Practice Ownership: The Business of Medicine

Ownership changes the question from what you produced to what the practice kept

As an employed attending, your economics fit on one line: wRVUs times a conversion factor, or a salary with a bonus formula. You watch your own production because your own production is the whole story. The day you become an owner, that line stops being the story. Your income becomes a residual — whatever remains after the practice pays the front desk, the medical assistants, the rent, the billing service, the malpractice carrier, and the electronic health record vendor. On $2,400,000 of collections in a three-physician practice, a three-point drift in the overhead ratio is $72,000 a year of partner income that quietly disappears, $24,000 of it yours. No one sends you a notice when it happens. The practices that pay their partners well are not always the ones that collect the most; they are the ones whose owners read the profit-and-loss statement the way you read a basic metabolic panel — every line, every month, with a differential in mind for anything out of range. This module teaches you to read those numbers before you buy them.

Overhead ratio

A practice's operating expenses — staff, occupancy, supplies, billing, administration — divided by its collections, conventionally calculated excluding physician compensation.

Practice revenue starts as fiction and ends as fact. Charges are the fiction: payer contracts set the allowable for each code, so a $250 charge may be a $112 collection. Collections — cash actually received — are the fact, and the speed of conversion (days in accounts receivable, denial rates) determines whether the practice runs on cash or on a line of credit. Against collections sits overhead. Industry survey commentary, including MGMA operating-cost data from 2025, commonly places primary-care overhead near 60 percent of revenue, with many practices falling in a 55 to 65 percent band; procedural specialties with hospital-based work often run meaningfully lower. Treat any benchmark as a screening range, not a target — figures vary by survey, region, and how expenses are categorized, so confirm the definition before you compare. Owners also change the numerator and denominator: adding nurse practitioners and physician assistants, or in-office ancillary services such as laboratory and imaging, raises revenue per owner. That is leverage — and ancillary lines sit under the federal self-referral (Stark) rules, so a compliance review precedes any pro forma.

Why it matters: Once you own the practice, your pay is what survives the overhead line. A practice collecting $800,000 per physician at 58 percent overhead pays its owner $336,000; the same collections at 68 percent pay $256,000. That $80,000 gap has nothing to do with how good a clinician you are, which is exactly why owners who never learned to read the ratio underperform employed peers.

A three-physician primary-care P&L, worked to the dollar

Three family physicians own a practice collecting $800,000 each on average. The practice employs a front office, medical assistants, and an outsourced billing service, and rents its space.

Bottom line: Each partner takes home $312,000 only because overhead holds at 61 percent — every single point of overhead ratio moves each partner's annual pay by $8,000.

Pass-through entity

A business structure — S corporation, partnership, or an LLC taxed as either — whose profits are taxed once, on the owners' individual returns, rather than at the entity level.

Nearly all physician practices are pass-through entities, so the practice profit lands on the owners' individual returns and is taxed once. The entity type still matters, because it controls the mechanics. In an S corporation, your pay splits into W-2 salary, which carries payroll taxes, and shareholder distributions, which do not. The IRS requires the salary to be reasonable compensation for the work performed; where that line sits is fact-specific and audited, which is why the split is CPA territory rather than a do-it-yourself project. In a partnership, partners commonly receive guaranteed payments — fixed amounts paid regardless of profit, taxed as ordinary income and subject to self-employment tax — with remaining profit divided under the partnership agreement. A C corporation pays a flat 21 percent federal rate, permanent since the 2017 TCJA, but its profits are taxed a second time when paid out to owners, which is why few medical practices choose it. The 20 percent qualified business income deduction, made permanent by the OBBBA in 2025, can help — but physician practices are a specified service trade or business, and the deduction phases out at higher incomes.

Why it matters: Two practices with identical profit can deliver different after-tax income and different retirement-plan capacity purely because of entity and compensation structure. You do not need to design the structure yourself; you need to understand it well enough to ask a CPA the right questions before you sign a buy-in, because the structure you buy into is expensive to change later.

Buy-in traps: paying twice for work you already did

Three traps appear in buy-in proposals often enough to check for by name. First, goodwill method games: goodwill can be valued as a percentage of revenue, as capitalized excess earnings, or by comparable-sale data, and the same practice can produce figures $50,000 or more apart depending on the method chosen. The method is a negotiating position, not a law of nature. Second, buying your own receivables: if the buy-in includes a share of accounts receivable, some of that AR may be collections from work you personally performed during your employed years — meaning you are paying the partners for income your own hands generated. Third, the private-equity trapdoor: if the practice sells to a PE platform during or shortly after your partner track, earnout and rollover-equity structures decide whether your buy-in converts to sale proceeds or gets stranded at its original price. Practice has varied widely here — the agreement controls, not the recruiting conversation.

How to avoid it: Request the valuation workpapers, not just the number, and have an independent CPA who works with medical practices re-run goodwill under at least two methods. Quantify how much of the practice AR your own production created before agreeing to buy any of it. Ask, in writing, what happens to your buy-in if the practice sells within five years, and require the answer to appear in the purchase documents. Engage a healthcare attorney before signing anything.

Check yourself: what a 5 percent revenue dip does to the residual

Own the numbers before you own the practice

• Owner income is a residual, so every point of overhead ratio in the worked three-physician practice moves each partner's pay by $8,000 a year, and revenue swings hit partner pay amplified.
• Survey benchmarks commonly place primary-care overhead near 60 percent of revenue, but ranges vary by source, specialty, and expense definitions — use them to screen a practice, then audit the lines.
• Entity structure changes how identical profit reaches you: S corporation salary-and-distribution splits and partnership guaranteed payments are CPA territory, not do-it-yourself territory.
• The three costliest buy-in traps are goodwill priced by a conveniently chosen method, accounts receivable your own work created, and sale clauses that strand your equity in a private-equity transaction.
• Ancillary revenue is real owner economics, but it exists only inside the federal self-referral rules — a healthcare attorney confirms compliance before that income belongs in your buy-in math.

Do this next: Before your next partnership conversation, request three years of practice profit-and-loss statements plus the current accounts-receivable aging report, and schedule a review of both with a CPA who works with medical practices.