Physician entrepreneurs must think and act like business owners as well as clinicians. That was one of the key messages delivered by Michael Jerkins, MD, MEd, president and co-founder of Panacea Financial, at the inaugural AMA Physician Entrepreneur Forum held in Chicago last month.
In his address, Dr. Jerkins worked to “peel back the curtain on what banks or financing partners look for,” he said. “They are going to be looking at you as an individual and as a business.”
Dr. Jerkins also spoke earlier this month at the AMA Independent Practice Accelerator Workshop. That event and the AMA Physician Entrepreneur Forum are part of the AMA Career Advancement Collective, a powerful new suite of educational programs and training that helps physicians develop and advance at every stage of their career.
Understanding the nuances of personal finances, business plans, the market and cash flow is crucial to physicians who want to strike out on their own, but many steps can be easily overlooked or discounted, Dr. Jerkins warned. However, proper preparation can help any would-be founder or new business owner build their endeavor on solid ground.
“There's no manual on how to do this, whether it's a practice, venture-backed care delivery or anything else,” Dr. Jerkins said. “So, give yourself a little grace while learning, because that's part of the battle.”
Cash, credit and credentialing
Cash is king, and Dr. Jerkins should know. Since 2020, Panacea Financial has made more than $1 billion in loans, and every year they help facilitate $6 billion in physician and practice transactions.
AMA members receive exclusive member benefits from Panacea Financial, including a 0.25% rate discount on practice and personal loans, and zero-dollar origination fees on practice loans, applied after underwriting. Get more details on how to take advantage of this AMA member benefit from Panacea Financial and about the terms and conditions that apply.
The first step in getting the income needed to start, sustain and grow a business is assembling a team.
A certified public accountant “and an attorney are the two most important folks you want in your corner, but a practice consultant who specializes in credentialing is crucial,” Dr. Jerkins added. “That’s how you get paid. If you can't get paid, especially in an insurance-based practice, you're up a creek.”
Expect lenders to evaluate both personal finances and the viability of the business.
Lenders will examine your FICO credit score “whether you like it or not,” he told the crowd. “Over 700 is a bare minimum, and I always recommend keeping track of this because you'd be surprised by what you don't know is on your credit report.”
Prospective borrowers should have a debt-to-income ratio below 45%, enough savings to cover three to six months of personal expenses and access to up to 20% of the project cost. A realistic 36-month pro forma, or estimated balance sheet, is expected, along with enough capital to fund the ramp-up period, demonstrable market demand and a projected debt-service coverage ratio above 1.2 by the second year of operations.
It is very helpful to continue to work some in an employed position while your practice is ramping up, he added. This will keep your debt-servicing above what is needed to succeed and help offset any insurance lag.
“They are going to pressure-test that pro forma,” Dr. Jerkins said. “You have to have a realistic ramp-up period. What happens if you have fewer patients than you expected, or your expenses go up?”
That extends to location, which, in the stressful and attention-absorbing process of obtaining financing, can easily become a lower priority. That makes investing in a demographic report advisable.
“Obtain that data and have it on hand,” he said. “It's cheaper than it's ever been to demonstrate that there is a market demand supported by the area's demographics.”
Other factors include whether the practice model will be insurance-based or cash-pay/membership. Both have specific characteristics that must be considered. In either model, the mismatch between revenue and expenses is critical in that rent, payroll, software, insurance and debt service begin immediately, regardless of revenue—or the lack of it.
Insurance-based practices should factor in significant delays before revenue becomes steady and reliable because credentialing can take up to 180 days. Without credentialing, practices cannot bill commercial payers, and Medicare generally backdates only 30 days.
This is why Dr. Jerkins repeatedly stressed the importance of prompt credentialing, or as prompt as it can be, anyway.
“One of the most common mistakes is that people don't start the process until a month or two before opening,” he said. “First claims will go out, some accounts receivable are 30 or 40 days past due or from the delivery of care—which is normal in an insurance-based world—and they start off cash-flow negative, burning through savings and working capital.”
Dr. Jerkins recommended beginning the credentialing process at least 120 days before the first planned patient visit. Most commercial payers will not pay retroactively for care provided during the approval process. With credentialing in place, denials and accounts receivable are more easily managed and reliable, and an insurance-based practice can reasonably expect a normal cash flow rhythm toward the end of its first year.
A cash-pay or membership service does not need to wait for credentialing and payment. It can begin collecting revenue on the first day, but very little income in the first three to six months is common. Physicians converting an existing practice typically bring only about 10% of their patient panel with them. That builds over time and income potentially returns to the physician’s previous level in the second year, but that slow period must be planned for and cash must be on hand to weather it.
It takes astute clinical judgment as well as a commitment to collaboration and solving challenging problems to succeed in independent settings that are often fluid, and the AMA offers the resources and support physicians need to both start and sustain success in private practice.
Teamwork a must for physician entrepreneurs
In his wide-ranging talk, Dr. Jerkins also touched on:
- Why physicians should expect a slow start in building their practice’s patient panel—and planning accordingly.
- Why the financial challenges of running a physician practice are ongoing, even after the task of launching it has been surmounted.
- The challenge—and potential—of recruiting other physicians to join the practice.
Above all, he said physician success in the entrepreneurial world, which assuredly does include starting or sustaining an independent practice, requires a teamwork approach.
“Don't try this alone,” he said. “Doctors are very smart people, but sometimes we think we're smarter than we actually are.” With the right team, realistic expectations and financial preparedness, physicians can build a practice that not only thrives, but becomes a foundation for growth.
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