Examining the Bad Business Plan of a Noble Calling
- by David Sable
In my prior post, “Minding the Meds,” I shared the results of a quick and rather unscientific poll of a group of premedical students, three-quarters of whom had decided not to go to medical school. As a follow-up, I pose the question: Although medicine is a noble and honorable calling, is medical school itself part of a good business plan?
Forthwith, a quick case study. Background material first:
From my entrepreneurship course, week one, topic one: Where do prices come from?
Scenario 1: You set your own prices. Your product or service is good enough, and the market is sufficiently conducive to pay you a premium for innovation, better results or just plain good service. The results are high margins and profits that can be plowed back into the business and used for further innovation and growth.
Your time and savings, or borrowed money, can be good investments in Scenario 1. Now write your business plan and convince yourself.
Scenario 2: The market dictates your price. Charge more and no one will buy from you. Charge less and you may not cover your costs. In Scenario 2, there are no excess profits to funnel back into the business for growth and innovation. The only way to increase revenues is to produce more.
There are two types of Scenario 2:
Scenario 2a is a competitive, commodity-type marketplace where a lot of companies provide the same, undifferentiated product or service.
Scenario 2b is where an outside agency uses a formula to set prices independent of market demand or your costs of production. The outside agency is usually the government.
As an entrepreneur, you have to be cautious in committing years of your life to this type of business, and you should avoid going into debt to finance one.
If you have Scenario 2 pricing, either from a competitive, commodity-priced market or from the government or an insurance company, but you assume Scenario 1 pricing and the resulting profits, your business plan will fail.
Medical practice has gradually evolved from Scenario 1 to a Scenario 2 for many reasons, some of which are driven by the federal government and insurers.
Now back to medical school and medical practice:
Without a special loan program, few people would have access to the financing needed to pay for four years of school. The uncertain future cash flows from take-it-or-leave-it pricing—pricing that does not respond to the rising costs of running a practice or allow for higher prices for differentiated and innovative care—make these loans too risky without a government guarantee of some sort. Student loan programs make paying for school within reach but do not make medical school part of a good business plan.
Huge upfront debt, years of foregone earnings and uncertain future cash flows equals a questionable business plan.
No one needs to tell me that medicine is a calling, nor that there are sublime, soul-nourishing aspects to being a doctor, nor that medical practice is one of the unique professions where much of what is produced is absolute, unequivocal good.
The intangible benefits of being a doctor are easy to recognize. But they can make the long-term costs of what may be an imprudent business plan easy to ignore.
Dedicated doctors are a gift, but medicine is not priesthood. There is a limit to how much well-intentioned people should have to pay for a higher calling trapped in a bad business model.