In taking a look at a savings and revenue analysis relating to medical billing staffing and payroll costs, it is actually pretty easy to calculate the possible increase or decrease in expense.  This post will walk you through a simple process to be able to develop a cost analysis to compare in-house medical billing vs. outsourced medical billing services.

BUT first…, it must be explained that this is just a small part of the evaluation process and many other areas need to be taken into account when dealing with resource evaluation.  The cost of the staffing resources being utilized is only half of the equation, the performance and efficiency of those same resources also needs to be taken into account.  It could end up costing you less to utilize in-house staff vs. a medical billing company, however, those same resources could be costing your practice significantly more in medical billing errors, compliance, denials, and a mismanaged accounts receivable.

To read more on understanding the efficiency and performance of practice staffing resources, please refer to the following article: Medical Billing Service Evaluation & ROI

According to industry estimates and averages, it costs a practice upwards of 14% to 18% of revenue or higher to run and operate an in-house billing operation.  Efficient medical practices and billing departments will be able to operate at less than 12% of revenue, and some of the top performing practices can see results less than 8%.  Here is a list of common areas that contribute to practice costs associated with an in-house medical billing operation:

Costs Associated with In-house Billing Operations:

  • Wages and Additional Payroll Costs (Including: Staff Benefits/Sick/Vacation Expense)
  • Workers Comp and Payroll Taxes/Fees
  • Office Supplies and Equipment
  • Building Space Requirements
  • Training and On-going Certification of Billing/Coding Staff
  • Staff Turnover and Employment Issues
  • Embezzlement and Fraud
  • Monitoring and Benchmarking Staff Performance Levels
  • Implementing and Maintaining Best Billing and Coding Practices
  • Maintaining Industry Compliance and Standards

We are going to take a look at some of these areas and use them to draft our staffing analysis.  Some of these categories need to be left out due to the fact that there is too much variation or difficulty in quantifying value.

The chart below will help us organize the analysis and compare side-by-side with outsourced services.  The first thing needed is to figure out the average annual medical revenue of your practice, as it will be used to determine the percentages involved in the analysis.  Below, we walk through an example for a three provider medical practice looking to make an outsourcing decision:

Practice Name:                               General Medical Group
# Of Doctors:                                   3 MD’s
Annual Medical Revenue:             $1,650,000

The below table uses (22 days) for working days in a month and (8 hours) for working day hours.


The following points below correspond to the line numbers in the chart above and provide further explanation:

  1. Industry averages show that typically there is a 1-to-1 ratio of medical billing and collections staff to MD’s. Enter your practice’s staff that support the billing operation, including medical billers, coders, and collection staff.
    (For part-time staff use 0.5 for each part-time staff member)
  2. Hourly wages will vary slightly by experience and region.  Here, you can use an average wage between all of your medical billing staff (recommended) or a specific wage amount, lower/higher, depending on how aggressive or conservative you want your model to be. If staff is salaried, Use –> ((Annual Salary/12mo)/22days)/8hrs
  3. Monthly Wages Expense = (3 Staff) * ($15 /hr) * (8 hours) * (22 days) = $7,920
    We will use this total to calculate additional staffing costs in lines 4-8
  4. Average of 5% of wages expense used to calculate benefits/sick/vacation costs –> (0.05 * Wages Exp.)
  5. Average of $15 per employee used to calculate workers comp expense –> ($15 * # of Staff)
  6. Average of 11% used to calculate payroll taxes and fees to the business –> (0.11 * Wages Exp.)
  7. $250 used to calculate average per employee monthly use of office supplies and equipment. (Paper/Printers/Forms/Ink/Fax/Scanners/Software…) –> ($250 * # of Staff).  This item is highly variable per practice, adjust accordingly.
  8. An average of 150 square feet of work area per employee is used. $1.50 per square foot is used as an average (variable based on location) –> ($1.50/sq ft * 150 sq ft * # of Staff)
  9. Sum of rows 3-8 to come up with in-house billing cost total.
    1. Outsourced services uses a range of 6% – 8% of revenue and is calculated by simply dividing each percent by your annual medical revenue.  6-8% is current industry average range for medical billing rates, depending on specialty.
  10. Calculate cost as a % of monthly medical revenue –> ($10,657 / ($1,650,000/12) ) = 7.75%
  11. Annualize cost –> $10,657 * 12 = $127,886
  12. Subtract each percent (6%, 7%, 8%) from your in-house percentage of revenue
  13. Subtract each monthly dollar amount from outsourced services from your in-house monthly cost
  14. Find average dollar amount spent per hour –> (($10,657 / 22days) / 8hrs) = $60.55
    1. Then divide monthly savings by dollars spent per hour –> ($2,407 / $60.55) = 39.75 hours
  15. Subtract each annual dollar amount from outsourced services from your in-house annual cost

Utilizing the chart above can serve two main functions for a medical practice. First, it can give an understanding of how much it costs you to operate an in-house billing department (Not taking into account performance or issues like turnover). And second, it can give you a basis to negotiate rates with a medical billing service.  You can easily see from the chart where it might be worth it to entertain outsourcing and where diminishing returns will begin to set in for the practice.

It is recommended that you use this chart, or a similar approach, along with an analysis like the one provided in the following article, Medical Billing Service Evaluation & ROI, to be able to put cost together with resource performance.  Understanding these two areas can be very helpful in coming to an outsourcing decision, or determine if an in-house restructure is needed.