The Intake

Insights for those starting, managing, and growing independent healthcare practices

Cut costs not corners: Building a healthcare operating budget for medical practices

a group of doctors determining a healthcare operating budget

At a Glance

  • A successful healthcare operating budget requires meticulous planning, research, and considering both expected and unexpected expenses.
  • A comprehensive business plan provides a foundation to guide you through funding, start-up decisions, expected growth, and potential challenges.
  • It is important to balance vision and sustainability, both as you pursue funding and as you plan your future.

You’ve spent years preparing to serve others by launching an independent medical practice. Now, it is finally time for that dream to become a reality. But how do you create an inclusive, realistic healthcare operating budget?

Structuring this effort for a successful launch and profitable longevity means ensuring your short- and long-term vision goes beyond concept to actionable steps. Many steps lie between ideation and actualization.

Consider high-level requirements such as:

  • Learning about the local market
  • Determining the best business model for your practice
  • Initial, mid-, and long-term staffing needs
  • Opening expenses
  • Revenue cycle management and ongoing operating expenditures
  • Deciding who will be chosen partners — internally and externally as well as who will be payors and require billing processes
  • Staff and payer credentialing
  • Becoming known to and trusted in the community

Some of these steps may seem rooted in basic common sense. Others may be surprises. Yet every good project needs a reliable foundation. As the architect of your practice’s design, a solid plan is the best place to begin. Business consulting experts note that the average planning phase for a start-up takes 3 to 6 months. That includes establishing your healthcare operating budget and plans for growth.

Create a business plan

Although creating a thorough business plan can be tedious and exhausting, it is where every serious new business owner must begin. This proforma requires you to think through and evaluate the minutiae and assures desired investors that this project is an intentional undertaking.

Part of that intentionality involves creating a detailed project plan with an implementation timeline. Case in point: you don’t want heavy equipment showing up before your flooring is installed.

Because let’s face it: even if you have a generous benefactor ready to finance your new practice, you still need a plan grounded in reality that has seriously considered the challenges of owning a medical practice.

One of those challenges is establishing a healthcare operating budget — which requires a complete picture of your business. Establishing your budget will be a thread you will weave into your practice’s ongoing business plan.

Be realistic about your start-up

Part of your business plan will include developing a timeline for growth. Keep in mind that your facility, IT infrastructure, staffing, and equipment will grow with you.

Areas where you can cut costs include:

  • Using a secure cloud-based IT server process rather than an extensive network of expensive on-site servers.
  • Using technological software programs to gain efficiencies resulting in fewer full-time staff members.
  • Research available local and national government programs designed to reduce new business tax burdens.

As you go through this process, be realistic about your expenses. Don’t endeavor to build a pseudo hospital when you are creating a place where your patients will come to feel known. The healthcare operating budget variance will be significant.

Conduct market research

As the population in the United States ages and the physician shortage increases, your profession is more essential than ever. The important consideration with a new practice is not whether a practice will be viable, broadly speaking. It’s more precisely whether another practice in your target location is needed.

The community dynamics around where you want to practice are an important factor. Ask yourself questions such as:

  • Are there specific state/local regulations or restrictions regarding practicing medicine?
  • How many other doctors, if any, already practice near where you want to open?
  • What are the predominant insurance companies and associated policy types?
  • Is there a large enough population to support multiple physicians?
  • If you’re a specialist, is there a sustainable need for your specialty in that space? Does the local demographic align with your specialty?
  • Will you be able to attract qualified staff members?
  • Are there any dominant languages or cultures in the location?
  • What are the demographics of the local population?
  • Is the location easily accessible by car or public transportation?
  • How stable is the local economy?

To answer these types of questions, turn to solid, quantitative data, such as that found in the most recent US Census. Go ahead and collect anecdotal, qualitative data as you talk to community members, too. It will give you a feel for how the area relates to new businesses and, in particular, physicians.

If you’re not comfortable working with data, or are worried about giving away practice “secrets” simply through attempting data collection, consider working with a third-party company to conduct the data collection. 

Determine your business model 

Before you can create a healthcare operating budget, you need to identify the target for which you are aiming. Are you planning on developing a solo or group practice?

Each option has associated pros and cons. You have to decide what’s most important to you when it comes to how much daily time you need to dedicate to various tasks, how many staff members you want to manage, how much control you want to have over your schedule, whether you prefer to fully own your practice versus chasing relative value units (RVUs), how important having access to personal benefits is to you, and how much of the responsibility you want to shoulder for the profit and loss of the practice.

Identify and estimate your start-up costs

Your start-up costs will vary according to whether you are building your practice from the ground up or acquiring an existing one. If you are creating a brand new medical practice, you need to determine if you will lease a space or buy a building.

  • Consulting and advising
  • Medical equipment and supplies
  • Administrative and breakroom furniture, equipment, supplies, and mandatory signage and notifications
  • Waiting room furniture and décor
  • Exam room, hall, and bathroom supplies and décor
  • Signage
  • Licensing
  • Insurance
  • Marketing and advertising blitz (above your typical monthly marketing budget)
  • Vendor and software selection for EHR, card processing, medical billing, collections, insurers for various coverage needs, payroll, and benefits
  • Hiring and recruiting fees and estimated overtime expenses
  • 12 months of estimated standard operating expenses
  • +15% of the total estimated expense (plus monthly operating expenses) to account for a margin of error and unanticipated expenditures

This information can give you a baseline for your initial investor funding or line of credit. 

If you’re purchasing an existing practice, determine what equipment you need to replace or add, how much renovation and updating the space requires, and what infrastructure, such as electrical, HVAC, and structural integrity, needs to be improved.

Plan your hiring

Speaking of expenses and revenue, you need to determine what positions you will need to run your practice. There are so many functions for which you won’t have time. Things such as:

  • Answering phones to take patient questions
  • Collecting specimens for laboratory evaluation
  • Sending samples to a contracted laboratory or processing and analyzing lab results
  • Managing the IT processes, ensuring they are up-to-date, effective, and secure
  • Booking, canceling, or rescheduling appointments
  • Managing billing, insurance claims, and reimbursements
  • Managing patient recordkeeping
  • Conducting ongoing marketing and social media efforts
  • Performing janitorial duties
  • Ordering and stocking supplies
  • Hiring, onboarding, counseling, and terminating staff

As you decide what staff will set your practice on a successful path, consider hiring a competent office manager to oversee day-to-day operations. You’ll be too busy keeping up with your patients and CME to dedicate the quality time these functions demand.

Additionally, how many nurses, PAs, and medical assistants will you need for the patient volume you anticipate?

Your focus now is naturally your start-up operations. However, it’s essential to plan for your practice’s growth and to consider how and when you will finance those additions to staff.

Evaluate your operating expenses

Your most significant monthly operating expense will be your staff salaries and benefits. Generally speaking, the US Department of Labor suggests employee benefits account for approximately 30% of a staff member’s compensation package. If you initially choose to use a staffing service rather than hiring full-time employees, plan for the agency’s fee instead of a benefits package.

Some states have different methods of determining benefits eligibility, so before you hire part-time employees or contractors, be sure you understand the local requirements.

Additional healthcare operating expenses to consider in your budget include:

  • Rent or mortgage
  • Utilities
  • Insurance 
  • Vendor fees
  • Ongoing education and training
  • Line of credit/loan repayment
  • Taxes
  • Marketing
  • Equipment upkeep, repair, and replacement
  • +15% to account for unanticipated monthly expenditures

Geography and whether you are in an urban or rural location will impact your line items. Consider hiring a consultant to help you estimate both your start-up and your ongoing expenses.

Obtain funding

Now that you have investigated what it will take to start your new practice, it’s time to locate investors and apply for lines of credit from financial institutions.

You’ll be expected to prove you’ve put thought and preparation into starting your practice. As you move forward to secure financing, general recommendations suggest applying to 5 to 10 medical divisions of financial institutions.

Taking time to seek funding from multiple institutions allows you to gather information and compare terms. This ensures you have the opportunity to choose the terms that work best for your vision.

Move forward through the funding waiting period

Banks need time to conduct their due diligence for your request for a business loan. You’ll likely get frustrated if you don’t have steps to take in the interim. Fortunately, there are several steps you can take while you wait.

Evaluate your potential practice site

While you wait for the financing process to move forward, use this time to evaluate the local market research results and conduct a deeper search for your ideal location. You likely already had some places in mind, but now you’re closer to exploring your options.

If you’re buying an existing practice as opposed to building a new practice from scratch, you most likely have a physical location, but there are still items you need to evaluate. Site visits will help you with your research.

As part of your research, you can determine:

  • What locations are available
  • Necessary site construction, renovations, and infrastructure updates
  • What benefits are present at each property
  • If what seem to present as liabilities can be worked around to make it work for your practice
  • Whether other physicians/providers are nearby

Now that you have identified a few possible locations, you can begin to determine what changes you will need to make to each to make them suitable for your practice. 

Research and interview vendors

You will work with several vendors and service providers, and it’s important to research and interview your options as you make your decisions. 

An excellent starting resource for this information is established local physicians. Ask them what they’ve been using, how long they’ve used it, what they like about the software, what they wish it did differently, and if they’d make a different decision if they could easily do it over again. This information can help direct your research efforts as you plan your healthcare operating budget. 

As you interview vendors, ask if their software is compatible with other systems you plan to implement. It’s also essential they provide you implementation timelines.

This is also when you will interview potential contractors who will oversee the construction that must be completed before equipment starts arriving.

Purchase equipment and contract services

You have obtained the funding you need. Now, it’s time to implement the decisions you’ve been working toward.

Review the timeline you created as part of your business plan and determine if there are adjustments that need to be made based on the additional information you now have. Will construction take longer than you initially anticipated? How long will it take to contract with insurance companies? Are supply chain challenges resulting in vendors experiencing delays? Are you in a tight labor market and need to get creative with your hiring process?

Build buzz for your practice through effective marketing

Getting started on a new venture is exciting. Now’s the time to start creating interest in your upcoming availability. There are several avenues your marketing team can use to introduce your medical practice to your community. Consider both electronic and direct marketing — some mediums work better than others.

Your approach might involve:

  • Targeted social media ads
  • Google ads for your search-engine-optimized website
  • Targeted email marketing lists, ensuring they comply with anti-spam and healthcare regulations
  • Direct mail marketing lists to send potential patients physical postcards. People like getting mail in their mailbox, particularly if it has been personalized.
  • Local radio or television advertisements
  • Targeted billboards

You’re excited about getting to know people within your practice’s reach. Well-implemented marketing messaging will translate your excitement to others, too. One way to do this is to send save-the-date cards announcing a grand opening event at your office.

Launch your practice

As you prepare to open your practice, it’s time to ensure everyone has received the training they need regarding your policies and procedures, not to mention the mandatory compliance training.

Conducting mock patient treatment scenarios will identify areas that need to be refined, added, or deleted from your processes. This will be true of the administrative functions and the medical evaluations.

These trial runs also give you time to order any supplies you previously overlooked.

Soft open

Now that you’ve conducted training and cleaned up areas that needed to run more smoothly, it’s time to soft open. To do this, open a limited number of new patient appointments. Gradually open the appointment schedule to book full days.

Continue to evaluate what’s working and where you can improve.

Grand opening

You’ve had this on your project timeline, and it’s hard to believe it’s finally time to throw your grand opening party. You sent out announcements, and now that your practice has been running for a few weeks, you will formally introduce your medical practice and staff to the local community and those likely to partner with you.

As you prepare for your grand opening, you may question whether this is a necessary budget hit you should incur. The answer is a resounding yes.

We live in a world full of minds that are consistently overstimulated. To ensure yours is the practice that comes to mind, prospective patients need to be exposed to your practice’s name and location an average of 7 separate times. Face-to-face interactions are more memorable than a passing recommendation or advertisement.

Once the party is over, keep the excitement alive with ongoing marketing. Keep your branding consistent and provide images that link back to the grand opening event people may have attended. The more reminders you can provide, the greater the likelihood they will remember that yours is the medical practice to contact.

Evaluate your business plan against your practice results

Set aside time quarterly to evaluate how your practice is running when you compare the day-to-day operational results to your business plan. Observe the monthly healthcare operating budget variances and make decisions about what is going well and what needs to change.

Perhaps your staff has identified ancillary services your community is requesting that fit within the scope of what you want to focus on, and you determine it is a valuable service your medical practice can offer.

A healthcare operating budget is the first step to success

Working out everything that needs to be implemented to bring your vision of a medical practice to fruition can be taxing. The more you work through the process and establish a realistic healthcare operating budget and timeline, the more you set yourself, your team, and your patients for a rewarding experience.

As you work to secure funding with the goal of having an effective, lean medical practice, consider implementing some cloud-based technological solutions that will move you closer to that goal.

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Karmin Gentili

Karmin Gentili has been a freelance writer and editor since 2016. She has over 25 years of experience in corporate HR and compliance consulting. She has worked to further elevate her skills by pursuing and receiving multiple certifications, including copywriting, video scriptwriting, effective content positioning, case study writing, and SEO. Her love of writing motivates her to use those skills to develop content for the medical field that ensures others can work toward achieving their goals.

Reviewed by

Baran Erdik, healthcare consultant and compliance expert

Baran Erdik, MHPA, has expertise in healthcare editing, administration, and policy. He currently works in healthcare compliance and consulting.

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