Is it time to be your own boss? Private practice may be the answer best suited for physicians desiring a degree of autonomy and work-life balance that they may not be able to get from employment at hospital systems. Some physicians may be motivated toward private practice to achieve more freedom regarding referrals for the best care of their patients to overcome the strongly discouraged practice of referring patients outside of the hospital system.
The trend up to this point has been for physician employment by hospitals or academic medical centers. However, for those with an entrepreneurial spirit, the bureaucracy of employment at these institutions may have started to become stifling, causing them to become disgruntled. Perhaps the trend toward hospital employment is simply because of lack of education on the business side of medicine or new physicians who have simply opted for the familiarity of hospital employment due to exposure to teachers who work for hospitals.
What financial knowledge is required to operate a private practice? The answer is that there is likely less financial knowledge needed to run a private practice than was needed to prepare for medical school. One can acquire the basics through a few seminars covering human resource management, marketing and understanding basic financial information and ratios.
One of the most common ways to get started in private practice is to buy a practice of a retiring physician. Often banks have physician loan programs that facilitate the financing of a practice acquisition. The medical degree, the asset producing future earnings, is essentially treated the same as collateral would be in any other business.
Private equity has become another predominant source of capital in recent years. While collaborating with private equity may be an excellent strategy for doctors considering retiring in 1 to 3 years, and a middle-of-the-road strategy for those with an exit term between 3 and 10 years, it is generally not the best strategy for physicians with a 10 or more year horizon starting a new practice. These physicians may want to run the math on the future revenue stream. The private equity investors will want a return on their investment. The return is typically accomplished through cost savings, including reduced salaries to physicians.
Start out the practice on the right foot with an experienced practice manager. Bringing in relatives without expertise to work in the practice, including hiring a family member who is an attorney without healthcare expertise, does not seem to work most of the time. It can also be a mistake for physicians to get too involved in the management side of the practice. They should be more the revenue producers, because they are the only ones who can perform this function.
Build relationships with other practitioners for referrals. Typically, specialists will court primary care physicians for referrals. However, it also goes the other way. Because there is currently a shortage of primary care physicians, patients often ask their specialists to refer to a primary care doctor. Building relationships with other practitioners and providing them with insight into your expertise can be one of the best ways to market your practice.
Considering the current shortage of primary care practitioners, there may be opportunities for these medical professionals to achieve success in establishing their own practices. Often those interested in establishing primary care practices have questions regarding the benefits of a concierge system. It appears that most concierge practices have the best chance for success when the practitioner has had a number of years of experience operating an insurance-based practice prior to transitioning to a concierge practice.
Opportunities also exist in telehealth, especially for certain specialties, e.g. Psychiatry. Through telehealth, a physician may be able to see more patients. In establishing or expanding a practice, consider surveying the patients to determine their preferences with regard to telehealth services.
Ancillary services, such as diagnostic services, may add a source of revenue for a practice. When initiating an ancillary service, start with a small one that does not cost a lot and then expand. Due to the required investment and lag in collection of billings, ancillary services often take 3 years before becoming profitable. Because of this, it is crucial to plan for initial negative cash flows. In your planning and evaluation, consider reasons why any negatives of ancillary services may be desired loss leaders that provide significant benefits to other aspects of your practice.
There can be a lot of independence in private practice. You will want to understand the revenue per additional hour per day. Choose the hours and number of patients that will meet both your financial and quality of life objectives. If you can choose to get out of taking calls, consider how the cut in profit margin from hiring coverage will weigh against the quality of life benefits. After considering these matters, you might even decide to eliminate your services for a day to meet your objectives.
In a hospital system, contracts can mismatch the amount of work required from a physician versus their compensation as compared to benchmark standards, e.g. work requirements can be in the 50th percentile, whereas compensation is in the 25th percentile. Further, the hospital system can decide to eliminate your services for a variety of reasons including a decrease in demand for services. In private practice, you can have the autonomy to make the decisions that are best suited to meet your objectives and maximize your compensation associated with your work output. You decide. Is it time to be your own boss?
Article submitted by Terri L. Marakos, CPA, CHBC
Fletcher, Terry and Phairas, Debra. NSCHBC EDGE Podcasts- Episode 18 (April 2022) Physician’s Getting Back to Private Practice from Hospital System Employees.