Cases and Comments on Contracts

Practice Revenues

by Robert V. West, MD JD FAAEM

Behind the closed doors and closed books of the management office lies a major force that drives our schedules and the business interests involved in our practices, money. That money is generated from our professional fees.

While the business interests are focused on the money that is generated by our professional fees, we seldom get to see the numbers or the profits that are generated by management. Despite the fact that we are the engines that drive the business, a third party is usually left to manage the revenue stream that we create. When left to their own self- interest, the "fair" market value of these management services is about 1/3 or 30% -35% of the net professional fees.

Here is a reality-based hypothetical as to how the contract manager generates that profit. For example, in a community hospital with an annual volume of 20,000 patients will generate a profit of +/- $500,000. This amount is skimmed from your professional fees.

Here is how the numbers typically breakout:

20,000 patients per year x $85 average revenue per patient= $1,700,000 per year.

- minus single coverage salary of $100 / hr x 5 docs = 876,000.

- minus billing and administrative fees of $160,000

- minus malpractice insurance for 5 docs = $100,000

= net profit of $564,000!

While this exact formula will not be specific for every practice situation, in this author's experience the profit margin that most managers will try to extract from your revenues is pretty close. That is in my experience the 30 % profit margin seems to apply irrespective of whether you are working for a corporate entity, a P.A. owned by your fellow ED docs, or working for a locum tenens group.