Entering a family practice

By Peter A. Bellini, CPA

In the face of continual and dramatic change in the health care industry, the need for family physicians remains absolute. Both the U.S. population and the health care delivery system look to family physicians more than any other medical specialty. According to the Family Medicine Interest Group, almost 25 percent of all visits to office-based physicians are to family practices.

If you’re a recent medical school graduate about to embark upon a career as a family practitioner, the demand is there. The question is how do you proceed? This article addresses some issues to consider whether you plan to become an employee of an already established family medical practice, purchase a practice, start a practice or become an equity member of a practice.

Becoming an Employee of an Established Medical Practice

Incomes vary significantly by location throughout the country, number of years as a practitioner and other business variables, but the average net income for a family physician is about $137,000 per year. Becoming a W-2 employee of an established practice is the most common avenue for family physicians to get started. Considering that the median level of debt is about $100,000 for recent family practice residency graduates, it’s less daunting for a family practitioner to join a practice and get established before considering the additional challenges of buying or starting a practice.

Joining an existing practice is in the comfort zone of most new practitioners. The practitioner receives a negotiated salary that is paid evenly throughout the year, and taxes are withheld by the employer and remitted to the government on the practitioner’s behalf.

A retirement plan is provided and the practitioner can focus on two things: delivering quality health care services to his or her patients and paying down significant medical school debt. Median debt level is nearly $100,000 with that number running as high as $140,000.

Before joining a family practice as an employee, you may want to ensure that at some point you are given an opportunity to become an equity member of the practice. Not all practices offer this provision. If you can buy into the practice, determine how large your “buy in” will be, how it will be structured, and how will the intangibles that you bring to the table be considered.

Purchasing an Existing Practice

Whether you are purchasing an existing practice or starting a new one, the steps to follow, in many cases, are very similar.

When purchasing an existing family medical practice, advance planning goes a long way. On the surface, purchasing a practice may seem more practical than starting a new one, but that may not always be the case. Due diligence is critical to making the right choice.

Simple demographics is often a driver in the decision making process. According to the Family Medicine Interest Group, family physicians are distributed geographically in much the same proportion as the population in general. It may make sense to purchase a practice in established, heavily populated areas and to start a practice in areas of the country where the population is growing at a significant rate.

One of the major opportunities for purchasing a practice comes when a family practitioner is retiring. Purchasing an existing practice gets you an existing office with equipment, an established patient list, an understanding of area demographics and the competition, and “goodwill.”

Don’t underestimate the value of goodwill. Get a good feel for the practice’s patients and their relationship with the physician(s). Keeping existing patients can be a challenge for the purchasing physician because doctor/patient bonds are so strong. Often, the retiring physician will stay on for a while to help with the transition. That’s one example of the value of “goodwill.”

Then there is the matter of financing. Selecting the best option, such as a traditional bank loan or a special seller-financed arrangement, will affect your operating costs down the road.

Starting Your Own Practice

Starting a business is not for the timid. If you have dreams of your own family practice, there are some significant questions for you to consider. Do you have money to live on until the practice is self-sufficient? How much of an initial cash investment will you need for medical equipment, office space, and other apparatus – from waiting room furniture to computer systems? Should you take on a partner?

The legal form the practice will take is based on whether you want to establish individual ownership, a partnership, a C-Corporation, an S-Corporation, or a single- or multi-member Limited Liability Company (LLC). You’ll want to talk with your attorney and tax advisor before making a decision, but here are a few guidelines:

· The above entities all provide limited liability protection except individual ownership.

· Number of owners required for each type of entity: individual ownership – one; partnership – at least two; LLC and C-Corporation: no restrictions (LLC, however, may require two for federal tax purposes); S-Corporation: 1 to 75.

· Levels of income tax: individual ownership – one; partnership – partner level only; LLC – member level only; S-Corporation – shareholder level, built-in gain and passive income tax at corporate level; C-Corporation – double tax.

· Compensation issues: individual ownership – Keogh or IRA; partnership and LLC – qualified plan with some Keogh type restrictions and no ESOPs; S-Corporation – qualified plan with some Keogh type restrictions; C-Corporation – no limits unique to this entity and some fringe benefit advantages.

All entities file a separate tax return, except individual ownership and the single member LLC, each of which is reported directly on your individual income tax return.

Then there are the operational issues to be addressed before you see patient number one. Just to get started you’ll have to consider:

· Financing options.

· Obtaining medical and business licenses.

· Malpractice, personal liability and worker’s compensation insurance.

· Credentialing and clinical privileges.

· Memberships and associations.

· Acquiring legal and accounting services.

· Tax obligations.

Before you seek financing, you’ll need to prepare a detailed business plan that illustrates your understanding of the economics of starting your own family medical practice. Loan officers will look for reliable estimates of start-up costs and operating expenses. They’ll want to see that your business plan includes efficient practice management methods and accurate projections for overhead expense allocation.

Remember all the benefits you received from the family practice that employed you, including an established patient base, an office, automatic payroll deductions for taxes and administrative services for employee retirement programs? Well, now you’ll need to provide those for yourself and any employees that join you as your practice grows.

Once you’ve obtained your financing and moved into your new office, you’ll have to make decisions on personnel.

Building your staff by hiring the right employees is critical to the success of your practice. Keeping your overhead low is important to economic success, but investing in people means you should be prepared to make significant investments in a quality staff to keep your practice running efficiently. An efficient office enables you to spend your time practicing medicine, not office administration.

Depending on the skills of your staff and internal capabilities, it may be advantageous to consider a health care consulting firm to help. These experienced professionals can help you with ordering and maintaining supplies and medical equipment, establishing fees and setting up coding systems, marketing and sales activities, and office operations. Office operations can include everything from billing, collections, computer systems, accounting and taxes, and benefits programs to regulatory compliance – to name but a few of the myriad activities required to keep your practice successful.

Together, your patient list and referral contacts will provide the major sources of your business growth. Continued success will be determined by how well you nurture and grow both of these sources. Strong relationships with referral contacts will help ensure a stream of new patients. Paradoxically, as a family practitioner, you will probably refer more of your patients to specialists than you will get in return. Therefore, you’ll have to consider other ways to grow your practice, such as taking on new physicians, with existing patients.

How you respond to these issues will determine the income level and economics of your practice. Overhead will consume 45 to 60 percent of total collections, and the largest component of overhead is usually compensation for employees. Because compensation is often based on collections, it is extremely important to implement medical billing procedures to help ensure adequate cash flow.

Your support staff will probably be compensated with typical salary and benefit packages for their functions. Physicians in your practice, however, will probably be paid according to a compensation formula based on components such as base salary and production (35 to 50 percent of net collections from patients). Most physician practices develop their own formulas.

Managing costs is one of the most critical aspects of managing your own family practice. It’s common knowledge that reimbursements from payers – the government and insurance companies – will continue to shrink. While patients will have to pay more for services, it is imperative that family practitioners find new ways to increase practice efficiency and strengthen practice management.

Peter A. Bellini, CPA is a senior manager in the Tax Department of Skoda, Minotti & Co., in Cleveland, Ohio.