American Osteopathic Association

Advancing the distinctive philosophy and practice of osteopathic medicine

Starting a Practice: Planning Phase

​Budgeting and Financial Planning

Financial planning and management is the cornerstone for starting and building a successful practice. Physicians should carefully allocate their resources, including time and money, in accordance with what they value and how they want to practice medicine. One pitfall in starting a practice is not allocating enough financial resources. If a physician has been previously employed by another physician practice group or a health system, the concept of overhead expenses can be overwhelming and unexpected. Physicians should consider working with an certified financial planner, an accountant and an attorney who specialize in health care in order to develop a financial pro forma and determine short-term and long-term financial expenditures. Starting a practice often causes negative cash flow for physicians and it is imperative that physicians carefully plan and budget for anticipated start-up costs and expenses.

Creating a Practice Plan

Physicians should consider creating a practice plan prior to starting a practice. The practice plan is an evolving plan that provides a road map for physicians to follow as the practice grows. The practice plan should include the physician’s values, vision, and goals for the practice. The practice plan should also address the clinical objectives  and practical considerations including: the practice’s location, scheduled hours of service, types of services to  be provided, clinical coverage, governance, staffing, payer mix, and anticipated billing services. The practice  plan should enable physicians to identify the ancillary services that will be needed by the practice and its patients.

The practice plan will also provide guidance to the physician regarding which services will be required by the practice including: accounting services, information technology services, legal services, insurance services, and employee benefit and retirement plan services. Depending upon the structure of the practice, a partnership agreement, shareholder agreement, operating agreement, and employment agreements may be needed. The practice plan should contain short-term and long-term goals for the physician and the practice. Physicians may decide to seek the input of a health care consultant who specializes in medical practices. The practice plan should be re-evaluated by the physician at least annually to determine whether or not revisions should be made to reflect the changing market, reimbursement, patient needs, and skills and values of the physician. 

Establishing Your Practice’s Structure

One of the first decisions that a physician must make is to determine the type of business entity through which the medical practice will be conducted. The business entity will be the vehicle through which the practice secures its Federal Tax Identification Number and is filed with the state where the practice is located. The choice of entity impacts the physician’s liability exposure, tax treatment, and corporate structure. Physicians should seek advice from an attorney who structures and forms medical practices. It is also a good practice to consult with the physician’s accountant regarding tax treatment of the entity in relation to the physician. 

When the physician selects the type and name of the entity, the related documents and forms must be filed with the state where the practice is seeking to provide medical services. Upon completion of the filing with the state, the entity will need to secure a federal tax Identification number (TIN) or an employer identification number (EIN) from the Internal Revenue Service (IRS). There will be specific governance and annual requirements that the entity will need to comply with in order to stay in good standing as an entity. For example, most entities are required to identify and elect a Board of Directors and conduct annual meetings in order to be in compliance with the state regulations. 

Finding the Best Location

 Physicians have often stated that one of the hardest parts of starting a practice is to find  a location. Location is a key ingredient to the success of a new practice. Depending upon the market, community, and payer mix, the location will be a driving factor to the sustainability of the practice. Once a location is identified, the physician will need to determine whether to lease the space or buy the building or condominium. 

Securing financing for the purchase of the building may be challenging given the economic times and whether the physician has any assets and the physician’s debt ratio, including student loans or any other personal loans or lines of credit. Working with a commercial banker will assist the physician with identifying the amount of capitalization required for the practice, including lease payments or the purchase of a building or condominium. Prior to securing a loan, physicians should consider all of the start-up costs of the  practice which may include: EHR system, computers, software, equipment and supplies, furniture, and other initial purchases for the practice. Set-up and  payment of utilities, taxes, and building services, including window washing, snow removal, and building repair and maintenance should also be factored into start-up costs and expenses.   

 

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