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

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

Paul Morton: That’s a really 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. 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 physicians and humans. There’s no difference.

However, the series of high debt when just starting into a practice, combined with a lot of pressure and a lot of work ahead, can feel like an uphill battle. I think a lot of those things combine just to start out.

Beyond that, I think that physicians face financial complexity a lot sooner than most everyone else. When someone finishes medical school, they go into residency and fellowship, and they’re dealing with more financial institutions. They have student loans and bank accounts, but they also are dealing with complicated benefit packages. They are dealing with managing credit card debt and budgeting on a lower initial salary in residency. At the same time, there’s no time, 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: Let’s talk about your KevinMD article today, “Physician practice ownership: risks, rewards, and reality.” For those who didn’t get a chance to read your article, tell us what it’s about.

Paul Morton: The intention was to capture the lifespan of a physician-owner practice. How it started was, in the same week, I had three different physician owners in my office. They were all discussing the complexity that they were feeling in the decisions that were being brought to them.

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. That can be difficult because once you make a decision, you cancel out all of the other possibilities. So she was having some struggles with that. Another one had a really complicated legal structure and was really needing some simplicity.

Another one was having some once-in-a-lifetime type of drastic personal life calamities. Houses were breaking down, a piece of real estate wasn’t selling like it was supposed to be, and she had some familial life occurrences that were keeping her from her practice. What was interesting about her—and she was one of the reasons why this article was written—is that she’s married to an employed physician. That stark contrast with an employed physician is significant. Steady benefits are delivered to him, whereas she had to create everything. Her schedule was a little bit more malleable, which can be bittersweet. That can ruin a work career, but it can also be a blessing.

She felt like she was behind for the year because all of these things were happening. We were looking at different money sources for her for some housing issues because she had a roof problem where the insurance company was trying not to pay a claim. She still needed a place to live.

It was just a reminder to her that the equity owner physician path is so much different than the employed physician path in that we are building something, but the payoff is later. When you’re exiting, there’s a liquidity event, which is a fancy term for the selling of a business or just a lot of cash coming in all at once.

If you’re employed as a physician, a liquidity event happens slowly over time, usually in the form of a retirement plan or just making your income a little sticky and saving it in various places. That was kind of a lightbulb moment to her that the decisions that she’s making right now in her practice will someday add up. How you develop and how you run your practice, your systems, and how you bill all matter. It really opened the door on why she’s doing what she’s doing, and I felt like it was helpful for her to at least file that piece of information somewhere.

Kevin Pho: As you know, the number of physician-owned practices is steadily declining. The majority of physicians are employed. A lot of it is for the reasons that we talked about, right? Because medicine already is so difficult, and you have to add the stress of running 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 or themes that physician-owned practices come to you with?

Paul Morton: I think early on is a really important indicator of if a physician or any business will make it. Medicine is really expensive to run in general. So managing overhead from early on is an indicator of if you will have decisions later on in the practice lifespan.

I think being prudent is important. Make sure that you’re making prudent decisions regarding “nice to have” versus “must have” initially. At some point, managing overhead then becomes investing in the business. If you manage from a scarcity standpoint forever, it is going to be hard for it to grow. I think that might be a good mindset to start with, but you need to pivot.

I’ve seen businesses be stripped of investment, and it feels like someone’s just eking out an income. I’ve also seen medical practices where a physician is paying multimillion dollars in taxes because they’re making a lot of money. They can pay that much in taxes and they’re still trying to reduce taxes. I’ve seen both sides of that coin where one physician’s quarterly tax payment is more than 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: It’s hard to pinpoint one thing because I think just like everything in a business, it’s a series of things. Once one domino falls, it does have a trickle effect. I think getting your real estate in order first is number one.

Real estate is initially a monster in a practice because it’s expensive. You have to have an actual footprint unless you’re doing some sort of telemedicine only. So it’s OK to rent and not be in the nicest of the nicest places initially. I see it right here in my building. It’s a decent building; it’s an old physician’s clinic where my office is. I see some other physicians nearby. When they upgrade or dissolve, I see them as they progress, move on, stay for a while, or wither away.

Having that vision of where you want to be is important. It has to start somewhere. It’s not that this door at the end of the hallway is the end-all, be-all. Let’s start with the first step. It might not be the thing that we desire, but it works for now. Let’s get off the ground. I feel like that real estate component can be a big mess maker.

Kevin Pho: 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?

Paul Morton: That’s a great question. I think using what’s already been laid in foundations and not reinventing the wheel is key. Gather information from other people. I put it in this article; there’s a book called Rocket Fuel by Gino Wickman. Fortunately, or unfortunately, I have that visionary mindset, and that was one of the best books that I read.

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, pair yourself with maybe an office manager or some sort of business manager who’s more of an integrator and doer. You need somebody who is not an underling. You need somebody who is not afraid to tell you, “No, that’s a terrible idea. I don’t know why we would ever do that.” You need 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, “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 integrator. That’s a really hard component to find. I also try to read this book often: It’s called The E-Myth Revisited by Michael Gerber. It 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. Now she’s doing it as a job, and she just always has to keep the lights on. She’s working 16- or 18-hour days, and it’s draining her. I feel like you can translate that to a physician pretty easily. Michael Gerber has co-written or inspired others to write E-Myth books; there’s one for physicians, and one that speaks to other practices or professions as well. 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. I think that if you have a yearning to mold, sculpt, and build something to make something your own, or if you are maybe a tad rebellious and you don’t like someone telling you what to do, then it’s probably at least a good idea to consider it. But that doesn’t mean you have to jump into it.

Any sort of practice or business that you start 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 would be a tall task for anybody. You are jumping out of a relatively lower income in residency and fellowship to potentially no income for a number of years as you are trying to make a business that doesn’t exist yet profitable.

It’s OK not to decide immediately. It’s OK to go see how medicine is and how it works. If I were to open, let’s say, a restaurant serving chicken wings, I probably would want to go work for somebody who does this on a consistent basis. I want to know how they do their pricing, what flavors, how they set up their tables, what’s the point-of-sale technology, and how many people do we need to employ. I would probably want to manage a restaurant before I go start a restaurant.

I think it might be similar to a physician practice. It might make sense to continue your education and be employed to some degree. Even if you join a private practice, there’s usually a one- to three-year testing period. That’s exactly what that’s designed for: one, to kind of see how the sausage is made; and two, the physicians who are already there and the new physician can kind of see if they like each other.

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: Absolutely. With medicine, there’s no perfect job out there. I think medicine is a higher calling. I work with physicians because I generally want to help the people who help us. When you start a practice, it can add some complexity to your financial situation.

Just like if I own an LLC or PLLC and I go to buy a car, I’m going to ask a lot of questions. Do I buy the car, or does the business buy the car? That creates a lot of questions further than that as far as where does the insurance come from? Is my umbrella insurance void if I have a corporate asset?

I think you can make a decision to start your own practice, but have some individuals to bounce some ideas off of. I love it when a client says, “Hey Paul, I’m going to go do this, what do you think?” Then we can have some conversations and get some things set up. A lot of times physicians will call me and say, “Hey Paul, I did this.” It’s like, “OK, well did you do A, B, C, D, and E?” And they say, “Well, what? No.” So I wrote this article to shed light on the practice owner’s lifespan, their journey, and their experience. I would say that you shouldn’t take the decision lightly to open your own practice. As far as your financial plan and your own life experience, that would be up there in one of the top one to five moments of your life that 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.