What physician practice back offices cost, by specialty

Lots of people can value, or put a price on, a medical practice. Fewer can price the practice's back office, even though it’s what an MSO buys, and its what a regulator now asks about. So here is the median figure, for 25 physician specialties, from public CMS data covering roughly 1.1 million clinicians: what non-clinical services cost as a share of practice net revenue.

The median specialty carries non-clinical costs of 46.6% of net revenue. The range is 16.6% to 75.7%, a 4.6x gap between emergency medicine and diagnostic radiology. Ten of the 25 specialties are 50% or above, while seven are below 40%.

The table above includes medians, blended across sites of service, based on figures from the MSOs module.

Why the spread is wide

Diagnostic radiology and pathology top the table because the practice owns expensive equipment: MRI machines, lab benches, etc. Dermatology at 61.4% is the classic MSO target for the same reason, an office specialty that owns its rooms, staff, and specialized equipment. At the bottom, emergency medicine's 16.6% is mostly accounting: the hospital owns the ED, so the physician practice carries little beyond billing and malpractice.

Geography is a smaller factor than you might assume

The instinct is that a Manhattan practice's overhead dwarfs that of one in Mississippi. Directionally yes, proportionally no. CMS prices practice expense across 109 localities, and the index spans 0.852 in Mississippi to 1.435 in San Jose. That is a 1.7x gap on the same basket of costs, compared to 4.6x for specialty. The wrong city can move your cost base benchmark by half, while the wrong specialty benchmark can move it by multiples.

From cost to fee

This table is check one of a two-check method. What the services should cost is the cost base; what a comparable manager earns above cost is the markup, a median 22.7% on cost implied by 73 healthcare outsourced-services M&A comparables. Cost plus markup is the fee structure that survives regulatory review, and the full method is here.

Specialty pages with each free median: dermatology, cardiology.

Common questions

What percentage of revenue does practice overhead take? The median specialty's non-clinical costs are 46.6% of net revenue. The range across 25 specialties is 16.6% (emergency medicine) to 75.7% (diagnostic radiology).

Which specialty has the highest practice management costs? Diagnostic radiology at 75.7% of net revenue, followed by pathology at 73.0% and vascular surgery at 67.5%. Equipment-owning specialties dominate the top of the table.

Does location change practice costs? Less than specialty does. The CMS practice expense index spans 0.852 to 1.435 across 109 localities, a 1.7x gap, versus a 4.6x gap between specialties.

What should an MSO charge for these services? The MSO’s actual cost plus a fair market value markup. The median markup implied by comparable outsourced service providers to the healthcare industry is 22.7% on cost. See the fee benchmark guide.

Sources and method

Built from public CMS data covering roughly 1.1 million clinicians. Non-clinical cost is expressed as the median percentage of practice net revenue, by specialty, blended across sites of service. Locality figures are CMS practice expense geographic indices across 109 Medicare localities. Figures cited are free-tier medians from the MSOs module; full distributions, site-of-service cuts, and locality detail sit behind the subscription.

This article is a market-data benchmarking resource. It does not provide, and must not be relied upon as, a fair market value determination, valuation opinion, appraisal, or legal, tax, or compliance advice. The opinion of value for any specific arrangement remains the professional judgment of a qualified appraiser.