Going solo: Start-up basics

Going solo: Start-up basics

By Ken Terry
Senior Editor

Here's what to expect in terms of time, money, and staff if you're going to go it on your own.

If you've never run a business before, the complexities of setting up your own practice may seem daunting. One way to reduce the fear factor is to retain a consultant. That will probably set you back $5,000 to $10,000, but the advice you get should more than make up for it.

Start planning for your leap into the unknown six to nine months before you make the move. That will give you time to locate the right space in the right location and have it renovated, says Gray Tuttle Jr., a consultant in Lansing, MI. It'll also give you time to find good used equipment often for half the cost of new. And you can organize your business entity, get your employer ID, and send applications to Medicare and commercial insurers before you open your doors.

If you're an established practitioner, it will take two to three months to get your own Medicare number. You can bill CMS later for services performed before you receive your number. Commercial plans usually accept you within a month if you participated with them through your former group.

If you're an employed physician, you probably have a restrictive covenant in your group contract. Some states, like California and Massachusetts, prohibit these noncompete clauses. And hospitals will usually let former employees out of them, if only to keep departing physicians loyal. But a private group will normally enforce a covenant, so you'll have to move outside the specified area. If you do, you'll lose many of your patients, your office, and maybe the staffers you worked with in the group.

How much you'll need to get off the ground

The cost of launching a practice depends on your style and whether you build up overhead slowly or all at once. Consultants' estimates which include costs for rent, payroll, insurance, and living expenses for the first few months range from $70,000 to more than $100,000 for a small primary care practice. At the high end, notes Tuttle, you can spend $50,000 to $65,000 on furniture, equipment, copiers, computers, and telephones. (The doctors profiled in "Going solo: How four doctors are making it work" in this issue, set up shop for much less.) A first-rate practice management computer system will cost $25,000, although you can get one for as little as $10,000.

Chicago consultant Karen Zupko also advocates buying an electronic medical record up front so that all your records will go on it from Day One. She notes that small practices can reduce their up-front expense for a practice management system or EMR by using an Internet-based application service provider, which charges a monthly fee for software and maintenance. Still, you might not be able to afford an EMR until you've been in practice for a while.

An alternative is to hire a billing service, but you'll have to pay it between 8 and 10 percent of collections. Consultants warn that good billing firms are hard to find and that bad ones can cost you. "Billing systems tend to go after the easy money and ignore the hard money," notes Marge Smith, a consultant in Pueblo, CO. If you do choose a billing service, consider buying a PM system later on, she says, so you'll have more control over your business.

Even if you outsource billing, a practice start-up can easily cost $70,000. But if you have a good credit history, you can get a bank loan, and interest rates are at rock bottom today. Think hard about how much money you need to borrow, says Tuttle. You don't want to overspend, but it's best not to go back to the well again, because that makes bankers suspicious, he says.

Structure the loan so you have interest-only payments for the first year. By then, you should be covering your overhead and drawing a decent salary out of cash flow. After that, says Tuttle, refinance the outstanding amount of your loan over four or five years.

Appropriate insurance coverage is important, too

Besides regular malpractice insurance, you'll need to buy "nose" coverage for your previous work, unless you have "tail" coverage from your old group, notes Kenneth E. Bowden, a consultant in Pittsfield, MA.

You'll also need workers' compensation insurance, he says, which can cost up to $2,000 a year for a staff of three. Then there's business liability insurance, which includes "slip and slide" and internal theft coverage and costs $500 to $700 a year. Your practice will also need casualty coverage on personal property such as furniture and equipment. A business owner's policy that covers everything except workers' comp costs between $1,500 and $2,000, says Tuttle, if your personal property is worth $50,000. If it's valued at $100,000, you'll pay $200 to $300 more. Workers' comp, he adds, is usually written as a rider on a business owner's policy. You can buy business overhead insurance, which will keep your office running if you're disabled, for an additional $1,500 to $2,500 at the low end.

The experts advise you to offer your staff some kind of health insurance; after you're successful, you might also provide retirement benefits. "People won't take a job anymore if they don't get benefits," says Smith.

Don't forget the costs of insuring yourself and your family. Your life insurance policy may lapse when you leave a group. Personal disability income insurance is also critical, especially for younger doctors. And you can't go without health insurance, which is becoming a major expense for everyone including doctors.

If you go on COBRA after leaving a group, you'll continue to be insured at the group rate for 18 months. But even under COBRA, you may pay $8,000 a year or more to keep your family health coverage. Once you have to buy individual insurance, of course, the sky's the limit.

A practice owner also needs to comply with government regulations, starting with payroll deductions. You might have an experienced bookkeeper who can do this. If not, your accountant might be willing. You or your spouse could also get out payroll checks with the help of inexpensive software like Intuit's QuickBooks or Microsoft for Business. If you don't want to bother, and don't mind hefty fees, outsource this duty to a national payroll service such as Paychex or ADP. You'll pay $5.50 to $6.50 per check if you have a small practice, Tuttle estimates.

How do you deal with all those other government regs, including the Byzantine rules of Medicare, Medicaid, Stark, CLIA, OSHA, and HIPAA? Soloists like FP Craig Wax of Mullica Hill, NJ, do it themselves. You can, too, with help from your specialty society, notes Karen Zupko. (The AAFP, for instance, has a plethora of how-to material on its Web site.) But if you don't have time and don't feel confident enough about delegating such important tasks to a staffer, consider farming them out to a consultant or an accountant with expertise in health care.

Can't find the right staff? Steal them

Your practice style and tolerance for scutwork will determine how many staffers you need. In Pueblo, CO, consultant Marge Smith says the average primary care practice has 2.5 "full-time-equivalents" per physician, including a receptionist and an MA (both cross-trained to do billing). But Gray Tuttle, based in Michigan, believes you need more. Pediatricians need 4.5 FTEs per doctor; family physicians, 4.25; and internists, 4, he says. Subtract half an FTE if you use a billing service.

Among the staffers Tuttle suggests you hire are a receptionist, a part-time billing person, a part-time records clerk, and a full-time "floater" who can jump in on various front- or back-office tasks. He and other consultants also advise hiring an MA or LPN, because not having one slows you down. But in the early days of your practice, when patients are few, you can do without a clinical assistant.

The quality of your staff is key to the success of your practice. If you have good people working for you in the group, says Tuttle, try to bring them along when you go out on your own. They might be out of a job if you don't hire them, so they might accept cuts in pay and benefits, he adds.

If you end up recruiting from the outside, consider placing a newspaper ad, says Smith. Even better is recruiting through word of mouth. This works especially well, she admits, in a small city like Pueblo. Kenneth Bowden has a more audacious suggestion: "Steal them from other offices. It's a limited community."

Bowden adds a word of caution, though: Stealing experienced employees from other primary care offices could boomerang on you if you're hoping to charm other family doctors or internists into sending you their overflow. They're not likely to do that if you steal Sally who's been on their front desk for 20 years.

You may need to recruit patients as well as staff. Advertising in the paper helps attract patients as well as job applicants. So does getting to know the folks in your hospital's referral center. Sometimes you can also pick up regular patients by working in the ED or an urgent care clinic. And by all means have a Web site you can direct patients to.

Going into business for yourself can be scary, and it takes a lot of planning, but it can work if you consult with the right professionals and use your head.

Ken Terry. Going solo: Start-up basics. Medical Economics May 9, 2003;80:114.