Healthcare Provider - Cost of Sales?

November 01, 2023

by a searcher from Xavier University in Dallas, TX, USA

I've looked at a couple of healthcare providers that claim the cost of sales is zero. Thus, all cost of revenue is classified as OPEX, and Gross Profit = 100%. I've had more than one broker make this claim. What have y'all seen? And what is considered best practice?

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Reply by a searcher
from Duke University in Savannah, GA, USA

Gross margin best practices depend on what kind of specialty and business model. Locum tenens or anesthesia are purely consultative so may not have much or any COGS, although probably some business development / sales expenses to keep B2B / referral relationships active. Any provider of healthcare services that has a practice and all the costs associated with delivering care to patients will have both costs of sales and other COGS related to the delivery of care. Costs of sales are normally marketing (SEO, social, magazines/newspapers, mailers), sponsorships (sports teams, charity events), and co-management (manage care of patient with specialist or primary care provider as an alternative to a referral fee). With good referral relationships set up, the healthcare provider may not need to do any marketing or sponsorships, but they still probably keep the referrers warm by taking them out to dinner or organizing continuing education trainings for them, which are costs they would incur. On the remaining COGS lines, anything relating to the provision of care could be in there, such as clinical staff, clinical and surgical supplies, implants (lenses, hips, knees, etc.), third-party providers such as anesthesiologists, click fees on equipment, etc. I would focus on understanding all of the costs of the healthcare provider and what causes them -- which are related to the delivery of care and therefore should be variable with the volume and type of procedures, which are fixed operating costs, and which are variable operating costs and what could cause their variability.

Reply by a searcher
from Temple University

Typically practices show zero COGS because they account for physician salaries somewhere in SG&A, so below the gross profit line. In that case sure gross profit would be 100%, but it doesn't tell you anything.. You'd have to look at the financials line items. It's kindof irrelevant because you would subtract OPEX from gross profit to get operating income. Gross profit with no expense baked in doesn't tell you anything. 30% margin on a physician practice is a decent ballpark. Figure $1.1mm per provider for partner physician revenue earned, but can range from $600k to $2.2mm. Lower for a part-time partner physician or new hire, higher for a well-established doc with a larger practice. Most smaller practices, the physicians are partners, negotiate reasonable salaries, and then share in the year end distribution of profits. You can judge physicians by their annual number of procedures. Be cautious of AR in specialty practices subject to litigation, for instance, orthopedics with a component of revenue generated by car accidents. Insurance payments may be contingent on outcome of accident litigation so the AR might look high, but could be drawn out by 9-12 months before a settlement. Beware of Corporate Practice in Medicine laws...Restrictions on how you have to structure the business if you're a non-physician purchasing a healthcare provider.

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