The economics of private practice startup

Despite the dire predictions of the demise of private medical practice in the U.S., physicians continue to open solo practices, form small private practice groups and purchase practices.

Some go into private practice because it has always been their dream. Others do it because it's the only option near their chosen location or for ethics/quality reasons. Still others are forced into it due to disagreements or personality conflicts with employers – and vow never to be someone else’s employee again. And, of course, some do it because they believe can make more money in a different practice.

In many markets and specialties, starting a private practice is considered too risky. If insurance plans or IPA/ACOs are closed to new physicians or don’t pay enough, or if there is an oversupply of physicians in the specialty or the demographics are inadequate, private practice startup is ill-advised. In those situations, the safer course is to simply take employment or relocate, and focus your “business risks” in other directions, like the stock market or real estate.

On the other hand, there are a lot of opportunities for successful, full, profitable, private practices in various locales across the U.S. Many communities are under-served, both in primary and specialty care. This is especially true outside of the commute distance of a coast, big city, resort or other desirable place to live. A joke here in California is that either you practice inland and can afford to live at the beach, or you practice near the beach and can only afford to live inland!

One of my clients – tired of trying to compete with entrenched practices in his adopted California resort community – moved back to the MidWest to care for his aging parents, started a new practice and tripled his income within the year. Now he takes more vacation days in California than when he lived there. Another surgeon flies in to work for a few days twice a month in an underserved small city, and has more than twice the average income in his specialty area. Any community with an average patient wait-list of more than two weeks for routine visits in a specialty service can usually support another physician.

Should you start a practice? It depends. I recommend that income not be the driving factor. When weighing options, you have money on one hand, and everything else in your life on the other hand. Only you can decide the value for yourself. There are a lot of unhappy physicians with lots of money, lots of happy physicians with modest incomes, both employed and self-employed.

Given the selection of a good location, proper preparation and proper execution of your start-up, the economics are straightforward. A few of the big banks have specialty departments that only lend to doctors, offering attractive rates and terms. I recommend taking out a line of credit for more than you’ll need, so you will have the confidence to make good business decisions without worrying too much about short term cash flow. Typically there will be no pre-payment penalty after a couple years, so take the longest amortization period with the shortest prepayment penalty period.

For example, get a $200,000 loan (double what’s needed for most startups), 12 years amortization, and no prepayment penalty after two years. Pay the minimum for two years and then pay off the loan. Most practices can pay off their loan in less than five years with earnings above what they would have earned in similar employment, (some hospital-employment arrangements aside), making the startup essentially cost-free. Buying a practice –at the right price– has the same economics and a little less hassle; it’s just a faster startup.

Around the country, physicians are starting private practices every day. And the economics work if the practice is constructed correctly – paying for itself and earning equal-to or greater-than that of an employment model.