It seems almost every other day I hear about some young college kids starting up a new business. Perhaps it is a dot com or social networking business or something unique. What everyone always wants to know is this - what is the business model?

This has got me thinking about the business model of medicine and in particular the business model of a private practice. I’ve come to the conclusion that being a doctor in private practice is not a good business model. Here’s why:

In this great country of America, the cost of running a business is very expensive. The main cost is labor and payroll. Here in America we are over-educated and over-paid. We expect great benefits and time off. We want the good life, no matter what rung of the economic ladder we sit on. This cultural phenomenon of entitlement is evident in the fact that payroll benefit costs run about one-third of actual salary costs. Thus it costs about $30 in benefits for every $100 you pay an employee. (No wonder why everyone wants to outsource to India or China these days.)

For most small business owners, the productivity of each employee increases revenue. Whether the product is a widget or a hot-dog or computer software, the general concept of employee productivity is that employees increase revenue and the more revenue per employee the better. Thus as sales escalate to the point of needing another employee, the revenue from that person’s productivity more than covers his cost. Thus scaleable businesses typically have desirable business models.

In private practice medicine, revenue is dependent on the productivity of one person - the doctor. Hiring more employees does not increase his productivity. The only thing that can increase revenue is for the doctor to work harder and faster to see more patients or do more procedures. He is the rate-limiting step in the business model. This is the reason why your trips to the doctor’s office get shorter and shorter.

Most businesses are based on a scaleable model of sales. However the product of a doctors office can only be created by the doctor and delivered by the doctor. In essence, it is a one employee enterprise and everyone else in the office is ancillary staff. In fact, it could be argued that the doctor actually works for the employees and not the other way around. He has to see patients and do surgeries to pay his staff’s salaries. Thus the incentive of the doctor is to actually hire underqualified staff to pay lower salaries and cut costs.

If you were an investor looking for small businesses to invest in, you definitely would not want to invest in a doctor’s office. If that doctor got sick or tired (or old) then he would not make money. Since he is not an employee, he actually loses money when he takes vacation. Not only does he not earn income, he still has to pay his staff.

Given the above thoughts, it is not a suprise that doctors are not typically great entrepreneurs. To boot, they are often considered some of the dumbest investors around!

Related posts:

1. Group Practice: The Secrets to a Successful Medical Practice
2. Corporate Medicine and the Physician-Businessman
3. Locum Tenens: Doctors as “Hired Guns”
4. Health Insurance Companies Take Advantage of Doctors, Part III
5. Does Doctors’ Pay Structure Encourage Patient Neglect?