Financial Guidance for Starting a Private Practice
As a physician, having your own private practice can offer many rewards and benefits. Being your own boss, deciding how many patients to see per day and how much time you spend with them, choosing the services you provide, and setting the tone for your workplace can make a big difference in how you enjoy your work life. Furthermore, there is the potential for significant financial upside compared to being a salaried employee, depending on your specialty and where your practice is located. Before you take the plunge, it is essential to thoroughly analyze the financial aspects of being in private practice to determine whether your expectations are realistic.
Build from scratch or buy-in?
Joining an existing practice run by a doctor who will retire long before you may seem like the best approach to going into private practice, as it allows you to skip over what is often a difficult start-up phase. However, a physician who owns and has nurtured their practice may have unrealistic expectations about what the practice is worth. You need to assess whether it would be a financially sound decision to buy in at that price based on the future income you could realistically expect to receive from it.
Keep in mind that if you take on debt to buy into a practice, that could defer other plans you have for your life, such as buying a house, saving for children’s college educations, adding to retirement savings, and pursuing other things that would give you satisfaction. Suppose you do not feel completely comfortable with cash flow forecasts and present value calculations. In that case, you should get some assistance from a trusted source that is familiar with that type of analysis before buying into an existing practice.
Another critical consideration to buying-in is that you’re at the mercy of the owner. They may genuinely believe that they will retire soon and won’t sell to a PE firm or another outside party when they tell you those things. Still, we commonly see owners drag their feet or change their minds. It’s hard to walk away from something you build from the ground up and possibly even more challenging to turn down a high offer that another doctor can’t or simply isn’t willing to match.
Setting that option aside, let’s assume you’ve decided you want to be on your own. Now what?
What will it cost to set up and operate the practice?
Creating a business plan or “pro forma” budget is a critical first step to make sure you understand what takes, financially speaking, to set up a practice and keep it going – in other words, to make sure you know the business end of practicing medicine. Start with estimates for all of the expenses you can think of. Here’s an essential checklist of what to include:
Medical equipment and furniture – What do you need, and what does it cost? You can buy equipment (medical equipment loans are available) or lease it. As with most things, leasing is more expensive in the long run, while buying requires a large upfront cash outlay, and you are responsible for repairs.
Employees – Determine how many (practice manager, nurses, others?) and their salaries. Multiply salaries by 1.15 to 1.20 to cover benefits, including health insurance, the employer portion of social security, vacation, and sick leave. Also, consider whether you will offer an employee retirement savings plan. Note that your practice can contribute to your retirement savings, so include that as an expense.
Rent – How much space do you need? What are the costs per square foot in the area where you plan to establish your practice? Comparison shop before committing to any space, even if the first space you see looks “perfect.”
Medical supplies – Include everything from exam room gowns to bandages to whatever instruments you need to perform procedures. Don’t forget the cost of a medical waste disposal service.
Enrolling in insurance plans so that you can get paid – Consider outsourcing this to an entity that can do it efficiently, saving time that you can put to better use.
A billing service, unless your office manager will be handling this.
Technology - EHR software, laptops or tablets, etc.
Insurance - Malpractice and business insurance.
Marketing costs – At a minimum, you should have someone else build and maintain a website.
Other – an answering service; legal services; accounting services.
Ask questions in online forums or Facebook groups dedicated to doctors in private practice to ensure you are not overly optimistic in your cost estimates and make sure you haven’t overlooked anything critical. Perhaps you can even find a mentor from another area or someone that has paved this road before that you can hire as a business coach.
Will the practice be economically viable?
To be economically viable, a practice has to generate sufficient revenue to cover all of your expenses and provide you with an income that meets your lifestyle needs and goals. To create a realistic revenue forecast, you need to know the following:
Is there sufficient demand in the area you plan to practice for the services you will provide? Find out how many patients current providers in the region see per week. If those providers are quite busy, it likely indicates enough patients in the community to support your practice.
How many patients can you see per day, and what types of exams and procedures do you expect to perform?
How much revenue per patient can you expect? That depends heavily on your specialty, the types of procedures you provide, and reimbursement rates from insurance companies unless you plan to serve a clientele that will pay for charges above what their insurance plan covers.
Will you be providing ancillary services (e.g., an ophthalmologist who sells eyewear), and if so, what revenue will those services generate?
Combine your revenue and expense forecasts (use a spreadsheet or an online template). The amount by which revenues exceed expenses gives you some idea of what your pre-tax income will be. Assuming you will structure the practice as an LLC or an S-Corp, you will pay personal income taxes on the income you earn from the business. A qualified accountant can help you to identify appropriate deductions to minimize your taxes.
Ask for a consult – Pick the brains of two or three reputable doctors who are in private practice in your specialty, in the area where you plan to locate. To prepare for these discussions, compile a list of specific questions. Be honest about what you don’t know. For example, ask about hidden costs, billing gotchas, handling employee challenges, and the biggest mistakes they made when they were getting started.
You might also consider hiring a business coach who caters to the medical profession. This type of guidance and objective feedback can be invaluable. Since a coach charges by the hour, you can control the cost.
It’s a cliché because it’s often correct – cash is king. The primary cause of small business failures is a lack of capital/liquidity. Even though analysis shows that your practice should be economically sound within a year or so, there will not be enough cash coming in to cover expenses in the early days. You should assume it will take longer than you expect to generate positive cash flow. So, it is essential to have other sources of liquidity.
If you own a home with sufficient equity, we recommend establishing a home equity line of credit (HELOC). In addition to providing personal liquidity, a HELOC can have the advantage of offering asset protection because it appears as a lien against your property, even if you do not use it. If you qualify, SBA 7(a) loans offer competitive rates and an extended repayment schedule – know that it can take some time to complete the application and funding process, so plan in advance. Separately, you should have sufficient savings to cover your household expenses for a bare minimum of 9-12 months. This concept holds especially true if your spouse doesn’t work, doesn’t have a very stable position/career, or has a highly variable income.
Your Overall Financial Plan
The financial aspects of your practice will affect other financial decisions you make for your life. Therefore, you need to look at this change holistically, considering all of your various financial priorities. For example, owning your own practice involves personal financial risk, so you may decide to take less risk in your investments or buy more disability insurance. A trusted financial advisor can help you anticipate these issues as you prepare for this exciting new phase of your professional life. Reach out with any questions.