How to Start a Medical Practice – Risks and Rewards

A doctor who knew how to start a medical practice is folder her arms in satisfaction.

How to start a medical practice? And does anyone really want to start their own medical practice these days? Well, for those healthcare providers who have been bitten by the entrepreneurial bug, I’ve bundled up an overview of the I’s and T’s that’ll need to be dotted and crossed.

In this Article …

 

To Start a New Practice, or to Join an Existing One as a Partner or Employee?

A survey of final-year medical residents revealed that they are deluged with job opportunities. Fifty-six percent of all respondents reported 100 or more job solicitations while in training. And of course, average medical school debt of $200,000 is a burden shared by about 70% of medical residents. This certainly explains the preference for salaried positions in a hospital, a health system, or large medical group practice. But what about healthcare providers who want to start their own private practice?

A few years ago, I had the opportunity to participate in interviews of medical practitioners completing medical residency programs for practice opportunities in a private hospitalist medical group. We routinely heard candidates say that they would spend a couple of years as employees but then wanted to go into private practice. So there still seems to be interest in starting a medical practice. Of course, it also means actually becoming a small business owner, too.

 

Opening a New Medical Practice (or Growing an Existing one) can be Challenging

A solo practice is ultimately successful based on the patient care the physician provides.  But remembering that starting a successful practice is starting a small business, too, can go a long way toward supporting that success.  It can increase your rewards, both financially and professionally.  This can keep you excited about your practice, despite long hours and many challenges.

All small businesses must deal with a wide range of issues:

  • Selecting a legal entity structure, such as a corporation, partnership, or limited liability company.
  • Applying for a Business License, which usually requires posting notices in local newspapers, and may require a fictitious business name.
  • Obtaining a small business loan or trying to secure financing to cover startup costs.
  • Applying for a federal tax identification number and state employer identification number.
  • Opening bank accounts and setting up financial records, or outsourcing bookkeeping/accounting services.
  • Hiring staff and making arrangements for payroll and benefits.
  • Obtaining insurance coverage such as general liability insurance, property, workers’ compensation, and business interruption insurance.
  • Establishing a website and developing an online presence.

 

Starting a Medical Practice as a Small Business Requires Several Additional Tasks

Physicians researching how to start their own medical practice have several more things to consider:

  • Deciding on the range of clinical services to offer, and how those decisions affect equipment, supplies, staff, and space.
  • Applying for a National Provider Identifier (NPI), and applying to participate in Medicare or Medicaid programs.
  • Obtaining professional liability (malpractice) insurance.
  • Applying to health plans and insurance companies to become a participating provider and negotiating agreements.
  • Developing policies and procedures for clinical and administrative tasks/activities.
  • Selecting practice management software and electronic health record system.
  • Setting a fee schedule that is competitive in the local area, especially if you will see a significant number of cash patients.

 

What does a Business Plan for a Solo Medical Practice Include?

One issue that medical practitioners do not get much education on in medical school is the business of starting medical practices. Using the format of a business plan to organize the activities necessary to start a practice can help you avoid overlooking important steps in the process. It can also be very valuable if you are securing financing. Here are some descriptions of the components of a business plan related to starting a practice.

  • Descriptions of Your Proposed Business Venture: This includes the products or services, the value proposition, and the success factors for your venture: In this section, you would identify the specialty you would like to practice and the range of services you plan to offer. These elements may seem self-evident, especially if you are the only audience for your business plan. But if you are expecting to secure financing from a lender, or even ask a hospital for a forgivable loan, having documentation of your plans for ancillary services will be important.
  • A Market Analysis: The market demand for your products or services and the competitors in the market. This type of analysis can help you zero in on a specific location as well as a referral network and the types of payor sources for your services.
  • A Financial Feasibility Study: This will include assumptions, proforma income and expense, cash flow statement, and balance sheet. In this part of your business plan, you can capture information about a host of issues you need to address.
    • Office space, including location, size, and estimated costs;
    • Start-up costs for office supplies and necessary medical equipment;
    • Human resources including personnel policies, and job descriptions of other office medical professionals;
    • Purchased services such as medical transcription, an answering service, and credit card processing;
    • Legal counsel and accounting services;
    • Information systems such as an electronic health record or EHR system and a system for billing and accounts receivable;

In addition to capturing all of the startup costs and ongoing costs of a new practice, you must also try to estimate the payments you can expect to receive as you begin providing and billing for services. Reimbursement for medical providers, whether from a government payor like Medicare or a private insurance company, always lags the date of the provision of services by a few weeks or even a few months. It is important to factor this lag into the cash flow projection for starting your own practice.

  • Management and Marketing Plans and Strategies: Even a small business will not manage itself, and your own practice is no exception.
    • Do you need an office manager? Who will you rely on to ensure the credentialing process of payors and hospitals is completed timely? Who will recruit and train the staff and manage the business operations of the business entity? Overseeing the daily operations of medical practice by a business owner who is also a clinician practicing medicine is a stretch for anyone.
    • All medical practices ultimately rely on referrals for a continuous source of new or continuing patients. Specialty physicians such as cardiologists or surgeons rely on a referral source such as a primary care physician. However, even primary care physicians rely on referrals from a health plan or an insurance company. Successful practices develop and implement a referral development plan identifying their referral sources and strategies to keep those referral sources satisfied.

What are some ways to overcome cash flow shortages during a start-up period? Consider only having a new office open part-time, and moonlighting a couple of days per week while patients find your office. Look for moonlighting opportunities as a hospitalist or in a hospital emergency department. Urgent care centers are another type of facility that utilizes shift work by physicians.

An Alternative to Starting a New Practice is to Purchase an Existing One

While starting a medical practice from scratch has its own set of challenges and rewards, another viable option for physicians is to purchase an existing private medical practice. This alternative comes with its own set of considerations, but it can offer several advantages for the right candidate.

Advantages of Purchasing an Existing Practice:

  1. Established Patient Base: One of the most significant benefits of buying an existing practice is immediate access to an established patient base. This can provide a steady stream of revenue from the get-go, unlike a new practice that might take time to build a patient list.
  2. Existing Relationships with Other Medical Professionals: The practice likely has established relationships with other healthcare providers, specialists, and institutions. This can be invaluable for referrals and collaborative care.
  3. Operational Systems in Place: An existing practice will have operational systems already set up, including an EHR system, practice management software, and possibly even trained staff. This can save a considerable amount of time and effort compared to starting from scratch.
  4. Physical Assets: The practice will come with medical equipment, furniture, and possibly even a leased or owned space. This can reduce the initial capital required compared to setting up a new practice.
  5. Financial History: An existing practice has a track record. This can be beneficial when seeking financing or when assessing the viability of the practice. It also offers insights into the practice’s financial health, patient volume, and other critical metrics.

Things to Consider

  1. Medical Records: It’s essential to ensure a smooth transition of medical records while respecting patient privacy and adhering to HIPAA regulations.
  2. Due Diligence: Just as with any business purchase, it’s crucial to conduct thorough due diligence. This includes reviewing the practice’s financial statements, assessing the condition of medical equipment, and understanding any existing liabilities. Does the practice own or lease its medical office or major medical equipment?
  3. Integration with Personal Assets: If you already have some personal assets, like specific medical equipment or an EHR system, consider how they will integrate with the existing practice’s assets.
  4. Tax Benefits and Implications: Consult with a financial advisor to understand the tax benefits and implications of purchasing an existing practice. This can include aspects like depreciation of assets and potential tax write-offs.
  5. Value of the practice you want to purchase: This is one of the most complicated aspects of purchasing an existing practice. Assuming the existing owner is also a physician, how much of the value is dependent on the reputation of the existing owner? Are there insurance company contracts and referral sources that would also be available to you? Can existing leases be assumed? The reorganization of the health care system, with much more widespread employment of physicians, makes the value of goodwill highly questionable these days.
  6. Group Practice Considerations: If the existing practice is a group practice, understand the dynamics, contractual obligations, and any potential challenges that might arise from joining or taking over such a setup. Is there a partnership agreement that outlines how new physicians become eligible to become partners?

Purchasing an existing practice can be a strategic move for physicians looking to have their own practice without the challenges of starting from scratch. However, it’s essential to approach the process with diligence, seeking advice from experts, and considering how the practice aligns with your professional goals and vision.

 

With the Practice Open, How Do You Monitor It?

After you clear all the hurdles of starting your own medical practice or have acquired an existing one, don’t forget to keep up with the management!  Our free monthly newsletter may assist you in keeping up to date on need-to-know subjects.  Some examples of what to monitor to sustain performance:

  • Appraising the quality of clinical services and customer services.
  • Tracking physician productivity.
  • Monitoring cash flow and profitability.
  • Evaluating billing, accounts receivable, and collections.
  • Assessing the performance of staff.
  • Analyzing the results of your online presence.
  • Monitor compliance and HIPAA-related requirements.

Starting a private practice as a small business from the ground up can seem like a daunting task.  To get help, download a copy of our list of Healthcare Start-up Issues.  It’s a more comprehensive list of issues to consider when thinking about starting your own practice as a small business!

And if you are not satisfied with your assessment of your own medical practice, there are consultants available to help you. Check out our services related to operational assessments of medical practices. Or if you are thinking about acquiring an existing medical practice, look over our article on practice valuations.

When you need proven expertise and performance

Jim Hook, MPH

Mr. James D. Hook has over 30 years of healthcare executive management and consulting experience in medical groups, hospitals, IPA’s, MSO’s, and other healthcare organizations.