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Healthcare Providers Learn Lessons on Business Ownership

Share current LOB: SmallBusiness

Hospital-based doctors, known as hospitalists, have had a presence in medical centers since the mid-1990s. Hospitals typically hire these skilled, multi-disciplinary physicians to care for patients who have been hospitalized and may not have access to their primary care physician.

In 2006, Drs. Doug Mitchell and Hung Davis were working for medical groups focused on primary care needs when they recognized a growing demand for specialty hospitalist services. The pair decided to leave their current employers and form a new hospitalist group—Maryland Inpatient Care Specialists—that provided more than primary care services.

Shortly after making this decision, they jumped at the chance to co-manage care for surgical sub-specialty patients at a medical center in downtown Annapolis, Md. From a business standpoint, Mitchell and Davis had stumbled upon a wide-open niche, and business boomed; the partners earned more than $1.5 million in revenue in the first year. But they quickly realized they had not adequately prepared for rapid growth or the demands of business ownership. 

Growing pains

In their first two years of business, Mitchell and Davis personally covered every medical shift on their schedule, leaving little time for business strategy, structure or marketing. Mitchell worked out of his book bag and arranged for his wife to submit billing and do accounting from their home.

“We were lucky we didn’t need to increase our line of credit right away,” Mitchell says. “There was no time to draw up a balance sheet.”

After two years, they finally hired more employees. 

Shrinking margins

Early on, with a team of two, rapid growth kept earnings well ahead of costs. But as they added more hospitalists to their team, payroll skyrocketed. The rapid cost increases were followed by the need to collect insurance payments.

“Healthcare providers experience a 14-day delay on Medicare payments, and it can be one to two months with private insurance,” Mitchell says. “If you’re primarily billing Medicare and a private insurance is secondary, that can translate into a four-month payment delay.”

Despite the increasing demand for services, payment delays and low reimbursement rates for inpatient work left Mitchell and Davis in need of a way to fund their growth. So Mitchell approached his bank for a loan. He was told he would have to sign a personal guarantee, as their cash-based accounting system did not reflect pending insurance revenues.

He provided the personal guarantee to get the loan and switched to an accrual-based accounting system—an approach that recognizes the revenue from pending receivables. He also hired a comptroller to make the transition and a dedicated bookkeeper to draw up a profit and loss statement.

Eventually, Mitchell and Davis were able to raise the capital necessary to lease office space and hire the additional back-office staff they needed to run day-to-day operations. 

Lessons learned

Today, Mitchell directs medical operations and focuses on measuring health outcomes and improving patient satisfaction—the reason he started the company. Looking back, he says his biggest challenge was trying to care for patients and keep up with the business side of things at the same time.

“When it’s your business, you want to be involved in everything, but it’s hard when you’re the one flipping the burgers,” he says.

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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