If you have run your medical practice for any length of time, you know it incurs a wide variety of costs. To get a better handle on these costs and perhaps identify ways to lower them, it can be helpful to divide them into two broad groups: explicit and implicit.

Explicit vs. implicit

Explicit costs include rent, salaries, lease payments, utilities, medical supplies and advertising. Meanwhile, implicit costs are costs that your medical practice incurs because you decide to use internal resources for something and thereby miss out on a benefit by choosing that option over another.

Although the terms “implicit cost” and “opportunity cost” often are used interchangeably, there is a slight difference. Suppose you have $1,000 in the bank earning 4% interest, but you decide to use that $1,000 to buy new office equipment, causing you to lose the $40 in annual interest you would have made. That loss is an implicit cost. On the other hand, if you choose to not buy the equipment, the opportunity cost is the lost business or additional revenue you might have generated by upgrading your office equipment and operating more efficiently.

Three common causes of Implicit Costs

An often-overlooked problem in medical practices is the fact that implicit costs may arise not from strategic decisions, but because of operational problems. Three of the most common causes of high implicit costs are:

1. Lack of Good Business Processes
   These can include patient scheduling, communications, billing and recall. Analyze these in your practice and determine whether you need to undertake improvements such as improved automation.
2. Insufficient Staffing
   Although it varies by specialty, the most efficient standard practice payroll ratio as a percentage of total revenue is 22% to 28%: Payroll includes compensation, benefits and payroll taxes. However, this can be difficult to maintain in a competitive hiring environment. A significantly higher payroll ratio suggests waste while a significantly lower payroll ratio can lead to high implicit costs from poor productivity, negative patient experiences and staff burnout.
3. Lack of Patient Engagement
   Many patients today perceive medical care as just another consumer product. That is, they expect it to be as easy and convenient as, say, shopping online. They also want the kind of customer/patient engagement and individualized attention that the consumer marketplace has largely adopted in the form of informative emails, online surveys, phone calls and text messages, and other forms of engagement. This expectation can increase implicit costs for medical practices that have not yet adopted more sophisticated marketing strategies and technology.

Related Read: Navigating an Understaffed Workforce

Stay profitable

Inflation has been on everyone’s mind recently. To stay profitable, it is important to keep a close eye on all your costs — including implicit costs that you may be overlooking. Your ORBA advisor can help you identify, track and analyze every type of cost that your practice incurs.

Related Read: Reviewing Your Revenue Cycle and Adjusting as Necessary

If  you would like more information on implicit costs, contact Carrie Hale at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Health Care Group.