“Am I spending too much on my behavioral health office space?” It’s a question I often receive and for good reason. Real estate costs are often one of the top three expenses for behavioral health professionals—psychologists, therapists, psychiatrists, etc.

Spending too much on your behavioral health office space can cripple your practice as you’ll never be able to collect enough revenue to offset improperly sized real estate costs.

Thru my 15+ years in management consulting and corporate real estate, I learned that the three biggest spends in every business, from Fortune 100 companies, to small family businesses, are almost always real estate, technology, and people.  Many businesses can improve their bottom lines by increasing revenue, decreasing expenses, or a combination.  In behavioral health, however, revenue is often a function of time – you can make more by seeing more patients, but your hourly rate is set by the region you work in or by third party payers like insurance companies, Medicare and Medicaid.  To run a profitable practice, you have to make sure your costs are as lean as possible.  One of the surest measurements for success is what I like to call the “Golden 20% Rule.”  Your hourly real estate expense should never be more than 20% of your hourly earnings.  But what does this mean and how do you get this?

To help understand, I’ll use three clinicians as examples:

Mary is a LISW-S who’s just starting out on her own.  She is paneled with a few insurance providers and sees a few self-pay clients.  While she wants to grow to a fulltime practice (20-25 clients per week), she isn’t sure how long that will take.  She’s also unsure about what the right office setting is or how much to spend, but she found an office sublease from a group practice in the evenings.

Jan is a psychologist who only takes self-pay clients and works 2 full days per week.  She has her own office but wants to make sure she isn’t spending too much.

Bill is a psychiatrist who accepts all forms of payment.  He has a full caseload but is looking to start winding down his practice.  His lease is up soon, and he isn’t sure what to do next.

How does your practice compare to the Golden 20% Rule?

Try our easy-to-use Real Estate Calculator now or read more below to see how we calculate your Total Cost of Occupancy percentage.

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1. First, let’s look at your Hourly Collected Rate:

Is your practice self-pay, third party-payer, or a combination?

Self-Pay:

Your patients pay you cash, check or credit card at the time of service. You pay a small percentage for credit card processing (probably 2-3%).  You have very few unpaid bills.  In this case, your hourly rate charged is your hourly rate collected.

Third Party Payer: 

Your patients may pay a co-pay at the time of service. You have been paneled by insurance companies, Medicare, and/or Medicaid, and you submit regular Superbills to them for payment.  You can wait months for reimbursement, and then possibly submit invoices to your patients for part of the outstanding amount.  The reimbursed rate is often 50-60% of your charged rate, but it can vary by payer.  Look at the number of patients you have by payer and multiply that by the hourly rate reimbursed.  Do this for all your payers and total those numbers.  Now divide that by the total number of patients you see.  That’s your average hourly rate collected.  If you have a pretty even distribution of patients per payer, you can just average the reimbursed rate to make life easy.

Jan averages 48 sessions per month and her rate is $75/hour for everyone. Her Average Hourly Collected Rate is $75/hour.

Combination:

As the name implies, your practice has a percentage of patients paying cash and the remainder using insurance or Medicare/Medicaid. Use the same math as with Third-Party Payers and include Self-Pay as one of the payers.

Mary has 1 self-pay client at $100/hour, and 3 clients on insurance at a reimbursed average rate of $80/hour. (($100 + $80 + $80 + $80)/4)=$85) This gives her an Average Hourly Collected Rate of $85.

Bill has 10 self-pay patients at $450/hour, 5 patients with Payer A at $97/hour, 7 patients with Payer B at $125/hour, and 3 patients with Payer C at 130/hour.

HourlyQtyMonthly Collections
Self-Pay$45010$4,500
Payer 1$975$485
Payer 2$1257$875
Payer 3$1303$390
25$6,250
Average Hourly Collected: $250

It is critical for your success to have a good handle on this figure. To be profitable, your advertised rates do not matter – only what you actually get paid.

Hourly
Self-Pay$450
Payer 1$97
Payer 2$125
Payer 3$130
Qty
Self-Pay10
Payer 15
Payer 27
Payer 33
25
Monthly Collections
Self-Pay$4,500
Payer 1$485
Payer 2$875
Payer 3$390
$6,250

Average Hourly Collected: $250

It is critical for your success to have a good handle on this figure. To be profitable, your advertised rates do not matter – only what you actually get paid.

2. Second, let’s look at your Average Cost of Real Estate Per Hour of Client Service:

This figure is made up of two components:

1. Client Sessions Per Month (in Hours)

For simplicity’s sake, take the average number of clients you see 60 minutes per week (if you also see patients for shorter 20-30 minute sessions, such as medication check-ups, then convert that number into 60-minute chunks, ie: 10 30-minute sessions would equal five 60-minute sessions), then multiply that number by 48 weeks, assuming 4 weeks of vacation/year, then divide it by 12 months. If you take more or less vacation, subtract that from 52 weeks first.

That’s your Average Number of Client Sessions Per Month.

  • Mary sees 2 clients, 60 minutes each, per week, so 2 x 48 / 12 = 8
  • Jan sees 12 clients, 60 minutes each, per week, so 12 x 48 / 12 = 48
  • Bill has a combination of 20-minute medication checks and 50-60-minute sessions. His schedule averages out to twenty 60-minute sessions, so 20 x 48 / 12 = 80

2. Total Cost of Occupancy (TCO) Per Month

When most people think about their real estate cost per month, they think “rent,” but that’s only one piece of the puzzle. To get a complete picture of your expenses, you need to look at all related components:

  • Rent: This is what you pay your landlord every month. If you lease your own space, it was probably calculated as a cost per square foot times the total square feet of your office.  If you share an office with other providers and are only responsible for a portion of the rent, then that’s your number.  Co-working offices will similarly charge you a monthly fee, or possibly an hourly/daily/weekly fee based upon your usage.  Subleases can often work the same way.
  • Utilities: Electricity is usually charged on a consumption basis, after the fact so you see your prior month’s usage on your current month’s invoice. Sometimes, you have charges for gas, water, air conditioning, etc.
  • Operating Expenses: Sometimes referred to as Common Area Charges (“CAM”) are usually included in your first year, but they show up in subsequent years through an increase. These cover your percentage, based upon square feet, of the maintenance of hallways, elevators, snow removal, landscaping, etc.
  • Parking: You may pay a separate fee or underground or surface parking. This can vary by region.
  • Phone/Fax/Internet: The healthcare industry still operates predominantly through fax machines, so you need at least one phone line in your office. If you don’t want to use your personal cell phone for business, then you will probably want an additional line or two for calls.  Additionally, if you use any technology systems for practice management, electronic health records, e-scripts, secure messaging, and email, you probably need to have a secure internet connection in your office.
  • Other: Last, there are miscellaneous charges many office leases do not cover, including housekeeping, maintenance, printer/fax/copier, etc. You also need to consider the cost for commercial general liability insurance for your office.  The larger the office, the more expensive your insurance policy.

Total these up and that’s your Total Cost of Occupancy Per Month.

This does not include the costs for building out and furnishing your office. Some landlords will include a budget for build-out in your lease; some may require at least a partial payment for it.  You also need to pay for furniture, decorations, etc.  These are capital expenses, which we won’t factor in your monthly spend, but you should look at these costs when comparing your options.  One office may have slightly higher rent but need significantly less work to be move-in ready.

 Mary (sublease)Jan (own lease)Bill (own lease)
Rent$250/mo$2,000/mo$2,750/mo
Utilities $150/mo$250/mo
Op Ex $100/mo$250/mo
Parking $50/mo$50/mo
Phone/Internet $150/mo$150/mo
Other $50/mo$50/mo
TOTAL$250/month$2,500/month$3,500/month

Your Average Cost of Real Estate Per Hour of Client Sessions is important to know because it helps you understand the profitability of your business. A typical lease requires you to pay for space 24×7, but if you’re only seeing 10-15 patients per week, you’re paying for space that isn’t generating revenue for you.

Take the Total Cost of Occupancy Per Month and divide it by Client Sessions Per Month.

Total Total Cost of Occupancy Per Month / Client Sessions Per Month = Avg Re Cost/Client Sessions

 MaryJanBill
TCO Per Month$250$2,500$3,500
Client Sessions Per Month84880
Avg Re Cost/Client Sessions$31.25/hr$52.08/hr$43.75/hr

Mary (sublease)
Rent$250/mo
Utilities
Op Ex
Parking
Phone/Internet
Other
TOTAL$250/month
Jan (own lease)
Rent$2,000/mo
Utilities$150/mo
Op Ex$100/mo
Parking$50/mo
Phone/Internet$150/mo
Other$50/mo
TOTAL$2,500/month
Bill (own lease)
Rent$2,750/mo
Utilities$250/mo
Op Ex$250/mo
Parking$50/mo
Phone/Internet$150/mo
Other$50/mo
TOTAL$3,500/month

Your Average Cost of Real Estate Per Hour of Client Sessions is important to know because it helps you understand the profitability of your business. A typical lease requires you to pay for space 24×7, but if you’re only seeing 10-15 patients per week, you’re paying for space that isn’t generating revenue for you.

Take the Total Cost of Occupancy Per Month and divide it by Client Sessions Per Month.

Total Total Cost of Occupancy Per Month / Client Sessions Per Month = Avg Re Cost/Client Sessions

Mary
TCO Per Month$250
Client Sessions Per Month8
Avg Re Cost/Client Sessions$31.25/hr
Jan
TCO Per Month$2,500
Client Sessions Per Month48
Avg Re Cost/Client Sessions$52.08/hr
Bill
TCO Per Month$3,500
Client Sessions Per Month80
Avg Re Cost/Client Sessions$43.75/hr

3. Last, we need to get your Average TCO Per Hour of Client Service as A Percentage of Your Hourly Rate Collected.

Take Your Average Cost of Real Estate Per Hour of Client Service, divide it by your Average Hourly Rate Collected, and multiply it by 100.

Avg Re Cost Per Client Session / Avg Hourly Rate Collected X 100 = Golden Rule Value

MaryJanBill
Avg Re Cost Per Client Session$31.25$52.08$250
Avg Hourly Rate Collected$85$75$43.75
Golden Rule Value22%42%18%
Mary
Avg Re Cost Per Client Session$31.25
Avg Hourly Rate Collected$85
Golden Rule Value22%
Jan
Avg Re Cost Per Client Session$52.08
Avg Hourly Rate Collected$75
Golden Rule Value42%
Bill
Avg Re Cost Per Client Session$250
Avg Hourly Rate Collected$43.75
Golden Rule Value18%

So, what does this mean? Remember, the Golden Rule is to spend no more than 20% of your hourly collections on your office space.

For Mary, she’s spending a bit more than ideal, but with so few hours per week, it may be hard to find something for less money.  Subleases can be beneficial for the tenants because they reduce the monthly exposure.  For the subtenants, however, it means taking space only when the other providers do not need it, working out of space that has been personalized to fit another’s practice, and a lack of security that the space will be available in the future.

Jan is spending way too much on real estate.  As she only works two days per week, she should consider subletting her space other days of the week or finding a part time solution for herself.  Subleasing can be difficult – you must find someone you trust, collect payments monthly, chase down late payments, and worry about having your PROPERTY damaged.  I often ask people what business they are in – helping clients feel better or real estate.  Unless Jan wants to be a real estate professional, she would be better off finding part time space at about half her current costs.

Finally, Bill is doing great.  He benefits from much higher reimbursement rates as a psychiatrist.  He also works fulltime, which lowers the average cost of real estate per hour of client sessions.

Next steps

I hope the 20% rule helps you answer the question “Am I spending too much on my behavioral health office space?”

To help make it easier to see how your practice compares to the Golden 20% Rule, I’ve built an easy-to-use calculator which is linked to below. This should make it simpler to see how your practice compares to this target benchmark.

If you have other questions on how to calculate the rule for your practice, I’m happy to help and have included my contact info below.

If you have other questions on how to benchmark the health of your practice, I’m here to help.

Good luck and thanks for the amazing work you do for your clients.

How does your practice compare to the Golden 20% Rule?

Try our easy-to-use Real Estate Calculator to find out.

Check Now