Do you run a financially independent business?

Although I would never describe the business of primary care medicine as cutting edge, there are a number of innovations that have come and gone during my short tenure running a medical practice.  The business of medicine is fascinating and leaves much room for personalization and creativity.  I have been lucky to operate at the forefront of practice management and learned quickly how to leverage two bleeding edge philosophies to multiply profits.  First, seeing the inefficiencies of compliance as relates to third-party payers, I started a concierge practice.   In this setting, I collected a yearly fee above and beyond the insurance payments that was charged for uncovered medical services.  The details of this type of structure can be found elsewhere.  Second, I utilized an oft-forgotten method of lowering overhead; I visited patients in their own homes instead of paying for office space.   Although I learned many lessons from my experience in this arena, there is one question that dutiful practice managers should ask to keep the books on track: Do you run a financially independent business?

I’m not talking about the same concept as personal financial independence here.  The idea is not that the business can generate enough cash without the input of manual labor for eternity. I’m thinking of a slightly different flavor.

Can a business generate sufficient revenue that it doesn’t need outside funding from another source, or internal funding from another revenue stream within the company?

Practice structure

Businesses generally support themselves using a few distinct models.  When it comes to primary care medical practices, I can think of three main funding sources.

1. Old school. A practice covers its needs by providing medical services, products, or testing that creates enough wealth to not only keep the lights on but also reward its principals generously.  This model, the norm in the past, is quickly falling by the wayside.

2. Loss leader. The medical practice has multiple revenue streams.  Primary care medicine, while losing money as it’s own entity, maybe funnels patients to specialists in the same medical practice or provides visits to the MRI machine down the hall.  The revenues generated by referrals improves the company’s balance sheet overall.  This model is common in large, hospital-owned medical groups.

3. Outside funding. Bleeding edge practices often receive funding from local hospitals (in exchange for using their services), insurance companies including the government (for improving outcomes), or venture capital (for building a practice model that eventually will be mass-produced and sold on the open market or be very profitable).   This is the most recent innovation in practice management.  Find a niche, and use it to leverage influence with bigger pockets.

Of the three models listed above.  Only the first can answer my screening question affirmatively.

The other models, therefore, are bound to fail.

Loss leader or loss loser?

The phrase loss leader is bandied about in many businesses, medicine included.  The idea is that one struggling financial entity can add value to a much more lucrative and stable one.  Therefore, the losses are taken on the chin for the overall good of the business as a whole.

Primary care, bereft of procedures or high-value products, is often considered in these terms when viewed through the lens of the multi-speciality medical group.

Maybe the primary care practice loses a few hundred thousand a year, but it keeps the endoscopy suite running smoothly.  The hospital systems takes a bath on the wholly owned physician clinic down the street, but it certainly keeps the hospital beds full.

While this structure sounds great for a business that struggles to make ends meet, there is very little control over revenue streams.  What happens when times get tough, and the bottom line tightens?  Often it is the loss leader that is first to be jettisoned.

Better yet, a new innovation or player comes to town that makes the loss leader irrelevant.

Many a primary care practice has gone bankrupt after a hospital system has turned it’s back after finding a new source of patients or contracting with a new insurance company.  All of a sudden, the loss leader is no longer a leader.  It’s a loser.

Do you run a financially independent business?  Does it generate enough revenue without the intrusion of outside funding?  If so, it can withstand these type of momentary catastrophes.

Innovation center

Insurance companies and venture capitalists love to support primary care businesses.  Especially if they believe that there are long-term cost savings or money-making opportunities.  They don’t care whether you run a financially independent business.  They only care about making money.

And this works peachy for a while.  Until one of a few things happens.

  • A change in management who no longer believes in the initiative.
  • They bring in their own hired gun to run the practice who drives it into the ground.
  • They fail to understand that the overall purpose of the business is to provide great medical care and not profits hand over fist.

Often the funding disappears in a cloud of disappointment or anger.  The practice, bereft of the cash inflow that it had become dependent on, shuts down shortly afterwards.

Conclusions

I have run many small businesses in my life.  Whether it be renting real estateselling art work, or providing medical care, I have found that the safest businesses are the ones that are financially independent.  You live or die by the quality of product or service you provide to the end consumer.  When your business does not make enough money or must rely on another entity, it is bound to fail.

It’s got no roots.

“DocG” is a physician who blogs at DiverseFI.

Image credit: Shutterstock.com

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