If you have been involved with physician practice operations for more than 10 years, you have likely observed a certain cyclical pattern to the ownership of medical practices by other, non-physician parties. For instance, in the late 1990s, physician practice management companies (PPMCs) acquired physician practices and rolled them up into larger entities. Physicians sold their practices, so they could divest themselves of the responsibility of managing the practice and its related finances and instead focus their efforts on clinical practice and taking care of patients. After a period of time, certain entrepreneurial physicians realized they actually missed owning and managing their own businesses and thus unwound these arrangements, bought back their assets, and hung their shingles out again as private practices.
Similarly, in the early and mid-2000s, hospitals entered the fold as they sought to develop strong physician networks and provide easy access to their system through primary care practices. Guaranteed salaries and multi-year agreements were quite common. Many physicians, again burdened by the challenges of practice finances and management, affiliated with and became employees of hospitals or health systems. Hospitals believed operating a medical practice to be a simple offshoot of managing an inpatient facility. This structure became challenging for many entities leading to the divestiture of employed practices and physicians, either voluntarily as the physicians again wanted autonomy and independence or involuntarily as many hospitals realized their physician employment models were leading to a negative bottom line.
In the early 2010s, another wave of hospital employment emerged. The Affordable Care Act of 2013 and high deductible health plans shifted the payer market as practices had to navigate new rules. Presumably learning from prior “mistakes,” hospitals returned to physician employment, this time seeking specialists. Physician employment contract terms were revised to limit guarantees while promoting productivity and (sometimes) quality. The goal was to bolster the bottom line by sharing risk with all parties. By the end of the 2010s, the return to physician employment expanded to include primary care physicians once again.
Concurrently, other patterns emerged in the market. The number of residents and fellows leaving their medical training programs to open their own private practices was declining with employment promoting the best opportunity for work-life balance. For many, hospital employment seemed to outpace private practice employment in terms of compensation and lifestyle. Private equity and venture capital entities also were entering the market, identifying opportunities for scale, improving efficiency, and creating an attractive option for existing practice partners who were approaching retirement and facing concerns that younger partners wouldn’t want or be available to purchase their practice.
Combined, these factors during the 2010s seemed to indicate a dire fate for the private practice. Was there enough force in the market for the pendulum to swing once again to private practice? While this employment cycle in its many constructs has lasted quite a while, there are emerging signs in the early 2020s that physicians once again are committing to private practice.
Recent market signals include an increase in the number of physicians considering solo practice; physicians who have been with large private practices seeing value in resetting to a smaller practice where they once again feel in control; physicians who realize they prefer being entrepreneurs instead of employees leaving hospital employment; and, in some cases, physicians buying back their assets from private equity buyers when they realize that structure doesn’t fit their long-term goals.
Regardless of the reason, the transition to starting (or re-starting) a private practice includes a number of considerations. In isolation, none of these considerations may seem difficult. When combined without a proper plan, however, these considerations can seem overwhelming, especially if a physician is seeing patients and planning for a transition at the same time. For instance, PYA considers more than 100 action items when assisting physicians with establishing their practices. Many of these action items are influenced by important decisions physicians must consider when determining how their private practice will be structured.
10 Considerations for Opening Your Practice
For physicians considering opening your own practice, following are 10 areas for which you’ll need to give thought.
- What is the best structure for the medical practice? Choosing the appropriate entity structure (e.g., professional corporation, limited liability corporation, etc.) has legal, tax, and operational consequences. Understand the risks and protections of each entity type and make an informed decision early in the process. The decision will impact how you obtain your tax identification number and ultimately how you enroll as a provider with payers.
- Where are you going to practice? Consider personal factors such as where you will be happy in addition to understanding the supply and demand for your specialty. This decision impacts how you will attract patients, secure and share practice call coverage, access non-employment hospital support arrangements (hospital call coverage, recruiting, medical directorship, professional service arrangements), etc. Understanding traffic flow, street visibility, market rental rates, square footage needs, etc. will all weigh into the decision about location.
- Are you flying solo, or will you have a partner from the start? Understanding early how you and another provider will collaborate is important. In addition to the operational considerations such as space and corporate structure needs, you will need to determine how you will make decisions (operational and those that escalate to voting rights), how you will make decisions regarding compensation, how you will apply for bank loans or contribute initial capital, among other considerations.
- How will you compensate yourself/yourselves? For some in solo practice, it is as “easy” as taking whatever is left over after all the bills are paid. For others, a steadier income is required while the practice is becoming established. Keep in mind that it is unusual in a medical practice with more than one owner for ownership percentage to heavily influence how compensation is divided, with some specific exceptions. Determining a sound compensation plan, therefore, that considers factors such as productivity (i.e., charges, collections), shared resources (i.e., group responsibility/accountability), management effort, call burden, etc., is important to determine early on. While changes can certainly be made as the practice matures, frequent changes to the compensation plan will create its own set of challenges.
- Will you need bank financing? Some providers seek bank financing while others have enough liquidity to fund startup operations without needing to borrow funds. The decision is a personal one. If financing is needed, banks will require a detailed financial plan that shows anticipated volumes, collections, and related expenses. This also should include perspective about how you arrived at the numbers being reported. Be sure to include all expenses for effective operations in addition to provider salaries, if needed. (The banks anticipate you will require money to live on during the ramp-up period.) Keep in mind that there is typically a time lag between seeing your first patient and collecting full payment, so factoring in a ramp-up, both in volume and timing of payments, is critical. Often a line of credit is recommended to help manage cash flow needs on an ongoing basis.
- Will you partner with another entity? Though you have committed to opening a private practice, opportunities still may exist to partner with a local hospital or health system in the form of professional service arrangements, recruiting agreements, and medical directorships, depending on the hospital’s needs. Various regulations will require that these arrangements be commercially reasonable and at fair market value. While the hospital often handles obtaining opinions related to these requirements, private practices should consider having someone experienced in these areas available to help review calculations and proposed contractual compensation amounts.
- Will you be a participating provider for payers? Insurance participation is an important decision that must be made early in the process. The enrollment process typically requires a significant lead time, and insurance companies process enrollments at their own pace. For many, enrolling with payers helps patients who are insured with the plan find a physician, which helps build a patient base.
- Will you handle billing for your services internally or via an external third party? Given the limited labor resources in many markets, providers often choose to contract with a revenue cycle management company to file claims to insurance companies, follow up on unpaid claims, and manage patient collections. Other providers prefer to keep these roles in-house to be performed by staff hired for this role. Pros and cons to both approaches exist, so the answer is not one size fits all.
- What electronic medical record (EMR) will you use? Selecting a strong EMR platform with a strong medical practice management (scheduling, billing, etc.) system will be important to your professional happiness and financial success. Whether local server or cloud-based, a system that supports how the providers see patients, documents their services, files claims, and manages accounts receivable is critical. In addition to day-to-day considerations, having an EMR that supports efforts to track and report quality and patient engagement also is important from a regulatory and reimbursement perspective.
- What should you keep and what can you delegate? Despite a strong desire to “just see patients,” physicians in private practice are best served by balancing what they retain to perform personally and what they delegate to others. Strong financial controls, sound advisors, and good processes can help assure the practice operates effectively and efficiently.
Building a solid foundation at the beginning pays dividends. PYA regularly assists physicians who are evaluating private practice by educating them on all of the important steps that must be taken; providing financial analysis to evaluate the economics of opening a practice; providing project management throughout the establishment process; determining compensation and decision-making structures; reviewing arrangements with hospitals for fair market value and commercial reasonableness; and providing many other advisory aspects related to establishing a private practice. If we can be of assistance to you as you begin this journey, one of our executive contacts would be happy to assist. You may email them below or call (800) 270-9629.
