(This article is the first in series about how to build and run a successful medical practice. Self-employed docs make more than salaried staff.)
How to Start a Medical Practice and Make Money
There is a definite fork in the road once your residency is complete. Start your own practice or work for someone else? Large medical groups, hospitals, and corporate telemedicine firms on the hunt for talent.
Medical students are looking at an average of $200,000+ in student loan debt. Those payments come due in 6 months after the residency ends. In the short term, taking a job seems like the best financial choice. In the long run? Not as much.
Let’s be candid. If you want to start your practice, it all comes down to money. How much you need and how much you’ll make.
How much do I need to start?
Any entrepreneur will tell you starting a business is not for the nervous types. If you are risk-averse, this may not be the best choice.
If you’re ready to leap, the first step is finding the money. For most new physicians, that involves more loans. But docs in private practice make more money than salaried physicians. Medscape’s Compensation Report of 2019 found that self-employed physicians made 24% more a year, averaging $359,000 vs $289,000.
What does it take?
Let’s set some assumptions: This is a family medicine practice run by a single physician. There are 4 staff members. The office space is leased and there are 2 exam rooms. The doctor has a spouse and lives within a 25-mile radius from the office.
To open the practice, assume you need between $70,000 and $100,000 for the first 6 months. This money should cover rent, payroll, and insurance. There could be some money for living expenses. How much is very dependent on your location.
That estimate is on the lower end. It also doesn’t include furnishings for the office or exam room, computers and systems. The calculation for office furniture is about $12 per sq. ft. The average cost to furnish one exam room is just under $3000.
An EHR system will cost between $15,000 and $25,000. It’s not an expense where you should skimp. The only choice you have is how much overhead you’re willing to assume right away. Some doctors are willing to go with paper records to start and add it to an EHR later. Others think the EHR is an essential system.
Either way, at some point the purchase has to be made and the records added. If you are or are trying to be a certified Medicare Provider – paper is not an option.
There are other software programs for billing and bookkeeping. You may need a CPA, legal services, or consultants. Here is the bare minimum you need to get started.
It’s unlikely that you’ll see positive cash flow during the first six months. It will take some time to build a patient base. If you were previously employed in another practice, some patients will follow you. If you’re just out of residency, it will be a slower process.
There will be times this is will be very stressful. Take care of yourself – diet, exercise, downtime – and keep focused on the goal.
Mitigate Financial Stress
There are ways to improve cash flow personally and professionally.
- Take a part-time job. If you pick up a couple of shifts at an urgent care or hospital, it brings in a little money. It’s a good opportunity to introduce your practice and build a referral network.
- The plan might be to have your spouse join your practice. If they’re currently employed, it’s better to postpone it until you’re starting to see some revenue. Their salary may help you get a loan and maintain your health insurance.
- Consider a direct payment option that eliminates the middleman (insurance). There are two models: pay per service or subscription. Many telemedicine companies are moving to this system. No denial of claims to deal with, no chasing patients for overdue bills.
- Speaking of telemedicine – they are hiring. You control your availability. While you’re building your practice, make money during slow periods. The highest earners have 4 years of clinical experience, but you can get hired on with less.
- Be as virtual as possible. The coronavirus has taken telehealth mainstream. Platforms like Doxy.me are free and secure. But don’t stop there. Use virtual assistants to handle calls and scheduling. Medical virtual assistants can perform transcription or HIPAA compliant data entry. No long-term commitment, no benefits – these are contract employees who work when needed.
Getting a Loan
Based on the numbers above, you’ll need $138,000 bare minimum. We’d suggest you bump that up by 25% ($34,500.) That brings you to $172,500. It gives you some wiggle room to negotiate and extra cash if you get it.
You may want to take some time to pull together a down payment. We’d suggest 10% is enough, so in this case, you need $17,000. Some lenders might want more. Talk to your bank to get a feel for what’s needed in your area.
It takes 13 years to pay off medical school student loan debt. What makes us think you might be able to get a small business loan?
Your income potential. Physicians are considered a good risk. With an average income of $359,000, lenders are more apt to take a chance on doctors. If your spouse is earning a salary that helps too. It’s not a guarantee but debt to income ratio is usually not as big a factor.
Here are some ways to increase your chance for approval:
Put together a business plan. Being a doctor doesn’t mean you know how to run a business. Your business plan positions you a credible candidate.
- Check your credit score for inaccuracies.
- Pay down credit card debt.
- Don’t take any new loans.
- Can you make your student loan debt more manageable?
- Start that part-time job now. You may be able to put together that down payment before you apply.
Here are some high earning specialties that can have a positive impact on your loan. (These practices would need more money to start up.)
- Cardiologists in private practice make $80,000 more a year than salaried physicians. Yet in 2018, only 25% were self-employed.
- There are 6,000 private practice gastroenterologists with an annual income of $370,000 to $455,000.
- Plastic surgeons have taken a COVID hit, but they consistently rank high in revenue. Physicians in private practices earn about $18k more than those in salaried positions. Both will generate close to half a million a year.
Shop for Lenders
There are different lending sources – some are better than others. A lot of it depends on your credit score. If you have good credit and collateral – 750+ – you have a decent shot with your bank.
You might consider a loan from the Small Business Administration. The 7(a)-loan program from the SBA lends up to $5 million. The requirements are pretty stringent, but the interest rates are good. FYI if you’ve defaulted on a student loan payment or a government mortgage, don’t bother. You’re disqualified.
Online lenders are also an option. They look at your potential income as much as your current financial state. You still need a reasonable credit score but the decisions are fast. Their interest rates are usually higher than loans from other sources.
Do some prep work before you apply:
Get your documents together:You’ll need copies of your taxes, business license, articles of incorporation, EIN, and bank statements to start.
Know how much you want and why you want it: It sounds like a given but prepare a crisp, concise answer and practice it. It lets the lender see you know what you’re doing.
Understand the lender: Every lender has their criteria. Avoid unnecessary pulls on your credit by understanding whether you meet their minimums. Before you apply. Look for “pre-approval” options to weed out rejections without impacting your credit score.
Offer a strong business plan: Because the business isn’t operational yet, you’ll need financial projections. (Don’t oversell.) Be clear about your marketing approach and the timeline to reach a full patient load. Be clear about the timeline for running in the black.
Make sure your down payment is liquid: When you’re in a loan negotiation, be sure you could transfer the down payment immediately.
If possible, structure the first year of the loan for interest-only payments. As cash flow improves, start to draw a better salary. Once the business is running in the black, try to refinance the loan at a better rate.
While you’re working on the financing, you can start taking care of some tasks.
- If you’re not licensed to practice, get it done right now. If you’re moving to a new state, check the licensing requirements and fees. Every state is different. The timeline is typically three months for processing.
- Find a commercial real estate agent and have them start looking. Do some research on the most desirable areas based on your patient demographic. Being in an area with other medical providers gives a new practice more exposure and credibility.
- If you need a narcotics license, apply for one.
- If you plan to accept insurance, start applying for authorization to receive payments. Approvals can take up to 3 months, so the sooner the better.
- Insurance. First is malpractice insurance. Look for a business owner policy to cover business liability and casualty insurances. Workman’s comp can be added as a rider once you have employees. Health insurance if you can provide it.
- If you plan to accept Medicaid or Medicare, complete your application now.
- Assess and purchase office tools. An application for electronic signature. An online intake system. Set up accounts for online banking and a platform for virtual consults.
- Organize your business documents in clearly labeled folders. Use a specific storage space for secure, anywhere access. (If you keep paper copies, use the same system.) Take time to do this now to save time once you’re busy with patients.
- Set a fee schedule for the services. The best bet is to see if a colleague who has a fee schedule will let you see it. Though CMS and the AMA have fee schedules available online – they’re hard to find.
- Take advantage of the downtime before the business opens. Get information on running a business. Look for a coach or a mentor. Take some classes or read books. The more you know, the more successful you’ll be.
Making Money Opening Your Practice
It’s reasonable to assume that within a 9-months to a year, the practice will be viable. That’s dependent on the choices you make during the process.
Choose a workable location, not too far from where you live. Make sure it’s accessible for people with disabilities. You want exam rooms at are 12 x 12 sq. feet.
Decide early on whether you’ll handle billing in house or outsource. Discuss your options with colleagues. Either way, vet the service provider or the software very carefully.
The majority of data breaches happen because of phishing emails. Take precautions and when you bring on staff – train them.
It’s going to get crazy sometimes. Owning a business is like a rollercoaster ride, especially in the beginning. Always remember quality of care is the primary purpose. The reason for opening your practice is the chance to serve your patients as you see fit.
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