Industry Watch

So you want to start your own clinic?

Here are the financial reasons why most new medical clinics are not launched by entrepreneurial physicians

By Brian Martucci
Tuesday, October 25, 2016

Congratulations! You survived medical school. You’re nearing the end of your residency or fellowship. Sure, you’re saddled with crushing student debt — the average medical student graduates $180,000 in the red, according to the American Association of Medical Colleges — but your skills are valuable. You’ll pay off that debt in a few years, right?

Maybe. That’s if you find a job with an established health system and negotiate a favorable salary package. On the other hand, you could resolve to be your own boss and launch your own practice. Take that route, and things are likely to get worse — financially and otherwise — before they get better.

Are indie docs a dying breed?

“New medical practices face significant barriers to entry,” says Ted Carlson, principal at Carlson-Commercial, an Edina-based real estate consultancy. He ticks off a laundry list of concerns for aspiring medical professionals: startup cash, malpractice insurance, physical and data security, billing and reimbursement. Most troublesome of all: regulation, specifically HIPAA, which (understandably) imposes onerous rules on the collection, storage and release of patient information.

In fact, independent physicians’ offices are a dying breed. Virtually no one launches independent, insurance-based medical practices anymore — the proverbial “hang out the shingle” approach. Instead, young doctors generally sign on as employees of larger health systems, like Fairview and Allina Health, exchanging equity (and theoretically unlimited earning potential) for predictable hours, guaranteed salaries, and limited or nonexistent administrative responsibilities.

Bruce Downey, president of Gateway Bank, has financed new professional clinics for nearly 30 years. “When I first started out, private practices were common,” he says. That started changing in the 1990s, when “bigger systems like Health East started gobbling up independents in a wave of consolidation,” he adds.

Consolidation was particularly pronounced on the primary care side of the industry. The calculus is different in some specialties, such as orthopedics, where billing and practice management tend to be easier. Many orthopedists still operate independently, though bigger players like Twin Cities Orthopedics enjoy valuable economies of scale.

Greener pastures for startup clinics

Okay, so if you’re a newly minted primary care doctor, you probably want to work for someone else. But what if you’re a dentist, orthodontist, chiropractor or veterinarian?

You’ll have it easier, says Downey, whose personal specialty is dentistry. Though practitioners might quibble with the characterization, most dental, chiropractic and veterinary work is technically elective, and reasonably affordable for patients. That means these fields are less insurance-driven than internal medicine — there are fewer dental plans out there, and they’re easier for patients and providers to work with.

How to get started

Still, starting your own clinic is no cakewalk. “Starting a dental clinic isn’t like opening a pizza parlor on the corner, but failures do occur,” says Downey.

As an aspiring clinic owner, you have two basic options.

Option one: Launch your own practice — solo, with a single partner, or with a small group of partners. Downey estimates the typical small clinic costs $300,000 to $400,000 to open, with equipment. Banks, including Gateway, happily finance clinic buildouts, and many equipment manufacturers offer financing for big-ticket items like X-ray machines, too.

Option two: Find an existing practice and buy it. This is a lower-risk move, as the existing patient population will offer a guaranteed revenue stream right off the bat. It’s also more expensive. Since clinics change hands pretty slowly, there aren’t a ton of data points, but your practice’s purchase price is sure to be tied to its revenue. For a clinic with annual revenues north of $1 million, budget at least $600,000.

“For some practitioners, it is actually more cost-effective to purchase a practice, rather than start from scratch, assuming the practitioner can obtain the proper financing for the transaction,” says David J. Holt, a St. Paul attorney who focuses in health care law. “However, it’s critical to audit the practice’s management and financials before purchase. At a bare minimum, you need to confirm a stable, long-term revenue flow and a plan to properly transition the patients into the care of a new provider.”

The nitty gritty

But that’s just the start. According to Holt, new clinic operators face a host of thorny issues.

“The three biggest considerations for practitioners are limiting liability exposure, compliance with licensing laws, and taxes,” he says.

On the liability and tax front, you basically need to choose the right business structure. Many of Holt’s clients are LLCs that file as S-corporations — which for small companies has certain tax advantages over C-corps — but your situation may differ. Practitioners need to apply for federal EINs and applicable Minnesota credentials, as well.

On compliance, it all depends on what you do. If you’re going to prescribe medicine, for instance, you need to register with the DEA. Accepting Medicare? You need a National Provider Identification Number. Opening an on-site laboratory? Read up on the Clinical Laboratories Improvement Amendment (CLIA).

Holt also strongly advises new clinic operators to draw up member control agreements — an oft-overlooked step. “Quite simply, this agreement helps dictate how money is split up in common situations covering most disputes with health care business owners in Minnesota,” he says. That doesn’t sound optional.

And then there’s the matter of insurance. Malpractice is the big one, but not the only one. “Medical malpractice coverage will cover the bulk of a medical professional’s liability,” says Holt, but not bodily injury, property damage, or so-called advertising damages (copyright and slander claims, for instance). For that, you need general liability insurance. You can probably get it, possibly with a bundle discount, from your malpractice insurer.   

Still interested in starting or buying your own professional practice? Good for you — and good luck. You’re gonna need it.