Direct primary care for internists: the membership math

DPC is gaining traction in IM. Here’s the membership-based practice model and the operating economics. The shift from a fee-for-service (FFS) treadmill to a membership model can feel like a leap of faith, but the underlying financial structure is what makes it sustainable. For internists, moving to Direct Primary Care isn’t just a clinical change; it’s a fundamental business model transition. Success hinges on understanding not just patient panel sizes and membership fees, but the specific tax and operational levers that can dramatically alter your take-home pay. This isn’t about generic financial advice; it’s about the specific, actionable strategies that apply directly to physicians running a pass-through business in our specialty. For a broader look at the clinical and operational side, you can find more in our internal medicine resources hub.

The 199A Qualified Business Income (QBI) Deduction: Your DPC Superpower

One of the most significant financial advantages of owning a DPC practice is the Qualified Business Income (QBI) deduction, established under Section 199A of the tax code. In simple terms, it allows owners of pass-through businesses—like an S-corp or LLC that your DPC practice would likely be—to deduct up to 20% of their qualified business income. For a practice netting $300,000, that’s a potential $60,000 deduction, translating to over $20,000 in tax savings in a high tax bracket. It’s a game-changer.

However, there’s a critical catch for physicians. The practice of medicine is classified as a “Specified Service Trade or Business” (SSTB). This means the 20% deduction is subject to a phase-out based on your taxable income. For 2026, this phase-out begins at a taxable income of approximately $394,000 for single filers and $787,000 for those married filing jointly. Many high-earning specialists automatically exceed these limits and get no QBI deduction at all. But for many internists, especially in the early years of a DPC practice, income may fall squarely within or below this range, making the full deduction attainable.

The key is proactive AGI management. Your “taxable income” isn’t your gross revenue; it’s what’s left after all your deductions. To stay under the phase-out threshold and preserve the 199A deduction, you must aggressively lower your AGI. Here’s the sequence:

1. Max Out Retirement Accounts: This is your primary lever. As a practice owner, you can establish a Solo 401(k). For 2026, you can contribute both as the “employee” (up to $24,500) and the “employer” (up to 25% of compensation), for a combined total of up to $73,500. These are pre-tax contributions that directly reduce your AGI.
2. Utilize an HSA: If you have a high-deductible health plan, max out your Health Savings Account. The family contribution limit for 2026 is $8,750. This is another above-the-line deduction that lowers AGI.
3. Consider a Cash Balance Plan: For established, profitable DPC practices, a defined-benefit cash balance plan can be layered on top of a 401(k). This allows for massive pre-tax contributions, often exceeding $100,000 per year, which can dramatically reduce your taxable income and keep you well below the 199A phase-out.

The Trap to Avoid: Don’t just look at your practice’s net income. The 199A threshold is based on your *total* taxable income, which includes spousal income if you file jointly. A high-earning spouse can easily push you over the limit. This makes AGI reduction strategies on both sides of the ledger essential. Modeling these scenarios is complex, which is where a tool like the physician finance hub can help map out how different contribution levels impact your eligibility for the full QBI deduction.

The HSA Triple-Stacking Strategy: Your Ultimate Retirement Shelter

Every physician should be using a Health Savings Account (HSA), but for a DPC owner, it’s a non-negotiable tool for long-term, tax-free wealth creation. The HSA is the only account that offers a triple tax advantage: contributions are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are tax-free. Most people use it as a short-term medical slush fund. That’s a massive missed opportunity.

The correct strategy is to “stack” these benefits over decades. Here’s how it works:

1. Max the Contribution: Contribute the maximum amount allowed each year. For 2026, the family limit is $8,750. This is an above-the-line deduction, meaning it lowers your AGI regardless of whether you itemize.
2. Pay Medical Expenses Out-of-Pocket: Do not use your HSA funds to pay for current medical bills. Pay for your family’s co-pays, prescriptions, and dental visits with a credit card or after-tax cash.
3. Save Every Receipt: Scan and save every single medical receipt in a dedicated digital folder (e.g., in Dropbox or Google Drive, labeled by year). These receipts are your key to tax-free withdrawals in the future.
4. Invest the HSA Funds: This is the most critical step. Once your HSA balance exceeds a certain threshold (often $1,000), invest the entire amount in low-cost, broad-market index funds (like an S&P 500 or total stock market fund). Let it compound, tax-free, for 20, 30, or 40 years.

By following this method, an annual $8,750 contribution growing at a conservative 7% per year can become over $1 million in 30 years. When you retire, you can withdraw funds completely tax-free by “reimbursing” yourself for all the medical expenses you paid out-of-pocket over the preceding decades. You simply tally up the receipts you’ve saved and take a lump-sum, tax-free distribution for that amount. Any funds remaining after age 65 can be withdrawn for any reason and are taxed as ordinary income, just like a traditional IRA or 401(k), making it a powerful supplemental retirement account.

The Trap to Avoid: The most common mistake is treating the HSA like a Flexible Spending Account (FSA). People spend it down every year, forfeiting decades of tax-free investment growth. The second trap is poor record-keeping. If you don’t have the receipts, you can’t make qualified tax-free withdrawals in retirement. Start a digital folder today and be disciplined about saving every medical bill.

W-2 Deduction Rescue: Using Side Income to Unlock Write-Offs

Many internists transition to DPC gradually, perhaps by starting the practice while maintaining a part-time W-2 hospitalist or outpatient job. This hybrid model creates a unique and powerful tax opportunity. Since the Tax Cuts and Jobs Act (TCJA) of 2018, W-2 employees can no longer deduct unreimbursed business expenses. Your scrubs, stethoscope, CME courses, state license fees, DEA registration, and journal subscriptions are no longer deductible against your W-2 salary.

However, the moment you generate even a small amount of 1099 independent contractor income, you can file a Schedule C (Profit or Loss from Business). This simple form reopens the door to deducting all your “ordinary and necessary” professional expenses. The expenses are deducted against your 1099 income, effectively making that income tax-free up to the amount of your expenses.

Here’s a concrete example:
Dr. Smith is a W-2 hospitalist who starts a small DPC practice on the side, generating $15,000 in membership fees in the first year (1099 income). During that year, she has the following professional expenses that her W-2 employer does not reimburse:

• CME Conference (registration + travel): $4,000
• State Medical License & DEA Fees: $1,200
• Professional Association Dues: $800
• Medical Journal Subscriptions: $500
• Home Office (pro-rated portion): $1,500
• Cell Phone (business use %): $600
• Total Expenses: $8,600

Without the 1099 income, these $8,600 in expenses would be completely non-deductible. With the Schedule C from her DPC practice, she can deduct the full $8,600 against her $15,000 of 1099 income. Her taxable side income is reduced from $15,000 to just $6,400. In a 32% federal tax bracket, this strategy saves her $2,752 in taxes ($8,600 x 0.32) that would have otherwise been lost.

The Trap to Avoid: You must be able to prove that these expenses are linked to your business activity. The home office deduction, for example, requires that a portion of your home is used “exclusively and regularly” for your business. Keep meticulous records and separate your business and personal expenses. Co-mingling funds is a red flag and makes it difficult to substantiate your deductions if you are ever audited.

Supercharge Your Savings with a Solo 401(k)

The ability to deduct expenses is only half the benefit of having 1099 income from your DPC practice. The other half is the access it provides to a superior retirement savings vehicle: the Solo 401(k), also known as an Individual 401(k).

A Solo 401(k) is for self-employed individuals with no employees (other than a spouse). It allows you to contribute as both the “employee” and the “employer,” dramatically increasing your tax-advantaged savings capacity beyond what a W-2 employee can contribute to their hospital’s 401(k). For 2026, the contribution limits are:

• Employee Contribution: You can contribute up to 100% of your self-employment compensation, not to exceed $24,500.
• Employer Contribution: You can also contribute up to 25% of your net adjusted self-employment income as the “employer.”
• Combined Limit: The total contributions from both sources cannot exceed $73,500 for 2026.

Let’s say your DPC practice, structured as an S-corp, pays you a reasonable salary of $100,000 and has an additional $80,000 in profit distributions. You could make a $24,500 employee contribution and a $25,000 employer contribution (25% of your $100k salary), for a total of $49,500 in pre-tax savings. This is on top of any contributions you might be making to a W-2 plan from another job (though the employee portion is shared across all plans).

Furthermore, most Solo 401(k) plans allow for Roth contributions on the employee side and permit after-tax contributions that can be converted to a Roth IRA (the “Mega Backdoor Roth”), offering a path to build a massive bucket of tax-free retirement money. They also allow for loans and can be established at brokerages that offer a wide array of low-cost investment options, freeing you from the limited, high-fee funds often found in hospital-sponsored 401(k)s.

The Trap to Avoid: The “poisoned IRA” trap for backdoor Roth contributions. If you plan to make backdoor Roth IRA contributions, you cannot have any existing pre-tax funds in a Traditional, SEP, or SIMPLE IRA due to the pro-rata rule. However, a Solo 401(k) can be a solution. Most Solo 401(k) plans accept rollovers from existing IRAs. By rolling your pre-tax IRA funds *into* your Solo 401(k), you can “clear out” your IRAs, setting your pre-tax IRA balance to zero and enabling clean backdoor Roth IRA contributions for both you and your spouse.

The financial mechanics of a DPC practice are different, but with the right strategy, they can be far more rewarding than a traditional FFS model. It requires a shift in mindset from being an employee to being a business owner who actively manages revenue, expenses, and tax strategy. If you are exploring this path and want to model the financial implications for your specific situation, you can talk to GigHz about a DPC practice structure.

Reviewed by Pouyan Golshani, MD, Interventional Radiologist — May 21, 2026