October 20, 2022
Adam Hoeksema
Confession time - I am not a doctor. I am an accountant and an entrepreneur, but I have worked with dozens of doctors over the years to help them create financial projections for their new medical practice, and recently I just got really curious - how do doctors ACTUALLY start their own medical practice?
I know from an Excel spreadsheet perspective how it works, heck, my company literally built the - startup medical practice financial projection template - but I still had so many questions. How does this really work?
How does a doctor go from working a job, to owning their own private practice?
So I decided to write this monster of an article to basically go through all of my questions, do the research and try to provide you with some answers and things to consider as you start your own practice. If I were a doctor looking to start my own medical office what questions would I have? What would I do?
I realize that there are all kinds of specialties in the medical field and your specialty may cause your path to look a bit different than others. I can’t pretend to know all of the intricacies of each medical specialty, but I do know most of the same questions about business will still apply. Since primary care is probably the most common type of medical practice for a doctor to start, I will use a startup primary care practice as our example in this post.
So with that in mind, I had over 40 questions that came to mind as I thought about what I would do or want to know if I was starting my own practice. Just so you can get an idea of what I plan to cover in this post, here is the list of initial questions.
Market Analysis for a New Medical Practice
- Where should I start my medical practice?
- Who are my competitors?
- Is there too much competition?
- How do I know there will be enough demand for my services to support my practice?
Acquire an Existing Medical Practice
- Should I acquire an existing practice instead of starting a new practice?
- How much does it cost to acquire an existing medical practice?
- How to finance the acquisition cost of a medical practice?
- How to find a medical practice to acquire?
Advertising for a Primary Care Practice
- Where will I find patients for my practice?
- How much does it cost to acquire a patient for a primary care practice?
- How much does the average patient spend on primary care services per year?
- Should I provide Medspa services?
- How many patients can I see per day?
Staffing for a Startup Medical Office
- Should I try to get other doctors to join my practice?
- What type of employees do I need for my primary care practice?
- How much should I pay my employees?
- When should I bring on additional employees for my medical practice?
- What size medical office do I need for a primary care practice?
- How many exam rooms do I need per doctor?
- How much will it cost to construct a new medical office?
- How much will it cost to lease a medical office?
Medical Practice Startup Costs
- How much will the medical equipment and furniture cost?
- How much working capital should I have for a startup medical practice?
- How to finance startup costs for my doctor’s office?
Physician Office Cash Flow Questions
- How long should I expect it to take for my startup medical office to breakeven?
- How long does it take to get paid by health insurance companies?
- How long does it take to get paid by Medicare and Medicaid?
- Should I accept insurance?
- Should I only accept private pay for my medical practice?
Primary Care Doctor Annual Revenue
- How much revenue can a primary care physician generate per year?
- How much revenue per active patient per year will a primary care office generate?
Primary Care Office Operating Expenses
- What are the typical operating expenses for a primary care physician?
- What is the average gross profit margin for a primary care office?
Primary Care Office Profitability
- How profitable is the average primary care medical practice?
- How much can I pay myself as a primary care doctor?
- Should I start full time right away?
- Should I keep a job on the side while startup up?
- How long until I will be able to pay myself?
- How much cash should I have saved before I launch my own medical practice?
- How much is my medical practice worth?
- Should I start my own medical practice or remain as an employee?
Yikes! That is a long list! Let’s dive in.
Market Analysis for a New Medical Practice
Since you have likely already decided on your area of specialization, we can’t really go back and think about whether it would be better to start a primary care practice vs. a pediatricians office vs. a urology practice, SO given that you know what type of medical practice you will start, my first question is where? Again, we are going to use a primary care office example in this post.
Where should I start my medical practice?
I would want to know where it makes sense to start my practice, and a big part of the answer to that question would be how many other primary care providers are in the area and whether there is a shortage or surplus of providers. I was able to find a January 2022 report on the number of active physicians per capita broken down by state. If you are willing to move anywhere in the country, this list could be a good starting point.
States with the Most Doctors per Capita
The top 5 states ranked by doctors per capita were:
- District of Columbia = 871 active physicians per 100,000 residents
- Massachusetts = 466 active physicians per 100,000 residents
- Maryland = 393 active physicians per 100,000 residents
- New York = 389 active physicians per 100,000 residents
- Vermont = 386 active physicians per 100,000 residents
So I would say from a high level that I would probably want to avoid the states with more doctors per capita simply because it means there is more competition for patients. You would be fighting against the current. It might make sense to take a look at a state lower on the list.
States with the Least Doctors per Capita
The bottom 5 states ranked by doctors per capita were:
46. Arkansas = 215 active physicians per 100,000 residents
47. Wyoming = 211 active physicians per 100,000 residents
48. Oklahoma = 209 active physicians per 100,000 residents
49. Mississippi = 196 active physicians per 100,000 residents
50. Idaho = 196 active physicians per 100,000 residents
You can find the full list of 50 states here.
Who are my competitors?
Now that I have an idea of the amount of competition on a state level, I probably just need to pick a few cities that I am interested in opening up shop in and do my own research. How many primary care physicians can I find on Google in city 1 compared to that city’s population and see if there is one city that sticks out as having a shortage of primary care physicians.
You can also do some sneaky research and call different physicians offices in the cities you are looking to open in and ask if the doctor is accepting new patients. If you find a city where many of the physicians are not accepting new patients that might be a good hint that there is more demand for primary care services than there is supply of physicians in that area.
Is there too much competition?
Another tactic to determine whether there is too much competition in a given city is to try to get an accurate count of the number of primary care physicians in the city, then take the city's adult population and divide by the number of physicians. You can find ranges from 2,500 down to 1,200 patients per physician as the “right” number. If you find that one city seems to have 3,000 adults per primary care physician that might be a good sign that there is a shortage of docs.
How do I know there will be enough demand for my services to support my practice?
Again, it looks like one primary care physician can sustainably support 1,200 to 1,900 active patients. So before you pick a location, your goal is to figure out whether you believe you can attract at least 1,200 patients to your new practice. If you can, you should be able to operate a sustainable medical practice from a financial standpoint.
Acquire an Existing Medical Practice
Before I go too far down the path of starting a new medical practice, I think it is worth considering what it would look like to acquire an existing medical practice. There are definitely some pros and cons and some questions that came to my mind that I wanted to dig into.
Should I acquire an existing medical practice instead of starting a new practice?
There are definitely some pros and cons to this question that I wanted to list.
Pros of acquiring an existing practice
- You will start with a base of patients
- You can be cash flow positive from day 1
- You can likely afford to pay yourself right away
- It might be easier to get an acquisition loan than it is to get a startup loan
Cons of acquiring an existing practice
- Change is hard. If you need to make changes for the existing practice, it might be hard on the patient base as well as the existing staff. Starting fresh allows you the chance to get it right the first time.
- You will likely need to take out a larger loan in order to acquire an existing practice than you would need to start a new practice.
- You might struggle with patient turnover. Patients selected the former doctor as their physician and if you operate differently or appeal to a different type of patient, you may end up losing many of your initial patient base and need to acquire new patients anyway.
How much does it cost to acquire an existing medical practice?
Another key question I have is how much are we looking at spending to acquire an existing practice. There are some nice pros, but they come at a price and I want to know how much that price might be. Typically businesses are acquired based on some multiple of the earnings of the business. Different industries command different multiples. For healthcare businesses we see a multiple of between 4x and 5x EBITDA. EBITDA is your practice’s earnings before interest, taxes, depreciation, and amortization. So if the practice you are looking to purchase did $1,000,000 in annual revenue with an EBITDA of $250,000 you could expect to pay between $1 million and $1.25 million to acquire the practice.
This would be the method of valuing a practice if you are buying based on the earnings of the business, but sometimes you might also purchase the real estate - the medical office building - in which case you can expect to have to pay to acquire both the earnings of the business plus the value of the real estate.
How to find a medical practice to acquire?
If you are set on a particular city that you want to practice medicine in, then my first step would probably be to connect with other primary care physicians that might be approaching retirement age and ask whether they have interest in selling their practice. You might be able to work out a deal where you acquire the practice over a period of time. You could join the practice, work as an employee or a partner for some time and then take over in a smooth transition when the owner retires.
How to finance the acquisition cost of a medical practice?
If you are a relatively young physician looking to acquire a practice you probably still have a bunch of student loans from med school that you are paying off, and probably haven’t had the chance to save a million dollars to use toward an acquisition.
So how do you buy the business?
Well you are probably going to need to get a loan. A common practice when acquiring a business is to split the purchase price between:
- Equity investment - 10% - you will probably have to invest about 10% of the acquisition price into the deal.
- Sellers Note - The seller might be willing to finance a portion of the purchase price with what is called a seller’s note. Basically this just means that you will pay the seller that portion of the purchase price over a period of time.
- Bank Loan or SBA Loan - The remainder of purchase price you can attempt to finance with a bank loan or SBA loan. The SBA has some great programs like the 7a program which will be perfect for an acquisition loan. When your banker asks you for a set of financial projections for the acquisition, make sure to grab our acquisition financial forecast spreadsheet which will help you provide the pro formas that the bank will need. There are banks that specialize in making loans to healthcare providers, I would suggest finding a specialist instead of simply walking into your local bank branch. A simple Google search will help you find a good bank for your location that specializes in medical practice lending.
Whether you end up acquiring an existing practice or starting your practice from scratch, there are still a number of questions that I have and will continue to walk through next.
Advertising for a Primary Care Practice
According to PatientGain the average US clinic will spend $6,677 per month in advertising to acquire new patients. If that sounds like a lot to you, it sounded like a lot to me too! But until your practice is near capacity you need to find ways to acquire patients quickly because each month that passes where you are paying for your office, your staff, your insurance, etc but you aren’t operating at or near capacity is a month that you are probably losing money.
Where will I find patients for my practice?
There are essentially 3 ways that I know of to acquire patients for your practice:
- Advertising
- Organic Search
- Referral
Initially it might seem like paying for advertising is bad and you should focus on free organic search results and referrals since they are free as well, but I would posit that all three options come at a cost. Advertising has a clear cost to acquire a patient. Search engine optimization (SEO) requires a lot of work and expertise in order to rank well for keywords like “primary care doctor in XYZ city.” You will either need to spend a lot of time creating content and working to rank well for that keyword phrase on your website, or you will need to pay an expert to help do that for you.
Finally, referrals aren’t free either. Referrals require that you invest time and effort in building relationships with other providers that can refer to you as well as investing in time to build relationships with your patients such that they would tell their friends about you.
How much does it cost to acquire a patient for a primary care practice?
It costs between $125 and $153 to acquire a patient for a medical office.
This is actually based on some pretty old data from 2016, but it estimated the cost per lead for healthcare businesses to be $126.29 back in 2016, so we can be quite certain it is more today. This is really only the cost for a lead which might mean scheduling an appointment. We also need to consider that some percentage of leads will not become active patients which means the cost to acquire a patient is even higher.
What percentage of doctor’s appointments are no shows?
Between 15% and 23% of scheduled doctor’s appointments are no shows according to Tine Health. This means that we can take the $125 cost per lead and multiply by 1.23 to come up with a high range cost to acquire a patient of roughly $153. If you are going to have to acquire all of your patients through advertising and we assume that you need at least 1,200 active patients, we know that you will need to spend at least $183,600 to fill your practice. That is also assuming you don’t lose a single patient which we know is unrealistic. I would make a mental note that I should expect to spend at least $200,000 in order to acquire patients in the first couple of years of my new practice.
Ouch that is expensive right?! But your alternative is to pay up to acquire an existing practice which will probably cost you even more per patient.
Where to Advertise for a Primary Care Clinic?
Another question is how are you going to spend this $200k in an effective way? I would recommend you find a digital marketing agency to help you, but just to give you some ideas. The most obvious place to advertise is on Google Adwords. You want to show up when a potential patient Google’s “primary care doctor in _____” for your particular city. One thing that is great about Google Adwords is you can use the Google Adwords keyword tool to estimate how much it will cost per click to advertise for various keywords. I demo how to use Google Adwords Keyword Tool to estimate your cost per click in this video.
Just as an example, we can see below that the range of the cost per click for the keyword phrase “primary care doctor in Chicago” is between $5.50 and $17.29.
I realize this is a big range, but it does give you some context on how much it will cost to get a targeted visitor to your website. If we split the difference and assume the average cost per click will be $10, that means for $150 you can get 15 targeted leads to your website and aim to get 1 of those 15 to sign up and show up to an appointment.
Again I wouldn’t suggest doing this yourself, you could waste a lot of time and money on Google ads, unfortunately I know from personal experience ha! But it is still helpful to understand the process so you can ask the right questions to a potential service provider.
OK that is probably enough for now on the patient acquisition side of things. Now that we assume we have some patients, we need to know what services to provide.
Primary Care Services
I am not the doctor here so I am not going to have an opinion on what services to provide, but I am going to answer a few key questions that will ultimately have an impact on your potential revenue.
How much does the average patient spend on primary care services per year?
First, I wanted to know how much does the average patient spend on primary care services per year in the United States. I found that the average annual spend on primary care services is $270 per person.
I had to do a bit of math to get to this number, so let me show my work like in high school algebra.
- This study states that total healthcare costs in the US in 2016 were $1.617 trillion dollars
- 5.4% of the total spend was spent on primary healthcare
- This means that total primary care spending in the US in 2016 was $87.3 billion dollars
- The US population in 2016 was 323 million
- The average person in the US spent $270 per year on primary care services in 2016
I am planning to get into how to forecast revenue for your clinic in a bit, but I can’t help but take a quick sidetrack here because the math is jumping out at me. If the average annual spend on primary care services is $270 per person and you only have 1,200 patients which I mentioned as a bottom of the range of what should be sustainable, that only amounts to $324,000 in annual revenue. That just isn’t enough and we know anecdotally that primary care clinics are making more than $324,000 per physician per year.
So what gives?
My accountant, non doctor, hunch is that although the average person in the US might spend $270 per year, we know that many people don’t see a primary care physician every year. In fact, I was able to find some helpful data that shows that roughly 25% of US adults don’t see a primary care doctor every year. So those individuals wouldn’t even fall within your patient population. Your average active patient will likely generate much more than $270 per year.
With nearly 50% of your active patients visiting at least twice a year, you can see how you should be able to generate more than the average spend of $270 per US adult per year.
Should I provide Medspa services?
While we are on the topic of how much the average patient spends, I have noticed a trend lately where a number of my physician clients are looking to provide “Medspa services” in addition to typical primary care. I have no medical opinion on this trend, but from a business perspective I can certainly understand the interest in providing medspa services. These services allow you to generate more revenue from the same patient base. Typically medspa services are repeat services as well which means you can potentially increase your revenue per patient per year quite dramatically.
I took a screenshot from our healthcare provider projection template below that shows how you can enter in your various services and for each service it will ask for the number of times per year that the average active patient will utilize each service. Since Medspa services are repeat services you can play around with the financial model and see the potential impact on total spend per patient per year.
How many patients can a doctor see per day?
On average, a doctor can see between 20 and 30 patients per day according to Excel Medical. This means that if you see patients 5 days per week for 50 weeks you can have a maximum of 7,500 patient visits per year.
Once you fill out the services table assumptions in our financial model it will show you the number of services/visits per year that you are forecasting per active patient. In our example you can see that the model is forecasting 6.15 visits per year per active patient.
You will then want to take this number x your number of active patients to estimate the number of visits per year that you are forecasting and make sure that it is not too much more than that 7,500 maximum number of visits that we calculated. In this example, if we had 1,200 active patients x 6.15 visits per year = 7,380 visits per year. Perfect!
Again, I am not advocating for providing Medspa services or not, but you can see that without the repeat visits, you will likely need many more active patients to fill up your calendar with 7,500 annual visits than if you can provide more repeat services.
Staffing for a Startup Medical Office
So we have patients and we have services figured out, but you can’t do it all alone. In fact, you shouldn’t do it all alone. As a doctor your time is incredibly valuable, so you should be trying to optimize for spending your time on high value billable services and hire others to take care of everything else, as best you can. I have worked with a number of doctors that are trying to do the billing and the scheduling and the bookkeeping etc when they start their practice, and I can understand this temptation because it allows you to save some money up front, but in my opinion you would be better off to just build up your active patients as fast as you can and spend your time on billable patient work and delegate everything else.
So let’s hit on some common staffing questions.
What type of employees do I need for my primary care practice?
The typical employees that a primary care clinic will employ at a bare minimum include:
- Non-clinical assistant - This employee will be responsible for checking in patients, answering the phone, scheduling and office paperwork.
- Medical assistant - This employee will be responsible for bringing the patient to the room, handling patient intake and taking their vitals among other miscellaneous tasks.
This is the bare minimum that will allow a provider to focus on being a provider. Depending on the size of your practice there is a whole list of potential employees you could consider hiring as you grow. That list includes:
- Front Desk Staff
- Dedicated Phone Staff
- Nurse
- Lab Services
- Billing
- X-ray Tech
- Transcription
- Practice Manager
Since this article is assuming a new startup medical office, I am going to assume you can start with just two employees and potentially add to your staff over time.
How much should I pay my employees?
Again since we are assuming just two required employees to start with, let’s focus on those payroll costs.
How much does a medical assistant make?
A medical assistant at a primary care clinic makes $32,000 per year on average. This is based on a $16 per hour national average as reported by Ziprecruiter.
How much does a medical receptionist make?
A medical receptionist at a primary care clinic makes $30,000 per year on average. This is based on a $15 per hour national average as reported by Ziprecruiter.
When should I bring on additional employees for my medical practice?
As I mentioned above there are a host of additional employees that you could bring on, but personally I think I would try to stick with 2 employees for as long as you can and then outsource everything else. You ought to be able to outsource your medical billing as well as your bookkeeping and accounting function.
Should I try to get other doctors to join my practice?
There is certainly a trend towards larger and larger physician practices. Of course there are benefits to having additional providers in your practice. You can have someone to fill in for you when you are gone is one of the obvious advantages. If you are the only physician and you go on vacation, your employees might as well take vacation at the same time and your practice revenue grinds to a halt. When you can share more of your startup expenses, staffing and operating expenses across multiple providers it will lesson the blow for any one provider.
And yet, there is still something intriguing about owning your own private practice and getting to run the show the way you want to run it. Depending on the number of providers you expect to have, the size of your facility will need to change. So again, we will assume you are on your own to start with.
Medical Office Questions
Assuming a single provider practice, I wanted to know what I would be looking at in terms of medical office space requirements. Here is what I found.
What size medical office do I need for a primary care practice?
The average primary care practice will need 1,200 to 1,500 square feet of medical office space for a single physician practice according to Medscape.
How many exam rooms do I need per doctor?
The average primary care physician will need 3 exam rooms and 1 procedure room in order to operate most efficiently according to AAFP.
How much will it cost to construct a new medical office?
It costs $498 per square foot to construct a new medical office space according to Levelset. So if you are looking at 1,500 square feet of new construction, you can expect a total cost of approximately $750,000 for a stand alone medical office. Now it probably doesn’t make much sense at all to build a stand alone medical office for your single provider practice. In reality you are probably going to lease and renovate a space, but I wanted you to at least have the data at your fingertips for new construction costs.
How much will it cost to lease a medical office?
The average annual lease rate for medical office space in the US was $22.95 per square foot according to Colliers in 2019. This was a triple net lease rate which means that you as the tenant will have to pay for additional expenses in the space like utilities, common area maintenance, and certain repairs and maintenance. We can also expect that this rate is probably gone up since 2019. If we assume a 2022 rate of $25 per square foot with a 1,500 square foot office you can expect to pay monthly rent of $3,125.
How much does it cost to renovate a space for a medical office?
It costs between $400 and $1,000 per square feet to renovate a hospital or medical office according to InvoiceOwl.
Ouch! Now that assumption was for medical offices AND hospitals so I would assume that a primary care office should be toward the low end of that range, but still $400 per square foot for 1,500 square feet is a renovation cost of $600,000. Now that new construction at roughly $500 per square foot doesn’t sound so bad.
You should be able to negotiate with the landlord to cover some or all of the tenant improvements, but if you are also responsible for renovations you can expect a medical office renovation cost of $600,000 based on these assumptions.
The longer you are willing to sign a lease for and the higher the rent per square foot you are willing to pay, the more the landlord will be willing to cover renovations. When you are a brand new startup, I would lean toward paying a higher monthly lease rate in exchange for the landlord to cover more of that upfront cost.
Medical Practice Startup Costs
It can cost between $100,000 and $800,000 to start a primary care office according to my analysis. According to Doctorly the cost is only between $70,000 and $100,000.
Personally I think this number is misleading. As we have been doing our research the numbers seem to be adding up to much more than $70,000 to $100k. I think $70k to $100k might be a reasonable assumption for the hard costs, the required startup costs, but it isn’t taking into consideration a number of key things:
- Patient Acquisition Costs - As we calculated above, it will likely cost $150 to acquire a single patient and you need at least 1,200 patients to be able to operate a sustainable primary care clinic. My math says that is $180,000 in patient acquisition costs that I expect you will need to spend over the first year or so.
- Medical Office Renovation Costs - As identified earlier in the article, if you are gutting a space and building out a medical office into that space you could be looking at $400 per square foot. With the average medical office of 1,000 to 1,500 square feet you are looking at $400,000 to $600,000. Your landlord will likely cover some or all of this cost depending on how much you are willing to pay for a lease rate and the length of the lease.
- Working Capital Until you Breakeven - With a business like a primary care clinic you are almost certainly going to lose money each month at the beginning because you will not be able to have a full calendar of active patients on day 1. It will take time to build up a patient base. Based on a series of assumptions that I made (which you can read all of the assumptions at the very bottom of this article), I calculated a required working capital cost of $333,000.
Based on these three big buckets that I would consider part of what it costs to start a clinic, I think the true startup cost for a family medicine practice is between $100,000 and $800,000.
How much will it cost to purchase the equipment and furniture needed for a medical clinic?
You should be able to acquire the necessary equipment, computers, copiers, diagnostic equipment, exam tables and furniture needed for your startup clinic for $50,000 to $65,000 according to Doctorly. Depending on your location you might also need outdoor signage which can run $10,000+.
How much working capital should I have for a startup medical practice?
This is a question that you will need to calculate with our financial projection template once you have settled on your plan. Once you have a plan and a set of assumptions in place you can enter those into our financial forecast and calculate how much working capital you will need.
It will depend on things like how many patients do you expect to have to start off with, how many employees will you start off with, what is your rental cost, will you need to pay yourself from the business or will you live off of outside income or savings? All of these questions will determine the answer to how much working capital you need for your specific situation. I filled our template out based on a set of assumptions (which you can read all of the assumptions at the very bottom of this article) that I thought was reasonable for a single physician opening a new clinic with no patients to start with and two employees and I estimated that we would need $333,000 in working capital.
How to finance startup costs for my doctor’s office?
You should expect to personally invest at least 10% of the total startup costs for the clinic, so if your business plan calls for $600,000 in startup costs, you should expect to invest at least $60,000 yourself. Your bank lender will want to see that investment as cash from savings, not borrowed money.
There are SBA lenders that specialize in medical clinic financing. My typical advice is to look at the list of the most active SBA lenders and reach out to a few of the banks at the top of the list. Those are the SBA lenders that have the most experience and are most likely to be able to get your loan approved and through the SBA process. Here is a list of the top SBA lenders by loan volume.
As of the time of this post Live Oak Bank, Newtek Small Business Finance, and Huntington Bank were far and away the top 3 in 2022.
Physician Office Cash Flow Questions
Cash flow for a startup medical office can actually be pretty tough. Why? Primarily because it will take a while for you to acquire enough patients to fill your schedule every day and secondly it takes a while to get paid after you provide your service if you are accepting health insurance and medicare and medicaid patients. Some of the key cash flow questions for any primary care business owner:
How long should I expect it to take for my startup medical office to break even?
It may take 20 months to reach cash flow breakeven for a startup medical office.
Now obviously in order to make this claim we have a whole bunch of assumptions that go into this, but again as I did all of the research and picked a set of specific assumptions based on that research and then filled out our cash flow projection model, the model forecasts a breakeven in month 20. You can update the model with your own assumptions to calculate your own break even point. (You can read through all of the assumptions that I made at the very bottom of this article.)
How long does it take to get paid by health insurance companies?
On average it should take a healthcare provider between 30 and 70 days to get paid after billing for a service. If you have a high performing billing department 30 days is the gold standard, but the average is probably more like 45 days.
How long does it take to get paid by Medicare and Medicaid?
On average you should expect it to take 30 to 60 days to get paid by government payers like Medicare and Medicaid.
Should I accept insurance at my primary care office?
I noticed a trend among physicians during my last few years as an SBA lender where more and more startup medical offices were not accepting insurance because they didn’t want to deal with the hassle of billing and the strain on cash flow. While I certainly understand the upside for the physician and the simplicity of private pay only, I think for most practices you will need to accept insurance in order to reach a full schedule of patients.
Should I only accept private pay for my medical practice?
Probably not. By only accepting private pay you are immediately disqualifying some huge percentage of your potential patient base that can’t or won’t pay individually for primary care services. Roughly 91% of Americans have health insurance, so when you decide not to accept health insurance you are making 9 out of 10 of your potential patients think twice about using you as their primary care doctor.
Primary Care Doctor Annual Revenue
The amount of annual revenue a single physician can generate per year is going to be dependent on how many appointments you can complete per year and the average revenue per appointment.
How much revenue can a primary care physician generate per year?
The average annual revenue per primary care physician is $1.4 million according to UHC Solutions. If we assume 7,500 appointments per year, that amounts to roughly $185 in revenue per physician appointment.
How much revenue per active patient per year will a primary care office generate?
The average active patient can generate between $1,166 and $735 per year if we assume between 1,200 and 1,900 patients and $1.4 million in annual revenue per physician.
Just because the average clinic can generate $1.4 million in annual revenue per physician that doesn’t mean your startup clinic is going to hit that revenue level in year 1, it almost certainly will not. It will take time to ramp up active patients to that level.
What Percentage of Billings will Insurance Pay for Primary Care Services?
You should expect to collect 50% of what you bill according to WealthyDoc.
This kind of threw a wrench in my thinking. The sources that say the average Doc will generate $1.4 million in annual revenue don’t share how much of that revenue is actually collected. I found another source that states a physician’s net collection rate is between 75 and 85% on average.
I think the key question for us is whether you are listing the pricing of your services at the rate that you expect to collect from insurance or are you pricing your services in your financial projections at the rate you might bill insurance knowing full well that they will only pay a percentage of that rate. From a financial model perspective, I would suggest putting in the rate that you actually expect to get paid for a service on average, and then entering in a net collection or reimbursement rate from there. If we use that approach I would assume that your collection should be in the 75 to 85% range.
For example, in our model I assumed that we were entering the price of the service that we actually expect to get paid and then entering in an 80% reimbursement rate from there as seen below:
Primary Care Office Operating Expenses
We already know that rent, advertising, and staffing are going to be 3 major buckets of expenses based on what we have found above in this article, but there are other operating expenses that we should take into consideration.
What are the typical operating expenses for a primary care physician?
Typical operating expenses for a primary care clinic include:
- Advertising
- Bookkeeping
- Credit Card Processing Fees
- Insurance
- Rent
- Subscriptions and practice management software
- Supplies - Office
- Supplies - Medical
- Utilities, phone, and internet
- Medical billing and coding service
In addition to these operating expenses you will have:
- Cost of Goods Sold - which would be materials used in providing services or lab testing fees for lab services or the cost of the vaccination etc.
- Staffing costs as discussed previously.
InvestingDoc shared the average expenses for the first 6 months of a new practice which I found to be really helpful even though it seemed like there might be some expenses missing. They listed first 6 months of operating expenses for a startup medical office as:
- Advertising - $700 per month
- Insurance - $1,400 per month
- Office Supplies - $800 per month
- Software - $450 per month
- Wages (excluding the doctor) - $7,000 per month
- Taxes - $1,800 per month
- Telephone - $120 per month
- Rent - $3,500 per month
It was really helpful to get some examples of real expenses, but a few things that seemed to be missing to me:
- Accounting / Bookkeeping - someone will need to complete the bookkeeping for the practice which I would estimate could cost at least $500 per month
- Utilities and Internet - Maybe these were included with the rent rate for this example
- Rent was low - the doctor mentioned that they were sharing an office with another physician which made rent lower than it otherwise would have been.
- No credit card processing fees for private pay
- No cost of good sold for medical supplies used for procedures
- No cost of billing services. Maybe the employees were doing the billing instead of a billing specialist. If you hire a medical billing service you should expect to pay between 6.5% and 8% of collections. I would expect to pay 8% initially and then it may go down over time.
Primary Care Office Profitability
It all comes down to profit potential right? If you are a doctor that could work anywhere and earn a handsome salary without the extra stress of being a business owner, the profit potential better be there if you are going to jump into entrepreneurship.
How profitable is the average primary care medical practice?
The average profit for a primary care practice with one physician is $321,552 according to InvestingDoc. This was the profit after the doctor had a full panel of patients. Based on our assumptions (which you can read at the very bottom of the article), we forecasted the following profits for the first 5 years of a medical practice.
Year 1 - ($222,303) net loss
Year 2 - $34,565 net income
Year 3 - $260,323 net income
Year 4 - $319,273 net income
Year 5 - $364,436 net income
Based on our assumptions, here is an example primary care clinic pro forma income statement:
How much can I pay myself as a primary care doctor?
A primary care physician that owns their own practice can pay themselves $321,552 per year according to InvestingDoc once the practice is full.
Logistical Questions
Should I start full time right away?
Based on our analysis, we are forecasting a loss of $222,000 in the first year alone, so it seems prudent to have some other source of income while you build up to a full panel of patients.
Should I keep a job on the side while startup up?
Yes I have worked with a number of physicians that will only open the clinic a couple of days per week for the first year and keep another source of income at a day job will building up the new clinic.
How long until I will be able to pay myself?
In our model we assumed that the physician would get paid $100,000 per year as a salary right away, but with that salary in place the business would lose money in the first year, so you would either need to find a loan or investment to put into the business in order to cover losses for the first year and still continue to pay yourself.
How much cash should I have saved before I launch my own medical practice?
In our example we assumed that you would invest $75,000 into the business and borrow an additional $700,000 in order to cover startup costs and working capital for the first 20 months until breaking even.
Miscellaneous Questions
How much is my medical practice worth?
Based on our example here, by the end of year 5 we are forecasting an EBITDA of $430,819, and we learned earlier that medical practices are valued at between 4 and 5x EBITDA which means your practice would be worth between $1.72 million and $2.15 million based on your earnings. Keep in mind that at year 5 you would still have a loan balance of $418,000 in our example which would need to be paid off with the proceeds of the sale of your business.
Should I start my own medical practice or remain as an employee?
Wow! There is so much here, so much to consider. I almost feel a bit of anxiety for you just thinking about it! All of these questions and considerations and we didn’t even touch on anything medical in nature. I often hear from docs that say, “they never taught us any of this in medical school.” I am happy to play a small role in helping doctors that are great at their profession become great business owners as well.
I can’t answer for you whether or not to start your own medical practice, but I hope this article helped show you the key information and the potential risks and rewards of opening your own clinic.
With all of these things to consider, the last thing you need is to be fiddling around with a spreadsheet to provide financial projections to your banker, so we are happy to save you just a bit of time with our medical office financial projection template, and if you need any help at all filling it out or customizing it for your unique practice model please reach out at support@projectionhub.com
List of Assumptions Used in Example Startup Medical Practice Financial Forecast
Throughout this article I referenced “our assumptions” for this example model. Now if you buy our financial projection template, we will have a version of the model that is pre-filled with all of these assumptions for a single physician primary care practice. Now lots of these assumptions are ranges and can drastically change based on your scenario, but I wanted to list the numbers that we actually used in our default model below:
Personal investment into startup medical practice = $75,000
Starting medical supply inventory = $5,000
Renovations to leased space paid by the tenant (you) = $300,000
Medical equipment = $80,000 - this was higher than normal because we are assuming that we will provide some Medspa services
Furniture and Fixtures = $20,000
Startup loan for medical practice = $700,000
- 10 year term
- 8% interest
Initial patients on day 1 = 50 patients
Cost to acquire a new patient = $150
Average number of new patients from word of mouth and referrals = 30 per month
Maximum number of patients = 1,200
Average annual spend per primary care patient = $669
Average number of visits per active patient per year = 3.7
Average net collection of billed fees = 80%
Advertising spend = $3,000 to $2,000 per month until full panel of patients reached
Accounting / Bookkeeping = $500 per month
Credit Card Processing Fees = 1% of revenue
Insurance = $1,400 per month
Rent = $3,500 per month
Software = $450 per month
Office Supplies = $800 per month
Utilities and Internet = $750 per month
Medical Billing Service = 8% of revenue
Primary Care Doctor Salary = $100,000 + benefits
Medical Assistant Salary = $32,000 + benefits
Medical Receptionist Salary = $30,000 + benefits
Based on all of these assumptions we generated a pro forma financial model that you can see at at glance below. Of course, we encourage you to grab the model and enter in your own assumptions to see how your forecast will differ. Best of luck!
