Overhead Costs of Private Practice

[Dr. Jay]

Hi All,

I am currently accumulating additional postdoc supervision hours in a private practice, and I am trying to estimate the practice owners net income. They are out of network, and their fee is $215 for a 45 minute session. They have enough referrals to have two or three permit holders at a time. Some permit holders carry caseloads of 25 patients per week.

Assuming the practice owners are seeing 30 patients per week at an average of $200 per session ($200 to account for some slight sliding scales), the owners are grossing $282k if they work 47 weeks per year:

30 (30 patients per week) * $200 (rate) * 47 (conservative estimate of weeks worked) = $282k

Even if their overhead for office space, accounting, and utilities is $50k per year, they are making more than I believed was feasible for psychologists.

Could anyone provide information as to how I may estimate overhead costs of running a private practice? Do these numbers seem off?

Also, I would appreciate resources that may assist with understanding the business aspects of private practice development and maintenance.

Thanks!

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[boomshakalaka]

It is hard to estimate given the variability in rents, taxes, clientele, etc. across states. I wouldn't get too excited about that kind of gross as there are a ton of different costs to factor in.

This is just an early morning reaction and calculation, but take that 282k deduct 35% off the top for taxes. Leaves you with ~183k. Deduct another 15k in family medical, dental, and vision. Don't forget retirement savings which at that salary would be about 20k. You're now at 145k. Lots to still factor in, but I'm sure you get the point.

Even if your numbers are spot on, it is difficult to estimate how hard the PP owners had to grind to build that kind of client base. They seem to be making more than you thought was feasible because it really isn't all that feasible. There is a ton of midlevel creep, especially among therapy private practices. I would also find six therapy cases a day to be exhausting.

 

[Harry3990]

Also, your numbers are not accounting for no-shows or cancellations. They may have a policy that still charges a full or partial fee for no shows, but I don't think many people charge for cancellations made with advance notice. So need to also take some off the top of your figure for unattended appts as well.

But yeah, cash practices with steady referral streams can make a lot of money potentially.

 

[Harry3990]

Also, in terms of resources for learning more, I found these books somewhat helpful in the past. However, I also found them to be a little bit overly optimistic at times and therefore took some of their estimates with a grain of salt.

Amazon product

Amazon product

 

[bcliff]

A little unclear on what you mean by permit holders, but I assume that these are clinicians who are permitted to practice at this clinic? I would assume that the "clinic" (as a business entity), likely takes a cut of that income as well (otherwise, what would be the incentive to bring them on?), which would also benefit the business owner -- I think that's probably an important number to also include in any attempt to estimate their income.

 

[Sanman]

A little unclear on what you mean by permit holders, but I assume that these are clinicians who are permitted to practice at this clinic? I would assume that the "clinic" (as a business entity), likely takes a cut of that income as well (otherwise, what would be the incentive to bring them on?), which would also benefit the business owner -- I think that's probably an important number to also include in any attempt to estimate their income.

I assume the OP is referring to post-docs.

OP, you are likely overestimating the number clients the owner is seeing, underestimating overhead, or both.

 

[Dr. Jay]

Thanks for the responses and resources. In terms of overhead expenses, below is a list of what I have come up with. Anything I may be missing?

Office space
Accounting services
Liability coverage
Internet
Phone

 

[WisNeuro]

In accounting services, are you also including billing/coding/pre-auth services? Any reception services? EMR? Physical property liability coverage?

 

[AbnormalPsych]

Electronic health record system, fax machine, advertising expenses and business cards, secure HIPAA compliant email (if needed), secure storage (locked cabinets), secure document disposal services, offsite storage (if needed), attorney fees, scheduler/biller if your time is better spent in session (it is), CEU fees, license renewal fees, etc... I am sure I am missing a bunch.

 

[PsyDr]

1) Of course you can make that much. You can even make a lot more.

2) $50k is a very low estimate. Three office spaces would easily run $3k/month +NNN. Then you're looking at clerical staff salary +benefits. Because there are going to be after 5pm hours, you're going to be paying more for staff and overtime. Let's call it $40-50k per plus benefits. If you need to create bills, regardless of if you are out of network, you're paying a premium for staff that are properly trained in medical billing and coding. If not, you're not creating a bill you're paying a billing company ~20% unless you're 1MM+, at which point your percent goes down to around 10-15%. 3-10% for credit cards. Office insurance is around $1-2k/yr. Phone, internet, etc is another $200-300/month. Then malpractice insurance for the company. Then benefits for clinicians. A few thousand for accounting. A few hundred to have an attorney on retainer. Maybe a thousand in fees for credit. If you wanna be like everyone else, add rentals like office furniture and a car. Eyeballing that, you're looking at well over $100k-150k in expenses.

3) Part of your math is off because the business is not steady. You might have 25 patients, and then 5 quit, and people on your wait list can't go where your openings are. Some people might have 25 patients, but patients get better, move areas, die, decide not to show up, etc. 75-80% is a decent estimation of who actually shows up. Add in at least another 25% of your time for charting, responses to phone calls, etc.

4) @boomshakalaka a SEP IRA allows you to save up to $49k/yr.

 

[Dr. Jay]

Thanks for all of the replies. They are very helpful!

 

[Sanman]

PSYDR chimed in and hit most of the high notes as I expected. To add what everyone else said, do not forget costs of water and coffee for clients, copy machine, toilet paper and soap for the bathroom, that elevator music in the common areas of the office, may be a flat screen for the waiting room, any manuals or worksheets you use with clients, etc.

If this person has hired 3 post-docs, I assume there are supervision hours, phone calls to return and marketing efforts, building/office issues to deal with, toilet paper to buy, etc. Those are all drags on your time. That plus 30 clients a week is a lot of hours. From the people I know in cash practice like this, 15 to 25 clients per week is more likely the norm.

As PSYDR mentioned, you are assuming steady business. In a practice catering to this kind of SES, expect people to take summer and Christmas vacations, so expect caseloads to be light at those times and it is rare that every slot will be filled at every other time. In addition, overhead in an area that would produce that many cash clients will be significantly higher. In areas with lower overhead, expect a lot more sliding scale than full fee.

 

[foreverbull]

Thanks for the responses and resources. In terms of overhead expenses, below is a list of what I have come up with. Anything I may be missing?

Office space
Accounting services
Liability coverage
Internet
Phone

-Marketing costs (website/domain, psychology today membership, other listings and/or products with the business name)
-software for billing/notes
-Business supplies
-decor/furniture
-psych association/continuing ed fees/convention fees and travel fees
-Business license fees
-attorney consultation fees/legal fees (if needed)
-general liability coverage (not just malpractice insurance)

These add up really quickly and can really cut income down quite a bit, depending on how fancy you want to go.

$282k sounds unrealistic to me in terms of income as a private practitioner, as does 30 scheduled sessions per week, which some of my colleagues would argue is bordering on an unethically high level of sessions (most see no more than 20-22 a week and consider that full time, particularly given the notes/consultation/research time you might spend on clients here and there). It's more realistic to make in the $100k ballpark when seeing ~20 clients weekly for therapy (no assessments), but $215 is really steep for 45 min, and rarely if ever seen in my neck of the woods. I suppose you could make more if you saw a ton of clients at that high of a rate, assuming a constant referral stream.

Lots of hidden business costs can drain your income quickly, though, I've found, including rent that matches a second mortgage payment.

Books: try Building a Therapy Private Practice by Grodsky?

 

[hamstergang]

This is just an early morning reaction and calculation, but take that 282k deduct 35% off the top for taxes. Leaves you with ~183k.

Who deducts taxes when calculating income? Yes it's important when figuring out how to spend your money, but salaries are always discussed as pre-tax numbers.

 

[WisNeuro]

Who deducts taxes when calculating income? Yes it's important when figuring out how to spend your money, but salaries are always discussed as pre-tax numbers.

Totally agree on the tax thing, but I'd look at it in terms of total compensation, not just salary. I always advise my interns/postdocs to actually calculate out EVERYTHING when looking at options (401k/403b/whatever, health insurance, time off, etc) It can all be monetized. Last time I went job hunting, I had one job offer that was actually 10k more than my current place of employment, but when you monetized the other benefits, they actually fell about 12k behind my current job. Salary is a good starting point, but the other things can make a huge difference monetarily.

 

[boomshakalaka]

Who deducts taxes when calculating income? Yes it's important when figuring out how to spend your money, but salaries are always discussed as pre-tax numbers.

Totally! I was mostly trying to highlight that the 282k gross being reported was going to dwindle significantly once everything was accounted for.

Totally agree on the tax thing, but I'd look at it in terms of total compensation, not just salary. I always advise my interns/postdocs to actually calculate out EVERYTHING when looking at options (401k/403b/whatever, health insurance, time off, etc) It can all be monetized. Last time I went job hunting, I had one job offer that was actually 10k more than my current place of employment, but when you monetized the other benefits, they actually fell about 12k behind my current job. Salary is a good starting point, but the other things can make a huge difference monetarily.

This is really great advice. Many correctional/forensic placements run by for-profit entities often have salaries ~10-12k higher than other state/comparable gigs. HOWEVER, there is often little in the way of health benefits, CME days, retirement match, alternate works schedules etc. etc.