Cost vs Reward of Opening a Medical Private Practice
By: Doctorly.org —
COST VS REWARD OF OPENING A MEDICAL PRIVATE PRACTICE
Although considered one of the most challenging endeavors in the health care field, starting a medical private practice is also viewed as one of the most rewarding accomplishments for a physician or medical professional. The ability to make decisions and provide treatment that directly influences the quality and standards of care delivered to a patient is often a coveted career choice for clinicians. However, private practice comes with a multitude of obstacles to overcome, hardships, start-up costs to pay, and common mistakes to avoid.
Starting a medical practice is similar to launching any other small business, and is subject to the same statistics as any other newly-established business venture. According to the U.S. Small Business Administration, roughly 50 percent of new businesses fold within five years. Physicians, who plan well, secure proper funding and remain flexible in the ever-changing climate of healthcare, face a better overall chance of achieving private practice success.
An overview of the common concerns and factors associated with becoming a self-employed physician are addressed below:
THE AVERAGE COST OF A MEDICAL PRIVATE PRACTICE
The path towards establishing a private practice is different for every medical professional as varying factors (such as style, location, specialty, and ability to create overhead) play an important role in affecting the overall cost to setting up and running a health care-related business.
“The challenges of opening your own medical practice in today’s healthcare environment unfortunately are significant,” says Marie T Debs, BE, MBA, of Halley Consulting Group, Inc. “There is considerable capital needed and great financial risk.”
Consultants estimate that the cost to launch a small primary care practice ranges from $70,000 to more than $100,000 – an estimation that includes the money needed for rent, insurance, payroll, and living expenses for the first few months [1].
[1] Going solo: Start-up basics by Ken Terry; Medical Economics.
Every physician with a medical practice faces two primary categories of financial obligations: (1) start-up costs, the expenses incurred when initially establishing a new business; and (2) continuing costs, the expenses required to maintain and operate a medical private practice.
Average Start-Up Costs include:
Physicians pay initial fees for registering a small business; business entity formations (such as PLC versus LLC); and/or trademarking a business name – all of which vary on a state-by-state basis. These aforementioned fees are in addition to the various state-, county- and other localized government fees that physicians are required to obtain in order to practice in a state. For example, New York State physicians pay a licensure fee of $735 and $105 for a limited permit.
Malpractice insurance is one of the first items a physician should obtain, as medical professionals are required to have it before the processing of medical credentialing paperwork can take place. The average cost of malpractice insurance depends on the location (state) of a practice and type of physician. For example, Minnesota offers some of the most affordable rates to get insurance, ranging from $4,000 to $15,000 annually for a physician in the internal medicine field – compared to $50,000 to $70,000 charged for doctors practicing in Florida.
General surgeons and OB/GYNs pay some of the highest insurance fees; sometimes exceeding $200,000 annually. However, discounts in price are available, as some professional associations provide members with special rates on malpractice insurance.
The cost of renting or leasing office space varies, and is determined by location and size by square feet. Leasing and renting space for a practice is generally a multi-year financial commitment. According to Prodigy MD, the ideal size of a private practice facility is 1200 to 1500 square feet.
When applicable, improvements or renovations to existing office space can cost between $15,000 and $50,000 – depending on the space. For example, some practices may require additional space to store equipment, such as an X-ray machine. To build out or make improvements, Coy Davidson says a modest office design runs $40-$60 per square foot.
The purchase of basic office equipment and furnishings includes an up-to-date computer system, printer/ copier/ fax machine, filing cabinet with lock, telephone and voicemail, and furniture (for physician’s office, waiting room and patient rooms). Prices are dependent on an individual’s office space and needs.
Average high end costs for furniture, equipment, copiers, computers, and telephones can range from $50,000 to $65,000 [1]. A first-class practice management computer system can cost in upwards of $25,000, while some are available for as little as $10,000.
Physicians are also able to cut initial costs by purchasing gently used office and diagnostic equipment, and then upgrade as the practice grows. Carl Bartecchi, in a Medical Economics piece, said he paid $11,000 for new and used equipment when opening up his practice [2].
[2] Going solo: How four doctors are making it by Ken Terry; Medical Economics.
Sales and marketing costs allow a physician to establish a presence within the community, and in an effort to build a patient roster, he or she may pay for newspaper ads, flyers, postcard mailers, radio spots, TV commercials, and phone book ads. Since most individuals locate and research health care providers by conducting an Internet search, an online presence is also important, such as purchasing a domain name and setting up a website. Business cards and letterhead are both valuable for the start-up of a practice, as well as for ongoing advertisement.
Retaining a consultant or advisor is optional and typically costs an average of $5,000 to $10,000, but their guidance and advice can streamline the transition from med school graduate (or salaried hospital physician) to a medical business owner.
Tax and legal advisors, such as attorneys and accountants, are also optional yet serve as a long-term investment for the success of a private practice which helps physicians to avoid costly mistakes. The fees and services they provide vary.
Average Continuing Costs include:
Office rent and utilities are paid on a monthly basis, which include the gas, electricity, telephone service, and Internet connection needed to run a business.
Office supplies and medical materials, from copy paper to syringes, are purchased on a continuous basis in order to maintain the administrative and clinical duties of a private practice – and is oftentimes a monthly expense.
Insurance plays a vital role in providing multiple levels of protection for both a clinician and small business owner, and must be renewed and paid on a scheduled basis. In addition to liability/ malpractice insurance, other types include a physician’s own health and disability insurance; and property insurance for the office space.
Private practice owners are responsible for the bi-weekly payroll, annual salaries, periodic bonuses and yearly benefits of their staff, which may include writing checks for an administrative team, nurse and/or other health care workers. In 2012, medical assistants were paid a median salary of $29,370, while a full-time registered nurse earned $65,470.
Business taxes are paid every year, and include the additional payment of self-employment tax – traditionally the responsibility of employers of salaried physicians.
Optional expenses to consider (which stay true for both salaried and self-employed physicians) include monthly living expenses, travel expenses, professional development (such as continuing education and licensure requirements), and membership dues. Also, the marketing of a medical practice is a continuous effort. For many, websites, blogs and online networking can attract patients. Some physicians choose to hire a professional to maintain a Facebook business page, engage with the public on Twitter, or write blog posts related to their field of expertise.
The Time Commitment for Owners of a Medical Private Practice:
Starting a medical practice comes with some of the same type of demands associated with establishing a small business, and a lack of planning is the downfall for any new enterprise. In addition to the time commitment it takes to earn a medical degree, physicians with an interest in establishing a private practice must also devote time to planning for their future business well in advance. Most start during their senior year of residency, as it can take at least ten to twelve months to set up a solo practice ready to accept patients.
The time a physician spends organizing a business plan is one of the most important investments made towards the success of his or her practice.
In a MomMD piece, Ester Horowitz says 80 percent of new businesses fail because the owners overlooked the appropriate steps needed to develop a successful business strategy and goals. There are also many steps outside of the control of a physician that can take time to complete. For example, physicians planning to accept insurance as a form of payment from third party payers must sign up with companies and local insurance panels by filling out the appropriate paperwork and undergoing the medical credentialing (or enrollment) process. This can last many months, and varies with each company.
According to the MBA HealthGroup, devoting at least 6 months to the start of a healthcare practice is essential to avoid falling into a “position of urgency.” The waiting period alone for the time-consuming medical credentialing process can take up to six months for a company to verify the legitimacy and experience of a physician.
States and insurance providers must determine if a doctor and their private practice meets their requirements. During the credentialing period, a physician’s license, residency completion, authentication of services, and other qualifications are confirmed.
Overall, a private practice does not blossom overnight, and the process involves taking financial risks and making cost-effective decisions in the beginning stages. It often takes at least two years before an established medical practice starts to see increasing profits. It is not uncommon for some physicians to lose money until a client base and steady referral network are established.
OBSTACLES ASSOCIATED WITH OPENING A MEDICAL PRIVATE PRACTICE
Physicians and medical professionals opening a private practice do not have the luxury of concentrating solely on the clinical side of health care, but must also create a sustainable balance between caring for patients and running a business.
Physicians seeking self-employment must comprehend and execute standard business practices.
“A strong understanding of finances, cash controls, revenue cycle and human resources, to name a few, is a necessity,” says Debs. “You will be the CEO, CFO and Human Resources Director.”
Along the path of establishing, managing, financing and growing a private practice, a physician typically encounters the following obstacles:
A Higher Level of Responsibility: As a salaried employer, physicians are not responsible for the accounts receivable; maintaining IT equipment; the inventory of supplies; business taxes; record-keeping; and administrative duties, such as staff hiring and termination. Owners of a private practice often deal with collecting past-due payments, billing patients, mediating staffing conflicts, upholding patient safety, and managing the overall business. Their level of responsibility goes beyond assuming the role of a clinician.
Must Build from Scratch: Hospital- and salaried physicians gain instant access to patients as a perk for being an employee, while owners of a private practice must start from the ground up establishing their own medical business and building a patient roster.
Hiring an Appropriate Staff (Team): Physicians face the challenge of recruiting and hiring staff members that fall in line with the mission, values and vision of their private practice. Employees are an investment, and hiring the wrong fit can become costly.
Choosing the Right Technology: Technological advancements in healthcare, such as the electronic health record (EHR), provide self-employed physicians with many options for improving the overall quality and efficiency of patient care. The key is to select business solutions prevalent to a practice’s area, which also require the least amount of transition or upgrades in the future.
Unique Limitations: As a solo practitioner, physicians encounter a unique set of limitations which can have a profound effect on how a private practice is managed. For example, they are unable to address the needs of every patient and provide around-the-clock care.
Although a group of physicians opening a collective business venture or multi-specialty practice are able to share the financial risk and provide extended coverage to patients, there are some drawbacks to consider. Each physician loses the autonomy associated with opening a solo practice; and must agree upon a set of established policies, such as establishing income distribution amongst doctors.
Healthcare Reform: Nationally recognized healthcare consultant Deborah Walker Keegan, PhD, FACMPE, said in How Healthcare Reform will Influence Private Practices that physicians in private practice are greatly affected by government regulations and nationwide healthcare changes. She mentions large changes will center on exploring a “value-based reimbursement” approach with various methods being tested out, such as shared savings, bundled payments, per member per month payments, and pay-for-performance models.
Unexpected Expenses and Financial Losses: Revenue for a private practice takes a hit whenever unintended expenses arise, such as a piece of equipment needing to be replaced, burst water pipes causing damage to the office, computer system shut downs, or an overall economic downturn in the community. Increases in local competition and the emergence of a nearby multi-specialty practice can also threaten the income stream of a private practice.
Threat of Being Sued: As there are no guarantees in medicine, physicians often brace themselves for the possibility of a malpractice suit. Not only does the process of legal action translate into the threat of financial repercussions, but can also create ‘bad press’ that damages the reputation and patient confidence of a medical professional.
No Guarantees with Income: As a salaried employee, physicians know exactly when and how much money they will be paid, while a self-employed physician earns varying levels of income on a monthly basis – which is dependent on a multitude of factors, such as the number of clients seen, payroll demands, fluctuating expenses, unforeseen expenditures, and the timeliness of reimbursements. Doctors in private practice also lose income when they take vacations or sick leave, unlike their salaried counterparts.
Medical private practices also experience ebbs and flows in business that can affect revenue. For example, Julie Hanks, LCSW, noted in Psych Central’s What I Wish I’d Known Before Starting a Private Practice that her practice experiences the lowest number of referrals and fewest client hours every December when patients are less likely to visit a practitioner close to the holidays.
REWARDS AND BENEFITS OF A MEDICAL PRIVATE PRACTICE
Debs cites the autonomy that private practice owners have as one of the largest rewards associated with establishing a medical business; it plays a greater role in making the following benefits possible for self-employed physicians:
Be Your Own Boss: Holding the top position, medical practice owners do not answer to administration, office managers or other executives that often affect the work environment and role of a physician in a salaried position. There is no one pushing them to increase the number of patients seen per day, or how to run their daily operations. Private practice owners are able to exercise a higher level of creativity. They set their own hours, designate their own vacation time, and determine the next steps for furthering their business goals.
Build a Respected and Trusted Business: The ability to run a practice as a physician sees fit allows them to create the atmosphere and quality of services they’d like to provide patients, such as offering a more relaxed, laid-back, family-oriented environment. In The Pros and Cons of Private Practice, J. Scott Litton, Jr, MD, attributes this benefit to being able to maintain a “high patient retention rate” and noted that patients enjoy being able to see the same physician, nurse, and front desk staff for follow-up visits.
Control Who You Work With: Physicians typically review the applications of nurses, office staff and other health care employees for their private practice, which means they have better control in outfitting the office with suitable, highly motivated workplace personalities. When conflicts arise with nurses and office staff, private practice owners have the power to discipline or dismiss, when necessary.
Greater Ability to Increase Revenue: Unlike working for an employer, physicians in private practice are able to increase revenue by accepting more patients, extending hours, as well as offering weekend and evening appointments. Depending on a physician’s specialty, solo practitioners can also increase their income by providing ancillary services, such as the orthopedic surgeon who performs procedures on patients at private surgery centers and rehabilitative centers. New physicians may also provide virtual visits or telehealth services to earn supplementary income.
Decision-Making Freedom: From choosing to accept a particular insurance carrier to ordering a new piece of cutting-edge equipment, physicians running their own medical practice have the power to make important decisions regarding office dynamics and the quality of patient care they provide. Self-employed physicians can also swiftly respond to new treatments, emerging medical trends, and the need to make office-wide changes.
Help Patients in Need: Solo practitioners are also in a position to make decisions that affect the affordability of care without having to answer to higher management, such as avoiding unnecessary diagnostic procedures or making an effort to better understand the cost differences of various treatment options and prescriptions which can lower out-of-pocket expenses for patients. Physicians may also implement a sliding scale fee to treat low-income patients.
Endless Possibilities: As a self-employed physician with a private practice, the options and opportunities to make money and provide services to clients are vast, including general medicine, specialized care, consultation, and training others. He or she can work alone or bring another physician into the practice.
Options for Offsetting Medical Private Practice Costs & Hardships:
When establishing a private practice, self-employed physicians and medical professionals often find that being a highly trained clinician is not enough to manage a successful medical practice. Whether it’s hiring an expert or attending a class or workshop, a physician increases their chances of success by enhancing their business knowledge, access to solid resources, embracing cost-efficient decisions, and seeking assistance from others:
Determine a Practice Focus: According to Heather Hill-Spaine, of Real Psych Practice LLC, medical professionals should narrow the focus of their practice, as she says it’s been her observation that a lack of practice specification increases the chances of a practice not surviving its first 18 to 36 months. Hill-Spaine says that identifying the types of patients a physician wishes to serve and the kinds of services they’d like to offer can make shaping and building a private practice much easier to achieve.
Hill-Spaine suggests assessing specific population(s) and communities to serve; drawing from special training and experiences regarding disorders and conditions; acknowledging unique or personal connections to the community; and amplifying the things that set a health care provider apart from those who provide the same or similar services.
Obtain Adequate Business Training: A common misconception regarding the establishment of a private practice is that expert health care knowledge and skills translates into a medical business that will automatically thrive. However, physicians who lack sufficient training and entrepreneurial knowledge face an increased risk of failure. A physician must learn business strategies, design, and implementation as it relates to running a private practice.
Work with a Business Advisor or Consultant: Healthcare business experts are trained to guide physicians through the process of launching and running a medical private practice. Although the average cost for their services is in the $5,000 to $7,000 range, advisors and consultants assist self-employed practitioners with:
The accounting and legal aspects of a private practice
Obtaining the proper insurance for practicing and running a business
Recruitment and training of employees
Implementing office essentials, from phone lines to digital record systems
Addressing government regulations and compliance issues
Speak with Experts and Recent Graduates: “Seek out experts in the field such as recent graduates who have gone the route of private practice,” suggests Debs. “Talk to those who have been successful and those who have not.” She also suggests speaking with physicians who chose a salaried position with an employer over self-employment. It’s highly recommended to explore their motives and learn firsthand of the pros and cons they encountered.
“However, when it’s your practice and your livelihood, you should not depend on other people to tell you how you are doing,” Debs adds. “Rather, know your business and watch over it.”
Create A Solid Financial Plan: One of the most important steps a physician must take before starting a practice is to establish a well-planned financial strategy with business projections. For example, it is suggested to create estimated statements that demonstrate financial scenarios for the best-, worst-, and most likely outcome for a private practice. A physician must draw from their specific circumstances, such as location, office size, staff size, intended fee schedule and specialty, to arrive at approximations.
Financial plans not only provide physicians with a blueprint for starting their business, but the information and projections help secure business loans and funding from banks and lenders. Banks and investors also review net income (profit and loss) statements; balance sheets; and estimated cash flow statements for monthly, quarterly and yearly expenses and revenue.
Join an Association or Organization: Debs also says it is important to locate further informal education regarding practice management from sources such as the Medical Group Management Association (MGMA), American Academy of Family Practice (AAFP) and societies for chosen specialties. The networking opportunities and resources gained provide valuable insight that can make opening a medical private practice easier to accomplish.
Moonlight: Craig Wax, who was featured in a Medical Economics piece titled Going solo: How four doctors are making it, worked for two different groups before opening his solo practice, and during the first year of operation – was able to make just enough to cover his overhead. He ‘moonlighted’ at a few other family practices and an urgent care clinic to pay his personal bills.
Buy Gently Used Equipment: It is not necessary to purchase new equipment when initially establishing a private practice. Gently used equipment can be bought for half the original cost, and can be upgraded or replaced as a practice and revenue grows.
Stay Highly Involved: In addition to a high level of community involvement and active recruiting, family physician Brian K. Nadolne also stresses the importance of physician involvement and not “sitting back” and allowing a manager to take care of all financial decisions [2]. Physicians who assume an active role in controlling expenses and staying on top of collections often have a better chance of reaping business success by knowing when to make profitable financial adjustments.
Expand Practice to Include Other Physicians: Solo practitioners who find it difficult to maintain a steady flow of patients, cover expenses, and adequately oversee the business and administrative side of their practice may consider becoming a group- or multi-specialty practice. The addition of one or more physicians or medical professionals often helps ease the financial burden and overall workload of a solo practitioner.
COST VS REWARD OF A MEDICAL PRIVATE PRACTICE
When asked if opening a private practice is ultimately worth the cost, Debs answers “it can be…however, it is highly dependent on the individuals’ personality, goals and desires.”
“It could be highly rewarding to develop your own medical practice and be your own boss,” she says. “However, if you do not have the desire to embrace the business side of a medical practice, it could be brutal.”
“The ultimate worth lies in what the individual wants and is interested and willing to do.”
For many, the rewards and benefits associated with opening and running a private practice center on the level of autonomy that owning a medical business can provide.
“You would be your own boss, and have the ability to create the atmosphere and culture in which you choose to practice,” says Debs. “You would have full control of your office and the decisions surrounding it, such as developing policies and procedures, purchasing equipment, software and supplies, choosing vendors and so on.”
“In addition, you would choose your location, hours of operation, who works for you and represents you and who your partners are, if you decide to recruit other physicians,” adds Debs. “However, all of these choices must lead to a profitable, sustainable business, and that’s where the challenge lies.”
Small businesses, which include medical private practices, face an uphill battle to succeed. The Small Business Association reports 30 percent of new businesses fail during the first two years of their establishment. During the first five years of business, half fail. Sixty-six percent of businesses do not make it past their first 10 years. Lastly, only 25 percent of businesses make it to the 15-year+ anniversary milestone.
A private practice owner encounters a great deal of decision-making which plays a significant role in the success and future of a medical business.
For starters, physicians must assess whether launching a private practice is economical and financially feasible according to their personal circumstances, including geographic location and level of local competition for their specific field of medicine or health care. Then, physicians must figure out how they will cover start-up and ongoing expenses until their business starts to turn a profit. While some dig into their savings, others take out a loan from a lender. It is also not uncommon to see a doctor hold a ‘day job’ to help fuel their own business.
Having an understanding of all the costs involved in running a medical business is essential, including how much it costs to see a patient per visit and the cost per diagnosis, as well as establishing a fee schedule that not only covers these costs but is also profitable in the long run.
Another way to create a balance between the start-up costs and rewards for a medical private practice owner is to make business decisions that reap benefits in the long-term. Dermatologist Charles Crutchfield III, MD, mentioned in The Business of Starting a Medical Practice, that spending $6,000 on a full-page, four-color ad was worth the steep price if it generates $20,000 a month in patient visits. In other words, physicians with solo practices must create a healthy balance between patient care and thinking like a ‘businessperson.’
In conclusion, opening a medical private practice is a significant investment a physician makes in their future. The opportunity is ideal for a medical professional wishing to reap the benefits of owning a business and treating patients as they best see fit. In addition to the high level of financial risk and responsibility, the process of launching a private practice also involves a substantial commitment of time and money. Those who succeed in their respective fields enjoy a high level of autonomy and a potentially lucrative career.
“You will need to wear multiple hats – one being a physician (what you were trained to do in medical school) and the second being a business manager (which is not taught in medical school),” says Debs. “Embracing both roles is critical in order to succeed in private practice.”
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