Founding a New Radiology Practice: Key Considerations
David MyriceEvery business starts somewhere; even in the current period of radiology-practice consolidation, startups are popping up around the country. David Myrice, director of practice management for Medical Management Professionals (MMP), says, “Every so often, an opportunity still presents itself to form a new group. The most common situation is that a hospital or health system approaches a radiologist it already knows and likes, and it wants him or her to form a group. It puts out a request for proposals and lets the physician know that if he or she had a group, it’s most likely that the group would be able to take over the contract.” In fact, Myrice says, building a practice from the ground up is such a daunting and complex proposition that it is rare for radiologists to attempt it without assurance from a hospital or health system that their new practice will get its business. “It is a significant challenge, and it comes with the understanding that you have no one to blame but yourself if it does not work out,” he says. “On the other hand, a lot of existing radiology groups have entrenched mindsets or old, outdated structures that can be very difficult to change. A startup, done correctly, is an opportunity to get things right—from the beginning.” The Checklist To ensure that the initiators of radiology-practice startups leave nothing to chance, Myrice recommends that they follow a detailed checklist that takes them through key tasks for every phase of the process: preassessment, issue resolution, document development, and operation. “The startup process is not dramatically different from what you would experience in forming any company, but you have to look at industry-specific needs,” he notes. “This is radiology. Your physicians on the partnership track will want to know the governance structure and how to change it, if needed: What are the powers of leaders? What are the powers needed to undo their decisions—or those made during practice formation? The democratic nature of practices makes the formation process integral to success.” In the preassessment stage of forming a new practice, the prospective founders must carefully evaluate the viability of their venture, Myrice says. “You need to look at the risks and potential in the target market; the potential volume you could be dealing with; and the needs of the potential new entity, in terms of staffing,” he says. “Decide whether there is a business need for this practice, based on modality mix and the payor environment.” If the venture is viable, the next step is engaging qualified professionals, including an attorney and a certified public accountant, to handle the legal and financial aspects of group formation. “You need to decide what kind of entity to form in the first place and what the tax structure will be,” Myrice says. “You also want to be talking about the management structure. Are you going to be able to manage this yourself, or do you need to go outside and find a third party?” An important factor to consider in the formation phase is the need for capital, Myrice adds. “A traditional, hospital-based radiology practice is not an especially capital-intensive startup,” he notes. “You will, however, have costs associated with the paperwork and documentation. Many startups have a buy-in amount that is required from each of the founders to meet the early financial needs of the group.” Founding members of the group will need to decide on a governance structure. “A lot of that is dictated in the formation of the corporation or LLC: You establish it in your articles of association and corporate bylaws,” Myrice says. “You have to decide whether you will have a board with actual power, or whether everything will be voted on by shareholders. How will you hire and fire, and what will the decision-making process be? You need to allocate a considerable amount of thought and time to these issues because they will determine what happens next in the formation process.” Decision Time With the governance structure established, the founding members of the group will have to make a long series of decisions regarding every aspect of the future practice’s operations. “Starting up a physician practice is not highly capital intensive, but it is people intensive,” Myrice says. “Everything a physician takes for granted—getting a paycheck on a regular basis, making sure the tax returns are filed, choosing health insurance, and having a retirement plan—has to be decided on and established prior to pulling the trigger on the business.” Compensation structure can prove an especially contentious subject, especially as practices nationwide experiment with compensation methods designed to create incentives for different types of physician behavior. “The lump-and-divide approach is the dominant structure, but a lot of groups out there are now trying productivity models—with limited success, in some cases,” Myrice says. “The management structure you put in place in the earlier phases of the process will help with the decision making. If you have decided to have partners, they will want to have input on compensation structure.” Next, the process of managing day-to-day operations begins. “You have to get credentialed at the hospital, set up interfaces for billing, get credentialed through Medicare and Medicaid, establish all-new third-party–payor contracts, create malpractice policies, and so on,” Myrice says. “You also need a national provider identifier number and a federal tax ID, which you cannot get until after you have already formed the company. Then, you can start applying for your hospital contract. From there on out, you make regular, day-to-day business decisions.” The startup process is a long and daunting one, but Myrice concludes by noting that in a well-established governance structure, nothing cannot be undone, if the need arises. “The most important things are to stay flexible and to maintain the ability to make changes as you go,” he says. “If you find that something is not the way you expected it to be, you can always adapt.” Cat Vasko is editor of and associate editor of Radiology Business Journal.