,000 in nonsurgical specialties
About $120,000 in surgical specialties
About $150,000 in multispecialty groups
The striking part is how they got there. Better performers generated more revenue per physician, but in most specialty groups they also spent less on operating costs per physician. They were not simply busier. They ran tighter operations that turned more of each visit into collected revenue.
They also collected more of their receivables in the first 30 days, held less A/R past 120 days, posted charges faster, and collected substantially more copays at the time of service. Those are operating disciplines, not luck.
The nine numbers worth watching
Gans recommends a short list of key indicators, grouped into three areas. Each one should be normalized so it can be compared over time and against peers: per FTE physician, per RVU, or as a percentage of revenue.
Profitability
Revenue per FTE physician
Operating cost per FTE physician
Revenue after operating and nonphysician provider cost per FTE physician
Physician compensation
Revenue cycle
A/R per FTE physician
Percentage of A/R over 120 days
Days of gross charges in A/R
Adjusted fee-for-service collection rate
Efficiency
Operating cost as a percentage of revenue, also known as the overhead ratio
If your overhead ratio is climbing while revenue per physician is flat, that is your margin crisis expressed in one line.
Start with the "high five" cost areas
MGMA's financial management guide recommends starting cost reviews where the dollars are largest:
Staffing
Salaries and benefits
Facility
Medical supplies
Third-party services
Before acting on any of them, weigh the full impact of the change: the dollars saved, the effect on operations, the effect on patient safety and access, and the effect on provider satisfaction and productivity. A cut that saves $40,000 and costs a provider two visits a day is not a savings.
Do not make layoffs the first move
Staffing is usually one of the largest expenses, so it is tempting to cut there first. The better first step is a staff allocation analysis:
Map every position to the functions it performs and the volume it supports.
Calculate the true cost of each position.
Look for workload that is mismatched, duplicated or dependent on a single person.
Cross-training often solves what looks like an understaffing problem, and it reduces overtime.
Turnover is expensive in its own right. MGMA's financial guide cites estimates of about 42 days and more than $4,000 to fill a position, plus months before a new hire is fully productive. Keeping good people is a margin strategy.
Compare locations and providers against each other
Break expenses down by location and by provider, then compare each cost category's share of total spend. In one MGMA example, a single percentage point of difference between sites represented more than $1 million.
When one provider's supply cost for a service is double a colleague's, the answer is usually workflow, not negligence. Compare the two, standardize on the better method, and show providers their own data next to their peers'. In a case cited in MGMA's guide, a health system that shared supply cost data with surgeons achieved double-digit savings on two procedures within six weeks, without mandating a single product.
Replace the static budget
A budget built once a year and filed away cannot manage a moving business. Better practice is a rolling forecast:
Build it on 13 to 25 months of history.
Have each department own its inputs.
Model best, worst and most-likely scenarios.
Compare actuals against the forecast every month.
Review on a fixed cadence:
Every month: the P&L, A/R and write-offs
Every quarter: vendor bills against contracted rates
Once a year: a full expense review
Remove waste, not people
Lean methods give practices a structured way to find cost that adds nothing for the patient: waiting, rework, unnecessary steps, excess inventory and wasted motion. The math is compelling. Recovering even 10% of the time staff lose to inefficiency adds up quickly. MGMA's Lean text estimates that recovering just 12 minutes a day approaches the time needed to see one more patient, at almost no added cost.
Be careful with false economies. One practice in MGMA's financial guide turned off its claim scrubbing software to save money. Its clean claim rate fell to 50% against a 90% goal, and the lost revenue far exceeded the savings.
What to do this quarter
Calculate your nine key indicators for the last 12 months and compare them with MGMA DataDive benchmarks for your specialty and size.
Run a staff allocation analysis before making any staffing decisions.
Break out expenses by location and provider, and investigate the biggest variances.
Replace the static budget with a rolling forecast and a monthly variance review.
Choose one high-volume process and remove its waste using a structured method.
The bottom line
The practices pulling ahead are not working harder. They measure more precisely, manage costs deliberately, and run a disciplined revenue cycle. Margin is not something that happens to a practice. It is something a practice manages.
Ark Advisory Group helps independent practices find where margin is leaking and build the management systems that keep it. Learn about our healthcare practice consulting, or book a discovery call at (908) 900-4607.
Sources: MGMA, Performance and Practices of Successful Medical Groups (September 2022; 2021 data); MGMA, Advanced Strategy for Medical Practice Leaders: Operations Management Edition (2024), ch. 8 by David N. Gans; Taya Gordon and Kem Tolliver, Advanced Strategy for Medical Practice Leaders: Financial Management Edition (MGMA, 2023); Owen J. Dahl, Humanizing Lean Leadership in Healthcare (MGMA, 2024). Figures are cited as published and reflect the data years noted.
