What Does It Cost Your Practice to Run Its Personnel Department?

Personnel costs may represent as much as 25­30% of overhead in a medical practice. Often included in that financial responsibility are such tasks as

  • Payroll management
  • Employee benefit design and administration
  • Tax filing and administration
  • Compliance with state and federal workplace legislation
  • Provision and maintenance of competitive benefits, including health insurance and pension plans

Is your practice too small to have a personnel department? That may be true, but those management functions still remain the practice’s responsibility‹no matter what size practice you are running. Key components of your practice’s financial management are assessing these personnel costs and making ongoing business decisions on how to provide these services cost effectively, in your role as human resources manager.

What Does an Employee Leasing Company Do?

A Professional Employer Organization (PEO) can take over the administration of your current staff and, in some cases, provide new staff members as needed. The practice retains primary responsibility for day-to-day management of work assignments and on-site supervision.

As you review the PEO services listed below, you’ll want to record them in the chart provided. These are tasks you currently handle well in the practice, tasks you perform but find burdensome, and tasks you are not currently doing (but know you should do or would like to do).

Specific PEO services may include

  • Development and maintenance of employee job descriptions and policy and procedure manuals
  • Employee recruitment
  • Employee record keeping
  • Disciplinary actions and employee discharging
  • Unemployment, disability, and workers’ compensation claims and administration
  • Administering employee benefit programs including o retirement plans o health care plans o life, disability, and accidental death and dismemberment insurance o credit unions o cafeteria benefits, such as fitness club memberships, child care, tuition reimbursement programs, etc.
  • Responsibility for compliance with regulations o Equal Employment Opportunity Commission (EEOC)
  • Title VII, the National Labor Relations Act (NLRA)
  • Fair Labor Standards Act
  • Americans with Disabilities Act (ADA)
  • Family Medical & Leave Act (FMLA)
  • Immigration Reform and Control Act (IRCA)

The attached graph is an example of a framework that can help you in determining whether to use a PEO. The column headings are interpreted as follows:

  1. “Category” refers to each specific component of the management of your staff‹that is, of the human resources department of your practice.
  2. “Practice Wants to/Required to Provide (Y/N)” is simply a checklist of those HR components the practice desires or needs.
  3. “Currently Provided Satisfactorily (Y/N)” is a checklist of those items that the practice provides and provides at a level of quality acceptable to the practice.
  4. “Current or Projected In-House Administrative Cost” is the cost of administering each item, separate from the cost of the item. For example, there is a cost for administering the health insurance plan, separate from the insurance premium. Other items, such as the maintenance of employee records, have no significant cost other than that of administering (maintaining) those records. Estimate the administration time actually spent on those items currently provided as well as the administration time for those items that you are not currently providing but want to provide; then multiply the time for each item by the employee cost (salary/wages plus benefits) of a staff member providing each item.
  5. “Cost of Service” is any cost in addition to the administrative cost (e.g., for insurance premiums, subscriptions to regulatory newsletters, etc.).
  6. “Outsourced Cost” is the cost for the PEO to provide the service. You may not be able to ascertain from the PEO the cost for individual components of a service. In that case, simply compare the PEO’s proposed total cost to your aggregate in-house costs for the same set of components.
CategoryPractice Wants to/Required to Provide (Y/N)Currently Provided Satisfactorily (Y/N)Current or Projected In-House Administrative CostCost of ServiceOutsourced Cost
Job descriptions
Policy/procedures manuals
Employee record keeping
Unemployment, disability and workers’ compensation claims and administration
Retirement plan
Health insurance
Disability insurance
Life insurance
Credit union
Fitness club
Child care
Tuition program
Fair Labor Standards Act
Administration of COBRA regulations
Administration of ERISA regulations
Americans with Disabilities Act (ADA)
Family Medical & Leave Act (FMLA)
Immigration Reform and Control Act (IRCA)
OSHA guidelines

By completing the matrix, you can begin to calculate the cost-comparisons for retaining the HR functions in the practice as opposed to outsourcing to a PEO. Many comparisons cannot be concretely measured. Some benefits can only be obtained through a PEO because of its ability to purchase services for a larger pool of employees. Don’t forget the cost of time required to manage, and to stay educated in, the various benefit-package offerings (retirement, investment, OSHA updates, etc.). Keep in mind that if you outsource your HR to a PEO, the exposure to penalty and interest charges for late-filed or late-paid payroll taxes and sanctions for technical administrative or regulatory shortcomings belongs to the PEO, not the practice.

Ideally, the practice will be able to reduce the tasks required of its internal administrative staff, saving enough money to compensate for the fees the PEO charges. The time saved on non-revenue-producing activities can contribute directly to the practice’s bottom line by allowing you to concentrate on activities that enable the practice to grow or that make it more efficient and effective.

The obligations and administrative burdens that a PEO assumes on behalf of its clients provide a strong incentive for doing a cost/benefit analysis. The cost advantages of outsourcing employee, tax, benefit, and regulatory compliance responsibilities are just part of the benefit that PEO client practices can realize.

An attractive advantage that a practice gains when entering into a PEO relationship is the ability to offer employees a much wider selection of benefits, often at lower costs. Typically, practices find it difficult or impossible to offer employees multiple options in terms of health care plans, insurance (life, disability and accidental death and dismemberment), savings and investment plans (401(k) and pension plans), and other employee benefits. Because they have larger employee pools, PEOs can offer employees of small practices the same level and quality of benefits that much bigger companies provide. The results are improved employee satisfaction, better employee retention, and the ability to attract high-caliber employees to smaller practices. Client practices also enjoy reduced volatility in unemployment and workers’ compensation insurance rates.

As described above, PEOs assume responsibility for many of the human resources tasks required of the practice, many of which most practices are not currently carrying out. The benefits of having those responsibilities executed by a PEO include

  • Relieving the practice administrator of the HR burden, allowing the administrator to concentrate on practice operations
  • Enabling the practice to offer a wider range of benefits
  • Allowing the relationship between the practice’s management and the employees to be concentrated on the operation of the practice and leaving the unpleasant tasks of employee discipline and discharge to be outsourced
  • Enabling compliance with employment regulations
  • Accomplishing these responsibilities at an acceptable cost Selecting the Right PEO If outsourcing is a good business decision for your practice, you’ll want to identify the PEOs in your area that can meet your needs. The most common sources of information on candidate vendors include advertisements in local medical publications, direct recommendations from other practices or from hospital physician-relations staff, and the website of the National Association of Professional Employer Organizations (NAPEO). The website ( has an online directory, by state, of PEO companies. To make certain that your practice realizes the maximum benefits from PEO relationships, you should identify organizations that
  • Can offer all of the required core services (payroll, insurance and benefits administration and regulatory compliance) as well as value-added services, such as employee policies, procedures, and communications, including employee manuals
  • Can offer evidence of strong infrastructure and administrative staff
  • Have stable financial policies that assure fiscal integrity (annual audited financial statements to verify that all taxes are paid and that required filings are made on time)
  • Have experienced staff, including HR staff
  • Have advanced computer technology for administration
  • Have proven track records and sterling references from practices in your area

NAPEO recommends the following when considering a relationship with a PEO:

  1. Evaluate your practice and determine your staff-management and benefits-management needs (be sure to complete the matrix).
  2. Evaluate each candidate PEO with reference to your practice’s needs. Can the candidate PEO meet YOUR needs?
  3. Ask for banking and credit references. You can also check with the PEO’s sources for insurance and other benefits to determine if there are problems with the PEO’s keeping up with payments and record-keeping information.
  4. Ask for client and professional references.
  5. Assess each candidate company’s administrative structure. During the interview and site visit process, the candidate PEO should be able to demonstrate to you that it can provide the needed services as well as, or better, than you can provide them internally‹and at a competitive price. Compare the responses of the various candidate companies to your questions.
  6. Determine which insurance carrier the PEO uses. Is it licensed and reputable? Does it offer the benefit products you require?
  7. Review the service agreement carefully (and also have your legal counsel review it). Determine the cancellation terms and performance guarantees.
  8. If your state requires a PEO to be licensed or registered, make sure the company you are considering meets all such requirements. The following states currently require licensing: Arkansas, Florida, Illinois, Kentucky, Maine, Montana, New Hampshire, New Mexico, Nevada, Oregon, South Carolina, Tennessee, Texas, Utah, and Vermont. Rhode Island requires registration only (this information is from the NAPEO website).
  9. Check to see if the company is a member of NAPEO, the national trade association of the PEO industry. Visit the NAPEO website at for the directory of PEO members.


Most ophthalmology practices, if examined in an administrative audit, are found to be at least somewhat deficient in the administrative management of their staff. With so much to be gained by having additional management time to concentrate on the practice’s operations and financial performance, and so much to be lost by not having every “t” crossed and “i” dotted in employee administration, it seems worthwhile to explore the option of outsourcing human resources management.


Ron Rosenberg, PA, MPH, Practice Management Resource Group, San Rafael, California
Irene Chriss Director, AAO Practice Management Dept.

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