How to Calculate a Medical Practice’s True Profit: A Complete Step-by-Step Guide

Admin
17 hours ago
4 min read

A practical framework to separate revenue from profit, uncover hidden costs, and make smarter decisions in a physician or dental practice.

The core mistake: confusing “collections” with profit

In the US, many practice owners look at gross charges or even collections and assume the business is performing well. But true profit is what remains after you pay (1) the cost to deliver care, (2) operating overhead, (3) clinician compensation (including owner comp),

(4) financing costs, and (5) taxes. Anything else is a financial illusion.

A full schedule can still produce a weak bottom line when your payer mix is skewed toward low-margin plans, when labor is oversized, when cancellations are unmanaged, or when supply costs creep up. A “busy” practice can be a cash-burning machine if operational discipline is missing.

Your goal is to calculate profit in a way that’s decision-grade: a number you can use to price services, adjust staffing, negotiate contracts, expand, or open another location.

Step 1 — Start with the right revenue number: Net Collections

Use Net Collections as your baseline. In the US, that usually means the money that actually hits your bank account from:

Insurance reimbursements (after contractual adjustments)
Patient responsibility (copays, coinsurance, self-pay)
Membership plans / packages (if applicable)

Do not use billed charges. Charges are not cash. And do not rely on “production” alone without reconciling it to what was collected.

Formula:Net Collections = Insurance Payments + Patient Payments + Other Operating Revenue

Step 2 — Separate costs into the right buckets

To calculate true profit, you need three layers:

A) Direct Costs (Cost to Deliver Care)

These are costs that scale with volume or are tightly tied to delivering services:

Clinical supplies (disposables, materials, medications used in-office)
Lab fees (especially common in dentistry)
Provider production-based compensation (if applicable)
Certain clinical staff that scale directly with visits/procedures (case-by-case)

B) Operating Expenses (Overhead)

Costs to run the practice regardless of volume:

Front desk, billing team, admin salaries
Rent/lease, utilities, insurance (malpractice + general)
Software (EHR, PMS, claims tools, phone systems)
Marketing, office services, non-clinical subscriptions

C) Non-operating and owner-specific items

Loan interest (equipment, buildout financing)
Depreciation/amortization (accounting, not cash)
Owner compensation (salary, distributions)
Income taxes (personal taxes depend on entity structure)

This separation matters because it helps you see whether you have a margin problem (pricing/payer mix/clinical delivery) or an overhead problem (structure, staffing, inefficiency).

Step 3 — Calculate Gross Margin (clinical profitability)

Gross Profit = Net Collections – Direct CostsGross Margin % = Gross Profit ÷ Net Collections

This tells you if your service delivery model is economically healthy. If gross margin is weak, you can’t “cut overhead” your way into prosperity—you need to fix pricing, payer mix, scheduling, clinical flow, and supply discipline.

Example (medical practice):

Net Collections: $250,000/month
Direct Costs (supplies, labs, variable clinical labor): $65,000
Gross Profit: $185,000
Gross Margin: 74%

Step 4 — Calculate Operating Profit (EBITDA-like)

Next, subtract operating expenses (overhead).

Operating Profit (EBITDA-style) = Gross Profit – Operating ExpensesThis is one of the cleanest “business health” numbers because it reflects operational performance before financing and accounting non-cash items.

Example continuation:

Gross Profit: $185,000
Operating Expenses (rent, admin payroll, software, marketing, etc.): $140,000
Operating Profit: $45,000
Operating Margin: 18%

If you don’t track this monthly, you’re essentially steering without instruments.

Step 5 — Define “True Profit” for an owner (the part that confuses everyone)

Owner-operators often mix business profit with their personal compensation. To make this crystal clear, choose one of two definitions:

Definition A — Practice Profit (before owner comp):Operating Profit is the profit generated by the practice before paying the owner as a clinician/leader.

Definition B — Owner’s True Profit (after paying market compensation):Pay the owner a market-based salary for clinical work and leadership. What remains is the “true profit” attributable to ownership and systems.

Owner’s True Profit = Operating Profit – (Owner Market Compensation Adjustment)

This prevents a very common trap: a practice that “shows profit” only because the owner is underpaying themselves.

Step 6 — Convert profit into decision metrics you can act on

Raw profit is important, but decision-making becomes faster when you translate it into operational metrics:

A) Profit per visit / per procedure

Helps spot which services actually fund the practice.

B) Contribution margin by service line

Contribution Margin = Service Revenue – Direct Costs
This is the engine of pricing and packaging decisions.

C) Break-even point

Break-even Collections = Fixed Operating Costs ÷ Contribution Margin %This tells you the monthly collections required just to “not lose.”

A complete example (simple and realistic)

Imagine a multi-provider clinic in a mid-sized US metro area (think Raleigh, NC or

Madison, WI).

Net Collections: $320,000/month
Direct Costs: $85,000
Gross Profit: $235,000 (73.4%)

Operating Expenses:

Admin + billing payroll: $72,000
Rent + utilities: $22,000
Software + services: $12,000
Marketing: $10,000
Insurance + misc: $18,000Total Operating Expenses: $134,000

Operating Profit:

$235,000 – $134,000 = $101,000 (31.6%)

Now define owner reality:If the owner is a practicing physician/dentist and a fair market comp is $35,000/month, then:

Owner’s True Profit:

$101,000 – $35,000 = $66,000/month

That’s a business with genuine profitability—not just a busy calendar.

The most common “profit killers” in US practices

Underestimating labor (especially front desk + billing inefficiencies)
Payer mix drift (more low-margin plans over time)
No-show/cancellation leakage without a recovery system
Supply cost creep without standardization and ordering controls
Pricing blind spots (self-pay fees misaligned with real delivery cost)
Owner working harder to cover structural issues

If you see “clinic full, cash tight,” it’s almost always a combination of these, not one single cause.

A practical monthly routine (so profit becomes predictable)

Every month, close your numbers with a simple cadence:

Reconcile Net Collections
Measure Direct Costs and Gross Margin
Measure Overhead and Operating Profit
Review the top 5 cost variances (what changed vs last month)
Identify 1–3 corrective actions (not 15)

Consistency beats complexity. A practice that reviews the same metrics every month wins long-term.

Final takeaway

Calculating true profit is not an accounting exercise—it’s a management system. When you separate collections from profit, and profit from owner compensation, you gain clarity on what’s working and what needs fixing: pricing, staffing, payer mix, scheduling, or overhead.