Is owning a medical practice worth the ultimate financial risk? [PODCAST]

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Certified financial planner Paul Morton discusses his article “Physician practice ownership: risks, rewards, and reality.” Paul breaks down the massive differences between an employed physician’s financial journey and that of an equity owner physician, exploring the reasons doctors choose the high-risk, high-reward path of private practice: the desire for control over patient culture, the “visionary” mindset, and the potential for a nonlinear financial reward. Paul dives into the challenging realities of managing overhead, dealing with inconsistent income from reimbursements, and the critical importance of strategic tax planning. This episode is a must-listen for any physician weighing the risks of entrepreneurship against the massive potential payoff of a “liquidity event.” Learn the financial strategies that separate struggling practice owners from the highly successful ones.

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Transcript

Kevin Pho: Hi, and welcome to the show. Subscribe at KevinMD.com/podcast. Today we welcome Paul Morton. He’s a certified financial planner. Today’s KevinMD article is “Physician practice ownership: risks, rewards, and reality.” Paul, welcome to the show.

Paul Morton: Thank you. Thank you, Kevin. First of all, thank you for uniting the community of physicians and those who speak to physicians. What you’re doing is really big, really great. I appreciate you having me on.

Kevin Pho: All right. Well, thank you so much again for writing and joining me. Let’s start by briefly sharing your story, and then we’ll jump right into your KevinMD article.

Paul Morton: OK, that’s great. I’m a financial planner. I work with really only physicians. You know, of course, I have the one-off, you know, mom or dad of a physician, but really I focus on physicians, and I’m married to a physician. So, I started dating my wife about a month before she started medical school. So I feel lucky to have seen this metamorphosis of what it takes to be a physician, and so that information is something that I apply to my own financial practice as well.

Kevin Pho: All right. And before I talk about your article, so specific to physicians, what is an example of a financial issue that only physicians encounter?

Paul Morton: You know, that’s a really great, great question. I’m not sure if there’s a financial issue that only physicians encounter. I think it might be a series of issues that, when combined, is really common with physicians, you know, because a dollar in a physician’s bank account is the same thing as a dollar in someone else’s bank account. So, a lot of times it’s not necessarily the one thing that only physicians experience. They’re still, you know, physicians, and humans are, I mean, there’s no difference.

But, you know, the series of the high debt when just starting into a practice, also, you know, combining that with just a lot of pressure, a lot of work ahead, kind of feeling maybe like an uphill battle. And so I think a lot of those things combined just to start out, and then beyond that, I think that physicians face financial complexity a lot sooner than most everyone else. You know, when someone finishes medical school, they go into residency and fellowship. They’re dealing with more financial institutions. You know, they have, of course, student loans, they have bank accounts, but they also are dealing with complicated benefit packages. They’re dealing with, you know, managing credit card debt and budgeting on kind of a lower, maybe initial salary in residency, but at the same time there’s no time or energy or capacity to figure out how to deal with a lot of these things. So, I feel like the combination is really what is impactful to physicians.

Kevin Pho: All right, let’s talk about your KevinMD article today, “Physician practice ownership: risks, rewards, and reality.” For those of you who get a chance to read your article, tell us what it’s about.

Paul Morton: You know, it’s really just the intention was to capture the lifespan of a physician-owned practice. And how it started was, in the same week, I had three different physician owners in my office, and they were all discussing, you know, the complexity that they were feeling in the decisions that were being brought to them. You know, one of them was at a fork where she had built up this practice, and now she had to make some decisions on where to go, and that can be difficult because once you make a decision, you cancel out all of the other possibilities that you could have gone. So, she was kind of having some struggles with that. Another one had a really complicated legal structure and was really needing some simplicity. And then another one, she was kind of having some once-in-a-lifetime type of drastic personal life. Not collapse, but calamities, you know, houses were breaking down, you know, a piece of real estate wasn’t selling like it was supposed to be, and then, you know, had some familial life occurrences that were keeping her from her practice.

But what was interesting about her, and she was really kind of the one of the reasons why this article was written, she’s married to an employed physician. And so that stark contrast with an employed physician, you know, steady benefits are just delivered to him, where she had to create everything, and then her schedule was a little bit more malleable, which can be bittersweet. That can, you know, that can ruin a work career, but that can also be really, really a blessing as well. And so she felt like she was behind because she, you know, for the year, because all of these things were happening. So we were looking at different money sources for her for, you know, some housing issues, because she had an insurance problem, I mean a roof problem, where the insurance company was trying to not pay a claim. So she still needed a place to live.

And so, you know, it was just a reminder to her that the equity owner physician path is so much different than the employed physician path, in that, you know, one, we’re building something. But two, the payoff is later, like when you’re exiting. There’s a liquidity event, which is a fancy term for it, like the selling of a business or just a lot of cash coming in all at once. Where, if you’re employed as a physician, you know, if you were to translate a liquidity event, it happens slowly over time, usually in the form of like a retirement plan or just making your income a little sticky and saving it in various places. And so, you know, that was kind of a light-bulb moment to her that the decisions that she’s making right now in her practice will someday add up. And so then how you develop and how you run your practice, your systems all matter, your processes all matter. And then also, you know, how you build that thing, that matters. And so then it really kind of opened the door on why she’s doing what she’s doing, and it was, you know, I feel like kind of helpful for her to at least file that piece of information somewhere.

Kevin Pho: Sure. As you know, the number of physician-owned practices is steadily declining. The majority of physicians are employed, a lot of it for the reasons that you had talked about, right? Because medicine already is so difficult, and, you know, in addition, you have to add the stress of running pretty much a business on top of that, which is one of the reasons why fewer physicians go into private practice. What would you say are some of the biggest mistakes? What are some of the themes that physician-owned practices come to you with?

Paul Morton: You know, I think early on is a really important indicator on if a physician or any business will make it. But a physician-owned practice, medicine is really expensive to run in general. And so managing overhead, I think from early on is an indicator on if you will have decisions later on in the practice lifespan. So, I think, you know, being, I don’t want to say miserly, but just making sure that you’re making prudent decisions, not “this is a nice-to-have,” but a must-have initially. And then I think at some point that pivots to managing overhead, then becomes investing in the business, because if you manage from a scarcity standpoint forever, you know, when you’re first starting, I think that might be a good mindset to not fully adopt, but, you know, to at least have in front of you. But then if there’s no investment in the business, it’s going to be hard for it to grow.

So I, you know, I’ve seen personally just in clients I serve, I’ve seen businesses be just stripped of investment, and it feels like someone’s just eking out an income. And then I’ve also seen medical practices where a physician is paying, you know, multimillion dollars in taxes because they’re making, you know, a lot of money, and they can pay that much in taxes, and they’re still trying to reduce taxes, and that’s kind of the outcome. So, I’ve seen both sides of that coin, where, you know, one physician’s maybe quarterly tax payment is more than, you know, another physician’s annual salary.

Kevin Pho: Now, when you say overhead, when a physician-owned practice is just starting out, can you tell us a story of a practice who maybe didn’t manage it as well? What exactly would that look like?

Paul Morton: You know, I think it’s hard to pinpoint one thing, because I think, just like everything in a business, it’s a series of things that would, you know, kind of like dominoes, like once one domino falls, it does have a trickle effect. You know, I think getting your real estate in order first is kind of number one. I think real estate is one of those, it’s initially a monster in a practice because it’s expensive. You have to have an actual, like, footprint unless you’re doing some sort of telemedicine only. And so it’s OK to rent and not be in, like, the nicest of the nicest place initially. And you know, I’ve seen, you know, just right here in my building, you know, it’s decent. It’s not like the nicest of the nice, but you know, there’s a, it’s, you know, it’s an old physician’s clinic is where my office is. And so there’s, you know, there’s some other physicians nearby, and I see some, you know, when they upgrade or when they dissolve, you know, I see them as they progress and kind of stop by and move on, or stop by, stay for a while, or stop by and then kind of wither away.

So, I mean, having that vision of “This is, you know, this is where I want to be,” like this end spot, it has to start somewhere. It’s not that, you know, this door at the end of the hallway is kind of that end-all, be-all, this is the goal. Well, let’s start with the first step, and it might not be the thing that we desire, but it works for now, and let’s get off the ground. So, I feel like that real estate component can be a big mess maker.

Kevin Pho: Yeah. You contrast that visionary mindset with, like you said, some of the realistic, pragmatic issues that a lot of visionaries face. So, what would you say are some of the tips that you could share for those with a visionary mindset so they could translate that vision into financial success? What are some tips you could share?

Paul Morton: That’s a great question. You know, I think using what’s already been laid in foundations, you know, not reinventing the wheel, kind of gathering information from other people that are way smarter than, you know, someone like me. And so I put it in this article. There’s a book called Rocket Fuel by Gino Wickman. And I am, you know, fortunately or unfortunately, I mean, it can go either way, I have that visionary mindset, and that was one of the best books that I read. I mean, I read it probably in one or two settings, and it really spoke to me in that if you do have a visionary mindset and you’re wanting this grand vision to come to life, pairing yourself with, you know, maybe an office manager or some sort of business manager who’s more of an integrator, more of a doer, and somebody who’s not, you know, I don’t want to say this rudely, but somebody who’s not an underling. Somebody who is not afraid to tell you, “No, that’s a terrible idea. I don’t know why we would ever do that.”

And so, somebody that can shoot you down when you’re piecing together your vision. But then also, this person would be able to filter through and say, “Well, you know what? That’s actually a really good idea. Let’s see how we can piece that together.” I really like that pairing. Now, not everybody has that, you know, integrator. That’s a really hard component to find. And then even just, I try to read this book often. It’s called The E-Myth Revisited by Michael Gerber. And it, you know, goes through this story of a pie shop owner and how she wanted to make pies. That was what she always wanted to do when she was a little girl with her aunt. They made pies together, and now she’s doing it as a job, and she just always has to keep the lights on, and she’s working, you know, 16- to 18-hour days, and it’s draining her. I feel like that is actually, I mean, you can translate that to a physician pretty easily. But then, you know, Michael Gerber has co-written or inspired others to write, you know, E-Myth books. You know, there’s one for physicians, and then there’s one that kind of speaks to other practices or professions as well. So that would be a fantastic starting point.

Kevin Pho: Now, what about for the residents who may be listening to you now, and they’re trying to decide whether the physician-owned practice route is right for them or should they go into the employed model? Tell us the type of questions they need to ask themselves to see whether they have the mindset and personality to choose one route over the other.

Paul Morton: Oh, what a great question. You know, I think that if you have a yearning to mold and sculpt and to build something, to make something your own, or if you’re, you know, maybe a tad rebellious and you don’t like someone telling you what to do, you know, then it’s probably at least a good idea to, like, consider. But that doesn’t mean you have to jump into it, because any sort of practice, any sort of business that you start, it always needs funding, and you need a runway for that to get going. So jumping right out of residency or fellowship into, let’s say, a solo physician model, I mean, that would be, you know, that’d be a tall task for anybody, because you’re jumping out of, you know, a relatively lower income in residency and fellowship to potentially no income for, you know, a number of potentially years as you’re trying to make a business that doesn’t exist yet, you know, profitable. And so it’s OK not to decide immediately, and it’s OK to go see how, you know, medicine is and how it works.

You know, I think, you know, if I were to open, let’s say, a restaurant, you know, and, you know, frying up and serving some chicken, some buffalo wings or chicken wings, I probably would want to work for somebody who does this on a consistent basis to know how they do their pricing, you know, how, what flavors, how they set up their tables, how many tables, what’s the point of service or the point-of-sale technology, you know, how many people do we need to employ? I would probably want to manage a restaurant before I go start a restaurant. And so I think it might be similar to a, you know, a physician practice, that it might make sense to continue your education and being employed to some degree. You know, and even if you join a private practice, there’s usually a one- to two- or three-year, kind of like, testing period, and that’s exactly what that’s designed for, you know, one, to kind of see how the sausage is made, and then two, you know, the physicians who are already there, and then the new physician can kind of see, “Hey, you know, do I like you?”

Kevin Pho: We’re talking to Paul Morton. He’s a certified financial planner, and today’s KevinMD article is “Physician practice ownership: risks, rewards, and reality.” Paul, let’s end with some take-home messages that you want to leave with the KevinMD audience.

Paul Morton: Yeah, absolutely. You know, I mean, with medicine, there’s no perfect job out there. I think medicine is a higher calling. I mean, I work with physicians because I genuinely want to help the people who help us. And so, you know, when you start a practice, it can add some complexity to your financial situation. Just like if I own an LLC or a PLLC and I go to buy a car, you know, I mean, then I’m going to ask a lot of questions. Well, do I buy the car? Does the business buy the car? And then that, you know, creates a lot of questions further than that as far as, well, where does the insurance come from? Is my umbrella insurance void if I’m, you know, if I have a corporate asset?

So, I think you can make a decision to start your own practice, but have some, you know, I don’t want to say counsel, but just some individuals to bounce some ideas off of, because I love it when a client says, “Hey, Paul, I’m going to go do this. What do you think?” And then we can have some conversations and kind of get some things set up. Sometimes, and I say sometimes, a lot of times, physicians will call me and say, “Hey, Paul, I did this.” And it’s like, “OK, well, did you, you know, do A, B, C, D, and E?” And they’re like, “Well, you know, no.” Like, “OK, great.” You know, so let’s, you know, let’s get to work.

So, you know, I wrote this article to shed light on the practice owner’s lifespan and their journey and their experience. But I would say that, you know, you don’t take the decision lightly to open your own practice, as that’s, you know, I mean, as far as your financial plan and your own life experience, that would be up there in one of the, you know, top one to five moments of your life that, you know, directs your life in one way or another.

Kevin Pho: Paul, thank you so much for sharing your perspective and insight. Thanks again for coming on the show.

Paul Morton: I appreciate you having me. Thank you, Kevin.

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