Every medical practice eventually faces this question: should we handle billing in-house or outsource it to a specialized company? It’s not a simple decision. The answer depends on your practice size, patient volume, payer mix, and how you calculate the true cost of billing operations.
Most practices dramatically underestimate what in-house billing actually costs. They see the salary line item for a billing coordinator and think “that’s cheaper than 5% of collections.” But salary is just the beginning. When you account for benefits, software, training, turnover, denied claim rework, and opportunity cost of provider time, the math changes considerably.
This guide breaks down the real economics of both approaches with actual numbers, helping you make an informed decision based on your specific situation.
When practices calculate in-house billing costs, they typically look at staff salaries and billing software subscriptions. That’s a mistake. The true cost includes at least 10 major components that most practices overlook.
Staff costs beyond salary. A medical biller earning $45,000 annually costs your practice $56,000-63,000 when you include payroll taxes (7.65%), health insurance ($8,000-12,000), 401k match (3-5%), PTO, and workers’ comp. That’s 25-40% above base salary before they’ve submitted a single claim.
Turnover and training costs. Medical billing has notoriously high turnover—industry average is 30-40% annually. Every time a biller leaves, you’re looking at 2-3 months of reduced productivity (backlog builds), 1-2 months of recruiting and hiring time, and 3-4 months before a new hire reaches full productivity. For a $45k position, total turnover cost runs $15k-25k each time. If you turn over billing staff every 2-3 years, that’s $5k-12k annually in hidden costs.
Software and technology stack. Practice management software with robust billing modules costs $300-800/month per provider. Clearinghouse fees add another $150-400/month depending on volume. Eligibility verification tools, denial management platforms, reporting dashboards—these add up to $500-1,500/month for a small practice. Annual cost: $6,000-18,000.
Ongoing training and education. Billing rules change constantly. CPT code updates, payer policy changes, modifier requirements, compliance updates. Your billing staff needs 20-40 hours of training annually to stay current. Between course fees, time cost, and travel (if attending conferences), budget $2,000-4,000 per biller annually.
Denied claim rework time. The average practice has a 10-15% initial denial rate. Working those denials—researching denial reasons, gathering documentation, filing appeals—takes 15-30 minutes per denial. For a practice submitting 1,000 claims monthly, that’s 150 denials requiring 35-75 hours of rework monthly. That’s nearly half of a full-time employee’s time just fixing mistakes.
Opportunity cost of provider involvement. When billing issues arise—unclear documentation, missing information, appeal letters needed—providers get pulled into billing discussions. If a physician making $250/hour spends 3 hours monthly on billing issues (conservative estimate), that’s $750/month or $9,000/year in provider time diverted from patient care.
Compliance and audit risk. In-house billing staff may not catch compliance issues that specialized billers would flag immediately. A single HIPAA violation fine starts at $100-50,000. Medicare overpayment recovery can run into six figures. Having non-specialists handle coding and billing increases audit risk—hard to quantify, but material.
Lack of payer expertise. General medical billers know the basics, but they’re not specialists in cardiology billing, surgical modifiers, or mental health authorization requirements. This lack of deep specialty knowledge leads to under-coding (lost revenue) and denial patterns that repeat indefinitely.
Vacation and sick coverage. When your single biller is out for two weeks, who handles billing? Often, claims simply don’t get submitted, creating cash flow gaps. Practices with only 1-2 billing staff have zero redundancy—any absence directly impacts revenue.
Technology obsolescence. Billing software and processes that worked fine three years ago become outdated. Upgrading systems, migrating data, retraining staff—these periodic overhauls cost $10k-30k every 3-5 years.
When you add up all these components for a small practice (2-3 providers, 3,000 encounters/year), true in-house billing cost runs $70k-120k annually—not the $45k-60k most practices estimate.
Outsourced billing companies typically charge 4-8% of collections. The percentage varies based on practice size, specialty, payer mix, and scope of services. Here’s what you should expect:
Standard pricing models. Most billing companies charge a percentage of collections, not a percentage of charges. This is important—if they’re paid on collections, they’re incentivized to actually collect money, not just submit claims. Typical ranges:
What’s included in standard pricing. At minimum, you should get: claim submission, payment posting, denial management and appeals, patient statement generation, and basic reporting. Many companies also include: eligibility verification, prior authorization support, and credentialing assistance.
What costs extra. Most billing companies charge separately for: credentialing (one-time $300-800 per provider per payer), practice management software if not already using compatible system ($100-300/month), and specialty services like expert witness preparation or comprehensive audits.
Setup and transition costs. Expect one-time setup fees of $500-2,000 to import your patient database, configure fee schedules, and establish workflows. Budget 2-3 months for full transition where some inefficiency is normal.
The collection rate difference matters. If an in-house team collects 92% of expected revenue but an outsourced company collects 96%, that 4-point difference often exceeds the billing fee. For a practice with $800k in annual production, 4% better collections = $32k—which covers a 5% billing fee and then some.
The crossover point where in-house becomes cheaper than outsourced depends heavily on practice size and complexity. Here’s the math:
Solo practice scenario.
Small group (3 providers).
Medium group (6 providers).
Large group (12 providers).
The pattern holds: outsourcing is almost always cheaper in pure dollar terms. But cost isn’t the only factor. Control, data access, and organizational culture matter too.
Not every practice should outsource, but these red flags suggest you’d benefit:
1. Your denial rate exceeds 10%. Industry best practice is 5-8% denial rate. If you’re consistently above 10%, your billing team lacks the expertise to prevent common errors. Outsourced companies with specialty focus achieve 3-6% denial rates through systematic prevention.
2. Days in A/R exceed 45. If your average days in accounts receivable is over 45 days, cash flow is suffering. Strong billing operations keep this under 35 days. Slow A/R suggests inadequate follow-up systems and claim aging that will eventually write off.
3. You can’t get clear metrics. If you ask your biller “what’s our net collection rate by payer?” or “what are our top 5 denial reasons?” and get vague answers, you lack visibility into your revenue cycle. Professional billing companies provide detailed dashboards updated daily.
4. Billing staff turnover is disruptive. If losing a biller means claims don’t get submitted for weeks while you scramble to hire and train, you need the redundancy that outsourced companies provide. They have teams, not individuals, handling your billing.
5. Providers spend time on billing issues. If physicians are regularly pulled into discussions about coding, denials, or documentation fixes, you’re paying $200/hour for work that should cost $25/hour. This is tremendously inefficient and frustrates providers.
Some practices genuinely benefit from in-house billing:
1. You’re large enough for specialized staff. Practices with 10+ providers can afford dedicated billing managers, specialty-trained coders, and separate AR follow-up staff. At that scale, you build internal expertise that rivals outside companies.
2. You have unique payer contracts. If you’re in value-based contracts, bundled payment arrangements, or complex ACO structures, in-house staff who understand your specific contracts may provide more value than generalist billers.
3. Your staff has deep specialty expertise. If you’ve built a team with true expertise in your specialty (orthopedic surgery, mental health, cardiology), and turnover is low, that institutional knowledge is valuable. Don’t give up high performers.
4. You want complete control over patient interactions. Some practices prefer their own staff handling patient billing questions for relationship management. Outsourced companies can provide this, but there’s an extra layer of distance.
5. Your net collection rate already exceeds 96%. If you’re already performing at top-tier levels with clean claims, low denials, and tight A/R, switching to outsourced may not provide enough incremental benefit to justify the disruption.
If you decide to outsource, choosing the right partner is critical. Not all billing companies are equal. Here’s what to evaluate:
Specialty experience matters. A company that specializes in your type of practice (family practice, surgery, mental health) will understand your coding nuances, common denials, and payer quirks. Ask for client references in your specialty.
Technology and integrations. Ensure they work with your practice management system or can provide one. API integrations beat manual data entry. Real-time reporting beats monthly PDFs.
Transparent metrics. They should provide net collection rate by payer, denial rate, days in A/R, and aging reports. If they’re vague about metrics or only report gross charges, that’s a red flag.
Denial management process. Ask specifically: “What’s your process for working denials?” Strong companies have dedicated denial staff, systematic follow-up timelines, and track resolution rates. Weak companies let denials age out.
References and longevity. Client retention rate tells you everything. If most clients stay 3+ years, that suggests consistent quality. High turnover suggests problems. Ask for references you can actually call.
Fee structure clarity. Understand exactly what’s included in the percentage and what costs extra. Hidden fees for credentialing, reporting, or patient statements can add up quickly.
Contract terms and exit clauses. What’s the commitment period? How much notice to terminate? Who owns the data if you leave? Don’t lock yourself into long-term contracts with steep exit penalties—that’s a sign they know their service doesn’t justify retention.
For more on systematic billing improvement, see our RCM Intelligence framework that outlines how top-performing practices manage revenue cycle.
For most practices under 10 providers, outsourcing medical billing costs less and performs better than in-house operations when you account for all true costs. The typical practice overestimates the cost of outsourcing and dramatically underestimates the cost of in-house billing.
The decision isn’t purely financial. Control, culture fit, and existing staff expertise matter. But if your primary concern is “what’s most cost-effective?”—the math favors outsourcing for the vast majority of practices.
Before making the switch, calculate your true in-house costs including all hidden components outlined above. Then get quotes from 3-4 specialized billing companies. Compare both the fees and the net collection rates they achieve. In most cases, you’ll find that outsourcing costs 5-6% but increases collections by 3-5%, making it cash-flow positive from day one.
Want to see exactly where your practice is losing revenue? Use our Revenue Recovery Simulator to calculate your specific revenue gaps. Or schedule a free consultation to discuss whether outsourcing makes sense for your practice size and specialty.
Industry Data & Statistics:
Billing Best Practices:
Compliance & Regulations:
Industry Publications:
This analysis was developed by the team at A-Z Medical Billing & Consulting, founded by Zain Vally based on experience managing billing operations for Vally Medical Group across multiple Hawaii locations. We’ve seen both sides—managing in-house billing and operating as an outsourced partner—and understand the real economics of both approaches.
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