Is every location in your multi-site practice profitable? How to tell

We were recently talking with a multi-site practice owner whose financials looked fine on paper: Revenue was growing every year, and the finance team hadn't flagged anything.

Then we split the profit-and-loss statement by office and found what we call the Red Four: four offices that were badly underperforming — and not because they were empty. They had decent revenue and about the same number of patients as the offices that were doing well.

If you operate a multi-site practice, your financial statement probably answers one main question: Are we profitable as a group? But you likely already know that.

The question that really matters is the spread between your best and worst office.

Consolidation averages out that spread, and we see many owners who don't know what a single office, or a single physician, actually earns.

The month-end problem

When we talk with a practice's controller, we often hear some version of this: "Everything in the management company is not allocated by location until the end of the month, so everything is consolidated."

The method for splitting those costs is usually inherited from a previous finance team.

So how was yours chosen?

The honest answer we hear: The previous CPA set it up that way, and nobody revisited it. Yet that inherited method is what the owner ends up using to decide which offices look worth investing in and which look worth closing.

Direct costs are the easy part

Look at every expense through one lens: Does this cost belong to a single office? Physician and clinical compensation and benefits, clinical and front-desk staff, rent, utilities, supplies, local marketing and equipment leases usually do.

This is mostly about getting the accounting structure right. If your ledger can't show costs by location, that's the first thing to fix. Assign each transaction to the right office when it's booked, instead of trying to rebuild location reporting at month-end. The Medical Group Management Association (MGMA) offers the same advice:

"You and your accountant should be able to set your locations as separate cost centers within your practice management system and accounting software so that you can receive accurate and meaningful reporting," write Kem Tolliver and Shawntea Gordon.

Shared costs are where the decisions get made

Central billing, credentialing, HR, marketing, practice management, owner compensation, software, insurance — these are expenses that don't belong to one office. So where do you put them?

A common shortcut is to allocate overhead based on each office's share of revenue. It's simple and easy to explain, but it can also hide the differences you actually want to see.

Take a simplified example: three offices collecting $7.4 million, with $740,000 of central overhead to allocate among them.

Office C handles a quarter of all visits but brings in less than a fifth of collections. The difference is payer mix: about $93 per encounter, versus $133 at the other two offices.

But those visits still use the same central resources. Each one still generates a claim for the billing team to work.

If you allocate overhead by revenue, Office C gets $140,000. If you allocate it by visits, it gets $185,000.

Same office. Same year. A $45,000 difference created purely by the allocation method — not by a choice anyone made deliberately.

In a 2018 article, MGMA cautioned that in health systems, cost allocations "may not be indicative of actual usage" because of "the allocation base or formula used."

The allocation method should match what is actually driving the cost. Billing is tied to claim volume. HR is tied to head count. Marketing should follow where the money was spent, not where the revenue happened to land.

One group we work with had been splitting administrative costs among its offices based on monthly sales. It is switching to a split based on staff time.

No allocation method is perfectly fair, and trying to make one so usually gets you nowhere.

What matters is that you chose the method deliberately, you can explain it to a partner who disagrees with it, and you aren't changing it every quarter to make one office look better.

The American Academy of Family Physicians (AAFP) has made the same point: "Allocating overhead is one of the stickiest issues facing a group practice. Unfortunately, there is no perfect answer."

Where physician pay and utilization distort the picture

Two things can throw these comparisons off more than most.

First is physician pay. If you work in one office and pay yourself below market, that office will look better for a reason that has nothing to do with the office itself. Normalize physician compensation to what a replacement would cost at market rates, then compare again. The ranking often changes.

Second is utilization. Two offices can see nearly the same number of patients and still have very different profitability. Often the difference is conversion: Stronger offices turn more inquiries into booked visits, so they fill their schedules with less marketing spend. Weaker offices spend more to reach the same visit count.

Think of underperformance as two different diagnoses. Either an office isn't bringing in enough revenue, or its costs are too high for the revenue it generates.

Two profit numbers, two decisions

Direct contribution is collections minus the costs that belong to that office. It shows what the office adds to the group today. We call it direct contribution, not contribution margin, because this number still includes fixed costs such as rent and salaried staff.

Fully loaded profit also subtracts allocated central overhead. It shows whether the office earns its share of the group's infrastructure. It doesn't show whether the office could survive on its own, because a standalone practice would carry a different cost structure.

Office C has $1.277 million in direct costs against $1.4 million in collections, leaving $123,000 of direct contribution. After allocated overhead, it loses between $17,000 and $62,000, depending on the allocation driver.

So should you close it?

Not based on that number alone. Closing Office C gives up $123,000 of direct contribution, and you'll still owe rent until its lease ends. It also doesn't automatically remove the $140,000 to $185,000 of overhead sitting above it: your billing team, your administrator, your own salary. Whatever you can't cut gets pushed onto the offices you keep, which will then look worse than they did the month before.

The real question is what revenue disappears and what costs you can actually remove with it. Some overhead will go away: marketing, software seats, eventually even a billing role as volume falls. Much of it won't. Separate the two before making the decision. A fully loaded loss alone is not a reason to close an office.

Fix, expand or close

1. Check where the money is going. If you set marketing budgets by revenue, a full office can get the biggest budget while another struggles to fill its schedule.
2. Count your own time, too. As one owner put it, the same effort might add $100,000 at a strong office versus $20,000 at a struggling one.
3. Set the limits before signing the lease. Agree on the budget, the break-even month and what you will do if the office misses it.

One acquirer described doctors "losing money, but not knowing that they lost money." You want to understand where your practice is losing money before a potential buyer does.

Stanislav Sukhinin, CFA, is the founder of Sorso, which provides fractional CFO and accounting services exclusively to outpatient health care practices. He spent 19 years in corporate finance at institutions including UniCredit and Société Générale, managing a $450 million loan portfolio and becoming a senior partner at a major mezzanine lender by age 29.