Starting your own practice is a big undertaking. Before you jump in, take a moment to consider the startup costs, which range from $50,000 to half a million dollars or more. These numbers are estimates that will change depending on your location and your specialty, but they serve as a starting point for you to begin to draw up a budget and think about what your practice will look like. Keep in mind that there will always be outliers–one physician opened his practice for $11,000–but the likelihood is that your costs will be significantly higher, so be prepared.
As you come up with your budget, you should always be looking for ways to limit your expenses wherever possible, while also being aware there will be unexpected expenses along the way. Expect the unexpected, hope for the best, and prepare for the worst.
In 2019, average medical office rents were just under $28 per square foot according to commercial real estate group CBRE Group. Remember that $28 is the average per square foot – your rent could be higher or lower, depending on your location. For example, New York is the highest cost location with rents coming in at $65 per square foot, while Los Angeles and San Francisco are the second and third most expensive in the low $40s per square foot. At the lower end of the range are cities such as Indianapolis, Salt Lake City, and Louisville, in the low $19s per square foot.
Most medical practices range in size from 1,500-2,500 square feet, so your rent could be anywhere from $30,000 to well over $100,000 per year. Get in touch with a few different commercial real estate brokers, ideally ones who specialize in medical real estate, to get a better sense of the costs in your area.
Unless you’re walking into a space that previously served as a medical office, you’ll likely have to do some renovations. You may also have to upgrade HVAC, plumbing, electrical, and fire protection to meet medical requirements. The cost here will depend on what you need to have done, as well as where you’re located. A completely raw, unfinished space will be the most expensive as everything must be added. A “white space”– an office which is empty or gutted but has the infrastructure (HVAC, plumbing, electrical) installed – is cheaper than raw space but still requires flooring, plumbing and fixtures, interior walls, electrical fixtures, and paint and furniture.
Costs can range from as low as $10-$20 per square foot for facilities that need minimal fixes up to $250 or more per square foot for raw spaces that need to be completely outfitted. Costs also vary from region to region. For example, one contractor quotes that the lowest average cost to renovate a medical outpatient facility is just under $230 per square foot in South Central U.S. and the highest is over $300 per square foot in the Northeast. Depending on your needs, renovation costs may be as little as a few thousand dollars but could run up to several hundred thousand dollars.
Most landlords will cover some, or perhaps all, of the cost of these renovations with what is called a “tenant improvement allowance” (TIA). The amount and details of the TIA need to be negotiated with the landlord as part of the lease negotiations. TIAs can take different forms so pay close attention to the details as to what is covered and who is responsible for what.
The cost of equipment will vary according to your needs and specialty. Consider buying used equipment to start out. You can add equipment and upgrade as your practice grows. Assume that basic equipment will cost you approximately $5,000-$15,000 to start out.
You’ll need a good Electronic Health Record (EHR) system. Try to visit some existing practices and watch their system in action to get a sense of which might work best for you. You want to make sure you get the right system to start out with as switching is expensive and time consuming. Expect the cost for this to run from $8,000 to $18,000, depending on the size of your practice. There will be an initial license fee (approximately $7,500-$10,000), as well as a monthly subscription fee per user (approximately $50-$650).
The survival of your practice will depend on you getting paid, so it’s crucial to have an efficient billing system in place. Although you could outsource this to third party billing services, some of these services have spotty records, so you might consider managing billing in-house. Costs for the software range from free to up to $10,000 per year, depending on the size of your practice and the features you choose. Billing software is also included in most practice management software as well.
Another important part of your software package is practice management software, which covers the administrative functions of your office, including billing, patient registration and scheduling, a patient portal, and reporting. This software should work seamlessly with your EHR system, so keep that in mind when you’re considering the different options. Prices range from $2,400 up to $12,000 annually.
Malpractice insurance will range in price depending on your specialty and where you’re located. Rates range from $10,000 up to $150,000. Check out this website to get an idea of what historical malpractice rates have been in your area.
Remember to add in the costs for disability and life insurance as well.
You’re probably going to need some help in your practice unless you’re prepared to do absolutely everything. Keep in mind that the more time you spend doing administrative and other work, the less time you’ll have to see patients. Consider hiring one person to help you to start – be sure that they’re willing and able to do both administrative and assistant work – and then you can add additional staff as needed. The average annual salary for a medical assistant in the U.S. is $31,278 but be prepared to pay more for an assistant who can, and will, do both assistant and administrative work. You’re getting two workers for the price of one – be ready to pay for it.
Remember that while additional staff will expand your practice’s capabilities, it will also increase the costs and management demands on your time.
There are a few legal steps you need to take when you start your own practice. First, you should incorporate yourself as a legal entity to protect your personal assets from legal liability. This shields you and your assets if you get sued.
There are different types of business entity to choose from (sole proprietorship, general partnership, limited liability company (LLC), a corporation, or a cooperative), each of which offers different structures in regard to ownership, legal liabilities, and tax benefits. The type you choose will depend on a number of factors, including, how much money you need to get your business up and running, your risk tolerance when it comes to legal liability, and your preferred tax structure. This is where the advice of a lawyer and an accountant will come in handy. They can help you decide what makes sense for you.
The cost of incorporating can range from $150 up to $5,000 or more, but many law firms offer a flat fee ranging between $500-$700 for incorporating a firm. Accountants usually charge by the hour. According to the U.S. Bureau of Labor Statistics, the average hourly fee was just over $35 but that fee can vary depending on the accountant, their experience, your location and your needs.
Next, you’ll need to register your business with the IRS to get an employer identification number (EIN), as well as your state and local governments for tax and regulatory purposes. The steps for registering with your state and local governments will depend on where you’re planning on opening your practice. The Small Business Administration (SBA) has information that will tell you what you require for your location.
Finally, you may want to consider registering a trademark for the name of your medical practice.
How do you intend to attract new patients? Unless you have a steady pipeline of referrals you can look forward to, you’re going to need to advertise. The difficult question to answer here is: How much should you spend?
The possible range is from $0 to the-sky’s-the-limit. The SBA recommends as a general rule that “small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing.” However, the CMO survey shows that healthcare and pharmaceutical companies spend an average of 9% of revenues on marketing – but pharmaceutical marketing spend is included in that and is likely pushing it higher than it otherwise would be. Which one of these is right?
The correct answer for you will be an amount unique to you and will probably be the result of some trial and error. You could start off spending anywhere from 2%-5% of your projected revenues for marketing and then track the effectiveness of your advertising efforts by asking your new patients how they found you. From there, you can expand or curtail your marketing efforts, depending on their effectiveness.
Finally, an important consideration is that it will take some time for both your patient volume and your office efficiency to get up to speed. In the meantime, you’ll be on the hook for your startup expenses and ongoing overhead. Part of your budget calculation needs to account for the possibility that you could earn little to no salary for the first six months to two years of operations. You’ll need to have reserves or a line of credit to help you bridge that gap.
The above list is by no means exhaustive, but it does give you an indication of the number of different items and costs you’ll encounter when opening your own practice. As you can see, the costs quickly add up: unless you want to try the barebones startup for $11,000, you’ll probably be looking at spending anywhere from $50,000 (and that’s still at the low end) up to several hundred thousand dollars. The amount will depend on your location, your specialty, and how organized and diligent you are in your execution.
Be aware that opening an office will take time, patience and perseverance but is very doable! The same skills and tenacity that saw you through medical school can help you navigate this challenge. The rewards of being your own boss offer both tangible and intangible benefits that for many, are well worth the risks.
In providing this information, neither Laurel Road nor KeyBank nor its affiliates are acting as your agent or is offering any tax, financial, accounting, or legal advice.
Any third-party linked content is provided for informational purposes and should not be viewed as an endorsement by Laurel Road or KeyBank of any third-party product or service mentioned. Laurel Road’s Online Privacy Statement does not apply to third-party linked websites and you should consult the privacy disclosures of each site you visit for further information.
Get tailored Laurel Road resources delivered to your inbox.