The Right Rx for Setting Up a New Medical Practice

December 22, 2010
Mark W. Balog, CPA

As a resident or new physician, or a physician considering a change in your current situation, starting a new medical practice brings with it a laundry list of questions in regards to carrying out your mission. Here are the main questions to consider.

As a resident or new physician, or a physician considering a change in your current situation, starting a new medical practice brings with it a laundry list of questions in regards to carrying out your mission.

For physician business owners, the mission is to provide high-quality healthcare, or the “practice of medicine,” as opposed to the task of actually running a practice, or the “business of medicine.”

For the “business of medicine," the physician should consider these “How do I?” questions:

• Assess the start-up issues?

• Structure the practice?

• Assemble the right professional team?

• Secure financing?

• Compensate physicians and staff?

• Operate efficiently through the use of technology to produce a quality profitable product or service?

• Market and/or advertise?

• Govern effectively?

• Plan for the future?

Let’s briefly discuss the first three questions, which are the most-important issues when setting-up a medical practice.

Assessing the Start-Up Issues

Before deciding to set up a medical practice, physicians need to answer the questions of “why” they want to start a business. Most doctors usually set up medical practices to: enhance their quality of life and income by increasing their revenue base; provide additional ancillary services, such as lab and diagnostic imaging services; and have coverage and economies of scale working in a group practice. Competition and managed-care issues are other driving factors for establishing a medical practice.

Once physicians have answered the “why” questions, they must decide if they want to establish a solo or group practice. In establishing a group practice, physicians will be presented with myriad compatibility questions that go with partnering with other physicians.

Physicians must first determine if they can work together on a daily basis. For example, are the physician practice styles, such as clinical compatibility and business and management styles, similar? Are the philosophies about the present and future direction of the practice similar? Do all the physicians have similar work habits, are they going to compromise on certain issues, and most important of all, are the physicians in consensus in regards to the type of payor-mix (insurance, HMOs, Medicare, etc.) that the practice will offer to its patients.

Structuring Your Practice

A new medical practice can be structured as a sole proprietorship, partnership, corporation, or a limited liability company; however, the practice must understand the salient benefits and detriments of each entity structure before making its final decision. The main salient points include creation, life span, managerial responsibility, legal liability, income-tax ramifications, and transferability during lifetime and death. Let’s briefly discuss each entity type below:

• Sole Proprietorship: A business with a single owner, but without any separate legal liability from its owner. The assets of the individual physician and medical practice are not separate, accordingly, the physician will not benefit from the shield of limited liability that is provided by other various entity choices.

• Corporation: A business that is either structured as a professional corporation (PC) or a professional association (PA) based on the practice’s state of domicile that is separate from its owners. A corporation provides its owners with limited liability, continuity of existence, transferability of ownership, fringe benefits and centralized management with double taxation unless a federal and state S-election is made that allows the entity to be a flow-through entity.

• Professional Limited Liability Partnership (PLLP) and Professional Limited Liability Company (PLLC): Both a PLLP and PLLC provide different levels of legal protection to the organization’s owners. Both legal forms allow the profits from the partnership or LLC to be taxed as partnerships -- meaning, there is no potential for “double taxation” of entity profits.

Assembling the Right Professional Team

The most important thing physicians must do when setting up their medical practices is to work with their professional advisors from the inception to the completion of the project. The professional advisors include the certified public accountant (CPA), attorney, banker, insurance advisor, and financial planner.

• CPA: The physicians must make sure that their CPAs are healthcare specialists, as there are too many accounting and legal issues that pertain only to the medical profession. CPAs specializing in the healthcare industry are much better equipped to assist the practice with the particulars of the revenue cycle management and practice-management issues.

• Attorney: Physicians must ensure that they retain healthcare attorneys that are well-versed with the federal antitrust laws that were designed to promote and protect competition; and to eliminate restraints of trade and related activities that interfere with competition. In addition, healthcare attorneys must have a thorough understanding of the Stark Laws that restrict or prohibit referring Medicare or Medicaid patients to clinical laboratory services in which the referring physician (or immediate family member) has vested financial or ownership interest.

• Banker: The banker plays an integral role for the medical practice as outside financing will be required for the “hard costs,” such as construction costs of the building, as well as “soft costs,” including money used to finance the daily operations of the new medical practice until the practice generates a profit.

• Insurance Advisor: Insurance advisors play a vital role for the medical practice in making sure physician business owners have the appropriate types of insurance policies and coverage before the practice opens for business; that can include general liability, malpractice insurance, workers compensation insurance, disability insurance, etc.

• Financial Planner: Finally, the financial planner works with physician business owners to help them achieve short, medium, and long-term goals by making their extra money grow with a proper investment mix or asset allocation.

Mark W. Balog is a partner and director of tax services with Lion & Co. CPAs, LLP. Mark caters to select businesses and high-net-worth individuals in the areas of taxation, accounting, and profitability consulting, with a special emphasis in the healthcare industry. He provides very different services than traditional accounting to his select clientele in an effort to create a significant impact on their quality of life and income. Mark can be reached at mark@markbalogcpa.com.

Lion & Co. is also a proud member of the National CPA Health Care Advisors Association. HCAA is a nationwide network of CPA firms devoted to serving the healthcare industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at info@hcaa.com.