This is the third post in a series to help new attending physicians get started off on the right financial foot.
Previously, we discussed some early career major work and lifestyle choices with big financial impacts. That was followed with a checklist to tackle the big personal finance issues of debt, investing, cash flow, and calamity planning for the freshly meta-morphed physician transitioning to independent practice. That move to independent practice brings the specter of running your own business to the forefront.
Today, we will work through a checklist of issues to consider while building your new practice.
#1 Learning To Run A Business
This is usually completely uncharted territory for a young attending. That makes it scary for most.
However, similar to fully exploring the globe, there aren’t nearly as many sea monsters as we thought.
There are many aspects to a medical business model that vary widely depending on our your specialty and practice type.
A number of resources can help a new attending figure out how to build a practice that suits them.
Hopefully, you made full use of your mentors while training to learn about the business aspect of your field.
If not, then discussing it openly with some of them before laying out major capital or making major commitments is advised. So is buying them a nice gift or feeding/hydrating them well.
Another good option is to locum and experience how different practices run at the ground level. You could also join an established clinic.
If you go this route, you should expect that there will be some type of premium paid until you grow into the role of an equal partner. It may seem unfair that someone gets a better deal than you for the same clinical work. However, remember that the clinic or established practice partners risked capital, time, and effort to build the infrastructure to where it is currently.
Consider some professional help if you need it.
Some accountants or human resource companies can help you make sure some of the details like hiring, contracts, and payroll are done correctly. These services are not usually specific to medicine.
The are some courses specific to medical practice management. The CMA has practice management seminars and downloadable resources. The OMA also has a practice management resource page. I am sure that other provincial bodies do also. I am just too lazy to look through them all. For those with even less motivation than that, there are professional companies that specialize in managing medical practices. Just expect to pay for it.
#2 Learn How to Bill & Set Up an Effective Billing Structure.
Whatever practice type you have, the vast majority of physicians will bill in some form. There are several aspects to doing this effectively:
- Read your province’s schedule of benefits (fee book). It is usually a labyrinth and vague on key issues.
- Make a cheat sheet of frequently used codes in your specialty. Some of your colleagues may have already done this.
- Speak with others in your specialty. Once every few years, I still have a dinner meeting with others in my specialty that practice in different cities. Every time, I drive away in my base model Subaru thinking about how it could have been a Ferrari. If only I had known some billing tidbit years before that I just picked up that evening. I then blame the subsequent feelings of indigestion on the chocolatey dessert.
- The fee schedule is vague, interpretation varies by docs and ministry assessors, and there is often more than one way to bill for the same thing. Only bill for what you do, but learn to choose the best way to do so.
If possible, you should have someone with a vested interest in your income enter your billing.
In fact, you probably want to be sleeping with your billing agent. That should be your spouse, if married. It could be yourself, if not. There are a number of benefits to doing this as outlined in the preceding click-bait-worthy link. This could be your only real chance to be The Boss – if even in a small way.
Paying a billing agency costs 1.5-2.5% of your gross billings. Instead, you could pay a lower income spouse the market rate for doing your billing. That allows the money to flow into your family’s pocket at a low tax rate rather than someone else’s.
Entering billing is quick and easy with good software. It may even be worth your while compared to your physician pay rate. Especially, when you consider who is going to be most interested in ensuring that you get the higher paying codes that typically require a little extra information or effort.
Even if you don’t enter your own billing, be a good boss. Write down the codes for the service you provided and the required information for your billing agent to easily enter it. Putting just a “name, date, and “visit” will ensure that you are always paid the lowest amount for what you have done.
Makes sure that you chart adequately
As a resident, you needed to chart enough that other care providers would be able to read the chart and know your plan. You also wanted to avoid getting caught inadequately charting by your attending or regulatory college. As a physician billing for your services, you also need to make sure that your charting captures the information needed to prove that you provided the services you get paid for.
Common documentation pitfalls include:
- Not recording the referring physician for a consult and giving them a written opinion.
- Start and stop times for time unit based fees.
- Procedure notes for common simple billable procedures.
- Not mentioning that you were called in for after-hours care (there may be a drive-in premium)
- Using the same diagnosis for different consults on a patient that address different issues. The same diagnosis may cause your code to be downgraded to a follow-up for the original problem.
#3 Make A Basic Business Plan & Track Progress
There is a detailed description of business plan writing on the Business Canada website.
At its core, a business plan should be simple and comes down to Cash Flow = Income minus Expenses
Income: Bringin’ Home The Bacon Flavoured Ice Cream
Medical practice has a huge variety of options of what kind of work you can do. Like flavours of ice cream! There are different types of clinical work within a specialty. You can even switch the cone around and do a variety of non-clinical work. This flexibility is great because it makes medicine interesting and allows you to shift around what you do at different points in your career.
Don’t kid yourself. The first time you successfully save a patient with your medical super-powers – it feels awesome!!!! Ten years later, it probably still feels awesome. Just less awesome at 3am or two nights in a row. Good news is, when you feel that you have reached your career fulfillment, you can switch it up. My dog may disagree, but even bacon-flavoured ice cream may sound better in theory than practice or the novelty could wear off.
The different flavours of your medical-specialty-ice-cream should be examined carefully when planning your practice. Some taste better than others and they also have varying sugar content (what you need to be a Sugar-Daddy or Sugar-Momma – i.e. money!) Sadly, sugar content and yumminess are usually inversely correlated. Regardless, everyone can find what they consider to be the sweet spot between calories and tolerability.
Look at how much work of each type you can reasonably expect and how much it pays.
This will give you a sense of the income that you can expect. Write it down. You need to keep this to the forefront when looking at your planned expenses both for your business and personally. Think about how different aspects of your business may grow in the future, set goals for that, and make a plan for how you can work towards them.
Expenses: Consider what costs you expect to incur.
Some may be relatively fixed. Like office staffing or overhead. You need to understand these costs to plan for them. Your obligation to pay your bills continues regardless of the revenue that you are bringing in. As discussed in my last post, you need a plan to surf the cash flow waves which can ebb and flow in practice. That means a business plan with a healthy profit margin and some financial reserve as cash or credit to smooth the waters.
Even though some costs are relatively fixed, consider how you can maximize what you get for them. Or whether you can make those costs more flexible. For example, is there a way to share office space, staffing, or equipment?
Many costs are incremental. For example, the more of a procedure that you do (outside of a hospital), the more you will need for supplies. When looking at incremental costs, keep an eye on how much revenue you generate for the incremental cost. Besides physical materials, your time also has value.
You may want to incur some costs, if they leverage your time to be able to more effectively to generate higher revenues. Physician extenders, like nurses or physician assistants, would be examples of this. Just remember though – increasing levels of specialized skill come at increased cost. Try to best match the skill level and time (of you or an employee) to the task.
Consider all of these expenses and write them down. Do the basic math of income minus expenses. Make sure that it is positive. Ensure that the margin of that positivity is large enough that you feel it is a good return for your time and risk. Know what your time is worth.
Those who build lucrative and rewarding practices usually don’t do so by accident.
There are three big pieces of advice that I can give to help you do this:
- Go where you are needed. The competition is less fierce. The non-financial rewards are greatest. Done properly, the financial rewards can follow.
- Make a business plan to make sure that the financial rewards actually can follow. Yes, going into an underdeveloped field of need that is novel can be a greater risk of your time and money. Just like investing, risk and potential reward are linked.
- Track your progress. No one gets it perfect right out of the gates. If you track your business finances, you can make better decisions when shifting the flavour of your practice.
#4 A Good Accountant Is Like Underwear
You should not go without it and picking the right pair is vital to avoid chaffing and discomfort. This is essential whether you are running your practice as a sole proprietor or have decided to incorporate.
Also like underwear, the details of choosing the right accountant for you, specifically, is personal. Getting this one right has saved me huge amounts of time, anxiety, and money over the years.
I found mine by talking with a mentor whom I knew was pretty financially savvy, had a similar practice type, and who does not suffer fools lightly. That is one good method when you are practicing where you trained. If you are practicing elsewhere, search the Facebook Group for accountant recommendations. It is full of physician mentors from across Canada.
A high quality and stylish-yet-supportive-and-comfortable accountant will discuss the best options for you. This could be some help with questions about payroll and your business plan in #3. It also means helping you to tax-plan for your specific situation. Rather than just telling you to incorporate, they should discuss whether it is best for you – as we will touch upon in #6. They can also save you from the predictable constant in life besides death – taxes.
#5 The Predictable Non-Fatal Event That Still Surprises People
The transition from middle-income employee to a self-employed high-income professional comes with a few tax shocks. You see huge cheques rolling into your accounts. The tax is not deducted at source from each paycheque by an external employer like it was as a resident. You will be responsible for the tax and “You aren’t as rich as you think“(TM).
If you are incorporated and paying yourself a salary, you will need to pay personal tax to CRA through your corporate payroll every month.
That would make the balance owing at tax time pretty neutral. However, it does not include the tax you will owe when you give yourself dividends. You will need to be prepared to pay that extra tax when filing. It will come due as a big chunk in the spring when you file your personal taxes. Since you don’t get income tax deducted at source, you need to plan for the big bill.
If you still owe money on a personal line of credit, you could pay that down to make enough room to pay your taxes when due. That means you save on the interest until tax time. This is a great advantage during your first year of practice.
After your first big tax filing, you will need to make quarterly tax installments in future years. Don’t worry, CRA will send you notices to tell you this and the options for paying. So helpful.
You may have a huge amount of cash sitting in your corporation.
However, remember that for you to spend it personally, it needs to find its way into your hands. That means paying personal income tax on it. You will likely be flowing more money through your corporation to pay for your spending and debt trashing than you did as a resident. The marginal tax rate that you are going to pay on that income is much higher than you are used to.
#6 Don’t Rush To Incorporate. Unless It Makes Sense.
But… All the cool kids are doing it…
Simply flowing money through a corporation does not save you money. In fact, it costs you. Accounting for a sole proprietorship will run you about $1000-$1500/yr. In addition to the legal and accounting costs to set up a corporation, there will be ongoing accounting, college, and legal fees. These can be in the $3K/yr to $5K/yr range depending on who you go with and how much of the legwork you do yourself. Further, accessing money via capital dividends etc. will come with more fees.
The Tax-Deferral Advantage of A Corporation
The main benefit of a corporation is when you are saving more money in it than you could put into an RRSP and TFSA. It is hard to make up for the decade of lost investment compounding from a physician’s late entry into the labour market. Physicians need to save way more money in a shorter time period than the average Canadian to save for retirement. This can easily overwhelm the space in TFSAs and RRSPs. Investing via a professional corporation can be an important tool to address that problem.
The other big benefit to incorporating is if you have a lower income spouse who will legitimately work >20h/wk for your practice. That opens the door to income-splitting to reduce taxes by using dividends. You can pay your spouse a “reasonable” salary for work done for your practice whether you are incorporated or not. In fact, having your lower-income spouse as your billing agent is great on many levels.
A double-doctor couple faces a slightly different dilemma.
If there is a high-income doctor married to a drastically lower-income doctor, then a single corp could be used to income split with dividends to the lower income spouse. For power couples with two big incomes or a really high savings rate, it may be better to have two separate corporations. You need your trusty accountant to help you with this one.
Since incorporation is mainly beneficial when you are saving substantially, you may want to delay that until you are actually saving money.
That avoids the higher accountant costs until they are offset by savings. Most attendings starting out will take several years to build up a revenue-generating practice and pay off debt. That is often followed by major purchases like a newer car, a house with all the trappings, and catching up on unused RRSP and TFSA room.
#7 Insure Against Business Bloopers
Just like your personal insurance, it is important to consider your business insurance. We are fortunate in that we have CMPA for our malpractice insurance needs. However, other aspects of doing business can be sources of financial hazard.
If incorporated, you could hold some disability insurance via the corp to cover office overhead obligations. This insurance type doesn’t kick in for several months. So, you still also need a bridging emergency funding plan. That financial reserve could be liquid stable assets (like cash) or an available line of credit.
Make sure that you update this to reflect your current practice and pay the appropriate premiums. You really should not work without this. Also, make sure that you understand if it covers you for unusual practices. For example, treating foreign self-pay elective patients. You do not want an unpleasant surprise.
This is kind of like house insurance for your clinic. It can cover losses from damage to the building or equipment and revenue loss from these types of calamities. There can also be liability coverage for actions undertaken by your employees or if someone is injured on the premises. Theft or fraud by employees can be covered, as well as privacy breaches from cyber-attacks.
Don’t Rush Into Whole or Universal Life Insurance
As a young attending, the most efficient way to cover for your death is personally held “term” life insurance as discussed in the previous post.
I only mention whole life insurance in this post because it is heavily marketed towards physicians as a dual insurance and tax-sheltered investment vehicle for a corporation. It can have a role in very specific circumstances which I will write about in a future post. In the cases where it is a useful financial tool, that won’t become an issue until mid-career and only for a minority of physicians.
So – no rush! Those who use a tool without fully understanding it, usually regret it. The aggressive marketing by industry and ignorance of physicians about this one results in >80% of physicians with whole life insurance eventually regretting it.
With that talk about using your tools appropriately and Halloween coming, I will leave you with one of the most useful tips from this blog post.
A jig-saw revolutionized my pumpkin-carving abilities. Using my kids as a “Daddy-extender” to scoop out of the gross pumpkin guts has also made the task more enjoyable for me on many levels. Yes, I also have good “own occupation” disability insurance.