In another post on How to Start a Medical Practice, we mentioned the usefulness of developing a medical practice business plan. There are a great many steps required to start a successful medical practice as a business enterprise as well as a clinical service.
In this Article …
- Your Medical Practice Business Description
- Market Assessment as part of a Medical Practice Business Plan
- Assessing the Competition in Your Medical Practice Business Planning
- Developing Financial Projections
- Patient Services Volumes
- Patient Revenues
- Practice Expenses
- Financial statements and Cash Flow Statements
- Explaining your marketing strategies
- Your Operations Plan
- The Executive Summary
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Medical practice business plans can help you organize those steps into a detailed business plan. They can also help you cover some elements you might not appreciate, such as a marketing plan and a solid financial plan. These are especially important if your target audience is third-party financing for your new medical business. People or institutions who might loan you money want to be assured you have some idea of how to set up and manage a business. And of course, they want you to pay back any bank loans you take out.
So let’s look at the individual components of a business plan for a private medical practice (the same will apply to a group medical practice).
Your Medical Practice Business Description
If you are a physician, the business you are in may seem obvious – you want to practice medicine. But even in that sphere, there are a lot of choices you can make, so mention some of them in this brief overview. Be specific about things like your specialty or sub-specialty and your proposed business location for the medical practice. Also, mention your target customers. This may also seem obvious if you are a pediatrician or an obstetrician, but family practitioners, general surgeons, and other medical specialties may have specific areas of focus to include.
Are there changes you foresee coming to the medical community in general or your area of specialization in particular? What is attractive about this geographic area and what is the legal structure of your medical practice? Are you planning to offer any ancillary or complementary services in the practice?
Finally, what special strengths and competencies do you bring to the practice business? Were you a chief resident in a residency program? Did you have any entrepreneurial experience outside of medical practice? Did you excel in a patient care area that you plan to include in your medical services? All these items can demonstrate competitive strengths you can exploit.
Many times, people reading plans about medical practice businesses may not get past the executive summary and an overview of the medical practice you are planning. So it pays to say most of the important information early in the company overview.
Market Assessment as part of a Medical Practice Business Plan
Including market research in a business plan for a new medical practice may also seem counter-intuitive, especially for physicians completing residency programs at urban teaching hospitals. It may seem like there is an oversupply of patients and never enough appointment slots to see them all timely. But when you’re taking the plunge to start a new private medical practice in an unfamiliar area, you need to make sure there is a target market that needs – and can pay for – your services.
At least three cohorts can describe target customers for medical practices.
- Demand (or need) for specific clinical services. Professional societies often publish data and trends in services provided by their members, or averages of persons per specialty. Market research firms also compile summaries of medical services, and the U. S. Centers for Medicare and Medicaid publishes statistical information on health services in the U. S. While national population usage rates do not always translate to specific states or smaller localities, they do provide at least one data point in a range.
- Demand for Clinical Services based on age. Age is a major influence on demand for clinical services by specialty. For instance, in 2021, 16.8% of the U. S. population was 65 years or older. However, persons 65 and older have almost twice as many physician office visits per year compared to persons 45-64 years of age.
- Demand for Clinical Services based on coverage. Although the Census Bureau reports the overall rate of uninsured persons in the U.S. was 8% in 2022, the rates vary widely. Massachusetts is the lowest at 2.4% but Texas is the highest at 16.4%.
It is possible to use these factors to estimate the desirability of a specific location for a specific specialty. For instance, a community with an older population and a few ski resorts would be an excellent opportunity for an orthopedic surgeon. Both older persons and skiers need orthopedic surgery at higher rates. Older people also have coverage from programs like Medicare, and skiers are likely to have good overage from their employer or have resources to pay for their medical treatment.
In any case, all of these types of market research lend themselves to graphs displaying the information in an easy-to-understand format.
Assessing the Competition in Your Medical Practice Business Planning
Completing a competitive analysis is another integral part of your medical practice business plan. These days there is no end of websites listing physicians by specialty in local geographic areas. Sites like Yelp and Healthgrades can also give you insight into experience and time in service as well as patient reactions. Health Plan or insurance company rosters can also provide information for your competitive analysis. For instance, you may find that a specific location is currently served by several physicians in your specialty, but many of them have been in practice for several decades, and they do not participate in health plans serving the area. That would be an indication of a favorable environment for finding new patients for your medical practice – and worthy of mentioning in your medical practice business plan!
Developing Financial Projections
Developing financial projections or a financial plan can be one of the most daunting portions of a medical practice business plan. But is an important part of a detailed business plan for a private practice.
A financial plan, sometimes called a financial feasibility study, starts with assumptions. Let’s look at some of the more important ones.
Patient Services Volumes
One of the most important, and most sensitive elements of a financial plan is the estimate of the volume of medical services. In a primary care medical practice, the main unit of medical service is the number of visits. Other practices may also need to estimate services such as surgical procedures or significant diagnostic or treatment procedures. Sometimes, the units of medical services can be estimated based on population and usage. For example, knowing the local population in the area, and the national rate of office visits per thousand for the population could result in an estimate of the total number of visits of the population in the area. It is typical to then look at alternative scenarios of how many of those visits your new medical clinic could capture. These assumptions should be consistent with the information developed in the Market analysis section.
Patient Revenues
Patient revenues can easily be forecast using Medicare payment rates for services in the geographic area. Commercial insurance plans and managed care health plans will usually pay more than Medicare rates, but this makes a reasonable business model for estimating third-party collections. Of course, there are elements like co-payments and payments from individuals, but these are accounted for by using the total Medicare payment rates instead of only the portion paid by Medicare.
Medical practices with significant numbers of procedures or diagnostic services will require more extensive modeling, but the process is the same.
The patient revenue projections also need to take into account the lag between billing medical services and payments by government healthcare programs and insurance companies/health plans. Government health care programs like Medicare will make payment electronically within 14 days of receiving a “clean claim” – one which follows the Medicare requirements for documentation of the claim. Other payors will often take 30 days or more to pay claims. These deadlines are usually set by state law, but it is safer to assume your first claims will not be paid by them for at least 60 days on average.
Practice Expenses
Practice expenses fall into several categories.
- Capital Expenses. Capital expenses for small businesses include things like machinery, equipment, building improvements, vehicles, and furniture that have a useful life of more than one year. This means that the life of the item must be estimated, and only a portion of the value of an item can be considered a deprecation expense for the current tax year. The good news is that the IRS allows a very high amount of capital equipment to be depreciated in the same year it was acquired and put into service. So while capital equipment must still be acquired when you equip a new office, most physicians do not have to worry about dealing with depreciation as an expense.
- Operating Expenses. Operating expenses include a long list of items:
- Salaries and Wages can be estimated by using websites such as salary.com.
- Benefits vary according to how extensive they are, but an estimate of 20% of salaries is usually close. Note this does not include the expense of replacing a staff member who is on vacation. That can add another 15% to salary expenses.
- Office Rent can be estimated by reviewing local office building ads for space in medical office buildings.
- Medical and non-medical equipment includes office and waiting room furniture, exam room equipment, computers, and any special equipment like an ECG machine or point-of-care laboratory testing equipment.
- Medical and non-medical supplies are usually a percentage of overall practice expenses.
- Outside services usually include services like billing (8% of collections), alarm services, housekeeping, and software applications.
- Professional services include attorney, accountant, and consulting fees.
- Interest on loans, if any. Principal payments are not an expense but are covered in the cash flow statement.
- Insurance, including malpractice insurance, and business insurance (general liability, property coverage, and cyber insurance).
Financial Statements and Cash Flow Statements
The output of a financial feasibility study is usually two types of statements. Financial projections are covered in pro forma Income and Expense statements. These should cover multiple scenarios of patient volumes for the first year of business operations, plus projections for the second and third years. The Cash Flow statement models how the timing of collections for the medical practice will actually work out and includes things like principal payments on loans. This is another area for graphs; put the tables that support the graphs in the Appendix.
Explaining Your Marketing Strategies
Another important component of your medical practice business plan is your marketing plan. Trends have expanded the range of marketing strategies and marketing platforms you can use to find new patients – and later to retain current patients. Your specific marketing plan will also be influenced by your general area of specialty. Are you a primary care physician who recruits patients 
looking for a family doctor, or a specialist who relies on referrals from other physicians?
One of the market trends that is common to all types of medical practices is social media marketing. Besides making sure patients can find you on public website listings and health plan provider directories, you may want to utilize customer relationship applications like Sales Force. And of course, you want to be visible on a whole range of social media platforms such as Facebook and LinkedIn. These types of marketing activities are increasingly acceptable to patients and can be very cost-effective for a medical office. It now takes the place of staples like print advertising or the Yellow Pages.
Specialty practices that rely on referrals from other physicians should focus on a referral development approach. This is a type of outbound marketing where you rely on developing close relationships with your referral sources. While excellent patient care to other physicians’ patients is a given, it is also important to provide excellent customer service – both to the physician as well as office staff members. This means things like timely reports and ease of access for the referred patients. It also means outreach to both the referring physician(s) and the office staff to ensure good communication and cooperation.
Your Operations Plan
This section of your business plan should contain a summary of how you intend to operate the medical practice. It should cover things like key members of your staff or the management team, and the major milestones you are targeting.
The Executive Summary
As noted above, sometimes the only parts of medical practice business plans that bankers or investors read are the Executive Summary and the Business Description. So be sure to include the most important elements of your market analysis section, financial plan, and Marketing Strategy in the executive summary.
Be sure to include relevant supporting documents in an Appendix, along with tables and graphs that portray all of the statistical and financial information you are relying on to support your conclusions.
It is hard to see how a successful medical practice can be launched these days without a business plan. The medical industry keeps changing rapidly, and the days of getting loans based on a handshake and a medical license are long gone. Make sure your business plan reflects the same level of professionalism that your clinical care includes!