Guide to Owning a Medical Practice
While doctors were more likely to open their own medical practice decades ago, this trend may be on the decline. Policy Research Perspectives, a paper from the American Medical Association (AMA) that studied medical practices from 2012 to 2016, reported that 2016 was the first year of the study where less than half (47.1%) of practicing physicians owned their own practice. This percentage represents a 6% drop from 2012.
The general size of medical practices may also be on the rise. The AMA notes that 61% of physicians worked in practices with 10 or fewer physicians in 2012, but that number dropped to just 57.8% in 2016.
Overall, medical practices are growing larger and physicians are opting to work for employers instead of running their own practice. So, what’s going on?
“There are numerous factors that may be influencing this change,” said Brian Dooley, former medical practice marketing executive and founder of Independence Digital, a medical practice marketing firm. “The regulatory environment of the healthcare sector in the last few years has made it increasingly difficult for doctors to start their own practices. Compliance is also more complicated than ever, and this means more overhead and higher costs,” he added.
Rising premiums for medical malpractice insurance are also a huge problem, particularly for independent physicians who shoulder the entire burden themselves. Starting a practice from scratch has become a real challenge, especially with the decline in health care reimbursements from insurance providers. “Many physicians are choosing to join large independent groups or hospitals so they can focus on medicine rather than the complicated business of health care,” said Dooley.
While this progression is real and supported by plenty of data, Debra Phairas, president of Practice & Liability Consultants LLC and board member for the Foundation for Education in Healthcare Management with the National Society of Certified Healthcare Business Consultants (NSCHBC), said she doesn’t think things will stay this way forever. Phairas, who has served as an advisor for physicians opening their own practice for 33 years, believes it’s more of a natural cycle.
There was a period where hospitals were buying medical practices in the 1990s before realizing they were less profitable than they thought, she noted. Eventually, this trend reversed.
The current environment makes it harder for doctors to strike out on their own, meaning independent practices are on the decline again. “It’s more difficult to manage a practice today,” said Phairas. “Physicians don’t always like the business side of the practice. But I always tell them they can do it if they learn some basics about finance and personnel management.”
Phairas believes millennial doctors may also be skewing the numbers due to the burden of massive student loan debt. The concept of starting a practice seems more daunting to them, which may be a major contributor to their disinterest in the business-side of an independent practice. According to the Association of American Medical Colleges, the median medical school debt for 2017 graduates was $192,000.
AMA data supports the consultant’s belief that young physicians are less likely to open their own practice. The same study found that only 27.9% of physicians under the age of 40 owned their own practice in 2016, compared to 54.9% of physicians 55 and older. “Some people just want a job. They don’t have the same feeling that this is a profession to be independent,” said Phairas.
Student loan debt likely plays a big role in how younger doctors choose to practice. Starting your own medical practice can be costly on its own and new physicians may not want to take on more risk while facing down expensive loans.
In this guide, we’ll cover:
The 4 Benefits of owning a private practice
The 4 Challenges of starting your own medical practice
How to start a medical practice
Financing your private practice
Joining a group practice vs. private practice
Owning Your Own Medical Practice: By the Numbers
While striking out on your own may seem like an impossible feat, there are notable benefits that come with self-employment and owning your own medical practice. Dr. Resham Mendi, a radiologist and a business owner of Bright Light Imaging, said the benefits of owning your own practice vary, but can be quite valuable.
Some of the most obvious benefits include:
1. Workplace freedom
“The main benefit of owning your own practice is autonomy,” said Dr. Mendi. “It allows us to practice the way we see fit without anyone higher up to report to.”
Mendi enjoys having her own practice because she can change protocols to improve patient care without dealing with any red tape or management.
“You are in charge of your own style of patient care, which allows you to practice the way you would like to instead of the way your institution dictates.”
2. Flexible work schedule
Having your own medical practice also means having as much vacation time as you want, provided you have the support to keep your office running while you’re gone. Dr. Mendi likes to control her own schedule by making herself available to see patients on her own time. She loves planning her work around her lifestyle instead of planning her life around her work.
3. More control over your business
Dr. Mendi said it is very difficult to work for someone else once you have had your own medical practice, mostly because you have a thorough understanding of how things should run in terms of billing, staffing, scheduling, etc.
“Once you know all that, it’s hard to go back to a lifestyle where other people are making all those decisions,” she said.
4. Financial benefits
Phairas noted that many independent doctors make more money than their peers employed by hospitals. However, this highly varies and may depend on the practice type and location.
“Independent doctors also have the freedom to forgo dealing with health insurance or government programs like Medicare and Medicaid,” said Dooley.
“This lets them remove most of the billing and coding overhead that can plague practices who work with complicated insurance processes. Some do this with a subscription-type model, where patients pay a monthly fee all year and certain wellness visits are covered.”
While owning a medical practice can be rewarding, entrepreneurship comes with its own set of pitfalls. The medical industry is highly regulated, which adds even more to the plate for doctors who choose to employ themselves.
Some of the biggest challenges of owning a medical practice include:
1. Collecting payments
Dr. Mendi noted that medicine is one of the only businesses in the world where you frequently don’t get paid for your services. You’re thrown into an environment where it’s hard to collect, which makes the business side of the equation even more challenging.
“We have to fight with insurance and pursue payment, which often means not getting paid,” she said. The time you spend chasing the money is time spent away from patients, too, which could cost you even more in the long run.
2. Managing the practice
Dr. Dina Strachan, founder and director of Aglow Dermatology and author of Moxie Mindset: Secrets of Building a Profitable, Independent Physicians Practice in a Competitive Market, said one of the biggest challenges of starting your own practice is learning to run the business side of the equation.
“You will have to be willing to work on yourself and grow as a person in order to be a business owner,” she said. “It requires a different mindset than one of an employee.”
Dr. Strachan also noted that self-practicing doctors will have to address their attitude towards money, which is something doctors find challenging in certain fields. “We are groomed in medicine to not care about the money–so now doctors find themselves at the mercy of those who do care about the money.”
3. Compliance and regulations
Phairas said one of the biggest challenges facing physicians is the overwhelming requirement to meet compliance standards. The regulatory environment in the medical industry has become increasingly complex, which can be overwhelming for even the most experienced physicians.
Below is an example of some of the different compliance silos faced by physicians:
- Medicare compliance: Medical practices have to remain compliant with Medicare rules, policies and procedures. Phairas noted that they also need to have a Medicare written compliance plan to accept payments from Medicare.
- OSHA compliance: Medical practices must remain in compliance with the U.S. Department of Labor’s Occupational Safety and Health Administration (OSHA). These regulations are enforced to ensure workplace safety. Phairas also noted that medical practices need to conduct special OSHA training for bloodborne pathogens. “They need to have a OSHA program in their practice, but this is something you can outsource and pay someone to set up,” she said.
- Compliance with HIPAA: The Health Insurance Portability and Accountability Act (HIPAA) of 1996 was created to protect the privacy and security of patients. Medical practices must take special care to ensure patient data is protected and also train their staff to understand and follow HIPAA regulations.
- Coding compliance: Coding compliance has become increasingly complex, but it is crucial for medical practices to get their coding right if they want to get paid. In short, this means submitting the correct coding for various medical procedures during the documentation and billing processes.
- Labor law compliance: Labor laws vary by state, so medical practices need to ensure their labor practices are compliant with local laws. This type of compliance governs how many hours someone can work, the difference between exempt and non-exempt workers and other labor issues.
4. Financial challenges
David Zetter, board member of the National Society of Certified Healthcare Business Consultants (NSCHBC) and president of medical practice consulting firm Zetter Healthcare, said financing a medical practice isn’t always easy.
First, you have to get financing for your practice, then you have to ensure you are getting a fair deal. Zetter said it’s not uncommon for physicians to encounter firms offering financing at 16% to 20% APR.
It’s also not always easy to make money — especially at first. Some specialties are very good at making money, but they are expensive to set up, said Zetter. If you’re going to need imaging, for example, you will need a lot of expensive equipment that could cost hundreds of thousands of dollars.
Furthermore, the location of your practice and the type of building you want to run the business in can increase your startup costs. “If you start a practice in a large city, it’s going to cost you a lot more to lease space there,” he said. “If you decide you want your own building, it’s going to cost a lot more than if you rent a space.”
Every business has its pros and cons and a medical practice is no different. Still, it helps to get your medical practice off the ground the right way from the start.
If you’re interested in owning a medical practice instead of working for an employer, follow these tips to get started in the right direction:
Tip 1: Line up financing
While we’ll outline the different types of financing you can access later in this piece, your first step in starting a medical practice is making sure you have the financial resources to do so. This often involves getting a loan from a bank, although there are other funding sources to consider.
Zetter said there are no hard and fast rules that dictate how much a medical practice will cost upfront. As an example, he said that if you’re a primary care doctor (family or internal medicine), you’re going to need three exam rooms and a reception area at the very minimum. You’ll also need various equipment and medical supplies to get started, although the equipment you’ll need will vary based on the type of practice you run.
“Normally for a small practice, you’re going to need a loan of $75,000 to $150,000 to get started,” he said. “Then you’re going to need a line of credit to access since there is a six-month delay before you start getting paid by insurance.” Your line of credit could be for another $100,000 depending on your unique situation.
But, once again, the type of medicine you’re in will play a huge role. For example, a psychiatrist would need far less financing since they don’t need medical equipment or exam tables.
Tip 2: Obtaining the right licenses
There are numerous licenses you will need to acquire before you open the doors to your medical practice. Some of the licenses you could be required to obtain include:
- A medical license. All states require physicians and surgeons to be licensed, although the exact requirements vary by state. To qualify, physicians must graduate from an accredited medical school and complete residency training. A passing grade on a standardized national licensure exam is also required, although the exam varies depending on a doctor’s specialty. For example, M.D.s must take the U.S. Medical Licensing Examination (USMLE).
- DEA Registration. You must register with the Drug Enforcement Administration (DEA); however, the type of application will depend on the specialty of your medical practice. You can get registered or renew your DEA registration by visiting www.deadiversion.usdoj.gov.
- Dispensing Physician Registration. Physicians that dispense drugs may need to register with their state pharmacy board or another regulatory board. This license is regulated on a state level, so you will need to conform to the licensing requirements where you plan to operate your practice.
- Laboratory License. If you plan to run a laboratory as part of your medical practice, you must also comply with the Clinical Laboratories Improvement Amendments (CLIA) and obtain a CLIA number. The objective of this program, which is overseen by the Centers for Medicare and Medicaid Services, is to ensure the quality of laboratory testing.
- State-based licensing. According to Dr. Mendi, you need to register your practice with the medical board that governs your specialty in your state. You also need a license to operate as a business in your state. Finally, you need to register with the Secretary of State and Department of Professional Regulation. “All of this licensing is required to practice legally and be able to bill,” said Dr. Mendi. “Insurance companies will not allow you to bill unless you are appropriately licensed.”
- NPI number. Individual physicians and their organizations need to apply for an NPI number, or National Provider Identification number. This unique number is issued to healthcare providers for use in the billing and coding process.
Tip 3: Credentialing with insurance companies
In order to accept any type of health insurance, you must set up credentialing with the insurance companies you plan to work with. This process involves filling out paperwork and reaching an agreement with insurance companies that dictates how and when they will pay you. Without insurance credentialing from individual insurance companies, you cannot accept that insurance as payment within your practice.
Tip 4: Obtain insurance coverage
There are two main types of insurance you’ll need for your medical practice — general liability coverage and medical malpractice insurance. Dr. Mendi said that medical malpractice insurance needs to cover both the owning physician and any of their employees individually, while general liability insurance is typically purchased to cover the entire practice.
Medical malpractice insurance has become very problematic for new physicians who are not yet turning a profit. However, the price and overall burden depends on the type of practice you run. A full-time radiologist may only pay $30,000 per year for medical malpractice insurance, while some surgeons may pay more than $100,000 per year just for this coverage alone. “There is a lot of variability here,” explained Dr. Mendi.
In addition to purchasing insurance to protect your practice (and assets), you will also need personal insurance. This would cover major medical insurance, dental coverage, life insurance, long-term care insurance, and other personal insurance policies that will protect you in the event of illness, injury, or death.
Tip 5: Purchase necessary equipment
The type of equipment required will depend on the type of medicine you practice. For example, a gynecologist may need an ultrasound machine, exam tables, exam rooms, and supplies. However, a radiologist would need MRI machines, X-ray machines, and CAT Scan machines. It may be necessary to finance the proper equipment in order to get up and running.
Tip 6: Hire staff
While staffing requirements will vary by both the size and type of practice, most offices need basic staff like a receptionist and clerical worker. If you do in-house billing, you need to hire someone who is certified in medical billing.
On the other hand, a family doctor (also known as a primary care physician or PCP) may also need to hire nurses, physician assistants, medical assistants, and an office manager.
Tip 6: Select your location
Do you want to operate in a standalone building or a shared building? Do you want to rent office space within a hospital? Deciding where to operate your practice is a big decision.
You want your location to be in an area that’s not too saturated with similar practices, but still in a location with a moderate flow of traffic. You also need to find a building that has enough space to house all your equipment and documents, while also leaving room for expansion.
Tip 7: Create a marketing plan
Opening a medical practice won’t help you earn a living if nobody knows about it, said Dr. Mendi. In addition to dealing with the details of opening your medical practice, you will also need a marketing plan. This can include conceptualizing a brand, coming up with a logo, creating a website, and printing brochures and business cards. This is another aspect of medicine that many physicians outsource to a professional.
Tip 8: Determine your price point
While prices are mostly dictated by Medicare reimbursements, you still need to decide how much you will charge for services offered. Many physicians hire an expert to help them determine average reimbursements in their area using market research data.
You may not have much say in how much you can charge since prices are set by market value, but you do need to reasonably estimate how much you expect to earn in order to understand the financial situation of starting your own medical practice.
Zetter noted that some firms will offer financing to physicians at extremely high interest rates. However, there are much more affordable financing options available.
For starters, many banks have a medical/dental practice arm that makes small business loans for this type of profession. Bank of America, Wells Fargo, First Republic, and Chase all have very specific programs just for physicians and dentists. Most of them will loan physicians at least $200,000 just for using their medical degree as collateral, and interest rates tend to be much lower since they consider medical practices a good risk.
Some physicians borrow money from family or friends or turn to private equity, such as hedge funds. More established doctors may even tap into their home equity line of credit (HELOC), since HELOC’s tend to be less expensive than other financing options.
Don’t just consider any lender who offers you a loan. “Definitely shop around and compare financing options,” said Zetter.
With the complexity of starting a medical practice, you’ll want to deal with a financial institution that has years of experience working with borrowers just like you. A bank with a medical and dental branch is often the best option since the professionals who work there deal with medical practice financing all the time.
Phairas also suggested a thoughtful alternative that she has a lot of experience with – hospital loan programs. These loan programs are offered on an independent basis when a hospital has an underserved specialty they need to fill.
In these unique circumstances, a hospital can provide a loan to a new physician or a group to bring in a new physician. “This is a forgivable loan,” said Phairas. “The doctor can apply for this program and they will receive fair market salary and overhead support. If the doctor stays and serves in the community for three-to-five years, they can have it forgiven.”
“The one big caveat is that they do have to pay income taxes on forgiven amounts,” she said. However, going this route can still save you tens of thousands -or even hundreds of thousands- of dollars.
A lot of physicians don’t know about these programs, she said, mostly because they are not heavily advertised. This is one area where hiring a professional medical consultant can help since they may be able to help locate these opportunities.
Before Dr. Mendi opened her medical practice, she worked in a group practice for over 7 years. She explained that there are pros and cons to both environments, but prefers to work for herself.
Many of the differences can depend on the size of the practice, who is in charge and where you live. Let’s take a look at the pros and cons of each scenario.
Joining a group practice
- You don’t have to deal with administrative headaches, You can just go to work and focus on patient care.
- You may be able to work regular business hours (Monday through Friday, 9-5), although it depends on your employer.
- When you work in a group practice, you are usually a salaried employee.
- Most group practices are relatively stable and you’re spreading your risk over multiple people. This means less personal risk and the potential for lower insurance premiums, said Dr. Mendi.
- You have little freedom and autonomy.
- You may not have any control over operating decisions.
- It may be harder to plan vacation around other people.
- You may earn less than you would in private practice, although this varies.
Opening a private practice
- You are in charge of patient care and protocols.
- You have more autonomy and personal freedom to practice medicine how you want.
- More freedom to plan a vacation around your own schedule.
- You may be able to earn more money as a private practitioner.
- There is more risk involved. “All of the risk is on you,” said Dr. Mendi. “If your practice doesn’t do well, that affects your bottom line.”
- All administrative work has to be handled by you. Even if you outsource tasks, you still have to oversee them and/or hire someone else to do that work for you.
- You may be able to take as much vacation as you want, but it’s not as easy to get away. “If you are a solo practitioner, closing your office is harder because you have to get coverage,” said Dr. Mendi.
Fact #1: Young physicians own their own medical practice at lower rates than their peers. As of 2016, only 27.9% of physicians under 40 owned their own practice, while 54.9% of physicians ages 55 and older do.
Fact #2: Note the gender gap. In 2016, 36.6% of female physicians had an ownership stake in a medical practice compared to 52.2% of their male peers.
Fact #3: Most physicians still work in practices owned by physicians. In 2016, 55.8% of physicians worked in a physician-owned practice. This also includes employed physicians and independent contractors who work for them.
Fact #4: Big practices may be on the rise. In 2016, 13.8% of physicians were working in large practices with 50 or more physicians. In 2012, only 12.2% of physicians worked in practices of that size.
Fact #5: The trend may be slowing. Since 2014, the increase of hospital-owned practices has slowed down. In both 2014 and 2016, 32.8% of physicians were hospital employees or they worked in a practice with at least some hospital ownership.
Fact #6: Small medical practices are decreasing in number. In 2012, 61% of physicians worked in practices with 10 or fewer physicians. In 2016, only 57.8% were in small practices of that size.
Fact #7: Physicians were more likely to own their practice in certain specialties. Areas with the highest percentage of physicians who owned a practice in 2016 include surgical sub-specialties (59.3%) and radiology (56.3%).
Fact #8: Some specialties have fewer owners overall. In 2016, the specialty with the least amount of independent practices was emergency medicine physicians (27.9%).
Fact #9: You are more likely to work as an employee if you work with children. In 2016, the specialty with the highest percentage of employed physicians was pediatrics (58.3%), noted the AMA.
Fact #10: Psychiatrists were more likely to operate on their own. In 2016, this specialty had the greatest percentage of physicians in solo practice at 31.9%.