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Economic feasibility of a primary care practice.

Economic Feasibility of a Primary Care Practice

Physicians completing training not only must be knowledgeable about the practice of medicine but likewise must be prepared to make management decisions that will greatly influence how successful they will be in their practices. For years, many small and medium-sized communities have solicited primary care physicians, hoping that they will set up practice. In order to make an informed decision, physicians must be able to evaluate the potential survival and growth of a new or growing primary care practice.

Various publications have previously recommended several necessary steps in selecting a site for a medical practice. In 1979, Balliett suggested investigating the selected population's income levels, projected changes in an area's population, and the historical ability of members of the community to pay for medical services. [1]

Professional societies, such as the American Academy of Pediatrics, have developed recommended physician-to-pediatric patient ratios, and authors such as Donohugh advise use of tables of population-to-physician ratios for specific specialties and comparison of the community n ar exploration to national norms in order to determine the area's appropriate health professional needs. [2,3] The use of a location scoring method, taking into consideration such factors as local and r egional medical facilities, community economic background and projected area growth, and the availability of community resources was addressed by Cotton. [4]

The need for an economic model for analyzing practice sites in nonmetropolitan communities was first identified by Doeksen and colleagues, who investigated the costs of establishing a community clinic. [5] Using this model, Williams and colleagues in 1983 collected basic financial data from 16 rural primary care physicians through the use of structured interviews. [6] The model was later expanded to include the kbservations of 25 general practice (allopathic and osteopathic) physicians in 1987, 10 nonmetropolitan pediatricians in 1988, and 19 family physicians in 1989. [7-11]

Method and Results

The 54 physicians surveyed in the 1987-1989 research project represented all areas of Oklahoma and were selected to include new (in practice less than 2 years) and established physicians. Thirty-eight were in solo practices, 9 were in partnerships, and 7 were in a multispecialty groups or associations. Nineteen had been in practice less than two years. all were located in nonmetropolitan communities--33 in communitites of fewer than 5,000, 11 in communities between 5,000 and 10,000, 7 in communities between 10,000 and 30,000, and 3 in communities of more than 30,000.

The survey questionnaires were administered personally by members of the research team to each physician and designated practice administrator. The investigators gathered information using local and regional sources on the number of primary care visits a practice area will generate, the distribution of visits between different primary care provider types, the average number of annual physician ambulatory and hospital-related visits per provider, the physical space requirements and equipment per practice site, the capital and operating expenses of a practice, and the projected gross practice revenue and net income generated by the professinal activities of the primary care physician.

Practice Volume

Although information on the frequency of visits to physicians and on the numbers of office visits per year categorized by patients' age and gender are not available for individual states, national and regional rates are available from a national survey of ambulatory care conducted by the National Center for Health Statistics. [12] To determine the service or practice area and its population, the research team developed a model using data from sources such as state/county census, chambers of commerce, school districts, area planning agencies, and county medical societies. Using national data and this model, a prediction of the total number of physician visits and primary care visits by age and gender can be determined for a community or a specific geographic practice area (table 1, below).

Specific Oklahoma data were obtained on the average number of annual visits per primary care provider. The research study of primary care physicians conducted in 1987, 1988, and 1989 provided information on office, hospital, emergency department, nursing home, and nursery visits.

Based on these observations, the average number of office visits was 4,590 per general practice physician, 5,163 per pediatrician, and 4,976 per family physician. The number for pediatric office visits approximates the published national norm of visits to pediatricians in nonmetropolitan areas (5,177), while the number for general/family physicians sas lower than the national norm of 5,766. [13] The average number of monthly visits for 15 new general/family physicians from both surveys was 82 for the first month, 182 for the fourth month, and 220 for the seventh month. In many cases, the highest number each month was at least two times the lowest number, which illustrates the wide variation in the number of patient office visits individual beginning physicians will most likely experience. Furthermore, new solo practitioners seem to have fewer visits during the early months of practice than a new physician joining a group practice.

The number of hospital, emergency department, nursing home, nursery, and home visits and their relation to office visits was determined for new and established physicians in all three primary care specialties. Because research documented different types of visits and rates of reimbursement, office visits were subdivided as initial (new patients) or routine (regular/follow-up patients), with the literature indicating that 15 percent of a typical physician's office practice consits of initial visits. [7]

Survey data revealed various percentages that could be used in projecting estimates for hospital, emergency department, nurery, nursing home, and home visits for each primary care specialty. additionally, the data indicated the percentage of office visits for each specialty that had laboratory, patient procedure fees, or radiology charges in addition to standard fees for the office visit. As illustrated in table 2, page 24, the typical family physician could expect to generate an additional 388 emergency department visits based on 7.8 percent of the total number of office visits.

Capital, Operating Expenses

A complete inventroy of all furniture and equipment found in each office practice (business office, laboratory, examination rooms, reception rooms, conference room, physician's office, etc.) was completed by a research team member. In some cases, physicians knew the cost of furniture or equipment. When they didn't, dealers of capital equipment were interviewed to obtain average costs of items. For physical plant cost, physicians provided either construction costs with specific loan terms or annual rental data in addition to specific office practice dimensions (square feet per provider) and landscaping costs.

To develop the database for operating costs, four aspects of the practice (personnel, building, office, and medical costs) were evaluated. Personnel costs included all wages and benefits. Insurance, taxes, utilities, and maintenance constituted the building costs; office expenses were associated with the business office operations, professional expenses, and malpractice insurance; and medical costs referred to laboratory and medical supplies used in the delivery of patient care.

The 1989 survey indicated that a solo family physician required 900 to 2,816 square feet of space, the average being 1,711 square feet. Furthermore, the data indicate that space requirements per provider varied with the number of providers within a practice. for example, the 1988 survey determined that approximately 900 square feet of additional space is needed for a third member. Data from the general practice, pediatric, and family practice surveys determined that for practices with rented space, the monthly charges varied from $325 to $1,125, depending on the terms of the lease and the type of ownership of the office complex (table 3, page 24). The average annual operating cost for building, office, personnel, and medical supplies for the three primary care specialties ranged between $68,570 and $76,276 per provider (table 4, page 25). These figures reflect 1987-89 costs in a nometropolitan area of the midwest and would have to be adjusted for other parts of the country.

Revenue and Income

Gross revenue data were obtained by documenting the amount charged for specific types of visits, procedures, and laboratory services for the three primary care specialties studied. Table 5, page 25, displays the average fees charged for 11 of the most common types of primary care services. These charges were multiplied by the number of visits in each category, and the product was modified using information on collection rates obtained from the surveyed physicians. The determination of net income was derived by subtraction of annual operating cost and appropriate capital costs from the gross revenue modified by collection rates.

Economic Feasibility Model

Based on the data from these primary care specialty studies, the authors designed a model for physicians and community leaders to use in determining the economic feasibility of establishing a new primary care office or adding another primary care practitioner in an area. The basic parts of the model are:

* A procedure to determine a geographic practice or service area.

* A procedure to estimate the number of annual physician visits.

* A procedure to estimate the number of annual primary care physician office visits.

* A procedure to estimate the number of new or additional physician providers needed in the service area.

* A procedure to estimate operating and capital costs for each provider (capital costs are converted to annual costs by assuming that the physician takes a loan and pays principal and interest charges).

* A procedure to project the type and number of nonoffice visits.

* A method to project gross revenue modified for collection rates.

* A determination of net provider income.

The model has been developed as a set of specialty-specific manuals that include the primary care database and a series of 11 forms with stepwise explanations and case examples that help the user in completing the feasibility study.


With this model and information on the composition of the medical community, a user can project the economic feasibility of establishing a new or additional primary care physician practice in a specific nonmetropolitan community. This model helps community leaders, physician executives, bankers, and health care administrators who wish to recruit a physician because it provides all parties with objective data and economic projections. Since the first model was completed, over 50 such studies have been conducted at Oklahoma State University and the University of Oklahoma. Primary care residents completing their training are taught to use the model when they are deciding on their medical practice site. Specialty-specific texts have been published that give the detailed model and results of the 1987 General Practice, the 1988 Pediatric, and the 1989 Family Practice surveys. [7,8,10] Physicians and communities who have used this feasibility model to initiate new practices or expand existing practices are being monitored to determine the practicality of thos modeling method and to offer suggestions of modifications for future revisions. [14] In addition, studies have been conducted using a computerized economic model to demonstrate how a physician lractice in a small community improves the economic viability of that community. [15]

Physician executives who are faculty at health science centers and medical schools must educate students and residents in health care economics, health care delivery systems, and practice management. By combining the growing medical management and health care administration literature with objective data, these professionals can help community leaders, hospital administrators, and potential and current community primary care providers determine the appropriate mix of health care professionals in a service area. The evolving research literature and models such as this can affect the growth and survival of a trainee as he or she matures into a practitioner.


[1] Balliett, G. Getting Started in Private Practice. Oradell, N.J.: Medical Economics Books, 1979.

[2] Community on Practice and Ambulatory Medicine. Management of Pediatric Practice. Elk Grove Village, Ill.: American Academy of Pediatrics, 1986.

[3] Donohugh, D. Practice Management for Physicians. Philadelphia, Pa.: W.B. Saunders Company, 1986.

[4] Cotton, H. Medical Practice Management. Oradell, N.J.: Medical Economics Books, 1985.

[5] Doeksen, G., Dunn, J., and others. Capital and Operating Costs for Community Clinics, (Oklahoma Agricultural Experiment Station Research Bulletin B-742). Stillwater, Okla.: Oklahoma State University, 1979.

[6] Williams, D., Boucher, T., and others. A Guidebook for Rural Physician Services. A Systematic Approach to Planning and Development. Stillwater, Okla.: Oklahoma State University, 1983.

[7] Knowles, E., Boucher, T., and others. A Guidebook for Rural Physician Services: A Systematic Approach to Planning and Development, Second Edition. Stillwater, Okla.: Oklahoma State University, 1987.

[8] Doeksen, G., Miller, K., and others. A Systematic Approach to the Planning and Development of a Practice. A Guide for Pediatricians. St. David, Pa.: Argus Press, 1989.

[9] Miller, K., Miller, D., and others. "A Model to Determine to Feasibility of a Pediatric Practice. American Journal of Diseases in Children 143(9):919-23, Aug. 1989.

[10] Doeksen, G., Miller, K., and others. Family Medicine: A Systematic Approach to the Planning and Development of a Community Practice, in press. Norman, Okla.: University of Oklahoma Press, 1990.

[11] Miller, K., Miller, D., and others. "A Model to Determine the Economic Feasibility of a Family Physician Practice." Journal of Family Practice, in press.

[12] U.S. Department of Health and Human Services, National Center for Health Statistics. National Ambulatory Medical Care Survey, United States, January 1975-81 and 1985 Trends, Series 13. Washington, D.C.: U.S.: U.S. Government Printing Office, June 1988.

[13] Center for Health Policy Research: Socioeconomic Characteristics of Medical Practice. Chicago, Ill.: American Medical Association, 1985.

[14] Doeksen, G., Miller, D., and Howe, E. "A Model to Evaluate Whether a Community Can Support a Physician. Journal of Medical Education 63(7):515-21, July 1988.

[15] Doeksen, G., and Miller, D. "Rural Physicians Make Good Economic Sense." Journal of the Oklahoma State Medical Association 81(9):568-73, Sept. 1988.

Kimball A. Miller, MD, MSHA, is Associate Professor, Department of Internal Medicine and Pediatrics, Section of Health Care Design, \niversity of Oklahoma Health Science Center, Tulsa; Deborah A. Miller, MS, is Faculty Associate, Department of Psychiatry, University of Texas Southwestern Medical Center, Dallas; Gerald A. Doeksen, PhD, is Regents Professor, Department of Agricultural Economics, Oklahoma State University, Stillwater; and Patti Jacobs-Shelton, BS, is Physician Placement Officer, University of Oklahoma Health Sciences Center, Oklahoma City.
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Article Details
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Author:Jacobs-Shelton, Patti S.
Publication:Physician Executive
Date:Sep 1, 1990
Previous Article:Measuring the quality of ambulatory care.
Next Article:The making of a hospital physician executive.

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