Chart out costs, revenues before hiring new doctor

Question: My partner and I are considering hiring a new physician to join our ob-gyn practice. This physician would be an employee of the practice initially, with the intention of inviting the doctor to become a shareholder later. From a workload aspect, the decision is clear. But cash is tight, and we are concerned about what it will cost during the "startup" period for this doctor. How can we determine if the decision to hire is financially feasible? When can we expect this physician to start generating a profit?

Answer: Though every hiring and cost situation is unique, there is a way for you to project the cost and eventual benefits of hiring this new doctor.

There are several potential additional expenses associated with hiring a new physician, not the least of which is salary and payroll taxes. Then there are startup costs, and expenses relating to staffing, operations, supplies and other items.

Startup costs include the direct costs associated with recruiting a new physician, such as hiring a physician recruitment firm if necessary, as well as preparing the necessary legal documents and marketing the newly hired physician to the community, along with some indirect costs.

Indirect costs associated with hiring a new physician should not be overlooked. These costs are typically the time that your partner and you will spend interviewing, conducting reference checks, participating in negotiations and meeting with your attorney, accountant and other advisers. This might impact the number of patients you see during that time period and cut into your personal life. Your staff, family and you should be aware of this time investment.

The second category of expenses to consider is the staffing changes that may be needed as a result of hiring an additional physician. These include wages and fringe benefits for any additional staff, plus any recruitment costs. Do not include the cost of current employees, such as your office manager, unless that employee's wages will increase because of the new doctor hire.

Next, determine if you need to increase office space. All costs associated with extra space, such as additional rent, new furnishings, new medical equipment, increased property insurance costs and utilities, should be included in your calculations. Even if you don't have to or can't increase the size of your office space, there still will be costs associated with new furnishings and equipment.

Other operational expenses include the increased costs of providing services to patients, such as medical and office supplies, additional phone lines, pagers and billing costs. As with the other expense categories, only the incremental costs should be identified when determining the overall cost of hiring a new physician.

The largest single expenditure will be the new physician's salary, payroll taxes and other related expenses. These include liability insurance, health insurance, retirement plan costs, dues and memberships, and other fringe benefits.

Once all of the expenses have been identified, prepare a 24-to-36-month schedule and record all the expenses on a month-by-month basis. This schedule may be created manually using multicolumn paper, or, preferably, electronically using a spreadsheet application.

List the months, starting with the first month you plan to incur an expense associated with hiring a new physician, across the top of the schedule; then list the expense items down the left side of the column. Then decide when the expense will start and list the monthly amount for each expense in each applicable column. The schedule begins when you start recruiting, not when the physician starts working.

Your accounting professional can help you with this schedule and incorporate more sophisticated calculations, such as rent and overhead increases, debt service on loans to finance this startup period, inflation, tax effects and other figures.

When you have finished, you will have a summary of all the outlays of cash, by month, associated with hiring the new physician.

Estimating revenue

To determine when the new doctor will start to bring in a profit, you will need to estimate how many patients he or she realistically will see from the first day in the practice through 36 months. Using an average fee per patient collected by your practice, estimate when insurance payments will be received. These data should be recorded on your schedule.

If you assume that payments will be received 45 days after the patient is seen, and the average fee received will be $75 per patient, you can insert these numbers into your schedule.

For example, if the physician begins working at the practice in the fifth month on your schedule and sees 10 patients per day, $750 per day should be collected starting in the middle of the sixth month.

Of course, initial insurance payments might take longer than usual. Instead of planning for the revenue in the sixth month, it will be more realistic to record it for month seven or even month eight.

As time progresses, the number of patients should increase, with a corresponding increase in revenues. We encourage you to be conservative in your patient-revenue estimate and aggressive in your expense estimate.

Once this schedule is complete, add the estimated total revenues and expenses for each month. Now you will have a clear idea of how much cash will go out before patients are even seen, and in what month revenues will actually surpass expenses.

This may seem arduous, but it is time well-spent. This schedule will provide your partner and you a realistic picture of the cost to finance this startup.

With this information, you will be able to make well-informed decisions on the feasibility of hiring a new physician based on how much of the startup costs the practice can afford to finance and how much may have to be financed through your bank.