How much does it cost to open a medical practice?

Starting a private practice represents a dream-come-true for many physicians in the United States.  Here are some cost estimates based on our experience starting hundreds of practices over the past ten years.  These costs are covered in more detail below.

A. Office Space- $2000-$2500 per month

B. Payroll- $3000 per month

C. Vendors- $5000 initial setup- $700 monthly

D. Equipment- $10000-$15000 for initial purchases

E. Insurance- $1000 per year for GL, $5,000-$15,000 on average for malpractice

Total Cost: $20000-$30000 initially with approximately $6000 per month

As we all know, more and more providers are brushing aside any ambition to start a private practice and instead joining a hospital or large group practice.  Private practice in 2018 looks entirely different than your father’s practice 40 years ago.  I actually love sitting with docs that have been in practice for 40+ years to hear stories of what it was like back then.  Hearing the stories, I can certainly see why physicians today are opting to retire early rather than deal with frustrations of today’s private practice.  The face-to-face visit has been replaced by a face-to-screen patient encounter and the liability of today’s practice extend far beyond traditional malpractice claims.  Still, after all of the negatives are considered, it’s still our opinion that the rewards of owning your own practice far outweigh the risks, as long as you have the stomach for the ride.  In this article, we cover what to expect as it relates to the costs of opening a new medical practice.

Defining the Costs of a New Medical Practice:

The costs of opening a medical practice vary greatly depending on the specialty, location and ambition of the owner.  Here is where we cover the costs of opening a practice in more detail:

1. Office space costs for a new practice:

   • We’ve found the sweet spot (depending on specialty) to be around 2000-2500 sq. feet with a monthly rent of around the same. The price and availability of space is varies greatly based on location so find the best deal and try to stay away from locking yourself into a longterm lease.  When evaluating your lease, remember to look at common area maintenance, tax, insurance, option to sublease and what they use to determine rate increases.  Inflation or CPI are the two most common methodologies used for this.  Make sure there is a cap on how much they can increase your rent and negotiate your renewal term on the frontend.  We have seen too many new practices taken advantage of when it’s time to renew a lease.  The last thing you’ll want to do(unless you’re going to buy something) is to move after the first lease term and the landlords know this.  It’s our recommendation to do a 3 year lease or even better, rent space from a colleague for the first year or two.  Longterm leases or purchases when starting out is pretty risky when opening in a new community.  It’s obviously different if you’ve been established in the community and are venturing out on your own.  The key is to keep overhead as low as possible for the first year unless you don’t really care about being profitable.  It’s also important to remember that location is more important than aesthetics and size.  Open as close as possible next to your primary referral sources, whether those sources are other physicians, hospitals, employers or neighborhoods.  People are all about convenience and if opening close to the action costs you 10-20% more per month, this is probably a risk worth taking.  When looking at space, remember to consider parking, ease of access, traffic patterns, waiting room size, bathrooms, patient flow and expansion opportunities.  You don’t want to box yourself into a space that can only handle 20 patients a day if your goals are to see 35-50 patients a day.  There is a fine balance between having too much space vs. the risks of growing out of your space to quickly.  The balance is different for every specialty but starting out around 2000 sq. feet usually works well.  Ideally, you will want to rent for the first 2-3 years with the longterm goal of owning your office.  The benefits of owning your own real estate are tremendous in medicine and this should definitely be a major part of your investment strategy.

2. Hiring and Payroll Costs for a New Practice

   • Start off with one employee that is proficient at multi-tasking and can be cross trained to work the front desk along and help you as a medical assistant.  Expect to pay $15-$18 per hour to start out with The key here is to hire slow and be very deliberate about hiring people that can fill multiple roles.  Your first employee shouldn’t be someone that only wants to work behind a desk or in the exam room.  Always start out with one employee unless you know that you’re going to open your doors and it will miraculously be filled with 30 patients.  You need people that are willing to do whatever is needed.  If that means checking-in patients, cleaning the toilets, answering the phone or taking vitals, they must be willing to do it.  One of the best ways we’ve found to help “specialized” employees get over themselves, is for you to do some of the very things that they don’t want to do.  If you’re slow, there’s absolutely no reason why you can’t pick up the phone, clean a toilet or walk a patient to their room.  As the owner, you must be willing to do whatever it takes which means that your pride might get beat up a little at first.   Whether you have 1 or 20 employees, utilizing a payroll service to take care of all of the taxes, benefits and regulatory BS is money well spent.  Don’t fall into the trap of hiring the person with the lowest wage requirements.  A person’s wage is often a reflection of their ability and paying a little more for someone that can fill multiple roles is better than hiring two inefficient individuals for a few dollars less per hour.

3. Selecting the Right Vendors for a New Practice

   • There are numerous initial vendors that will need to be setup.  These vendors include some of the following: EHR, revenue cycle management/billing, credentialing/insurance enrollment, credit card processing, internet(go with the fastest possible), phone(consider VOIP like RingCentral), payroll and sharps/biohazard pickup to name a few.  The first two vendors listed (RCM & Credentialing) are the two most important vendors to spend time researching.  They can make or break your practice and really represent the foundation of your organization.  These are two areas where spending some extra money really make a difference in your monthly revenue.  The other vendors, all things considered, are pretty inconsequential to your profit and longterm success.  You need to negotiate the best rate for all vendors and remember to get at least two quotes to compare.  When selecting an EHR, make sure to see it in action at a local practice.  This is not only a way to ensure it is a fit for your practice style, it’s also a great opportunity to meet a new referral source.  These days, it’s not typically a great idea to have two vendors (one for EHR and RCM) when you can select one that can do an excellent job providing both.  Over the past decade, we’ve had the opportunity to work with nearly a hundred different EHRs and billing companies.  Through this some times painful experience, we’ve identified a few companies that we believe offer the best of both worlds.  A user friendly EHR and a superb billing service that will maximize our client’s revenue.  Obviously, it all depends on the specialty of the prospective practice and this is where a company like ours can help narrow down the vendors.  As a new practice, you can expect to pay 6-8% of your monthly collections if an integrated EHR is being offered.  The collection fee covers the entire billing service along with the monthly fee typically associated with an EHR/practice management platform.  When it comes to credentialing, this is another area where selecting the right vendor can make or break your practice.  We wrote an article a few years ago that covers this in more detail (why credentialing is critical when starting a practice).  Suffice it to say, if cash flow, fee schedules and meeting timelines are important to you(which they have to be) you must spend ample time selecting the right credentialing/contracting vendor.

4. Equipment to Purchases for a New Practice

   • Set a budget before purchasing a single item and stick with it.  It’s our recommendation to try to keep all purchases under 10-15 thousand if possible.  Make a game of it and see how frugal you can be.  There may be a time to buy the latest and greatest equipment, but it’s not when your first starting your practice.  Most practices borrow to buy equipment which usually leads to overspending.  This is a mistake.  Try to find gently used equipment and get by with less when starting out.  Remember that any new equipment purchased can be taken as a write-off(Section 179 deduction) but don’t fall into the trap of maximizing your deductions before you’re profitable.  Your taxes the first year will likely be pretty insignificant your first year when compared to future years.  Save those big purchases when you need to drop your income into a different tax bracket.  Your priority for the first year or two is to get your business off the ground and start making money.  Remember, everything you buy from McKesson or Cardinal are going to be 3-10x more expensive than an equivalent item from an alternative manufacturer.  If you’re in a specialty where technology is always evolving, leasing equipment could also be a good option.  Dermatology or cosmetic surgery is one specialty that comes to mind.  It’s typically not a good idea to invest in a “new” laser when that same “new” laser could be obsolete in 2 years because of the “newest” laser.  One mistake we see a lot of practices make is in the purchase of a bunch of desktop computers initially.  You’ll be much better off buying a couple of laptops that can be used with your EHR and be brought into the exam room as needed.  Laptops are much more efficient and reliable than they used to be not to mention how versatile they are.

5. Insurance for a New Practice

   • You will obviously need malpractice insurance when starting out and this cost varies greatly by specialty, claims history and location.  There are two different types of malpractice insurance, claims made and occurrence.  I don’t want to spend much time going over the difference but claims made is the type of policy which requires you purchase tail insurance as it only covers you for claim while the policy is active.  If you have a lapse in coverage, that means you’ll be liable for any claims against you, even if the claim is from a time when the policy was active.  An occurrence policy, is a lot more expensive but is all inclusive.  Meaning, you can buy a years worth of occurrence insurance, go on a sabbatical for 5 years and still know that any malpractice claim that arises will be covered by your policy.  For a claims made policy, you’ll want to ensure you keep your policy active or purchase tail coverage prior to your sabbatical.  Regardless of which policy you select, you should negotiate with the carrier to ensure you’re getting every available discount.  It’s always recommended to get at least a couple quotes for coverage.  In addition, you should break up the payments into quarterly installments.  General liability insurance is another insurance needed for a new practice but thankfully it’s nowhere near the cost.  It covers you in the event a patient slips in your office and breaks their hip.  You also should consider obtaining HIPAA, Errors and Omissions and cyber security insurance depending on the cost.  A lot of times, these can be included as riders on your malpractice policy without any added costs.