Business Overview

Billing a patient for medical services can be complicated. Plus, not all patients can afford to pay the entire bill in full. And then there's the paperwork. With laws like the Health Insurance Portability and Accountability Act of 1996 (HIPAA), it can be confusing and difficult to know which documents need to go where. If a hospital or doctor messes things up, it's a huge legal liability.

This is where a medical billing businesses can help. They take care of billing clients on behalf of doctors, hospitals, and other healthcare providers. Medical billing companies try to simplify the process by coordinating multiple providers and billing systems, while incorporating processes to adhere to changing regulations, so healthcare providers stay compliant and can get paid for their services.

Who is this business right for?

This business is perfect for individuals who are passionate about running a business in the healthcare industry and want to help both patients and providers make the billing process easier and more streamlined. Business owners should be naturally detail-oriented and task-focused thinkers. Medical billing is all about systems, processes, and completing tasks in a specific order to comply with federal regulation as well as internal healthcare provider policies.

What happens during a typical day at a medical billing business?

A medical billing company stays busy. The owner of the business oversees day-to-day operations which include collecting delinquent accounts and establishing payment arrangements with patients, monitoring patients' payments, and following up with patients when payments do not arrive on time.

The business also subcontracts business out to collection companies when payments cannot be collected within a reasonable amount of time. It maintains a medicare bad-debt cost report, which tracks billings and collections. It also initiates claims against estates for backpayment of medical bills. Medical billing companies maintain an active list of contacts with various legal departments and law firms as well as local governments (e.g. clerk of the court), which they use to help with collection attempts.

Medical billing companies also do normal bill collections by sending out bills for payments on behalf of hospitals, doctors, and other healthcare providers.

What is the target market?

The target market is as wide as the healthcare industry. You can narrow your focus, of course, and target specific types of practitioners and providers. This is what most small to medium-sized medical billing companies do.

How does a medical billing business make money?

A medical billing business makes money in any of several ways: billing by the hour, billing by the claim, or taking a percentage of the money collected from claims.

What is the growth potential for a medical billing business?

Medical billing can be done on a small or large scale. Starting out of your home, you can get a medical billing company up and running with a laptop computer and basic accounting and billing software. Larger operations require a staff, ranging from 5 to 10 employees up to thousands.

Getting Started

What are some skills and experiences that will help you build a successful medical billing business?

To run this business, you'll need data entry skills, management skills, and knowledge of the healthcare and billing industry.

What are the costs involved in opening a medical billing business?

Software for a startup can be outsourced through a cloud-based billing software company. The price points here range from $60 per month, per user to $250 per month, per user.

Of course, you can grow your medical billing practice quite large. A medium-to large-scale operation requires professional, in-house, systems which can cost upwards of $50,000 to install. Servers add another $3,000 to $5,000 to the cost, and training adds another $3,000 to the startup total.

You'll also need backup hard drives at $50 to $150 per drive, ethernet switches and wires at $50 - $100 per wire, depending on length, software licensing at $1,500 to $3,500 per user, software upgrades at $1,500 to $3,500 per year, and IT support at $150 to $200 per hour.

What are the steps to start a medical billing business?

Once you're ready to start your medical billing business, follow these steps to ensure that your business is legally compliant and avoid wasting time and money as your business grows:

STEP 1: Plan your Business

A clear plan is essential for success as an entrepreneur. A few important topics to consider are:

  • What are the initial costs?
  • Who is your target market?
  • How long it will take you to break even?
  • What will you name your business?

Choosing the right name is very important. We recommend checking if the business name you choose is available as a web domain and securing it early so no one else can take it.

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STEP 2. Form a legal entity

Establishing a legal business entity such as an LLC prevents you from being personally liable if your security guard company is sued. Consider using a registered agent service to help protect your privacy and stay compliant.

STEP 3. Register for taxes

You will need to register for a variety of state and federal taxes before you can open for business.

STEP 4. Open a business bank account

Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.

STEP 5. Set up business accounting

Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.

STEP 6. Obtain necessary permits and licenses

Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.

STEP 7. Get Business Insurance

Insurance is highly recommended for all business owners. If you hire employees, workers compensation insurance may be a legal requirement in your state.

STEP 8. Define your brand.

Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.

STEP 9. Establish your Web Presence

A business website allows customers to learn more about your company and the products or services you offer. You can also use social media to attract new clients or customers.

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Select your state below for an in-depth guide on completing each of these steps in your home state.

Where can I find a business mentor?

One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.

Having a support network in place to turn to during tough times is a major factor of success for new business owners.

What are some insider tips for jump starting a medical billing business?

Make contacts early on to get up and running quickly. This is a saturated market. If you know anyone in the healthcare industry, find out what events they go to and network with them. Find out who does their medical billing. New doctors just out of residency can also be a good source of leads.

Since many hospitals already have a medical billing system, it's best to stick with practices that are just starting.

Growing Your Business

How to promote & market a medical billing business

Promoting and marketing your medical billing company isn't easy. Since this market is saturated, it's best to build up a good referral network. Network with individuals just graduating med school, those in residency, and those who are just starting their practice.

Make contacts with hospital administrators. They may not need your services, but may be able to help you better understand the medical billing industry.

Recommended: Get started with local advertising for your business with a $300 credit from Yelp.

How to keep customers coming back

Keeping customers is easy if you do a good job on the billing. Since it's difficult to change billing companies, it's difficult to take business away from your competitors. Providers simply don't like switching. At the same time, it's difficult to take away your business once you become established.

How and when to build a team

Building a team isn't necessary in this business. However, if you want to grow your business, add medical billers as fast as you can. They are the core revenue generators of the company.

Legal Considerations

Federal Business Licensing Requirements

Medical billing companies are legally required to operate under federal regulations regarding health information set forth by the Health Insurance Portability and Accountability Act (HIPAA).  

State & Local Business Licensing Requirements

Certain state permits and licenses may be needed to operate a medical billing business. Learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.

Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.

For information about local licenses and permits:

Maintain Personal Asset Protection

Don’t think that just forming an LLC, or any other type of business, will save your personal assets in case of a lawsuit or other matter by itself.

When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your LLC is sued. In business law, this is referred to as piercing your corporate veil.

Two of the simplest steps that will protect your business, and yourself, are to:

Open a business bank account

  • This separates your personal assets from your company's assets, which is necessary for personal asset protection.

  • It also makes accounting and tax filing easier.

Get a business credit card

  • This helps you separate personal and business expenses by putting your business' expenses all in one place.
  • It also builds your company's credit history, which can be useful to raise money and investment later on.
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To learn more about maintaining your LLC's corporate veil, read our guide and protect your personal assets.

Certificate of Occupancy

A medical billing business is generally run out of an office. Businesses operating out of a physical location typically require a Certificate of Occupancy (CO).  A CO confirms that all building codes, zoning laws and government regulations have been met.

  • If you plan to lease a location:
    • It is generally the landlord’s responsibility to obtain a CO.
    • Before leasing, confirm that your landlord has or can obtain a valid CO that is applicable to a medical billing  business.
    • After a major renovation, a new CO often needs to be issued. If your place of business will be renovated before opening, it is recommended to include language in your lease agreement stating that lease payments will not commence until a valid CO is issued.
  • If you plan to purchase or build a location:
    • You will be responsible for obtaining a valid CO from a local government authority.
    • Review all building codes and zoning requirements for your business’ location to ensure your medical billing business will be in compliance and able to obtain a CO.

Earning Potential

How much can you charge customers?

The industry standard rate is $4 to $6, per claim. If a company charges fees as a percent of total sums collected, fees range between 5% and 10%. Some companies charge upwards of 15%. Hourly rates are rare these days, but may range between $20 and $50 per hour. You can also charge a flat-fee per clinician or an initial fee plus a percent of sums collected on claims.

What are the ongoing expenses for a medical billing business?

Ongoing expenses include software, insurance, utilities, and office supplies, along with labor costs. These costs range from $100 per month just for software, up to $10,000 or more per month if you have a small medical billing company. Medium and large companies spend hundreds of thousands of dollars per month just to keep the business running.

How much profit can a medical billing business make?

Profit potential varies a lot but typical gross margins are between 5% and 10%.

How can you make your business more profitable?

Making the business more profitable involves specializing. Most successful medical billing companies don't work with everyone and anyone. A business might become known in the Chiropractic community, for example, or choose to work exclusively with veterinarians or family doctors. Some medical billing companies customize their services for specialists like cardiologists or ENTs.

Another way to improve profits for your company is to hire talented medical billing specialists who are good at collecting payments. Since this business only thrives when collections are high, your employees need good people skills, empathy, and raw sales talent to succeed at collecting current and past-due medical bills.

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