Money Checkup Podcast

Debra Phairas

Episode 22: Launching New Medical Practices with Debra Phairis

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Altogether, the process of setting up a medical practice takes about six months. In this week’s episode of Money Checkup, Debra Phairis of Practice & Liability Consultants, LLC walks us through each step you’ll need to take to get your practice up and running.

Financing your medical practice

As you research the possibility of owning your own practice, figure out the demand for your specialty in your region. A primary care practice can thrive while serving 1,000 to 2,000 people, whereas a general surgery practice might need a population ten times as large. (The Council on Graduate Medical Education and the American Medical Association have research on these topics.) Then, research the physicians working in that specialty in that region to understand if the area is over- or under-served. 

Some hospitals offer loan guarantees to physicians starting practices that will meet underserved needs. In these programs, hospitals typically provide a physician with startup capital, a fair market salary and overhead support for your first year. If you stay in the community for a certain period of time, typically three to five years, the hospital begins forgiving your loan. For example, if the term is three years, 1/24 of the loan will be forgiven each month during years two and three.

If you pursue a hospital loan, note that the hospital will issue a 1099 to you at the end of every year after the first year. You will have to pay income tax on the amount of the loan. Still, assuming that tax burden is almost certainly cheaper than taking out hundreds of thousands of dollars in loans yourself. Your CPA can help you put aside money for that liability. 

It can be much easier to buy a business than to start one from scratch. If you choose to buy an existing practice, make sure all parties to the deal agree on the value of the assets. You may find it easier to get a loan to buy a business than to start one — lenders will look at the prior owner’s history and, if the business was successful, may give the borrower favorable terms. 

Setting up your business entity

Next, set up your legal business entity. Most medical practices are incorporated as C-Corps or LLCs. Incorporation offers some extra protection in case of lawsuits. After they incorporate, I usually recommend that my clients make an S-Corp election for tax purposes. If you are a C-Corp, you’ll pay tax at the entity level, and then any distributions you give yourself will be taxed as dividends; as an S-Corp, you report your profits and losses on your personal tax returns — it is not taxed at the corporate level. 

Some physicians choose to practice as sole proprietors and others as LLCs. Generally, though, I recommend that physicians incorporate across the board. 

There are two important exceptions for California physicians. First, medical professionals are not permitted to set up LLCs, so California physicians usually incorporate as C-Corps. Second, if you choose to have a fictitious business name, you need to clear it with the Medical Board of California to make sure it isn’t too similar to another practice.

Finding space for your practice

Finding suitable space is essential to starting a successful medical practice. And this needs to be near the top of your to-do list: You’ll need to provide your address for your business license, insurance credentialing, and more. 

On average, medical practices spend about 6% of their revenue on rent. In high-cost areas, like coastal U.S. cities, practices may need to spend more or make do with less square footage. Use your revenue projections to set your budget as you begin your search. 

The most important part of medical office space is exam room space, because that’s where revenue is generated. Family practices typically need three exam rooms per doctor; other specialties may only need two. When exam rooms are full, your practice is operating at maximum capacity and generating maximum revenue.  

Choose a building that is already zoned for medical practice, if possible. If you plan to do interior or exterior renovations, plan for construction to take at least two weeks longer than you expect. And make sure to tell your CPA if your landlord offers you money for tenant improvements — leasehold improvements are amortized and your CPA can help make sure you receive the tax benefits you’re entitled to. 

Getting your business license and bank account

Set up a phone and fax line right after you secure your lease. If you’re going to accept Medicare payments, you’ll need to provide a phone and fax number. 

Next, take your tax ID, articles of incorporation, and contact information, and go to the bank for a business bank account. Some banks offer business customers a “lockbox” in addition to standard banking services. This can be helpful if you’re signing a short-term lease and worry that payments from insurance companies may be delayed — insurers can send them to the lockbox instead of your office space. 

Finally, obtain a city or county business license. Medicare requires that medical practices have local business licenses before they can accept payments. 

Setting up your accounting practices

Medical practices are at high risk for embezzlement. To mitigate this risk, set up good accounting controls: At least two people should be involved in the process of accepting payments, depositing checks and keeping the books. 

A CPA can help you set up good accounting practices, both online and offline. I typically recommend QuickBooks to my clients as a management software. Using QuickBooks, you can track accounts receivable (payments from patients) and accounts payable (your business expenses) and categorize expenses. Break out payroll, if you can, into separate groups for physician owners, physician employees, nurse practitioners, and staff. This will help you track how profitable each provider is in your practice. Have separate line items for medical supplies, office supplies, and ongoing office expenses like utility bills. All this will make tax season much simpler. “Miscellaneous” expenses are often a target for IRS audits, so categorize every expense. 

Business owners should know their books better than anyone else. Still, it can be helpful to hire someone to help you manage and maintain them. For example, consider giving your CPA access to QuickBooks so they can track your revenue and spending. Your CPA can help you compare your balance sheets year over year to understand how your business is growing or where you’re struggling. 

Carrying insurance for your medical practice

As a business owner, you’ll need to carry several insurance policies (in addition to the malpractice insurance and disability insurance physicians should already have.) All business owners should have general liability or premises liability coverage, and your lease may require that you carry a specific amount. Employment practices liability insurance is also a wise investment. 

Practices in California are required to carry workers compensation insurance, and many practices offer employees health insurance as well. 

Accepting patient insurance and Medicare

The one single step in this process that takes the longest? Getting credentialed by patient insurance carriers and Medicare. Expert help is essential for navigating this part of the process.

If your medical practice plans to do insurance billing, it can take three to four months (and sometimes longer) for insurance companies to issue credentials for your practice’s new tax ID. As soon as you can, get your NPI, or National Provider Identifier. Corporations are NPI Type 2. Then, make sure you respond promptly to any correspondence from insurers and from Medicare, and get re-credentialed as necessary. If you don’t, you could lose your provider status, making you ineligible to receive Medicare and insurance payments until your paperwork is up to date. 

Putting the final pieces in place

Finally, prepare to open your doors. Order office supplies and furniture. (Don’t overlook used options — often you can find excellent pieces for half the price of new ones.) Design a mobile-friendly website, stationery and business cards. 

To keep your office humming, you’ll need office policies and procedures that cover everything from how to answer the phone to how to set up trays for physicians to carry into exam rooms — and all of it needs to be HIPPA-compliant. If you need help getting started, the AMA and other organizations have examples online. Make sure you also create a tracking system for physicians who refer patients to your practice. These physicians are your customers too, so contact them in the manner they prefer and make sure they have a good experience with your practice. 

At least six weeks before you plan to open your doors, begin looking for your office staff. Familiarize yourself with your state’s labor and anti-discrimination laws, including what you can and cannot ask applicants in job interviews. For example, employers in California cannot ask about an applicant’s criminal history. If you want to do a background check, you can do so after you extend a job offer, as long as you explain in the offer letter what you plan to do. 

As you walk through each of these steps, work with CPAs, consultants, lawyers, and other professionals who know how to work with physicians and medical groups. They’ll be able to guide you through the ins and outs of finances, human resources and business development, with an eye toward your ultimate goal, which is to provide medical care.  

Make sure your personal finances are ready

It typically takes a new business owner about three years to build a business from the ground up. In the context of a medical practice, it’s not necessarily that you will lose money for the first three years — just that it might take that long for you to earn a competitive salary for your specialty. Make sure you have money set aside for yourself and your family before you start building your business. 

Debra Phairis is the president of Practice & Liability Consultants LLC, a consulting group that helps physicians set up their own medical practices. The firm has worked with more than 2,000 practices since 1985. To learn more, visit https://www.practiceconsultants.net or email her at DPhairis@practiceconsultants.net

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