Physician Finances

Estimating Your Income Needs In Retirement

For many people, and most physicians, getting to a retirement age means being able to work because you want to work and not because you have to work. A year and a half ago, I wrote a 12-part post on financial planning for physicians, with one goal of saving enough for retirement. But how do you know how much money you are going to need in retirement if you stop working? There are a lot of on-line retirement income calculators but I find that they are too simplistic and can be misleading, mainly because they will ask you to make an assumption of what percent of your current income you will need in retirement – commonly 85%. What number do you use for your current income? Should you use your current pre-tax income, your current post-tax income, your current post-tax & post-retirement contribution income? There are just too many layers of financial nuance. These on-line calculators are convenient because they only take 1-2 minutes but projecting your retirement income warrants a bit more accurate analysis. I think that a relatively easy and much more confident way to estimate your retirement income needs is to make 3 calculations: determine what your current net disposable income is, what your projected retirement income will be, and what additional expenses you will likely have in retirement. It should take less than 15 minutes.

(1) Calculate your current net disposable income

The amount of money that you currently live off of is a great starting point for figuring out what you are going to need when you retire. If you are pretty happy with your current lifestyle and you can buy most of the things you really want and do most of the things you really want to do, then there is a pretty good chance that you’ll be happy in retirement if you have the disposable income that you have currently. To calculate your current net disposable income, you’ll need a few things: (a) a paycheck stub (preferably one from the end of the calendar year in December), (b) your last year’s income tax forms, and (c) a tabulation of everything that you put into retirement savings the previous year. You’ll then need to calculate the following:

  1. Your gross annual income. The easiest way to get this number is to look at your W-2 form in the box that has city income (box 18 on the W-2 form). This number will be higher than your federal income because it will include all of the money that went toward pension, 401(k), and other benefits. If  you have more than one W-2 form, then add up all of the city income numbers. If you additionally have self-employment income (reported on your federal income tax schedule C form, line 31), then add this in.
  2. Your total income taxes. Add up your federal income tax (form 1040, line 63), your state income tax, and your city income tax from the respective income tax forms from last year. You can also usually find the totals for your federal, state, and city income tax payments on your end-of-the-year paycheck stub.
  3. Your total retirement contributions last year. Look on your W-2 forms and add up any pre-tax retirement savings that you contributed to last year. This will include your portion of pension contributions (but do not include your employer’s portion of pension contributions), 401(k), 403(b), 457, etc. that will be reported on your W-2 form box 12 (typically with codes D through H) Add in any money that you put into an IRA, Roth IRA,  or SEP plan (the SEP contribution is on your federal income tax form 1040, line 28). Also add in any money that you put into your personal investments last year, such as stocks, bonds, or mutual funds.
  4. If you plan to pay off your house mortgage before you retire, then determine how much you are currently paying on your mortgage. The easiest way to do this is to multiply your current monthly mortgage payment by 12 and then subtract your annual property tax. This assumes that the bank that is holding your mortgage loan is currently paying your property taxes from the mortgage escrow account, which is usually the case. If you have other major loans (student loans, etc.) then treat them similarly.

Next, subtract your total income taxes, total retirement contributions, and mortgage payments from your gross annual income. This is your current net disposable income – essentially, what it costs you to live your current life style.

(2) Calculate your future net retirement income

This can be a little tricky and can get pretty complicated when you try to figure out which of your retirement funds are going to be income tax-free (e.g., a Roth IRA), which will be taxed at the capital gains tax rate (e.g., a mutual fund), which are going to be taxed at a regular income tax rate (e.g., a 401(k) or pension) and which will be taxed at a variable tax rate (e.g., Social Security benefits). Most people will have the largest percentage of their retirement savings in pensions and 401(k)s/403(b)s/457s. So, an easy way is to take a “worst case scenario” approach and just figure that all of your retirement savings will be subject to regular income tax. If you have a relatively large amount in non-retirement investments or in Roth accounts, then you can adjust your projected annual income taxes and capital gains taxes in retirement accordingly.

  1. If you have a pension, determine what your annual pension will be when you retire. Most pension plans (for example, State Teacher Retirement System of Ohio), will give you an annual report that will tell you what your projected annual retirement benefit will be based on when you plan to retire.
  2. Calculate the amount of money that you will have in retirement savings (other than pensions) when you retire. The easiest way to do this is to use an on-line compound interest calculator. If you know how much you have in retirement savings currently and your total retirement contributions from last year (as an estimate of what you are going to be contributing in the future), then you can get a rough idea of what to expect your retirement savings are going to be on the day that you retire. You will need to enter an estimated interest rate – if you are younger and exclusively invested in stock funds, then use 9-10%. If you are older and are more heavily invested in bond funds, then use 6-7%. If you are mid-career with a balanced retirement portfolio, then use 8%. This calculation works best if you are pretty close to retirement but if you are younger, it will underestimate your retirement fund’s future value because you will likely be adding more money to your pension or 401(k) in future years as inflation results in you having a higher annual income and higher 401(k) contribution limits.

Next, add these numbers together to get your future gross retirement income and then calculate your federal income tax – you can use a quick on-line income tax calculator to get a rough idea of your projected income tax. Do the same to estimate your state income tax. Add the estimated state and federal taxes together and subtract them from your future gross retirement income and that will give you your future net retirement income. In all likelihood, you will not need to pay city income tax on your retirement income so you won’t need to include city income tax in your calculations.

(3) Adjust for new expenses in retirement

The expense that people frequently overlook is health insurance. If you are working, the chances are that you are paying a portion of your health insurance premium and your employer is paying a portion. And it is likely that your employer is paying more than you are. The average healthcare costs per person in the U.S. is about $10,000 per person per year (this number will be lower for younger people and higher when you become older in retirement). You will also need to add in the annual costs for vision and dental insurance that are currently covered by your employer since in retirement, you will need to pick up the total cost of these premiums. If you retire before age 65, then you are going to have to purchase your own health insurance and this could cost around $18,000 for a couple. If you are over age 65, you still have to pay Medicare premiums as well as out of pocket deductibles and secondary insurance premiums.

Anticipate what you are going to be doing in retirement and factor that into your expenses. Planning on doing a lot of fishing? Then factor in the cost of  a fishing boat. Planning on doing a lot of traveling? Then factor in the cost of travel. Planning on taking up golf? Then factor in country club dues. Planning on buying a condo in Florida as a second home? Then factor in the mortgage costs.

Add up all of these projected new expenses and subtract them from your calculated future net retirement income. This will give you your future adjusted net disposable retirement income.

Is your future and current net income aligned?

Your goal is to be able to at least maintain your current lifestyle in retirement. So, you want to be sure that your current net disposable income matches your future adjusted net disposable retirement income. You’ll need to make one more calculation to determine if you are on target by adjusting for future inflation. It is not possible to know exactly what the inflation rate will be in the future since the inflation rate has historically fluctuated widely from one year to another. But use 3% annual inflation as an average. Take the current net disposable income that you calculated in (1) above and plug that into an on-line forward flat rate inflation calculator. This will tell you what your current net disposable income will be in retirement year dollars. If this number is lower than what you calculated your future net disposable retirement income to be in (3) above, then you are in great shape and you are going to have extra spending money in retirement. On the other hand, if this number is higher than your calculated future net disposable retirement income, then you are either going to have to save more for retirement or postpone your retirement date in order to maintain your current lifestyle.

Once your retirement savings plan results in equilibration between your current net disposable income and your calculated future net disposable retirement income, then you are in a perfect position for retirement. In the year that you retire, you want your current net disposable income to be aligned with your net disposable retirement income and that give you power. Power to continue to work because you want to work and not because you have to work. Power to change to a different lower-paying job that you always wanted to do but couldn’t afford to do in the past. Power to trade work for travel/hobbies/family. Retirement then becomes freedom.

April 10, 2018

Physician Finances

Making Your Inpatient Practice More Efficient

In my last post, I showed how Medicare reimburses at $36 per work RVU but most physicians get paid $45 – 70 per wRVU. In order to get from $36 to, say, $55 per wRVU, the physician has to either find ways to supplement their income from non-clinical revenue sources or they have to increase their efficiency so as to reduce the proportion of their revenue that goes toward overhead expense. Alternatively, by increasing efficiency, the physician can maintain a high-volume practice and still make a competitive income, even at $36/wRVU. Here are some general ways to enhance revenue, from the perspective of the average consultant:

  1. A consult is a gift. All during residency and fellowship, physicians in training tried to get out of seeing consults – more consults means more work. As soon as that physician enters the real world of being an attending, those consults that they previously sought to avoid now become a critical portion of their revenue. When a primary care physician or hospitalists chooses you to request a consult from, they are now doing you a favor and you need to treat that consult as such. If you want to get consulted on the higher paying commercially-insured patient, you have to be grateful for all consults, regardless of insurance. A few years ago, a specialist that I know started to refuse to see inpatient consults if the patient was uninsured or had Medicaid; very shortly thereafter, the hospitalists stopped consulting him altogether.
  2. Avoiding a consult is death. In our current fee-for-service world, physicians depend on consults and if the physician tries to get out of seeing a consult several bad things happen. First, you get out of an opportunity to get paid, in other words, you are relinquishing income. Second, the physician asking for your consultation needs help and if you don’t give it to him/her, then he/she is going to find another consultant to see future consults.
  3. Availability usually trumps ability. The attending physician requesting a consult needs help in the form of your opinion or the procedure that you provide. In the hospital, that attending physician is under enormous pressure to get that patient out of the hospital as soon as possible and that means engaging consultants who will see that patient as soon as possible. If you are the world’s most famous pulmonologist and you can’t see an inpatient for another 24-36 hours, then the attending physicians are going to consult the average (or below average) pulmonologist who can see their patient that same day, every time.
  4. Don’t sign-off too quickly. Most residents and fellows were motivated by trying to keep their consult census as low as possible – smaller consult list, less work. In academic medicine, where most of these residents/fellows trained, the academic attending physician is also incentivized to keep their consult census as low as possible since there is often less direct association between clinical volume and income. In real life, however, by signing off, you are relinquishing return visit bills. Don’t get me wrong, I’m not suggesting that you should keep seeing follow-up visits as a consultant just so you can increase your billing. However, you can often provide important on-going input into the patient’s management, follow-up test results and cultures, and help to coordinate post-hospital care. Moreover, you can see hospital follow ups very fast and that can be converted in to a significant number of wRVUs per hour. Inpatient medicine is a team effort and as long as you are needed as a member of that team, then stay on the team.
  5. Make the EMR work for you. Most physicians learn how to use the electronic medical record initially and then don’t really keep up with new developments in the EMR. Consequently, they do not maintain optimal efficiency with its use and capabilities. Spending 5-10 hours initially developing templates and order sets can save dozens of hours over the course of a year. A couple of hours a year spent training in program updates can save more hours. Our state medical boards require physicians to have a specified number of hours of continuing medical education (CME), a medical practice or hospital would be wise to require a specified number of hours of continuing EMR education, also.
  6. LTACHs are lucrative. In most residency programs, residents are not involved in the primary management of patients in long-term acute care hospitals, or LTACHs. Even if there is an LTACH on-site in one of the hospitals that residents work in, it is not practical for a resident to care for an LTACH patient – when there are ACGME mandated limits to the number of patients the resident can take care of, you don’t want to have LTACH patients on that census because LTACH patients are in the hospital for about 4 weeks and so one LTACH patient on a resident’s service can profoundly limit the total number of patients that the resident cares for over the course of a 1-month rotation, thus limiting their training experience. Once that resident becomes an attending physician, however, those LTACH patients require relatively little day-to-day effort compared to regular acute care hospital patients and consequently, the physician can see more of them in the course of a day and get paid more.
  7. Procedures are lucrative. For pulmonologists, reading pulmonary function tests pays better than any other clinical activity. Interpreting EKGs, cardiac echos, and other tests in the hospital can be a very effective way of improving one’s income with minimal time investment. I would be bored out of my mind if the only thing I did all day was read PFTs but from a business standpoint, it is something that you don’t want to give up. Based on my own practice patterns, here is what I estimate the hourly wRVUs I can generate doing various pulmonary/critical care activities (assuming reimbursement at $36 per wRVU):
  8. Procedures are not always lucrative. A physician can read pulmonary function tests or EKGs really quick, even using an inefficient PFT or EKG reporting system. However, other procedures can take time and if you spend too much time on those procedures, you end up losing money. We often refer to specialties such as critical care medicine and emergency medicine as specialties that do not require a ramp-up of hospital subsidy for new physicians because the ER doctor, hospitalist, or ICU doctor has a full census of patients the first day they walk into the unit. However, what is often missed is that the more experienced the physician is, the faster he/she can complete the procedures that are inherent in ER or ICU or hospitalist practice. The reality is that for bedside procedures to be lucrative, the physician has to be fast – in this case, fast means you have to be good at the procedure and good means you have to have a lot of experiences with the procedure. Here is my analysis of how long you should take to do various procedures from a financial viability standpoint assuming either $36/wRUV (Medicare reimbursement per wRVU) or $67/wRVU (average income per wRVU for a U.S. critical care physician):
  9. Medical directorships can help. As a physician becomes more seasoned and senior, his/her experience becomes valued by the hospital and that experience can be parlayed into hospital medical directorships. On a per-hour basis, a very busy physician can make more money seeing patients and doing procedures than they can being a medical director. However, the medical directorship income is predictable and constant and can play a stabilizing force in the physician’s portfolio of income-producing activities, much like bonds do in one’s investment portfolio.
  10. Look for minimal effort supplementations. Often, there will be an anticoagulation clinic, a wound clinic doing hyperbaric oxygen treatments, a stress cardiac stress lab or a cardiac rehabilitation clinic in the hospital building. These services often require a physician to be on-site for emergency purposes. If you are in the hospital throughout the day, negotiate coverage fees to provide that physician availability.
  11. Hospital subsidy is usually necessary. There is a very good reason that most physicians straight out of residency training are now employed by hospitals – it is hard to make a living on billings alone. As an example, see my previous post on palliative care medicine. For specialities such as palliative medicine and hospitalist medicine, it is nearly impossible to earn a competitive income without subsidy. Negotiating the best subsidy usually means being able to see your services as beneficial to metrics that the hospital values, like hospital length of stay, mortality rate, and readmission rate.
  12. Monitor operating room efficiency metrics. For surgeons, income is proportionate to surgical volume. Two factors that directly impact volume are on-time first starts and room turnover time. If you have an operating room for a 4-hour surgical block time and you primarily do a surgery that takes 30 minutes and the OR usually start a half hour late, then you’ve lost one surgery per block time. If the room turnover time drops from 45 minutes to 30 minutes, then you can do one additional surgery per block time. Sometimes, improving on-time first starts and room turnover time requires changing OR staff habits but sometimes it requires changing the surgeon’s habits.
  13. Don’t forget to bill. If you as a group of physicians how often they thing they forget to fill out a bill for inpatient services, most of them will probably say < 1%. The reality is that most physicians will fail to bill 5 – 8% of their inpatient visits unless charge entry is integrated into the inpatient electronic medical record so that the physician can’t enter their encounter or procedure notes without entering their billing information. But hospital EMRs are purchased by the hospital with the hospital’s interest in mind and physician billing is not a priority for the hospital, especially when the physicians are not employed by the hospital. Developing strategies to ensure that every service gets billed is hard and what works best for one physician does not necessarily work best for another physician.

February 26, 2018

Medical Economics Physician Finances

The High Cost Of Physician Billing

When I open a newspaper, I expect to get depressed about the bad news that fills the paper. But when I open a medical journal, I don’t expect to get depressed, I expect to get enlightened about new methods, awed at new technological advances, and inspired by human stories… today, though, I just got more depressed.

An article in this week’s JAMA looked at the administrative cost of physician billing at Duke University Medical Center. To start, the authors mapped the entire billing process – it takes 12 different steps and involves many different people along the way. The results confirmed what most of us intuitively already knew: billing for medical services is costly and the time cost to the physician is excessive. The costs ranged from $20.49 to pay for the billing costs of a primary care physician visit to $215.10 to pay the billing costs of an inpatient surgery, and this was just for the physician services.

On the surface, this might seem like the costs to bill a primary care outpatient office visit are pretty low but the problem is that the primary care physician gets paid a very small amount for that visit, compared to, for example, an inpatient surgical procedure. So in many ways, it is more useful to look at the percent of the revenue that the physician gets paid for a service that has to go for billing expenses. The results are astounding. Fully 25% of what an emergency room physician gets paid goes toward paying for the cost of billing that service. For that primary care office visit, 15% goes toward coving billing costs.

Although revenue cycle staff do a lot of the billing work, disturbingly, a lot of the time of billing is done by physicians. So, for example, for that primary care office visit or for the ER visit, the physician spends 3 minutes preparing and submitting the bill. The amount of physician time to bill a general inpatient stay is 5 minutes. For either an outpatient or inpatient surgery, the physician spends 15 minutes doing the billing.

These results are likely conservative – Duke is a big organization with a robust electronic medical record system and most smaller physician practices are probably less efficient with more costly billing. The electronic medical record was supposed to simplify administrative tasks such as billing but it hasn’t. This study does not address why but I have some ideas why costs have risen in the era of the EMR:

  1. Transferring coding responsibilities to the physician. In the old days of paper billing cards, you kept a list of a dozen of the main diagnoses that you most commonly used at the bottom of the card. You would check a diagnosis and a level of service and you were done. The billing staff would do all of the data entry and file the bill. Now, the initial data entry is all done by the physician and so it takes more time for the doctor to enter an electronic charge than it used to to enter a paper charge.
  2. ICD-10. This was hyped as a more exact way of tracking diseases and conditions. It takes considerably more time to locate and select the exact code for a patient in ICD-10 than it did in ICD-9. The additional complexity may give more exactness to the diagnosis for billing purposes but this has zero impact on the actual care that the patient receives and only adds time and effort for the physician.
  3. Increased insurance scrutiny. Insurance companies may a living by denying charges. 20 years ago, I spoke with an employee of one of the largest health insurance companies in the country and she said that she was told to deny every 10th claim randomly because most of the time, the physician would not want to take the time and effort to appeal the denial and those denials translated into greater corporate profits. Although insurance companies are not so egregious now, they still pose time requirements on physicians for billing and approval. For example, today, I had to do 2 “peer-to-peer” appeals for tests that I ordered that were denied by the insurance companies. One was to get authorization for a cardiac echo in a patient who had a history of myocardial infarction who I was consulted on for shortness of breath – I have no idea why they denied it and the peer physician that they had me talk to approved it right away… but the phone call with multiple layers of phone tree recordings and time being put on hold took 6 minutes of my time. The other was for a chest CT – it was the third time I had called to appeal the insurance company’s denial. The first time was in November and it was approved without a fuss (but with a 4 minute phone call). The second time was in January because the patient got called out of the country on business unexpectedly and since the prior authorization approval was time-limited and the time expired, it had to be renewed (another 5 minutes phone call). Today’s was because he had to leave to go out of state on a family emergency this month and the prior authorization approval again expired so I had to renew it a third time (another 4 minute phone call). Insurance companies make a living by finding ways to not pay for medical services – if the physician really believes that they are needed, the physician pays the price in denial appeal time.
  4. Stupid rules. Nowhere is this more evident than in the observation status versus regular admission status designation for inpatient hospital stays. The coding and documentation requirements for billing these are immense and despite our best efforts, insurance companies will often contest patients being designated as inpatients unless they have spent 2 midnights in the hospital (less than 2 midnights, and they are considered outpatients). Another rule that insurance companies use is the “inpatient only” surgical procedure. If a surgery is classified as one that can only be performed on a patient if they are an inpatient, and the surgeon accidentally puts an observation status admission order (thinking that the patient will recover and only need 1 rather than 2 midnights of hospital stay), then the insurance company can deny the bill and doesn’t have to pay for the surgery. The amount of time that physicians and billing staff have to expend to document all of the nuances of observation status and inpatient only procedure status is huge and not a second of it impacts the actual medical care that the patient gets.

Healthcare economists are searching for ways to reduce the costs of American medicine. Currently, we have by far and away the most expensive medical care in the world, yet the quality of care that our citizens receive on average is lower than most other industrialized countries. By simplifying our billing process and doing away with senseless coding and documentation requirements, our overall costs will go down and physicians will have more time to spend taking care of patients rather than billing for the care that they provide. The editorial that accompanied this week’s JAMA article stated that in the U.S., we spend about $500 billion in medical billing every year. You could give a lot of flu shots, do a lot of screening colonoscopies, and buy a lot of blood pressure medications for $500 billion a year.

February 22, 2018

Physician Finances

How To Bonus Physicians

You remember when your grandfather used to say to you: “You get what you pay for”? Well, when it comes to paying physicians, he was right. Money is the great motivator and when you give someone a bonus, you do it to motivate a specific behavior. There are all sorts of ways to make bonus incentive plans for physicians and over the past 30 years, I’ve seen a lot of them – either from personal experience or from the experiences of other physicians around me. There is not a single best bonus plan for all physicians at all times – the best bonus plan is the one that rewards the behavior you want rewarded at that particular time. Here is my take on different bonus plans.

What Are You Going To Bonus?

(1) No Bonus Plan At All

This is the idea around socialism. On the surface, it sounds aspirational and would be the ultimate expression of egalitarianism. But in reality, it goes against 200,000 years of human evolution. Countries that base their national economies on socialism tend to either fall behind other countries in productivity and personal income or they convert to capitalism. On a more modest scale, communes tend to fade away after a few years as their members realize that they can do better for themselves outside of a collective ownership community.

Physicians in particular make poor socialists (at least when it comes to their own compensation plans). We are driven to succeed from the time we were in high school – otherwise, we never would have made it to medical school in the first place. Highly productive people want to get rewarded for being highly productive. When you put physicians in an environment where they no longer are rewarded more for working harder, guess what? They stop working harder.

I’ve seen this happen in several practices – the physicians decide to eliminate a productivity-based bonus plan for altruistic reasons and shortly thereafter, the most productive physicians leave and the overall productivity of the practice drops. The practice then either has to cut expenses or they run deficits. Many academic medical practices work this way as a means to avoid disenfranchising those physicians involved in research and education. Many government practices also work this way and it can result in inefficiency and backlogs since there is no incentive to work more efficiently or longer hours.

The bottom line is that adopting no bonus plan is not a solution for practice longevity. The only times these are useful is in the start-up years for young physicians who need a period of guaranteed salary to establish their practice and in practices where you are paying physicians by increments of time, such as by the hour or by the shift.

(2) Income-Based Bonus Plans 

These plans give the physician a base salary and then a periodic bonus based on a percent of their collections. The advantage is that it is simple and straightforward. If you are in a solo practice, this is the reality of your income. It is the so-called “eat what you kill” model of practice. However, in a group practice, this can be dangerous because it promotes picking patients based on that patient’s insurance plan. There is inevitably 1 physician who figures out how to game the system and only sees patients in the clinic location with the best payer mix or figures out how to divert all of the Medicaid patients to one of the junior members of the group.

(3) RVU-Based Productivity Bonus Plans

I know many physicians who lament for the days before the invention of the RVU. But to my view, that is like lamenting for the days before the United States used the dollar for currency. When you are paying a physician by the RVU, you are paying them for the work they do, rather than their payer mix, etc. The downside of RVU-based productivity models is that it may not necessarily align with the group’s success – you can pay a physician to work a lot but that work may not be translating into the dollars it takes to fuel the group if the physician is primarily seeing uninsured patients or patients with Medicaid. If you do decide to go with an RVU-based incentive plan, then you have to decide whether you are going to bonus for work RUVs or total RVUs. This becomes important when different activities in the group have different degrees of overhead expense which translates to different work RVU:total RVU ratios. For example the work:total RVU ratio for new inpatient admissions averages 0.67 (because of less overhead expense for inpatient care) whereas the work:total RVU ratio for new outpatients averages 0.47 (because of more overhead expense in ambulatory practice). In a practice with a blend of inpatient care, outpatient care, and procedures, the work RVU is usually the safer metric to use.

(4) Quality Metric-Based Bonus Plans

As a hospital medical director, I like quality based incentive plans because they can promote things like reducing readmission rates, improving patient satisfaction scores, and improving medical record documentation. But these plans not only help the hospital, they can also improve the reputation of the group practice in the community as well as improve the position of the group when it comes to negotiating reimbursement rates from commercial health insurance companies. These plans can be particularly useful in situations where the physician cannot control patient volume, such as the attending physician on an inpatient teaching service subject to an ACGME-legislated patient census cap – in this situation, no matter how many hours the physician works or how efficient the physician is, there is a defined limit to the number of RVUs that physician can generate.

(5) Shared Savings-Based Bonus Plans

The best current example of this model is the accountable care organization. In his model, the physician reduces the cost of care for a group of patients over the course of a year while still meeting specified quality standards and then at the end of the year, they get a certain percentage of the total amount of money saved that year. For this to work, there has to be complete buy-in by the physicians because you are asking them to bill less (translate: earn less) on the promise that they will get a bonus at the end of the year. If it works, then the physicians are getting paid for value rather than getting paid for volume. But at the end of the year, if the savings don’t meet expectations, then there may be little or no bonuses for those groups of physicians that looked for ways to reduce their billable income and then those physicians get discouraged that their income is low and leave for other models of practice.

Setting The Base Salary

Once you decide on what you want to bonus, you have to decide whether you want a high base salary with a small bonus or a low base salary with a large bonus. The higher the base salary, the more the compensation model starts resembling socialism where as the lower the base salary, the more the compensation model starts to look like the physicians are working on commission. You must strike a balance between productivity complacency that comes with a high base salary and the personal financial uncertainty that comes with a low base salary. There is not a single best base salary:bonus ratio – it will vary depending on the specialty and the unique circumstances of the practice location. For example, you will want a highly compensated proceduralist, such as a Mohs surgeon or a cataract surgeon, to have a high volume of procedures so you may want these physicians to have a  lower (relatively speaking) base salary with a higher bonus potential to incentivize them to do more procedures. On the other hand, a physician whose productivity is not based on factors that he/she can control (such as an emergency room physician) will likely be better suited for a higher (relatively speaking) base salary.

In order to be competitive, you have to be careful. Lets take two hypothetical practice groups: hospitalist group A that has a relatively high base salary and then gets bonused when the daily RVUs exceed 35 and hospitalist group B that has a lower base salary but the bonuses start when the daily RVUs exceed 25. The invisible hand of capitalism will guide the most efficient and productive  hospitalists (which are usually the most senior and experienced hospitalists) to group B because they will figure out that at the end of the year, they will make more money for being more efficient and seeing more patients. Group A will tend to attract younger physicians and those that are less efficient in their practices.

Practical Tips:

  1. Make the bonus plan simple. Avoid having too many variables in the bonus plan – if there are more than 4 different metrics, then the plan becomes confusing and it will not be clear what you are really trying to incentivize.
  2. Don’t make the bonus plan too simple. If the only thing you reward is lots of RVUs, you’ll get lots of RVUs at a cost of quality. Consider prorating RVU productivity based on quality outcomes, such as patient satisfaction.
  3. Make it realistically achievable. A bonus plan based on a family physician billing 10,000 RVUs won’t work because it is nearly impossible for for a family physician to bill that much. A bonus plan based on improving patient satisfaction from the 30th percentile of a benchmark to the 90th percentile of the benchmark will fail because it is in general simply not possible to make that big of a jump in that short of a time period.
  4. Align the bonus plan with the local reimbursement model. In a pure fee-for-service payment system, you are going to want to bonus volume. In an accountable care organization, you are going to want to bonus value.
  5. Set the base salary at the appropriate level for the specific type of physician specialty and practice.
  6. Think really hard about unintended consequences to what you are bonusing. They are always there and you need to anticipate them. If you only bonus RVUs, you’ll never get anyone to work the night shift (when there are fewer billable encounters).
  7. Develop a special provision for new physicians. They are not going to get up to the level of productivity of a more experienced physician in the first year or two; however, you still want to motivate their behavior. One way of doing this is to pay them the higher of either a guaranteed salary (with no bonus) that is higher than the base salary of the more experienced physicians or the low base salary with productivity bonus potential that you pay the more experienced physicians.
  8. Set the bonus distribution time correctly. It is hard for a physician to wait 12 months for a year-end bonus and by the time he/she gets the bonus, the work that they did to earn it is often out of memory. It is better to bonus on shorter intervals, such as every 3, 4 or 6 months.
  9. Be willing to change the bonus system next year. If you find that the metrics that you selected are unachievable or too easily achievable, then you will need to adjust those metrics. Also, the medical economics environment will change from year to year and so your bonus system will need to adapt accordingly.

When you have a bonus plan, not all of the physicians are going to be equally motivated by the plan. Some physicians will rather work fewer hours or see fewer patients per hour and for them, these lifestyle implications are more valuable than the extra income they would get from a productivity bonus. But you don’t want to hold back your highly productive physicians by not having an effective bonus plan that helps fuel their productivity.

August 3, 2017

Hospital Finances Physician Finances

How To Write A Pro Forma For A Doctor

When a medical practice wants to hire a new physician, they will often turn to the hospital to ask for financial support. The hospital gets lots of these kind of requests – more than they can afford to pay for. For the medical practice to get what it wants, you have to know what the hospital wants and how to write a compelling pro forma. You want to show that the hospital’s investment will bear fruit over the next several years.

The pro forma is a statement of projected income and expense for a new physician, service line, or piece of equipment. What the hospital is going to want to see is:

  1. Will the new physician bring new business to the hospital?
  2. Is the new physician needed to provide necessary services that would falter without the new physician?
  3. What type of ramp-up period will the physician require in order to be maximally productive?

To create the compelling pro forma, there are a couple of caveats. First, be concise. If the pro forma is longer than 1 or 2 pages, it is not going to be read in detail. Second, don’t make it excessively technical. The hospital chief financial officer and executive director are usually not physicians and even though they will be knowledgable about medical issues, you need to be sure that you are writing the pro forma using words that they will understand. Third, be realistic in your projections. The people who run the business of a hospital are used to over-exaggerated claims of future programs and if they find you are overestimating income in one section, they won’t believe anything in the entire proposal. Fourth, don’t make your reader have to work to figure out what you are trying to say. Be sure that your sections and tables are clearly labeled so that even with just a brief glance, someone can find the information that they want and understand exactly what you are saying.

To create the compelling pro forma, break it into 5 sections (in order): introduction, revenue, costs, hospital support needed and summary. Your goal is to “Tell them what you are going to tell them, tell it to them, then tell them what you just told them”. The introduction is telling them what you are going to tell them; the revenue, cost, and hospital support needed is what you are telling them; and the summary is telling them what you just told them.

Introduction. Concisely say why this physician or position is needed in your hospital and what the net value will be of the physician/position. Notice that I used value and not profit. Although the hospital is going to be interested in increasing income, sometimes the value is in other measures, such as length of stay, patient satisfaction, mortality, or public relations. The value will depend on the particular specialty and circumstance. For example, the value of a joint replacement surgeon will be in improving lucrative elective inpatient surgical admissions but the value of a palliative care physician will be in improving patient satisfaction and length of stay. The introduction should be short – no more than 2-3 sentences – just enough to remind the reader why this particular physician/position is important.

Revenue. As a person who reads a lot of pro formas, I like to have revenue up front before expense in most situations. This allows me to see financial value to set the stage before I hear about how much it will cost me. Most revenue projections should extend for 3-5 years, depending on the specialty. Physicians who require a longer ramp-up time to get fully busy need a 5-year projection (for example, a urologist straight out of residency who will need to build a referral base and start of with longer OR times per surgical case). On the other hand, a physician who will be busy from the first day of work may only need a 3-year projection (for example, an experienced radiologist who will only need a year or two to hit peak operational efficiency after he/she gets used to the workflow in your hospital). If you can base projected revenue off that of an existing physician, this will improve the perception of validity of the compelling pro forma because you have an internal precedent.

The best medium of exchange to use in revenue projections is the RVU. For some specialties, it may be the work RUV and in others, it may be the total RVU. For example, if the physician will be hiring his/her own office staff, paying for a billing company, and renting office space, then the total RVU is probably better. On the other hand, if the physician will be using hospital staff for scheduling, having the hospital do the billing, and using office space provided by the hospital, then the work RVU is probably better.

Next, you’ll need to project how much, on average, the doctor will get paid per RVU. If there is a physician in a similar practice in the hospital, then you can use his/her payer mix to come up with an average number of dollars per RVU to expect. Start with Medicare reimbursement per RVU – currently about $38/RVU. Adjust that number up if the doctor will be seeing patients who have higher paying private insurance and adjust that number down if the doctor will be seeing Medicaid or uninsured patients.

Lastly, project the number of patients the doctor will be seeing on a typical workday and then determine how many workdays that doctor will be working per year. Don’t forget to factor in vacations (usually 2-4 weeks per year, depending on the practice), CME time (up to 1 week per year), and holidays (there are typically 10 holidays per year but most years, at least 2 of those days fall on a weekend so 8 days is a good number to use). Also, don’t forget to factor in weekends which will vary from specialty to specialty. A general surgeon who working a weekend will usually have relatively little new income generated on that weekend since he/she will only be doing emergency add-on surgeries and their inpatient rounding will be on patients who they are already billing a global surgical fee for the entire hospital stay. On the other hand, a critical care physician will be generating just as much new revenue on a Sunday as he/she will on a Monday. In an academic medical center, not accurately accounting for weekends is one of the most important reasons why a physician’s actual financial performance ends up looking a lot different than was projected in the original pro forma. As an example, take 2 physicians in the same specialty, one has 33% clinical time (15 weeks of inpatient care) and one has 100% clinical time (45 weeks of inpatient care [after accounting for 7 weeks of vacation, CME, & holidays]). If weekend call is split equally among all physicians resulting in both physicians taking one weekend per month rounding on the inpatient service, then the physician with 33% clinical time will have a lot more than 30% of the number of RVUs as the 100% clinical time physician at the end of the year – in fact, it will be 40%, making it look like the 33% clinical FTE physician is knocking it out of the proverbial RVU park. If we assume that a physician generates 36 RVUs per day then:

Expense. Only include those expenses that are reasonable but make sure that you list all of the reasonable expenses. It is important to be consistent. If you are asking the hospital to subsidize a physician’s salary, then don’t include expenses for cell phones, journal subscriptions, and gas mileage for driving from the office to the hospital – unless the hospital covers those expenses for all physicians. Here are the expenses that I believe are reasonable:

  1. Salary
  2. Benefits
  3. Shift differential (eg, additional pay for doing night shifts)
  4. Malpractice premiums
  5. Cost of trainees (in many institutions, attending physicians have to pay for a portion of fellow salaries)
  6. “Taxes”, including Dean’s taxes and departmental taxes
  7. Business expenses including billing, compliance, legal, etc.
  8. Rent
  9. Office expenses (staff, equipment, supplies, answering service, electronic medical record, etc.)

This is where using the total RVU versus the work RVU as a basis for the income analysis becomes important – if the physician will personally be incurring all 9 of these expenses, then use the total RVU. On the other hand, if the physician only needs to cover his/her salary and benefits (and the hospital pays for everything else), then use the work RVU. If the physician will be covering salary, benefits, and malpractice, then use the work RVU + malpractice RVU. If you use the wrong number (eg, use the total RVU when you should be using the work RVU), then the hospital leadership will think that you are either dumb or devious – either way, they are not going to believe anything you tell them in the future.

Hospital support needed. This is the bottom line of what you are asking the hospital to pay to subsidize this particular physician. In its simplest form, this is the anticipated expense minus the anticipated revenue for each year. This will typically be highest in the first year out and then drop each subsequent year. For some specialties, it will eventually reach zero, if it is anticipated that the physician will eventually be self-sustaining once his/her practice matures. For some specialties (such as palliative medicine and hospitalists), hospital support will always be necessary, albeit at a lower amount than the first year of practice.

Summary. The hospital business leader has just spent 5 or 10 minutes scrutinizing your numbers to be sure that they are accurate and that you are not trying to take advantage of the hospital and then checking your work to be sure that the amount of dollars that the hospital is being asked to come up with is correct. In the summary section, you need to bring them back from their left-brain accounting mindset to their right-brain strategy mindset by reminding them why this particular physician brings net value to the organization. It will be similar to the introduction section but try to make it short: 1 or 2 sentences.

Your first pro forma will not be your last pro forma so it is important that you get it right the first time. If you do, then you will get the reputation as a fair and realistic planner so that when you submit your next pro forma, they will see you as a trustful partner rather than a deceitful adversary.

July 22, 2017

Hospital Finances Medical Education Physician Finances

The Conundrum Of Academic Release Time

It is that time of the year when department chairs and division directors come to the hospital administration asking for financial support for the upcoming year. Few specialties can be self-sufficient in an academic medical center so the hospital has to provide some amount of money to ensure that there is adequate physician staffing. Inherent in being an academic physician is the premise that you are not going to be seeing as many patients or doing as many surgeries as your colleagues in private practice because you are going to be spending part of your time doing academic activities: teaching, writing papers, developing a focused area of clinical expertise, and doing research. You also commit to directing part of your income to the college of medicine (“dean’s tax”) and the department/division (“academic expense”). For this, you are willing to make a little less than your private practice counterpart, but not too much less. Thus, the need for the subsidies from the hospital.

But the hospital wants to know that there is some value in the these subsidies. By and large, the funds are ultimately used for “academic release time”, that is the time that the physician spends doing those activities that are important to the academic mission of the medical center but are otherwise unfunded. Back in the 1980’s, unfunded academic release time was typically about 40% for a newly hired physician: the physician would do 6 months of inpatient service and see patients for a half-day in the clinic. By the 2000’s, that had dropped to about 20% and now 10-15% is more common for new physicians.

The problem with academic release time, is that if everyone gets it, it can become an entitlement and then it becomes next to impossible to take away without organizational disruption. So, our challenge is to find a way to ensure that physicians are accountable for that otherwise unfunded academic time that they have. In order to figure out how we can do that, lets start with a look at how several specialties in our medical center deal with unfunded academic time. For the purposes of simplicity, I am going to use “department” to mean either department or division.

Department #1. All physicians start at 100% clinical full time and then after they are practicing for months or years, they come up with specific proposals to acquire academic release time. These could include doing a hospital quality project, chairing a hospital/college committee, doing a clinical research study, taking on an administrative position, etc. The physician continues to get that academic release time as long as he/she continues to perform that particular non-clinical activity.

  • The problem: many of these physicians never have the initial time investment to get any kind of academic activities off the ground and so after several years, they often move to private practice jobs since there is nothing tethering them to the university.

Department #2. All physicians get some percentage of academic release time that is negotiated individually at the time of their initial appointment. The percentage varies from 10% to 20%. The purpose is to teach and obtain research funding. At this time, however, none of the physicians except the chair have research grants.

  • The problem: there is a lot of “release time envy” by those physicians who only negotiated 10% release time versus those with 15% or 20% release time since those with more release time are seen as having to work less but getting paid the same as those who have less release time.

Department #3. All physicians get 20% academic release time and that is maintained in perpetuity, regardless of what they do during that time. There is an annual review process with the chair and those physicians who lack any academic productivity are directed by the chair to do more.

  • The problem: in theory, this academic productivity would be tied to physician bonuses but the department has not had any money to give bonuses for 15 years. Therefore, there is little incentive for the physicians to do anything productive for 20% of their time.

Department #4. All physicians get 10% academic release time at the time of their initial appointment. If they don’t have any academic output to show for after 3-4 years, then their release time is eliminated and they become 100% clinical.

  • The problem: once you go 100% clinical, you can never go back. Eventually, a private practice job across town that will pay you more for the same amount of work looks pretty inviting.

Department #5. All physicians get 20% academic release time but they are expected to produce work RVUs at the 75th percentile of national benchmark during the 80% of their time that they are doing clinical activities. In this way, the physicians self-fund their own 20% academic release time.

  • The problem: you are really deceiving yourself by making yourself be way more productive than the average physician 4 days of the week so that you can have the 5th day to do academic stuff. The reality is that most physicians work at a pace of average productivity so inevitably, they end up doing clinical work on that 5th day to catch up. In other words, the physicians coast for 1 day to make up for sprinting the other 4 days. What you are in reality doing is asking the physicians to have average productivity 100% of the time; you are just wrapping it up differently.

Department #6. All physicians get 20% academic time. If a physician gets a paid administrative or teaching position, that 20% of time is eliminated.

  • The problem: you reward those physicians who do not take on administrative or teaching roles. Those physicians who do take on a paid administrative role have to do more work than everyone else and get paid the same. You discourage anyone from volunteering to take on paid teaching and administrative roles and you encourage your doctors to not do anything that might ultimately improve care within the hospital or bring academic notoriety to the college of medicine.

So what is the answer? Ultimately, what the academic medical center wants are those activities that bring research grant dollars, result in journal articles with the institution’s name on them, create teachers who attract the best medical students & residents, generate clinical expertise that attracts patient referrals, create an environment of high-quality clinical care, and result in efficient clinical care with a positive financial margin. What the doctors want is enough time to do academically creative things that will help them achieve whatever they define as an academically success for themselves. Here are two proposals:

Model #1:

This is essentially what department #1 does above. Namely, all new physicians start out at 100% clinical and then submit specific proposals to “buy down” academic release time. The goal would be for most physicians to buy down 15% academic release time by their 4th year of practice. Because there is not enough money in the system to pay for every single physician to have 15% non-clinical time, there would have to be some way of adjudicating the proposals to cull out those that do not provide institutional value or that have a low chance of success. This model works best for physicians who do shift work where it is relatively easy for them to flex up or down in the number of shifts that they do since they are relatively interchangeable with one another. Examples include hospitalists, anesthesiologists, and emergency medicine physicians.

Model #2:

This is a variation on the “ramp up” period that many surgeons have in their initial contract with the assumption that as they build experience and a build a referral base in their first 5 years of practice, they are more able to support their own salary so that they need a lot of hospital support their first year in practice but need progressively less each subsequent year. So, in model #2, a typical clinical-track physician faculty member would get 20% unfunded academic time in their first 2 years, 15% unfunded academic time in their third and fourth years, and then 10% unfunded academic time in their fifth and sixth year. The physician could maintain their 20% unfunded academic time after their second year by demonstrating that they have been good steward of that time by producing publications, obtaining grants, doing a lot of unpaid teaching activities, etc. After year six, a physician who has no academic output would be moved to a 100% clinical role. This model works best for physicians who are office-based or who rely on an individual referral base since increasing non-clinical release time after they have become established can be disruptive to patients by transferring his/her patients to other physicians in order to reduce the physician’s outpatient patient panel or by refusing some patients referred specifically to that physician. Examples include primary care physicians, surgical sub-specialists, and outpatient consultative specialists.

Ultimately, unfunded academic time should be used as an investment in junior physicians with the potential to become academically productive and to support those physicians who are doing academic or clinically unique activities that are vital to the success of the institution but that are otherwise unfunded. It is up to us to ensure that this unfunded time does not simply become an entitlement that allows the physicians to leave work at 2:00 on Friday afternoons or do fewer surgeries per week, just because they have an academic title in front of their name.

April 9, 2017

Medical Economics Physician Finances

Do Happy Doctors Make Less Money?

I was reading over the 2016 Medscape Physician Compensation Report and was struck by some of the results. Every year, Medscape does a survey of physicians about their income, job satisfaction, demographics, etc. Last year, 19,200 physicians, responded to the survey and it unveiled some curious results.

Perhaps not surprisingly, the 6 specialties with the highest incomes were:

  1. Orthopedics ($443,000)
  2. Cardiology ($410,000)
  3. Dermatology ($381,000)
  4. Gastroenterology ($380,000)
  5. Radiology ($375,000)
  6. Urology ($367,000)

Equally unsurprisingly, the 6 specialists with the lowest incomes were:

  1. Pediatrics ($204,000)
  2. Endocrinology ($206,000)
  3. Family medicine ($207,000)
  4. Infectious disease ($215,000)
  5. Allergy ($222,000)
  6. Internal medicine ($222,000)

The real surprise came in the responses to the question “Would you choose to go into medicine again?”. The physicians in specialties that were most likely to respond that if they could do it all over again, they’d still go into medicine as a career were:

  1. Family medicine (73%)
  2. Internal medicine (71%)
  3. Rheumatology (70%)
  4. Pulmonary (69%)
  5. Infectious disease (69%)
  6. Pediatrics (68%)

The the physicians in specialties that were least likely to go into medicine again if they had to do it all over again were:

  1. Plastic surgery (47%)
  2. Radiology (49%)
  3. Orthopedics (49%)
  4. Urology (51%)
  5. Dermatology (53%)
  6. General surgery (54%)

Notice anything striking? The physicians in the lowest paid specialties were most likely to choose a career in medicine if they were just starting out again whereas the physicians in the highest paid specialties were least likely to go into a career in medicine again.

I’ve been thinking about this and came up with a few possible explanations. First, it could be that the highest paid specialties are the most grueling and stressful leading to greater burn-out. Second, there could be career selection bias if medical students choose specialties based on projected income rather than what they are passionate about. Third, it could be that having more money makes you lament the fact that you don’t have very much time to enjoy it.

However, I’d like to think that there is a fourth explanation. The physicians who were most likely to say that they would choose medicine again were in specialties where there is temporal continuity of the doctor-patient relationship. By that I mean that those physicians tend to have patients that they take care of for years and even decades and develop long-standing bonds with those patients.

In my pulmonary practice, I have patients that I have managed their asthma for 25 years. Patients that I’ve seen regularly since placing airway stents 20 years ago. Patients who are the children of my patients from years past. These are people who when I look at the next day’s office schedule, I look forward to seeing them again. Over time, you become vested in a patient’s health, in their life, and in their family. It is one of the great satisfiers in medical practice.

In recent years, we have been under increased pressure to increase productivity. I’ve often been asked by business leaders to increase my new-to-return patient ratio by seeing more new patients and transferring return patients to advanced practice providers to see to see for follow-up visits. From a short-term revenue standpoint, this makes total sense, because those new patient visits pay better and have a lot of down-stream revenue to the health system. But in the long-term, it is the return patient visits that create the bonds that make physicians say, “If I had to do it all over again, I would”.

For doctors, money can’t buy you job satisfaction but maybe the doctor-patient relationship can.

January 14, 2017

Physician Finances Physician Retirement Planning

Planning For Retirement For Physicians Part 12: Overall Summary

This is the twelfth and last in a series of posts made in preparation for a presentation I will be making for physicians in fellowship training at an upcoming ACCP meeting. In this post, I’ll summarize the key points from the last 11 posts.

Retirement planning for physicians is different than for everyone else. You make a lot more money. You have a lot more educational debt. Because of how long you trained, you have less years to save for retirement. Because of your income, your children are not going to be eligible for financial aid in college. And you have different insurance needs. Here is my list of the 13 rules to invest by for your retirement.

Start saving for retirement as early as you can afford to. Compound interest is a beautiful thing and you need to make it work it’s wonders for you.

Know your tax rate. It is not your income tax bracket that is important, it is your effective income tax rate and these are very different numbers. You also need to know your capital gains tax rate and which types of income are susceptible to income tax versus capital gains tax. Also, realize that changes in tax laws and tax rates are inevitable and the rates today will very likely not be the rates when you retire.

Tax-deferred investments are almost always better in the long run. Financial advisors who tell you that you will be in a lower tax bracket when you retire and so you should invest in post-tax investments are wrong – your goal is to retire in the same or a higher tax bracket than you are in now. Tax-deferred investments outperform other types of retirement investments.

If you have access to a defined benefit pension plan, take it. We’ve all heard about defined benefit pension plans that went belly up during the great recession and many people got scared of these pension plans. But the reality is that all investments went belly up during the recession. Unlike a blue collar worker or high school teacher for who the pension plan may be the only retirement plan that they have, you will have a lot of additional options and a defined pension plan is a fantastic component of a well-diversified retirement portfolio.

Investment priority listSet a priority list for retirement investment options. Each different plan has different tax implications and some are going to be better than others in the long haul. Employer-matched 401(k) or 403(b) plans are a no-brainer because the you can basically double your money from the outset. 457 plans have an advantage of no penalties for early withdrawal compared to 401(k) and 403(b) plans. If you are at a university, you may be able to invest in BOTH a 457 and a 403(b) plan. Once you become eligible for a 415(m) plan, you will likely have to make a one-time irrevocable decision about whether to contribute to it and how much to contribute to it – I recommend you choose to contribute the maximum percentage of your salary that you can; even if you can’t afford to do that now, you can always reduce your 403(b)/457 contributions for a few years until you are financially able to do both the 415(m) and your other tax-deferred investments. If you have self-employment income (from consulting, etc.), then open an SEP and put the maximum contributions that you can into it. Every year, put money into a traditional IRA and then immediately convert it into a Roth IRA – this gives you additional diversification in the types of retirement accounts that you have. After you have done all of that, then start putting retirement savings into regular investment accounts (i.e., those made up from post-income tax money). Don’t put money in a traditional IRA unless you are going to convert it into a Roth IRA.

Buy term life insurance.  But only buy as much as you need during the time in your life when other people who depend on you need it.

Buy a $1 million umbrella insurance policy. Remember, as a physician, you have a big red bull’s eye on your back that every personal injury attorney in the United States can see.

Seek no-load mutual funds with low expense ratios. The easiest options will be index funds.

Pay off your student loans on time but don’t try to pay them off too early. Being debt-free is always desirable but if you are careful with your personal budgeting and finances, then you will be better off contributing to a tax-deferred retirement plan than making additional early payments on your student loans.

If you use a financial advisor, pay him/her by the hour. Avoid using financial advisors who get paid by investing your money. No matter what they say, they are going to be motivated by making as much money off of your investments as they can. By paying by the hour, you avoid the conflict of interest that comes with getting advice from advisors who work on commission. Some investment companies (such as TIAA-CREF and Vanguard) will have free financial counseling by advisors who are not on commission, take advantage of free advice that comes without a conflict of interest.

For your children’s college savings, open a 529 plan and make regular monthly contributions to it. The tax advantages of 529 plans are huge and the control you have over the account puts these plans far ahead of other college savings options.

Diversification is the foundation for a strong retirement portfolio. Know the right percentage of stocks versus bonds in your portfolio for your age. Your goal is to have the optimal balance between risk and returns – when you are younger, take greater risks in order to get greater long-term returns – when you are older, take less risks in order to get more predictable short-term returns. Don’t forget that a defined benefit pension plan is the ultimate in predictable returns and this gives you a great foundation for portfolio diversification.

Above all, realize that you can be your retirement fund’s best friend or its worst enemy. Knowledge and patience are your most powerful tools in investment for retirement. If you try to beat the market, you most likely won’t since even professional stock analysts usually don’t. You need to make a long-term plan and stick with it. When the stock market crashes and everyone is in a panic, that’s the time for you to put a little extra into your retirement funds rather than pull money out of stocks because even though stock markets go down, they always eventually come back up and as a physician, you are going to have a secure enough job and high enough income to weather economic declines compared to people in just about any other profession.

September 7, 2016

Physician Finances Physician Retirement Planning

Planning For Retirement For Physicians Part 11: State Teacher’s Retirement System, Yes Or No?

This is the eleventh in a series of posts made in preparation for a presentation I will be making for physicians in fellowship training at an upcoming ACCP meeting. In this post, I’ll be covering the pros and cons of state teacher’s retirement systems. This post will mainly apply to those physicians pursuing an academic career at a university.

Most states have a special pension program for teachers and university professors, including physicians who work at universities. In Ohio, we have STRS, the State Teacher’s Retirement System. Although each state’s teachers’ retirement program will be different, I’m going to discuss Ohio’s STRS. If you work at a university in a different state, you’ll need to be familiar with the specifics of your own state’s system to decide if it is right for you.

In Ohio, STRS is currently financially healthy but that is not currently the case for every state. During the recent great recession, most pension plans really suffered and lost a lot of their value. But they still needed to pay out a fixed amount in pension payments every year. So Ohio STRS, like many other state teacher’s retirement systems, came dangerously close to having projected future liabilities exceed projected future income. This made state legislators and taxpayers nervous since they did not want to have to bail STRS out with taxpayer money. It also made new physician faculty nervous since they were worried that they might end up putting money into STRS and not getting it back out again once they retired. Now that the recession is over, STRS is healthy again but it does illustrate that a pension is an investment and like any other investment, it has risk. Its just that the risk is relatively low compared to most of the other things you can invest in.

One thing to keep in mind about Ohio STRS: it is a substitute for Social Security. In other words, you will not have Social Security payroll tax taken out and consequently, you will not be getting Social Security checks when you turn 65 or 70 if you are a teacher in Ohio. If you have other income, for example, you worked enough years and contributed to Social Security before becoming employed at a university, or maybe as a professor, you have some outside income from consulting, etc. that is subject to Social Security payroll tax, then you may be eligible for Social Security benefits in addition to your STRS pension benefits in retirement. However, the federal government will look at the amount that you get from your STRS pension and your Social Security monthly payments will be reduced, fairly drastically. In my case, because of my work history, I’ll have STRS retirement benefits and will be eligible for Social Security benefits. But my annual Social Security benefits will not even be enough to make 4 months’ worth of mortgage payments.  Bottom line, if you have STRS, don’t count on much (or maybe anything) from Social Security.

When we first become employed as faculty members in Ohio, we have some irrevocable decisions to make. The first is whether to participate in STRS or in the “alternative retirement plan” or ARP. In the ARP, you can put your money into an investment of your own choosing, a lot like a 403(b) or 457 plan. When you take the money out in retirement, you can take it out however you want but when you have taken it all out, it is gone. So, unless you have other investments, you could find yourself at age 70 or 80 and broke with no income.

If you decide to go into STRS as opposed to the ARP, then you have to decide whether to do the “defined contribution plan” or the “defined benefit plan”. For details about the differences between these, refer to the 2nd in this series of posts. The vast majority of physician faculty will choose the defined benefit plan with the result that you (or your surviving spouse if you die) will get a fixed monthly income for the rest of your life. My father was a physician and university professor who died when I was in college – STRS helped support me in my last year of college and in medical school and I am eternally grateful for that support.

There are federal contribution limits for STRS that are currently set at $265,000. That means that you can only contribute to STRS up to that amount of salary and anything over $265,000 needs some other retirement investment option. For many universities, that will be a 415(m) plan that will kick in if you make more than $265,000 per year. The 415(m) plan will typically be with an investment company, such as TIAA-CREF, and it is not with STRS.

If you go the defined benefit route, then you do not get the maximum benefit until you have a certain number of years of service. That used to be 30 but when the recession hit, the number in Ohio was increased to 35. Therefore, if you leave academics to go into private practice, you will not get the maximum retirement benefit.

With any defined benefit pension plan, you are, in essence, taking a gamble that you will out-live other people in your age range and ensuring that no matter how long you live, you’ll always have at least something to live off of. As physicians, there are two variables that make us different than most other teachers in STRS. First, the average teacher starts his or her career after completing their master’s degree at about age 23 or 24. The average physician does not start his or her career as a professor until after completing residency or fellowship between the ages of 27 to 31. Since the years of service to get full retirement benefits in Ohio is 35 years, the average teacher will be eligible to retire at age 57 whereas the average physician with a 3-year residency will need to be age 62 (although in some residencies, you can start contributing to STRS during residency and this will lower the retirement age). Therefore, a physician will typically have a shorter life in retirement to fund than the average teacher. On the other hand, physicians tend to have healthy habits: we have access to good preventive medicine, we rarely smoke, and we usually exercise and eat right. So we hopefully can live to an older age than the average American.

One other aspect of STRS to be aware of is where the contributions come from. There is an “employee contribution” of 14% to STRS and also a “university contribution” of 14% to STRS. On the surface, it looks like the State of Ohio and consequently the Ohio taxpayers are funding university physicians’ retirement accounts to the tune of 14% of their salary. BUT, the Ohio State University, like most other universities, gets the funds to pay for the “university contribution” from the physician practice plans and not from state government. Therefore, in essence, we the physicians fund the “employee contribution” by a 14% reduction in our gross salary and we also fund the “university contribution” by transferring the equivalent of 14% of our salary from our clinical practice income to the university. Thus in reality, the physicians are paying for the entire 28% STRS contribution and the taxpayers of Ohio pay nothing.

STRS v ARPSo, should you choose STRS or the ARP? If you think (like I do) that you are going to live a long, long time in retirement, then having a fixed income that you can count on every year is an advantage but if you think you are only going to make it 5 or 10 years after you retire, the ARP is the better option. STRS has the ability to contract with health insurance companies for good group prices on health insurance policies and this can be a plus if you are going to retire before you are eligible for Medicare; no one knows if “Obamacare” will be repealed by politicians in the future so no one really knows if health insurance exchanges will continue to be available in the future – having the confidence that you can get access to affordable health insurance no matter what happens in the future can be a plus. If you think you are going to stay in academic medicine for your whole career, then STRS is a good option but if you think you may leave to go into private practice after a few years, then the ARP is the better option. If you are a control freak and you can’t stand someone else overseeing your investment, then the ARP is better for you since STRS will make all of the investment decisions regarding your retirement account. Lastly, if you are risk adverse, go with STRS – even though STRS (like all investments) has risk, in the long-run, that risk is a lot less than putting your money in the stock market yourself.

So, what is a new faculty member to do? My own advice is that if you have access to a defined benefit pension plan (such as STRS) as one component of a diversified retirement portfolio, do it. As an academic physician, you are going to have a lot of additional investment options including a 403(b), 457, and a converted Roth IRA that will give you that diversification. You may not have Social Security. Having the relative security of a fixed monthly STRS pension for the rest of your life will allow you to be more aggressive in your other retirement investments by not needing to have as high of a percentage of your retirement portfolio in low-risk bonds. This will allow your retirement portfolio to have a higher percentage of stock that are both riskier than bonds but in the long-run, will pay off more.

In the final post of this series, I will summarize the key points from all of the previous posts.

September 5, 2016

Physician Finances Physician Retirement Planning

Planning For Retirement For Physicians Part 10: Insurance For Physicians

This is the tenth in a series of posts made in preparation for a presentation I will be making for physicians in fellowship training at an upcoming ACCP meeting. In this post, I’ll be covering the types of insurance that you need to get yourself safely to retirement.

You can buy insurance to cover almost anything you can imagine, and there are salesmen out there that will try to. Most physicians will need several types of insurance: home, car, health, malpractice, disability, life, and umbrella.  I am going to focus on just the last 3 types of insurance.

Disability insurance. You’ve likely invested more than $200,000 and between 11 and 15 years in your education to become a physician so you had better protect that investment. The amount and type of disability insurance you need will depend on your individual circumstances. For example, early in your career, you have a lot more to lose if you suddenly find yourself unable to work whereas if you are close to retirement and already have a sizable retirement fund, then you may not need to depend on disability payments to get by. Also, you will need to consider your specialty. A friend of mine who is a general surgeon had to stop operating in his early 50’s due to arthritis in his thumb and that pretty much ended his practice career. On the other hand, another of my colleagues who is an endocrinologist became paralyzed from the waist down and dependent on a wheelchair after a diving accident as a young adult; she practices full-time and is one of the most highly regarded physicians in her field nationally. Many group practices and hospital employers will provide a standard disability insurance policy and you will need to look at your own circumstances to determine if that is enough or if you need to purchase additional disability insurance on your own. Disability insurance policies can have a lot of differences. For example, some will cover student loan payments and some won’t; some are subject to income tax and others are tax-exempt.

Life insurance. This is a tricky one. If you are single with no dependents, you may not need any life insurance since if you die, no one will be left unsupported. But most of us have at least one person other than ourselves who depend on our income. The amount of life insurance that you need will vary depending on how many people depend on your income and for how long they will be depending on it:

  1. If your spouse does not work, you need more life insurance
  2. If you have children, you need more life insurance
  3. If you are early in your career and have not built up a sizable retirement fund, you need more life insurance
  4. If you have a lot of debt (mortgage, loans, etc.) that you don’t want to leave to your heirs, you need more life insurance
  5. On the other hand, if your spouse works, your kids are out of college and you are near retirement, you may need little or no life insurance

There are essentially two types of life insurance, term and whole life. For physicians, term life insurance is the better deal and I would stay away from whole life policies since whole life policies are considerably more expensive and provide coverage that you will not need for your entire life.

Umbrella insurance. This is a policy that provides coverage over and above your regular insurance policies. When asked why he robbed banks, Willie Sutton famously replied, “Because that’s where the money is”. The same could be said for why personal injury attorneys sue physicians: because that’s where the money is. As a physician, you have a big red bull’s eye painted on your back and if you are involved in an automobile accident or someone slips on your sidewalk and gets injured, there is a pretty good chance that they and their attorney are going to go after you for more than your regular automobile or home owner’s insurance policy. I think that all physicians after residency and fellowship should have an umbrella insurance. $1 million in coverage is usually sufficient.

So, in summary, don’t just buy a lot of disability insurance, buy the right amount that you are going to need based on your specialty and how far along you are in your career. Don’t just buy a lot of life insurance, buy what you need when you are younger and when your family is dependent on your income. But do buy umbrella insurance.

In the next post in this series, I’ll go over the advantages and disadvantages of state teacher’s retirement systems for those physicians who are eligible for them.

September 3, 2016