Doing the Math of Private Practice
No one becomes a therapist because they want to be a millionaire. In fact, we all heard it OVER and OVER again throughout our grad school (at least I did) about how little money we make in this field comparative to most others with an advanced degree. However, many of us find out that barely getting by isn’t sustainable and doesn’t allow us to fully show up for our clients in the way that we want. Often, private practice is an opportunity for increased financial freedom and a desire to an actual work-life balance.
The downside? If you want to know how to make money or be able to adequately run and afford a private practice, you are going to have to do a bit of math. I know, I know- math isn’t what we want to do, and although I will break down the step-by-step math ahead, if you are wanting to short cut this path (and utilize a tool I only wish I had when I was opening private practice), click HERE to utilize SimplePractice’s financial calculator.
One thing I say all of the time is that opening a private practice absolutely changed my life for the better. But, that doesn’t mean it is the right fit for everyone, and I want everyone to go into it with all of the information so they can make an informed decision for themselves. This means that the first step is talking with therapists in your area and getting as much information as you possibly can.
Here are some of the top questions I would ask and things I would encourage anyone to think through in this initial step:
What are average insurance rates in my area?
Insurance rates vary WILDLY between states, plans, insurance types, etc. You will want to know what the average rate is for as many of the insurance types as you can. The best option would be to know the lowest payout you would receive from insurance and the average payout you would receive from insurance, as you will need this data in the math portion.
What is the average rent for office space in my area?
If you are wanting to do in-person sessions, you will need to have an office space. Office space is another thing that varies wildly by state and by individual area. Look at your options and get a general idea of what this cost will be.
What are your approximate business expenses per month/per year?
Some things to consider include: electric, internet, utilities, rent (as discussed above), website, advertising/marketing, EHR (click here to save on SimplePractice), office supplies, telephone, bank fees, licensure fees, insurance, anything your current employer pays for, etc.
What were the starting costs of opening your business? (Price out furniture, office materials, technology, decor, etc. that you would want to purchase before opening
Again, these are costs you are going to be spending prior to even making money. Think about your office set up: will you need a couch? chairs? desk? decor? computer? pens? fidgets? fan? You don’t have to have your office perfected- some of these expenses can wait over time, but some cannot and you want to make sure you are prepared for this ahead of time.
If you are having a hard time collecting this data from others in your area, or you are just wanting even more information and assistance, SimplePractice is there for you. Using their Financial Calculator, you are able to break down the average made in a year by EACH state and consider the differences in cash pay, insurance pay and a mixture of both. This can be an easy and efficient way for you to get some clear information about what the next steps in this journey would be.
Now that you have collected the data, it’s time to do the math so you can make decisions for you. The basic equation for profit in private practice is
Gross Profit-Expenses-Taxes= Net Profit
However, I think this equation needs to be broken down further when you are starting to decide what your practice needs to look like to feel successful and okay for you. There are a couple of ways that you can do this:
Minimum Number of Sessions
This is my preferred way (and what I personally did) to identify how many sessions I would need to conduct in a week in order to make what I was making at my previous employment. Use the information you have gathered to determine what your monthly expenses will be. In my opinion, you are better off rounding up to be prepared for the worst/most expensive expenses you may have. Then you will want to utilize the below formula to figure out how to make the same amount of money (after taxes and expenses) as you previously were.
((Current Income/0.7)+Expenses)/ Lowest Insurance Reimbursement Rate= Minimum Number of Sessions
For example, if your current income is $1,000 a week, you are estimating $1000 in monthly expenses and the lowest insurance reimbursement rate in your area is $100 you would do:
((1000/0.7)+250)/100=16.78
This would mean, with these numbers, you would need to conduct 17 sessions a week to make the same amount of money as you currently are.
Minimum Fee Charged
If you are not planning on utilizing insurance, you can instead use a similar version of this formula to identify the fee you want to charge. In order to do this, you would want to know how much money you want to make and the expenses you will have to pay for (again, err on the side of caution) and how many sessions you want to complete a week to determine your preferred rate.
((Preferred Income/0.7) + Expenses)/Number of Sessions= Preferred Rate
For example, if you are wanting to make $1000 a week, you are estimating $1000 in monthly expenses and you want to conduct 15 sessions a week you would do:
((1000/0.7)+250)/15=111.90
This would mean, with these numbers, that you would want to charge at least $112 per session.
Max Expenses
If you are trying to decide what expenses you are willing to have (maybe you are trying to decide between in-person or tele-health only), you would want to utilize the below formula. For this, you would again want to know your preferred income, the average insurance reimbursement rate in your area (you can use the lowest to be safest in calculation) and how many sessions a week you want to conduction.
(Number of Sessions X Lowest Insurance Reimbursement)-(Preferred Income/0.7) = Max Weekly Expenses
For example, if you are wanting to make $1000 a week, you are wanting to conduct 15 sessions and the lowest insurance reimbursement in your area is $100 you would do:
(15X100)-(1000/0.7)=71.42
This would be your weekly expenses, so multiply by 4 would mean $284 is your max monthly expenses
Max Profit
The final way I will discuss is identifying what your max profit would/could be. For this, you will need to average insurance reimbursement rate (you could also do the highest if you are wanting to know your absolute max- this would mean you have all clients with this insurance type, so I recommend using average, but that’s just my preference). You would also need to know how many sessions you are willing to conduct a week (what is your max), as well as your estimated expenses.
((Average Reimbursement Rate X Max Number of Sessions) X 0.7) - Expenses = Max Profit
For example, if the average reimbursement rate in your area is $100, you are wanting to do a max of 20 sessions per week and your expenses are $1000 a month, you would do
((100X20)X0.7)-250= 1,150
This would mean that your max take-home per week would be $1,150 (after taxes, expenses, etc.)
I know that most of us didn’t go into the field of therapy because we love math, however, it is a part of having a successful private practice. Knowing information online about the success of others or how they make their business work is incredibly important and helpful. However, when it comes to making the decision about whether or not private practice is right for you, you need to think about your specific situation and area. I never want someone to take this leap without as much knowledge, support and guidance as possible. I also think it is important to remember that none of these calculations included start up costs or the length of time insurance takes to reimburse (because that’s a whole other conversation).
If you are wanting more support in deciding if the transition to private practice is right for you OR if you did the math and are ready to take the leap, but looking for some extra support- you don’t have to figure it out all alone. Reach out here for private practice coaching. You will receive an email in 1-2 business days after you submit this form with information about how to get your first appointment with me scheduled!
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