Categories
Hospital Finances

How Should Hospitals Subsidize Physicians?

Hospitals and the physicians that practice in them have a conflicted relationship. They are mutually interdependent but often are often adversaries when it comes to finances. Across the country, this is the time of year that academic medical centers are preparing budgets for the next year. Most academic hospitals are on a July-June fiscal year to coincide with the June graduation of medical schools and the July start of new residents in the hospital. So, February and March is the prime season for physician practices to submit budget request for subsidies for the upcoming fiscal year. And every year, at every hospital in the country, more resources are requested than the hospitals have to give.

2019 was a turning point, when for the first time, more physicians were employed by hospitals than were self-employed. In academic medicine, the percentage of hospital-employed physicians is even higher. As with most things in life, the primary driver of this employment model is economics. By joining physicians and hospitals together, lower malpractice premiums can be negotiated and higher rates from commercial health insurance companies can be negotiated. The hospitals and doctors can better align their services and administrative efficiencies of larger size can often be realized. The hospital can be assured of referrals from hospital-employed physicians and the physicians can have a greater say in the services that the hospital provides.

But it is becoming increasingly difficult for physicians to earn enough to cover their entire salary + benefits. This is particularly true for specialties such as hospital medicine and palliative medicine where the time required to provide optimal care exceeds the professional fee reimbursement. But hospital-employed physicians generally do not use revenue from professional services as the medium of exchange; instead, it is the RVU that is used as the measure of physician productivity.  And when physicians do not meet RVU targets, they look for other ways to maintain their salaries. Here are some of the ways that hospital-employed physicians can be subsidized.

Everyone wants a nurse practitioner, physician assistant, or social worker

One of the easiest ways physicians can increase their RVU numbers is by having someone else generate them. A nurse practitioner or physician assistant is ideal because both NPs and PAs can write orders and can bill for services. If the hospital hires an NP or PA to assist a physician, that NP or PA can do all of the “scut” activities that would otherwise occupy the physician’s time without generating many RVUs. This could include doing phone calls, writing prescriptions, entering progress notes and orders into the electronic medical record, and filling out forms.

Surgeons can particularly benefit by this type of arrangement because the surgeon will be paid a set amount for doing a surgery and that amount is supposed to include post-operative follow up care. If the surgeon has a PA or NP doing the post-operative visits, either in the hospital or in the office, then that frees up the surgeon to be able to do more surgeries. Additionally, if that surgeon has an experienced PA assisting in the operating room, the surgeon will be more efficient and can do more surgeries per day. So, frequently, having the hospital pay for an NP or PA can be a win-win: the surgeon can do more surgeries leading to more RVUs for the surgeon and more procedural revenue for the hospital.

Because NPs and PAs cost considerably less than a physician, they can also be used to reduce costs in certain areas within the hospital. For example, if an emergency department is too busy for a single physician but not busy enough to justify 2 physicians, then a physician plus a nurse practitioner may make sense. Similarly, if an ICU is too busy for a single physician but not busy enough to justify 2 physicians, then a physician plus a physician assistant may be more cost-effective.

However, there are 2 situations when this type of subsidy can go wrong. First, if the NP or PA is used to subsidize an otherwise underperforming physician then the hospital is paying to support an inefficient physician (or one that just does not want to work very hard). Second, if the physician demands their own full-time PA or NP but the workload only justifies a partial FTE, then there is money wasted on the NP or PA who is not busy enough to justify their cost. The solution to the first situation is to be sure that the surgeon’s productivity is being benchmarked to others in that specialty. The solution to the second situation is to have an NP or PA who is shared by multiple surgeons.

Another common request by physicians is a social worker who works only for that physician to help with patient counseling and care coordination. Some physicians will ask for a scribe (particularly those who grew up before the era of the computer keyboard and can’t type). Other physicians will request a nurse to take care of phone calls and scheduling. In some situations, each of these requests may be valid and valuable. But each of these requests must have a careful cost:benefit analysis.

Call pay

You can’t cover the cost of a physician being on call with professional fee revenue. The hospitalist covering the inpatient service at night will generate a small number of RVUs from nighttime admissions but does not generate any RVUs from the calls from the floor nurses. The pediatrician taking home call at night can bill only a tiny number of RVUs for every phone call from an anxious parent of a child with a fever at 2 o’clock in the morning. The surgeon on trauma call who has to be within 20 minutes of the hospital at all times may not generate any RVUs if there are no motor vehicle accidents or gunshot victims that night.

In the past, for self-employed physicians, taking call was just part of the job. But increasingly, hospital-employed physicians are expecting addition pay to be on call. Similarly, physicians are often requiring a supplement for working on holidays.

Call pay is a necessity in many situations. Your hospital cannot manage myocardial infarctions, be a designated stroke center, or be a trauma center without an interventional cardiologist, stroke neurologist, or trauma surgeon available 24-hours a day. But what about specialists for less time-sensitive diseases or for conditions that less frequently result in calls to the hospital at night? Should the hospital provide call pay to the otolaryngologist, the endocrinologist, the psychiatrist? Which specialties warrant call pay will vary from hospital to hospital depending on the size of the hospital and the scope of emergency services provided.

Direct subsidies

These are often listed as “physician support” or “hospital investment” and are funds transferred from the hospital directly to the physicians to subsidize their income. Frequently, these are justifiable means to ensure availability of physician services. For example, hospitalists almost never bill enough to cover their salaries. Hospitals with a high percentage of uninsured patients or patients with Medicaid will have a difficult time attracting specialists who will be paid nothing or next to nothing in profession fees. In these situations, subsidies are necessary for the physicians to make a competitive take-home income.

But sometimes these direct subsidies are used as ransom by physicians when the hospital has no alternatives to provide that particular service or procedure. If all three of your hospital’s gastroenterologists demand an extra $50,000 per year or they are going to leave to go work at a hospital across town, you may have no option but to pay them. Ransom subsidies can be be as maliciously infectious as the plague… as soon as other physicians find out that the hospital is paying one group of physicians just to keep them, then every group of physicians will have their hand out.

Direct subsidies are particularly common in academic medical centers. These medical centers must produce research and education but the amount of money that physicians get paid directly from research grants or teaching appointments is so much less than they get paid for clinical activities, that in order to keep those physician researchers and educators, the hospital has to support their salaries. Furthermore, the success of a department chair or division director is measured by that department’s or division’s research and educational output and so that chair or director is incentivized to bring on as many researchers and educators as possible, requiring the additional costs of those researchers and educators to be passed on to the hospital. Although some subsidy is necessary, there is a limit to the number of researchers that the hospital can support, particularly if those researchers do not have grant funding. The hospital must have a regular accounting of the value that every subsidized researcher and educator brings.

It can be challenging when the clinical volume of the hospital is insufficient to justify a 100% FTE physician. For example, if the inpatient cardiology consult census only averages 5 patients per day, then that only equates to 2-3 hours of inpatient work per day. If the cardiology group wants to put one physician in the hospital all day for consult coverage, then they are going to require an enormous subsidy. It may require some negotiation with the cardiology group in that situation to have that consult cardiologist also assigned to interpret EKGs, read outpatient cardiac echos, or do outpatient telemedicine visits when the consult service is slow. Usually creative thinking and flexibility can solve the dilemma.

Medical directorships

In the past, this was a common way of disguising subsidies to physicians, with medical directorships paying a lot more than the actual physician time required to perform a given administrative role. However, more recently, CMS is requiring that fair market value be paid for medical directorships and this generally means ensuring that medical directors keep time logs and ensuring that medical director compensation be in line with national averages.

However, this is an important way for the hospital to get the administrative and quality oversight that it needs so that the operating room runs efficiently, the emergency department is meeting regulatory standards, and the intensive care unit has protocols in place. If the uncompensated administrative time required for a service provided in the hospital is 2-3 hours per week, then a 5% FTE directorship is appropriate. For administrative jobs that require only a few hours per year, sometimes an unpaid medical directorship that comes with a title (but no money) is sufficient for many physicians.

Think beyond this month’s financial statement

Every year, I get requests for more nurse practitioners & physician assistants than the hospital can afford and each year, I get a requests for enough direct subsidies to put the hospital in deficit. Deciding who and how to subsidize requires careful analysis of upfront costs and benefits as well as downstream costs and benefits. Sometimes the requests that seem most outlandishly over-expensive on the surface can either dramatically increase revenue or decrease expenses in the long-term. But sometimes, the requests that are most outlandishly over-expensive on the surface are really just outlandishly over-expensive.

March 14, 2021

Categories
Physician Finances Physician Retirement Planning

The 15 Commandments of Physician Financial Health

For physicians completing residency or fellowship, managing finances can be bewildering when that first paycheck as a practicing physician comes in. There was no class in personal finance in medical school. So, here is a short course on the basics of financial health: 15 rules to live by.

1. Have an emergency fund

This is the very first thing that a newly practicing physician (or anyone, for that matter) needs to do to ensure financial safety. No event in generations has made this more clear than the COVID-19 pandemic which brought unemployment rates higher than any time since the Great Depression.

But unemployment comes in cycles and it is certain that there will be 2-3 additional spikes in U.S. unemployment during your working career. Although physicians were relatively immune to the 2020 COVID-associated unemployment spike, it is common to suddenly find oneself out of a job if the hospital terminates the contract with your practice group, the hospital closes, or a hurricane destroys your hospital. Although physicians can usually find a new job somewhere, it can take several months to process a hospital application or obtain a medical license in a different state. You need a minimum of 3 months-worth of expenses and preferably 6 months-worth in a safe investment (checking account, savings account, or money market account).

2. Eliminate excessive debt

A newly trained physician has a lot of pent up consumption. The roommate that you graduated from college with 7-8 years ago drives a new BMW, vacations in the Turks and Caicos, and just joined a country club. Meanwhile, you’ve been driving a 15-year-old Chevy that was handed down from your aunt, your only vacation last year was to visit your in-laws in New Jersey, and fine dining involves a Domino’s pizza. You want to catch up and that first paycheck is going to be more than you made in the past 4 months of residency. You will be tempted to max out your credit cards in anticipation of that paycheck and you’ll be tempted to put that first paycheck towards a new house/car/vacation. There will come a time for expensive purchases but have patience and do not take on excess debt, especially early in your career. If you cannot pay off your credit cards every month, then you are buying too much stuff. Too high of a monthly mortgage payment or car loan will financially suffocate you for years to come.

3. Buy insurance judiciously

Everyone needs health insurance and most people need some other type of insurance. When you are first starting out in your career, you will have lots of people trying to sell you things, especially insurance policies. But be careful and only buy the insurance that you actually need:

  • Life insurance. This comes in 2 main types: term and whole life. When you buy life insurance, you are making a bet with the insurance company – you’re betting that you are going to die when you are young and the insurance company is betting that you are going to die when you are old. Term life insurance is relatively inexpensive and straight forward: you pay the insurance company a set amount each month and the insurance company pays your beneficiaries if you die while your policy is active. Whole life is a lot more complicated and considerably more expensive – it is the marriage between term life insurance and a savings account and that marriage cost you much more than the individual cost of the insurance plan and the savings plan individually. The insurance agent will try to sell you on whole life in order to put his or her children through college. My advice is that term life insurance is necessary when you have young children or a spouse who does not work – once you are close to retirement, you no longer really need it. Avoid whole life insurance.
  • Disability insurance. Every physician should have disability insurance until they retire. Unlike life insurance which is there to support your dependents if you die prematurely, disability insurance is there to support both you and your dependents if you become disabled. After you retire, you no longer need it.
  • Umbrella insurance. Once you become a practicing physician, you will have a big red bull’s eye on your back that every plaintiff attorney in the country can see. They know that you don’t bother to sue a person at fault who is broke, you sue the person who has money… and physicians have money. If you or a family member are involved in a motor vehicle accident with injuries or if a pedestrian falls and breaks their neck on your sidewalk, you need excess coverage. Buy a $1 million policy.
  • Annuities. These are the opposite of life insurance and can be considered as death insurance: You are placing a bet with the insurance company that you are going to live a long time and the insurance company is betting that you are going to die soon. However, this is really what a pension is – a way to insure that you still have an annual income if you live longer than you expected to. So, buying a simple annuity is a lot like purchasing a pension. The problem is that annuities can be extremely expensive and insurance companies often dress them up with all kinds of extra features that you don’t really need (and most people don’t understand). Insurance agents make a bunch of money on annuities, so they will push them very hard. They still might be worth it for people with a relatively lower income. For high-income physicians, avoid them – your regular investments will be substantial enough to buffer your retirement and will be much less expensive than an annuity.

4. Start saving for retirement early

The secret to building a sizable retirement fund is compound interest. It is true investment magic. Over the past 50 years, the U.S. stock market has averaged an annual 10.9% rate of return. So, lets assume that after expenses, you get a 10% annual return. If you invest $36,000 into your retirement fund today, how much will you have in 35 years when you retire?

Compound interest is the secret to turning $36,000 into $1,012,000 for your retirement. Therefore, the earlier you can start saving for investment, the less burdensome investing will be – even a small amount of investment early in one’s career can make a huge difference. But most people do not just contribute to their retirement account in 1 year, most people contribute something to their 401(k), 403(b), 457, IRA, or SEP every year. Once again, compound interest is magic:

5. Use 529 plans for your kid’s college savings

College is expensive and it keeps getting more expensive, faster than normal inflation. For most families, college will be the largest expense they will have after their house. One of the challenges is that unlike retirement, where you have 35 years for compound interest to create wealth, you only have 18 years from the birth of your child until that child has college expenses. Therefore, it is essential that you start saving as early as possible, preferably the year the child is born. There are a number of investment options to save for your child’s education but none are better than the 529 plans. Their advantage? The investment grows tax-free and then when you take the money out for educational expenses, you don’t have to pay any taxes on the withdrawals. Furthermore, you can usually deduct contributions from your state income tax – in Ohio, you can deduct up to $4,000 per year of contributions into each child’s 529 plan. No other college savings investment comes close to these tax advantages of the 529 plans.

When our first child was born in 1988, our goal was to have enough saved up to pay for 4 years of a public university in Ohio by the time that child was a senior in college. So, we put $5,000 into a college fund the year she was born and then had $100 automatically transferred from my checking account into the college fund each month. For our children born later, we increased the monthly transfer a bit to allow for inflation. By the time each of them was in college, their college funds had enough to pay for a public university.

But 1988 was 33 years ago and college will cost a lot more 18 years from now. So, to pay tuition, room, and board for a public university in Ohio in 18 years (estimated at $255,000), you would have to start with $15,000 initial investment and additionally save $250 per month. If your goal is for your child to go to a private university, for example, the University of Notre Dame, you’re going to need $764,000. That means that you’ll need to start off with $15,000 initial contribution and add $1,000 per month.

6. Don’t pay someone else to invest your money

Physicians finishing residency or fellowship are inundated with letters from financial advisors who want you to become their client. They will invite you to free financial planning seminars, they will take you out to nice dinners, they drive nice cars, and they have really nice offices. They make a living off of other people’s money. I will argue that physicians are smart enough to do their own investing, at least early in their careers and you are better off putting a little more money into your retirement account than into a financial advisor’s fees. But this is contingent on taking enough time to learn about investing and financial intelligence. 10 hours of homework can save you thousands of dollars in the long run.

7. Choose retirement investments strategically

Your choice of what type of retirement accounts to invest in today should be guided by what you believe your effective tax rate will be in retirement. In general, income tax rates will be lowest during residency and fellowship, will gradually increase over the course of a physician’s practice career, and then will fall again after retirement. The strategy is to pay income taxes at a time in your career when you have the lowest effective income tax rate. Therefore you need to know which taxes you pay in the distribution year (when you withdraw the money) versus the contribution year (when you earned the money).

When a physician is a resident or fellow (and thus having a relatively low income tax rate), a Roth IRA is the most tax-advantaged retirement investment. This can be as direct contribution to a Roth IRA if one’s income is below the Roth contribution threshold set by the IRS. Alternatively, it can be as a post-tax contribution to a traditional IRA that is then converted to a Roth IRA if one’s income exceeds the Roth contribution threshold (the “backdoor Roth”). The income tax-advantaged time to contribute pre-tax investments (403(b), 401(k), 457, and SEP) is during a physician’s practice years when their income tax rate is relatively high. During these earning years, the following is my recommendation for prioritizing retirement contributions:

  1. Matched 401(k) or matched 403(b). Never turn down free money and if your employer is going to match your contributions with free money, take it!
  2. 457. This type of retirement account is offered through government agencies/institutions. The advantage of the 457 over the 403(b) and 401(k) is that if you retire before age 59 1/2, you cannot take money out of the 403(b) or 401(k) but you can take money out of the 457.
  3. Non-matched 401(k) or 403(b). The 401(k) is offered by for-profit companies and the 403(b) is by non-profit companies.
  4. Simplified employee pension plan (SEP). Use this if you have self-employment income, for example, honoraria and expert witness income.
  5. “Backdoor” Roth IRA. Use this after you have maximized contributions to the above retirement options.
  6. Regular investments. You will pay regular income tax on the annual interest and dividends. You will pay capital gains tax when you sell stocks, bonds, or mutual funds on the accrued value of those investments (selling price minus purchase price). Most physicians will be in the same capital gains tax bracket when working and when retired (15%) So there is no tax advantage of selling these when working versus when retired.
  7. AVOID TRADITIONAL IRAs. Except during residency and fellowship, nearly all physicians will have a taxable income that will exceed the threshold set by the IRS for pre-tax contribution to a traditional IRA. Therefore, traditional IRA contributions will be post-tax contributions. The problem is that when you take money out of a traditional IRA in retirement, you will pay regular income tax and that tax rate will be higher than the capital gains rate that you would be paying if you had instead put that money in a regular investment.

8. Your first mutual fund should be a no-load index fund

Your most powerful tool in investing is the magic of compound interest. However, annual expenses of a mutual fund can erode those benefits of compound interest. For example, lets assume you invest $100,000 for 20 years with an 8% annual return. Fund A has an expense ratio of 0.21% and fund B has an expense ratio of 1.15%. At the end of those 20 years, the total cost of fund A will be $19,190 and the cost of fund B will be $96,260. That is a $77,070 difference! Index funds have annual expenses that average about one-eighth those of actively managed funds. In addition, if you have to pay a front-load (commission) when you purchase the mutual fund, then you not only pay the cost of that commission but you also lose all of the compound interest wealth that you could have obtained had that money stayed in your account. Some people would argue that it is acceptable to pay a commission or a higher annual expense for an actively managed mutual fund because the professional fund manager can pick stocks and bonds that are more likely to increase in value. The problem is that more often than not, this just is not true – index funds actually out-perform actively managed funds. The following graph shows the annual return over the past decade for U.S. index funds versus actively managed funds. The only area where actively managed funds out-performed index funds was in corporate bond funds. Data from the previous decade looked exactly the same.

9. Don’t buy individual stocks

If professional stock analysts who run actively managed mutual funds do not perform as well as the index, why would an amateur expect to pick stocks any better? In an analysis of the Russell 3000 index between 1983-2008, only 36% of individual stocks performed better than the Russell 3000. By purchasing an index fund, you are purchasing a small piece of dozens, hundreds, or thousands of individual stocks thus spreading out your risk. Only purchase individual stocks for entertainment purposes with money left over after you contribute to your investment accounts.

10. Timing the market doesn’t work

There is an old adage that “Time in the market beats timing the market”. If the professional mutual fund managers do not have a crystal ball to predict when the stock market is going to rise and fall, then neither do you. Lets say you invested $10,000 in a broad stock index fund in 1990. If you did not touch that money and left it alone, by 2020, you would have $172,730. However, if you were taking money in and out of your investment trying to optimally time the market and you happened to miss out on the 10 single best days in the stock market over that 30-year period, you would only have $86,203. No one can predict that the next day is going to be one of the best (or worst) days of the stock market. Day trading is for entertainment but not for investment. That being said, I do have one character flaw when it comes to investing: when the stock market falls by 5%, I invest a little in stock index funds; when it falls by 10%, I invest a bit more; and when it falls by 20%, I invest as much as I can afford.

11. If you don’t understand it, don’t buy it

This applies to any type of investment. If you don’t know what a company manufactures, don’t buy stock in that company. If you can’t figure out how an annuity works, don’t buy it. And if you have heard of Bitcoin but don’t really understand how it works or how it is made, don’t buy it.

12. Know your investment horizon

Over time, stocks outperform bonds. However, in the short-run, stock prices are much more labile than bond prices. So, if you anticipate that you will need money in 3 years, say for a down payment on a house, don’t put that money in stocks. Instead put that money in a less volatile investment such as a bond fund or a certificate of deposit. On the other hand, you are saving for your planned retirement in 30 years, your money should be primarily in stocks because you can ride-out the year-to-year volatility of the stock market over a 30-year time period in order to achieve the higher long-term yields.

13. Diversify

Just like diversifying your stock portfolio by buying an index fund provides greater financial stability than buying individual stocks, diversifying your entire investment portfolio creates greater investment stability. Early in your career, this means having a retirement portfolio that is composed mostly of stock index funds and then later in your career, increasing the percentage of bond and real estate funds. In an ideal world, a diversified retirement portfolio would include a pension, a 401(k)/403(b)/457, a Roth IRA, and individual investments.

14. Pay off student loans strategically

The average U.S. medical student graduates owing $200,000 for medical school and an additional $25,000 from undergraduate college. The monthly loan repayment is around $350/month during residency and then balloons up to around $2,000/month after residency. So how should a newly trained physician approach having a staggering $225,000 debt on the first day of their career? First and foremost, always pay off monthly loan payments on time – the penalties for late payment are severe. However, if you have money left over at the end of the year, should you try to pay off the student loan early or put the money into a pre-tax retirement investment? Although it is laudable to strive to be debt-free, it is better to be debt-smart. The first $2,500 of student loan interest is tax-deductible which has the net effect of reducing the net interest rate that you actually pay each year. If you do the math, you come out ahead if you put that extra money in a 401(k)/403(b)/457/SEP rather than try to pay off the loan early. The bottom line is don’t postpone retirement investment by trying to pay off the student loan too quickly.

15. You are your finances best friend and worst enemy

When it comes to investment, a little knowledge is dangerous but a lot of knowledge provides security. I’ve seen many smart physicians who spent thousands of hours training to care for the health of their patients but less than 2 hours training to care for their own financial health. I’ve seen physicians put all of their retirement investments in money market funds rather than stock funds because they were afraid of risk, even when retirement was 25 years in the future. I’ve seen physicians invest heavily in an individual stock based on a “tip” from a golf buddy, stock broker, or family member. I’ve seen world famous physicians having to live frugally in retirement because they couldn’t conceive of a day that they would not be practicing medicine during their careers and so they never saved for retirement. I’ve seen physicians sell off most of their investments in 2009 when the great recession hit and then do it again in March 2020 when the COVID-19 pandemic hit because they thought that the end of the financial world was coming.

Investment, and particularly investment for retirement, is a marathon and not a series of sprints. Develop a plan for the long-term and then stick with that plan during short-term rises and falls in the marketplaces. It is OK to periodically re-balance your portfolio and to modify your investment plan as you get older and as your financial situation changes but those modifications should be based on long-term goals and not short-term fears. There is a difference between gambling and investments. Gambling is a series of short-term expenditures but you know that over the long-term, the house is always going to beat you. Investment is a series of short-term expenditures but you know that over the long-term, you are always going to come out ahead.

March 11, 2021

Categories
Epidemiology

Who Should Be Prioritized To Receive COVID Vaccinations?

One sure way to elicit an “OK boomer” comment from anyone under age 50 is to quote the comic strip, Pogo. In the War of 1812, naval commander Oliver Hazard Perry defeated the British navy in the Battle of Lake Erie and messaged the military leadership “We have met the enemy and they are ours”. In 1970, Pogo creator, Walt Kelly, satirically paraphrased Perry’s message in an Earth Day commentary about pollution by having his character say “We have met the enemy and he is us”. A half century later, Pogo’s statement could also be applied to prioritizing COVID-19 vaccinations: “We have met the COVID special interest groups and they is us”.

When it comes to the COVID vaccine, there are two types of people, those who are not going to get it because they fear it and those who want it as well as believe that they should get it before anyone else.

When the vaccines were first authorized for use by the FDA in December 2020, each state was directed to make its own criteria for which groups of people would receive the vaccine first. The CDC and the FDA provided general recommendations but this was really a “state’s rights” issue. Most states initially approved vaccinating healthcare workers, followed by different at-risk groups.

On the surface, vaccinating healthcare workers made perfect sense – these are the people who were risking their health and their life exposing themselves by caring for patients infected with COVID. Furthermore, we need healthy healthcare workers to take care of patients hospitalized with COVID. But should all healthcare workers be prioritized ahead of the rest of the population? Across the country, hospitals developed a process for ranking their employees for who should get the vaccines in what order. Some categories of healthcare workers were easy, for example, emergency department and intensive care unit nurses. But after that, things get a bit controversial.

What about the nursing unit clerk who does not have direct contact with COVID patients but is working at a desk down the hall from sick patients? What about the primary care physician who does not care for patients in the hospital but might encounter a patient with undiagnosed COVID coming into the office with sinusitis symptoms? What about the facilities worker who might be called to do a repair in a hospital room with a COVID patient in it? What about the billing office staff who are working from home but who are essential to keeping the hospital open and running? What about healthcare professions students who are not permitted by their school administration to care for COVID patients but could encounter a patient with asymptomatic COVID infection during a clinical rotation??

Throughout the country, each of these groups of healthcare workers started lobbying that they should receive the vaccine or that they should be moved up on the prioritization list. In January, media coverage exposed hospital board members, hospital staff working from home, and health profession students who were not providing direct patient care to COVID patients. This resulted in outrage by state legislators and governors across the nation who directed that vaccine prioritization move to non-healthcare worker groups.

Many states next prioritized nursing home residents and workers. This made a lot of sense because these patients were not only at high risk of being hospitalized or dying if they got infected but because they live in confined areas close to a lot of other nursing home residents, they were more likely to get infected than people who lived independently in their own home and could isolate themselves. But what about people who live in other congregate settings such as college dorms, homeless shelters, and prisons? At the beginning of the pandemic, many prisons in the United States experienced outbreaks of COVID with large numbers of inmates and guards becoming infected. In several states, these outbreaks among prisoners were of sufficient magnitude to overwhelm hospitals to the point that it became difficult to provide care to regular citizens. In response to this experience, some states prioritized prisoners and the homeless for getting vaccinated resulting in outrage by regular tax-paying citizens.

Some states prioritized people with various diseases. This immediately created lobbying by people with one disease to be prioritized over people with other diseases. Should people with asthma be prioritized before people with COPD? Should people with type I diabetes be prioritized before people with type II diabetes? Should people with cystic fibrosis be prioritized before people with pulmonary fibrosis? In Ohio, asthma, type I diabetes, and cystic fibrosis were prioritized over the other conditions. The whole idea of lobbying is to convince governments to give something to one group instead of another group. As with all lobbying, the decisions made by states about which diseases should be prioritized first werenot often not made based on the science of epidemiology but rather based on which group could most eloquently and effectively lobby to get vaccinated first. Moreover, how do you prove that a person has a particular disease? Do they need to have a note from their doctor or do they just need to say that they have one of the diseases when they show up at the vaccination site?

Another group of citizens to be prioritized  were “essential workers”. Depending on your vantage point, more than half of employed people in the U.S. are “essential”. Where do you draw the line between grocery workers, restaurant workers, members of the military, farmers, teachers, government workers, and manufacturing workers?

The least controversial prioritization grouping was by age. The probability of being hospitalized or dying if a person becomes infected with COVID is directly related to that persons age. People < 18 years old have an exceedingly low COVID hospitalization rate and mortality rate. People > 80 years old have a 25% COVID mortality rate. By using age as a criteria, lobbying is eliminated – a lobbying group for people 60-65 years old is not going to demand that their constituency be vaccinated before people 70-75 years old. It is easy to provide proof of eligibility – all you need to do is show your driver’s license or other identification, you don’t need a letter from your doctor stating that you are 68 years old.

From a societal standpoint, vaccine prioritization should be guided by:

  1. Which people are at highest risk of death or disability if they get infected 
  2. Which people are at highest risk of creating a lot of expense if they get infected
  3. Which people cause the greatest societal disruption if they get infected
  4. Which people are most likely to get infected
  5. Which people are likely to spread the infection to others if they get infected.

The first two groups of people are the same – those who create the greatest expense are those who get hospitalized and these are the people who are most likely to die. Age is clearly a leading predictor of death and hospitalization. People older than age 85 years infected with COVID are 80 times more likely to be hospitalized and nearly 8,000 times more likely to die than people under age 18 infected with COVID.The table below from the Centers for Disease Control shows the risk of hospitalization and death from COVID infection by age.

Other strong risk factors for hospitalization and death from COVID-19 are obesity, chronic kidney disease, diabetes, and hypertension. Because there are varying degrees of obesity, hypertension, kidney disease, and diabetes, it becomes very difficult to decide where to draw the line by BMI, systolic blood pressure, creatinine level, and hemoglobin A1C.

The second and third of these groups require even more value judgement. For example, does a firefighter who has to go out on sick leave result in more social disruption than a grocery worker who has to go out on sick leave? We know that certain racial groups are more likely to become infected than others so should people belonging to one race get vaccinated before people belonging to other races?

Ultimately, nearly all of us are in a COVID vaccine special interest group and can think of some reason or another for why we should be vaccinated before the rest of the population. In many ways, this is better than the alternative of no one wanting to get vaccinated. Fortunately, the number of new cases of COVID is falling and the amount of vaccine is increasing, so soon, everyone who wants a vaccine will be able to get one. Until then, maybe we should just keep things simple and use age alone as the criteria for prioritizing vaccination.

February 25, 2021

Categories
Medical Economics Physician Finances

2021 Medicare Physician Fee Schedule Winners And Losers

Every year at this time, physician practice administrators hold their breath and wait for the annual relative value unit (RVU) revaluations by Medicare. This year, Medicare was delayed in releasing the “final rule” that dictates how physicians will be paid and the final report was not released until earlier this month (December 2020). As in past years, some specialties will have increased revenue and some will have decreased revenue. Here is the projections for the RVU changes in 2021.

So, why are there so much differences between specialties? There are two reasons. First, with the 2021 Medicare Physician Fee Schedule, the evaluation and management codes for outpatient visits were revised with a result that office visits are more highly valued than in the past. Medicare is required to keep overall physician reimbursement constant so when outpatient visits were more highly valued, other procedures and services necessarily had to be lower valued. Therefore, those specialties associated with a lot of outpatient office visits will see an overall increase in their Medicare payments. For this reason, endocrinology, rheumatology, hematology/oncology, and family practice will all see double digit increases from Medicare

Procedure-oriented specialties such as surgical specialties will see a decrease in Medicare payments. Because of the increase in RVUs associated with outpatient E/M codes, the Medicare “conversion factor” (the amount that Medicare pays physicians per RVU) will drop from $36.09 to $32.41 in order to stay budget neutral. Overall, this translates to physicians getting paid 10% less per RVU in 2021 than in 2020. Therefore specialties with no E/M billing (such as pathology and radiology) will see a significant drop in income and surgical specialties that have most of their RVUs from surgical procedures and have a lower percentage of their RVUs from E/M billing will also see a drop in income.

Every year, different physician specialty societies lobby for increasing their own specialties’ compensation. In that sense, doctors as a profession are a group of competing special interests.

For physicians in solo or small group private practice, a decrease in total RVUs has the biggest impact on physician income since those physicians still have the same overhead expenses in 2021 as they had in 2020. If that overhead expense is half of total revenue, then a 10% drop in total revenue can translate to a 20% drop in physician income. Therefore, radiologists and pathologists in solo or small group private practices will see the biggest drop in take-home income. I anticipate that in this group, there will be increasing pressure to become hospital-employed next year as a consequence of the significant drop in private practice income.

For physicians who are hospital-employed, a decrease in the work RVU has the biggest impact on physician income since those physicians typically have the work RVU as the measure of productivity by which the hospital bases their income. Therefore, critical care physicians, anesthesiologists, and radiologists who are hospital-employed will see the greatest drop in their income.

The annual changes in physician reimbursement has a big financial impact on current physicians but also has a quieter impact on future physicians. As medical students see changes in compensation among specialties, the invisible hand of capitalism will affect the decision about which specialties those students choose to enter. One way of assessing medical student interest in different specialties in in the National Residency Match Program data. In the 2020 residency and fellowship match, the specialties with the lowest fill rates were nephrology (62%,), geriatrics (50%), and infectious disease (79%). Specialties with the highest fill rates were radiology (98%), dermatology (98%), otolaryngology (99%), plastic surgery (100%), and thoracic surgery (100%). In the future, we can expect students to be drawn to those specialties that have an increasing reimbursement and away from those with lower reimbursement.

American medicine is not a free market economy. Each year, Medicare can have a big impact on the compensation among different specialties as well as the interest in students entering those specialties, simply by changing the RVU valuations and the conversion factor. In 2021, we will see some of the biggest changes in recent years.

December 23, 2020

Categories
Outpatient Practice

Creating A COVID-19 Monoclonal Antibody Infusion Program

Two monoclonal antibodies have received emergency use authorization (EUA) by the U.S. Food and Drug Administration. Bamlanivimab (produced by Eli Lilly) and casirivimab/imdevimab (produced by Regeneron) were both approved in November 2020 as treatment for outpatients with COVID-19 and mild to moderate symptoms. The two drugs were studied in 2 different clinical trials in which each was compared to placebo with a primary outcome being detectable viral load on the days following treatment. Both drugs showed a reduction in viral load compared to placebo. But the clinically important findings were in secondary outcomes of need for subsequent hospitalization and duration of symptoms. Both drugs reduced the duration of symptoms from 6 days to 5 days. Both drugs also significantly reduced the need for hospitalization. Four subjects taking the combination drug casirivimab/imdevimab required subsequent hospitalization compared to 10 subjects taking placebo. In the other study, 3 subjects taking bamlanivimab required hospitalization versus 10 subjects taking placebo. This was great news to hospitals facing a surge of COVID-19 patients that threatened to overwhelm hospital and ICU beds. 

The FDA-approved indications were for outpatients (including patients in the emergency department that were planned to be released and not admitted to the hospital) with documented COVID-19 infection and not requiring supplemental oxygen (or an increase in normal oxygen flow rates if already on oxygen). Patients must have had symptoms for less than 10 days. In addition, patients must have at least one of the following risk factors for severe COVID-19 infection:

  • BMI ≥ 35
  • Chronic kidney disease
  • Diabetes
  • Immunosuppressive disease or taking immunosuppressive medication
  • Age ≥ 65
  • Age ≥ 55 AND either cardiovascular disease, hypertension, or chronic respiratory disease
  • Age 12-17 AND either BMI ≥ 85th percentile for age/gender, sickle cell disease, heart disease, neurodevelopmental disease, medical-related technological dependence, or chronic respiratory disease (including asthma)

The challenge for hospitals and outpatient practices is how to identify those patients with COVID-19 who fit the criteria, create a safe location for the infusions to be given, and then get patients in for their infusions within 10 days of symptom onset. These are enormous logistical challenges. We had less than a week to prepare from the time the FDA approved the medications until Ohio began distribution of the drug. We received our first shipment of the drug on a Monday afternoon and were able to have our first patient get infused 90 minutes later. Here is how we did it at our hospital. 

Identify A Location For Infusions

Most hospitals have an infusion suite that can be used for chemotherapy to treat cancer or biologic drugs to treat autoimmune diseases. These areas are unsuitable to treat patients with COVID-19 because of the need to keep COVID patients far away from immunosuppressed patients. Ideally, the monoclonal antibody infusion location should be close to the hospital (for pharmacy, nursing, and physician support) and should have its own entrance so that patients with COVID do not have to walk through public hallways in the hospital. The area has to be large enough to accommodate the projected demand (on our busiest day so far, we treated 38 patients). We elected to use the auditorium at our hospital since it is large enough to handle up to 24 patients in the area at a time and has a separate entrance directly to the parking lot.

The Role Of Infection Control

Once we identified a suitable location, we had to be sure that it would be safe for patients and for the healthcare staff. Our infection control team checked the air flow in the auditorium and we were pleasantly surprised that the number of air exchanges in the room per hour was higher than our bronchoscopy suite! The floor was carpeted so we had our facilities team install a solid floor covering. We needed to have a separate entrance for healthcare staff that was different than the patient entrance so we put up a temporary wall in the auditorium lobby so that staff could enter through the hospital corridors and we could keep masks, gowns, and gloves in the staff entrance, away from the patient entrance. 

The Role Of Information Technology

Next, we had to ensure that there was computer access so that healthcare staff in the infusion suite could chart in the electronic medical record. This required augmenting our wireless signal strength in the auditorium. We had to create a separate monoclonal antibody infusion location in the electronic medical record for the purposes of scheduling and charting. We created an order set for an “E-consult to COVID monoclonal antibody infusion” so that physicians and other providers could order the infusion. 

The Role Of Pharmacy

When we received our supply of the drugs from the State of Ohio, we had to have a location to store and re-constitute the medication. Our hospital pharmacy was ideally suited for this since they already do this on a regular basis for inpatient medications. We assigned oversight to the pharmacist who also oversees our regular outpatient infusion center since she was experienced in the logistics of infusion drug preparation and delivery. 

The Role Of Nursing

Nursing represents the most staff-intensive component of the program. There has to be registered nurses experienced in placing IV catheters and in administering IV medications. There needs to be other staff who can check vital signs and assist with throughput; for example, outpatient medical assistants (MAs), inpatient patient care assistants (PCAs), or licensed practical nurses (LPNs). Because our infusion center needed to be up and running less than a week after the FDA made the approval announcement and because it was anticipated that the infusion center would be temporary (only lasting for a few months), we could not just go out an hire nurses and PCAs dedicated to the infusion location. Instead, we drew from nurses currently working in other locations within the hospital or ambulatory sites; we paid a lot of overtime.

The Role Of The Doctors

To ensure that the monoclonal antibody treatments were being used appropriately, we needed to have a process for review of the referrals. Rather than having primary care physicians order the infusion directly, we created an order in our electronic medical record for “E-consult for COVID monoclonal antibody infusion”. One of the pulmonologists became the designated consultant and he reviews each patient to be sure that the FDA-approved inclusion criteria are met. This was simplified by structuring the electronic medical record order for the consult to require that the ordering physician check boxes for the various inclusion criteria, such as age ≥ 65 or diabetes. 

In addition, Medicare requires physician oversight whenever infusions are performed. Fortunately, in January 2021, Medicare loosened the requirements from “direct supervision” to “general supervision”.  With direct supervision, a physician must be physically on-site in the building while infusions are being administered. With general supervision, the physician merely needs to be available by phone or video conferencing and does not need to be physically in the building. Since I am in the hospital most of the time, I became the designated physician supervisor – on those days that I am seeing patients in the outpatient clinic area, one of the hospitalists is my back-up, in the event that a patient must be seen in-person for medical attention. 

The Role Of The Legal Department

There are several compliance issues that we needed to address and fortunately, our legal department was able to provide immediate assistance to ensure that the infusion referral process was compliant with everything from the “general supervision” issue to physician referral. For example, it was recommended that a physician or other provider who has a pre-existing relationship with the patient be the one to contact the patient to inform them of their COVID diagnosis and determine if the patient wanted to be referred for treatment. In addition, we needed to register the auditorium with the state department of health as an outpatient treatment location.

Setting Up The Work Flow

We notified physicians at our medical center of the availability of the monoclonal antibody infusion suite and how to order a referral. However, we immediately found that many patients were self-referring to get their COVID-19 tests and so those test results did not necessarily get routed to a physician’s electronic medical record inbasket. Furthermore, many tests were ordered by surgeons, gastroenterologists, or other proceduralists as part of the patient’s pre-procedure evaluation and those results also did not get routed to a primary care practitioner. Therefore, we needed a way to identify patients with a positive COVID-19 test, determine if those patients meet the FDA approved indications, and then notify the appropriate physician or advanced practice provider that one of their patients meets criteria.

Once again, our information technology staff had an answer. They created an app within the electronic medical record that identifies all of the positive COVID-19 tests each day and then stratifies patients based on the number of FDA-approved risk factors for infusion. We do 500 – 1,000 COVID tests each day at our medical center and on some days, we can have more than 100 positive tests so the ability of the app to identify those patients who may be eligible was vital. When we first began our infusion center, I would run the app several times a day to identify eligible patients and then send a message to those patients’ primary care provider or other physician in our medical system alerting them and giving them instructions on how to order the e-consult. As our process evolved, we now have one of the pharmacists who works in the general internal medicine division and another pharmacist in the family medicine department take responsibility for positive tests ordered by physicians or providers in those departments. I now just review those patients whose tests were ordered from another department/division. 

Once the order for the e-consult is placed, my colleague reviews the consult and then enters an orderset for the infusion. That order goes to the pharmacy where a pharmacist reviews the orders and contacts the patient to schedule their infusion. We can generally get the patient infused within 24 hours. Patients are told to park in the parking lot adjacent to our auditorium/infusion suite and call a number that one of the infusion nurses answers. The patients are then directed where to enter the suite and are placed in a reclining chair. Nurses then do a nursing assessment, check vital signs, start the IV and administer the drug. The FDA requires that the infusion be given over 60 minutes and further requires that the patients be observed for 60 minutes after completing their infusion. Once the patients leave, the nurses route the electronic medical record encounter to me for review, supervision attestation and encounter closure. We operate the COVID-19 infusion suite daily from 8 AM to 5 PM, Monday through Saturday.

The medication is provided by the State of Ohio so there is no medication charge. The infusion can be billed under code M0239 (bamlanivimab) or M0243 (casirivimab/imdevimab); both are reimbursed by Medicare at $310.

Is It Making A Difference?

As of the day this post was written, we have given 442 infusions in our COVID-19 monoclonal antibody infusion suite. Statistically, this has prevented 31 COVID hospitalizations at our medical center and helped to reduce the strain on hospital resources from the current surge in patients. In addition, we have developed a similar process for our emergency departments so that patients with COVID meeting infusion criteria can be infused with monoclonal antibody and released from the ER. When an outbreak of COVID happened at a nearby nursing home this month, we partnered with the nursing home staff so that we gave infusions at the nursing home so that those residents did not need to be transported to our hospital’s infusion center. All told, we estimate that these efforts have prevented 50-60 hospitalizations in the past 1 month.

Winning the war against COVID-19 will not be done by any one intervention. It takes social distancing, face masks, hand hygiene,  availability of  testing, isolation of infected people, prompt initiation of treatment, and widespread vaccination. A monoclonal antibody infusion program is just one of these interventions but one that will pay off with reduced hospitalizations and lives saved.

December 20, 2020

Categories
Inpatient Practice

Changing To A Different Hospitalist Group

Hospitalists have gone from rarities to dominating inpatient care in the past 25 years. Currently, there are approximately 50,000 hospitalists in the United States. The term “hospitalist” was first coined by Dr. Robert Wachter and Dr. Lee Goldman in their 1996 article in the New England Journal of Medicine. The young specialty was quick to show financial benefits to hospitals with studies showing improved hospital length of stay and lower costs per admission in patients cared for by hospitalists. Currently there are 3 common hospitalist practice models:

  1. Hospital-employed physicians
  2. Physicians who are part of local primary care or multi-specialty group practices
  3. Physicians employed by regional or national hospitalist companies that contract with numerous hospitals

There are advantages and disadvantages for each of these 3 models and the optimal model will be different for different hospitals. Periodically, hospitals will choose to change to a different hospitalist model or change to a different physician group within a given model. Managing this transition can pose unique challenges to the hospital.

Timing the decision

The decision to change hospitalist models or change to a different hospitalist group requires long-term planning, and should ideally be made 12-18 months before the intended transition date; the larger the hospital, the more time you will need. A small hospital that only needs a few hospitalists can change groups fairly quickly. But if the hospital is looking at changing coverage of a large number of inpatient beds, then the sheer number of new doctors that have to be recruited and hired takes a lot of advanced preparation. For example, to cover 100 beds, the hospital will need somewhere between 20-30 hospitalists, depending on patient acuity and other factors. Because of the high-demand for hospitalists, it can take many months to recruit this large of a number of doctors – there are not many unemployed hospitalists reading the help-wanted classified ads in the newspaper each morning.

Many new hospitalists will be recruited from internal medicine residency programs. Residency programs run on a July through June cycle so residency graduates will be available in July/August each year. These physicians generally start interviewing for hospitalist jobs about 1 year in advance and most residents from the better programs will have signed contracts by October or November of their senior year of residency. If a hospital waits until December to recruit and interview new graduates, there will be very few uncommitted residents left.

When do you let the doctors know?

The initial planning for a hospitalist transition is usually done privately with only a small number of hospital leaders aware of the plan to change to a different hospitalist group or model. This is necessary because as soon as the current hospitalists know that their employment contracts are going to be terminated, they will start looking for a new job. When to make the upcoming transition public depends on the employment contracts that the doctors have. Most physicians will have a 60, 90, or 120 “without cause” termination clause in their contracts. This means that they have to give 60, 90, or 120 days notice if they intend to leave. The day that you tell the doctors that their employment contracts are going to be terminated is the day that they will begin looking for another job.

You want all of your doctors to stay at the hospital until the date of the upcoming hospitalist transition. If you tell them about the transition 180 days before the date and the doctors have a 90 day without cause termination clause in their employment contracts, then you are going to find yourself with no hospitalists in the final weeks or months before the transition. However, you do want to be fair to the physicians who have been providing care to the patients at your hospital – you might want to hire them again in the future plus it is just the right thing to do. It generally takes at least a month for a hospitalist to find and sign a contract for a new job so a good rule of thumb is to let the current doctors know 30 days more than whatever their without cause termination period is in their contracts. So, if they have a  90 day without cause termination clause, let them know that their contracts will be terminated 120 days in advance.

Have a contingency staffing plan

As soon as the contract termination becomes public knowledge, it will be nearly impossible for the existing hospitalist group to hire new physicians – doctors looking for permanent employment do not want to sign up to work for two or three months. Inevitably, there will be some hospitalists in the current group that were planning on leaving, get sick, get called up for military reserve duty, or go on maternity/paternity leave in the months before the transition. So you have to have a reserve of short-term physicians who can fill in the vacancies until the new hospitalist group starts.

The easiest solution is to hire locum tenens physicians. These can sometimes be local physicians that the hospital can contract with individually to provide short-term hospitalist coverage but more often, these physicians come through a locum tenens company that maintains a pool of doctors who are available for short-term employment. It is important to plan early with the locum tenens physicians so that you can get them through your hospital’s credentialing process well in advance of when you will need them. If the hospital’s credentials office takes 3 months to complete credentials for new physicians, then you need to identify and get started on credentialing those locum tenens physicians shortly after announcing the hospitalist transition decision. Even if you have to pay a retainer to the locum tenens company, it can be worth it so that you do not find yourself with patients but no doctors to take care of them just before the transition date.

Create a transition workgroup

Key leaders from the hospital, the existing hospitalist group, and the new hospitalist group need to meet regularly. Because there can be animosity between the two hospitalist groups, it may be necessary for the hospital leaders to do most meetings with the hospitalist groups individually. Initially, the workgroup should meet monthly and then in the final 2 months of the hospitalist contract, the meetings should be weekly. These meetings may only take 10 – 15 minutes but it is important to put them on everyone’s calendar to ensure a safe and efficient transition. Specific issues to cover include:

  • How will test results that come back after the transition be handled? This will usually require some way of routing electronic medical record “inbaskets” to the new hospitalists.
  • Who will sign verbal orders after the transition date? Verbal orders have a  habit of showing up in the electronic medical record a day or two after the physician actually gave the verbal order. There needs to be a process in place for getting those orders signed. The same goes for signing discharge summaries, H&Ps, and operative notes.
  • How will death certificates be managed? If a patient dies a couple of days before the transition date, the funeral home will likely send the death certificate over to the hospital after the transition date. A mechanism for signing these in a timely fashion must be agreed upon.
  • How long will the current hospitalists have access to the electronic medical record? The doctors may only need to have access for a couple of weeks to sign verbal orders. However, their billing office may need access for several months to manage late bills and provide documentation of services to insurance companies.
  • Managing patient hand-offs. Ideally, the transition hour should be at the end of a day shift rather than the end of a night shift. The hospitalists who have been managing the patients during the daytime are generally in the best position to answer questions about their care than the night coverage hospitalists. This can result in a smoother transition.
  • What about trainee evaluations? If the current hospitalists have medical students or residents, then work with the appropriate education office to ensure that there is a mechanism for end-of-the-rotation evaluations to be completed after the current hospitalists have left. Trainees are notorious for completing their notes late so there needs to be a mechanism for co-signing these notes after the transition date.
  • Get an equipment inventory. After a period of time, is can be easy to forget whether the hospitalist group or the hospital purchased computers, furniture, phones, journal subscriptions, printers, and fax machines. Make sure everyone knows what stuff stays and what stuff goes.

Meet with the nurses and other physicians

Change can be alarming for doctors and nurses who have been accustomed to one group of hospitalists and one pattern of practice. There must be a mechanism for the hospital to clearly articulate the reasons for the change and reassure the staff that there will not be a reduction in the level of medical care provided by the new hospitalist group. Surgeons who have relied on the hospitalists for inpatient consultative co-management need to be engaged. The emergency department physicians need to be aware of any change in the admitting process with the new hospitalist group. Consultants need to be confident that the new hospitalist group will not reduce the number of consults that they order.

The things you didn’t think about

Different hospitalist groups practice medicine differently and one cannot be simply substituted for another. Consideration need to be made about:

  • Who manages cardiopulmonary arrests? Stroke alerts?  RRTs (rapid response team alerts)? Not all hospitalists have experience managing these situations and may require additional training prior to starting coverage.
  • Who manages bedside procedures such as central venous catheters, lumbar punctures, and intubations? Increasingly, internal medicine residents are not being routinely trained in these procedures. Endotracheal intubation is a particular problem – fewer and fewer hospitalists perform them and so you will need to decide if anesthesiologists, emergency medicine physicians, or respiratory therapists will become responsible for airway management if the old hospitalists performed these but the new hospitalists do not.
  • How will physicians be contacted? Maybe the existing hospitalists prefer to use pagers but the new hospitalists use their cell phones or an app in the electronic medical record. Be sure that it is clear how nurses and other physicians contact the specific hospitalist managing any given patient.
  • Clean up the electronic medical record. Don’t leave an option for a consult or admission to be placed to the old hospitalist group once the new hospitalist group takes over. That order for a consult will not go anywhere and patient care could suffer.

Your quality metrics will take a hit

During the last month of the old hospitalist group, the doctors will be less motivated to help the hospital with things that matter to the hospital. Anticipate that the inpatient length of stay will go up, hour of discharge will be later in the day, patient satisfaction will go down, and quality events will increase. This will be particularly true if the hospital has to rely on a lot of locum tenens hospitalists in the last weeks before the transition. It is very similar to college students getting “senioritis” in the months just before graduation. You can partly preserve performance on these various quality metrics by developing a bonus plan to pay the physicians for their performance in the last couple of months of their contract.

Be collegial

When a hospital changes to a different hospitalist group or model, the current hospitalists are going to feel betrayed and devalued. The end of their employment at the hospital means the end of friendships with nurses, other physicians, and hospital staff. It may mean that they have to sell their houses and move to a new community. It may mean that they will be out of work for a few months while seeking a new job. It likely means an end to a job that they really liked and were passionate about.

These physicians need to be treated as the professionals that they are. Meet with them regularly. Volunteer to provide job references. Provide them access to continuing medical education such as hospital grand rounds for a few months. And most importantly, explain to them that it was a business decision and not because they are bad doctors. Who knows, you might want to hire that physician or hospitalist group again in the future.

There will often be non-compete clauses in their employment contracts so the hospital or new hospitalist group may not be able to hire them. For those hospitalists who are superstars, it may be worth trying to negotiate a buy-out for the non-compete contracts. It costs a surprisingly large sum of money to hire a new hospitalist when you consider paying for a search firm as well as interviewing, credentialing, and orienting the new hospitalist. You may have to pay moving expenses or medical school loan repayments. When all of these are considered, it may be cheaper to pay a $25,000 or $50,000 buy-out for a current hospitalist than to hire a new hospitalist.

Managing change is one of the main things that hospital leaders do and it can be time-intensive as well as emotionally draining. But by planning in advance and giving attention to detail, changing from one hospitalist model or group to another can happen smoothly and offer new opportunities for the hospital.

November 7, 2020

Categories
Epidemiology

Anti-Maskers And The Company They Keep

Anti-maskers are flourishing in the era of COVID-19 but they are not new. During the 1918 influenza epidemic, the wearing of masks was mandated in many U.S. cities and “mask slackers” rebelled with one Portland, Oregon city council member arguing “Mask requirements are autocratic and unconstitutional; under no circumstances will I be muzzled like a hydrophobic dog.” The anti-maskers never went away during the past century, they’ve been quietly meeting in secret, just waiting for a new pandemic to happen so that they can once again profess the dangers of wearing masks. So, who are these anti-maskers? Most are members of a fraternity of organizations whose mission is ostensibly to protect personal liberties. Here are some of these other organizations in the fraternity of the anti-maskers:

The Anti-Hand Washing League. This secret society was created in 1848 to combat the hand washing hysteria being propagated by Dr. Ignaz Semmelweis, the physician on the lunatic fringe of medicine who had the audacity to recommend that doctors wash their hands after performing autopsies. The League’s mission is to globally eliminate hand washing in order to preserve the natural body oils of the hands. Says League president Max Saponify, “Requiring me to wash my hands after using the toilet is an infringement of my constitutional rights!

The Federation Dedicated to a Deodorant-Free World. This group has a goal of global elimination of antiperspirants and deodorants. “These chemicals are a well-known cause of armpit cancer” says Federation chairman Axilla LaPue. The Federation’s motto is that “A man should smell like a man… and a bear,… and a boar,… and a Tasmanian Devil”. Many members are also affiliated with the Anti-Bathing Guild whose motto is “Satan made soap”.

The Stogies in School Society. Formed after municipal laws against smoking in public were enacted in the early 2000’s, the Society’s mission is to preserve the rights of middle school students to smoke cigars in class. A side project of the Society is the “Spittoons in Church” project to promote legislation requiring all churches to provide spittoons in the pews for parishioners who chew tobacco during services.

The Pull My Finger Association. This organization is committed to the promotion of public flatus. The annual meeting is held in Boston every December and culminates with the group’s baked bean dinner followed by the flatus a cappella contest. Last year’s winner was the Central City Cheese Cutters with their rendition of Bob Dylan’s “Blowing in the Wind”. Afterward, the attendees went caroling in downtown Boston with their unique wordless Christmas carols.

The Anti-Vaxxers. This mainstream group opposes vaccines of all kinds. Said one anti-vaxxer: “They say vaccines prevented smallpox and polio. I don’t know anyone who ever had polio or smallpox. I think drug companies just made up those diseases so they could scare people into buying their vaccines.” Group members have determined that vaccines cause disease. “You get a flu shot and your bowels will be irregular for months… not for me!” wrote another member in a letter to the editor of the Cowtown Gazette. The group points to the Will Smith movie I Am Legend as evidence that vaccines turn normal people into flesh-eating zombies.

The Free the Snot Foundation. Dedicated to liberating oppressed nose mucus from confinement in Kleenex and handkerchiefs, the FSF is considered by some to be a terrorist group, spewing unsuspecting passersby with nasal secretions. Among the group’s more mainstream activities is the annual “Shoot the Snot” contest to see which contestant can propel sinus secretions the farthest. The current world record is held by Charlie “Booger” Snout with his 2015 performance of 15 feet, 3 inches. But a darker side of the Foundation is the rumored rite of passage for admittance that allegedly requires initiates to clandestinely launch snot over the rail of the Empire State Building creating the so-called “rhinitis rain” that the City of New York is widely known for.

The Anti-Trouser Alliance. This male-only organization seeks to overturn local ordinances requiring men to wear pants. “If God wanted us to wear them, we’d be born with pants” said the Alliance’s spokesman I. M. Stark. The Alliance’s annual project this year is the “Butts on Buses” initiative to promote the freedom to sit on public bus seats pants-free. The initiative was conceived after the enormous success of the “Butts on Banisters” project last year.

The MPH Liberation Club. This group hopes to eliminate speed limits in school zones. “Those roads were built with my tax dollars. If I want to drive 60 miles an hour in front of St. Mildred’s Elementary School, then it should be my right!” said member Phlatt N. Quash. The group also seeks to eliminate stop signs, traffic lights, and center lane lines on public roads.

The Sidewalk Turd Confederation. The Confederation’s mission is to eliminate public bathrooms. It is composed of individual groups including libertarians that want to eliminate highway rest areas in order to reduce government costs, the gas station worker’s union that objects to requiring employees to mop restroom floors, and environmentalists seeking to save trees by abolishing toilet paper. Said the Confederation’s Secretary General, P. N. Yard, “Squirrels do it, birds do it, dogs and cats do it. Don’t we have the same rights as the animals?”

The Yell “Fire” In Movie Theater Consortium. This organization’s goal is to preserve the First Amendment right to free speech. Members are encouraged to walk through maternity wards and randomly tell new parents that they have an ugly baby, to tell their mother-in-laws that her cooking is terrible, and to  shout “Shark!” at public beaches.

Anti-mask = Anti-business

The reality is that masks work. The COVID-19 virus is spread through the respiratory tract – when you cough, sneeze, or talk loudly, you exhale viruses. If you want to stop a respiratory virus from spreading, you have people wear masks to catch viruses contained in exhaled breath. Wearing masks is the fastest way to re-open stores, stadiums, bars, churches and restaurants. Anti-maskers have the confused notion that masks infringe on their human rights; the reality is that the more people wear masks, the sooner the economy recovers and jobs return. Don’t be a member of one of these fraternal organizations, wear a mask!

November 1, 2020

 

Categories
Academic Medicine Medical Economics

Why Are There So Many Asian Physicians In The U.S.?

People of Asian descent comprise 5.6% of the American population but Asian Americans comprise 19.8% of all U.S. physicians. Two things happened this week that led me to think about this statistic and why Asian Americans are so disproportionately represented in American medicine. First, I listened to the America’s Test Kitchen podcast, Proof, about why there are so many Chinese restaurants in the U.S. (quite fascinating and worth a listen). Second, I listened to this week’s MedNet webcast on Racism and Racial Bias in Medicine that included an exploration of why African Americans are under-represented in U.S. medicine. Part of my interest is because of my own Chinese heritage (albeit only 1/8th).

Several years ago, there was a lawsuit against Harvard University by a group of Asian students who were denied college admission and claimed that the University discriminated against Asian applicants who had superior admission test scores and grades than applicants of other races. The allegation was that Harvard made it harder for Asian applicants in order to keep the percentage of Harvard students who were Asian from becoming too high. The press surmised that Asian American students have a culturally-driven higher study ethic than students of other races. But I think that the reason for the high percentage of Asian students at elite U.S. universities and the high percentage of U.S. physicians who are Asian American has a deeper and darker cause that has its roots in immigration laws that paradoxically were created to keep Asians out of America. As the law of unintended consequences dictates, those laws ultimately resulted in Asian Americans being more academically successful and more overly-represented in American professions such as medicine.

The Naturalization Act of 1790

One of the first laws of the new U.S. government was the Naturalization Act of 1790 that limited naturalization to “free white person[s] … of good character“, thus excluding Asians (as well as anyone else who was not from Europe). This law essentially banned Chinese from immigrating to the United States but this was in many ways a moot point since travel by ship to the Eastern seaboard of the country from China via the Atlantic Ocean was very difficult and expensive. Not until the country’s westward expansion opened California to development did travel from China to the U.S. via the Pacific Ocean become feasible.

The next major event that affected immigration and naturalization of Asians was occurred in 1868. That year, the first section of the 14th amendment to the U.S. Constitution stated: “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.” The implication was that even if a non-white immigrant to the U.S. could not obtain citizenship himself or herself, their children could become citizens if born in U.S.

The Chinese Exclusion Act of 1882

The California gold rush attracted many Chinese to the west coast of the U.S. where they worked in mines and then when the mines played out, they worked in railroad construction. But soon, these laborers were competing with American citizens for labor jobs and often accepting much lower wages thus making it harder for white Americans to find work. This created a lot of hostility by many Americans toward Chinese immigrants. Notably, 140 years later, that same hostility would be directed against Latin American immigrants who are perceived as “stealing” jobs from other Americans.

The Chinese Exclusion Act of 1882 was enacted to appease this hostility. The act barred Chinese laborers from immigrating to the U.S. and also made Chinese immigrants ineligible for citizenship. The only exceptions were for Chinese merchants and teachers. At the time, Chinese were subject to racial discrimination equal in many situations to Blacks. In fact, in in 1896 Supreme Court case, Plessy v. Ferguson,  Justice John Marshall Harlan wrote in his dissent: “…the Chinese race is a race so different from our own that we do not permit those belonging to it to become citizens of the United States.”.

Because the Chinese Exclusion Act limited immigration to merchants and teachers, the act essentially barred Chinese women from immigration since at the time, the vast majority of merchants and teachers were men. Indeed, by the end of the 19th century, Chinese men in the U.S. outnumbered Chinese women 27 to 1. Many of these Chinese store owners and teachers married white women since there were so few Chinese women in the country. One of those men was my great-grandfather, who came to the United States from China in 1873, opened a Chinese laundry, married a white woman (my great-grandmother), and ultimately became the president of the Chinese Merchant’s Association of America (but that is another story).

The unintended consequence of the Chinese Exclusion Act was that it selected out only educated Chinese men from immigrating to the U.S. And when these men married and had families, they instilled the importance of education into their children. The unwritten message was that if you were Chinese in America, you had to have an education to economically survive. Racism against Chinese created a more educated and middle class Chinese population in the U.S. In contrast, racism against Blacks in the U.S. resulted in Africans being brought to America as slaves and education of their children was suppressed in order to maintain a population of unskilled enslaved laborers.

Many of these Chinese merchants opened restaurants. Chinese restaurants proliferated because their owners had to sell better food at a lower cost than other American restaurants since they had no other employment options than to be a merchant, even if it meant making a lower income by selling inexpensive food.

The Immigration and Nationality Act of 1965

After World War II, the Chinese Exclusion Act was repealed, in part because China had been a U.S. ally during the war. However, immigration from China was limited to only 105 Chinese immigrants per year. The Immigration and Nationality Act of 1965 eliminated national origin, race, and ancestry as basis for immigration. Importantly, it created a “special immigrant” category that was not subject to quotas – included in this category were foreign medical graduates. The implication was that if you wanted to immigrate to the United States, you had to go to medical school first.

Currently, 25% of U.S. physicians are foreign medical graduates. The more medical schools a given country has, the more physician immigrants that country can send to the U.S. There are 348 medical schools in India offering an MBBS degree. There are 154 medical schools in China that offer an MBBS degree and 50 of these teach in English. In contrast, there are only 160 medical schools in the total of the 48 countries in Sub-Saharan Africa; consequently, India and China are capable of producing more medical graduates that can then immigrate to the United States than other countries can.

One of the best predictors of whether or not a person will become a doctor is whether their mother or father was a physician. In the United States, 20% of doctors have a parent who was also a doctor. I’m a perfect example, a third-generation doctor, with my physician-father a descendent of one of the Chinese immigrants affected by the Chinese Exclusion Act. Medicine is the family business.

The counter productivity of Chinese racism

For a century after the inception of the United States of America, Chinese were usually disdained and immigration from China prohibited. For the second century of our country, some Chinese were tolerated, but only those who were well-educated and entrepreneurial. As a result of policies and laws to keep Asians out of the U.S., we now have a disproportionately high percentage of Chinese and other Asians occupying the ranks of physicians. And given the propensity for children of doctors to become doctors, the percentage of doctors who are Asian American will likely grow in future decades.

Racism is always morally wrong. And racism is always bad policy. There can be unanticipated consequences of racism that result in exactly the opposite of what racism intended… your doctor is likely going to be someone like me, a son of a son of a daughter of a Chinese immigrant.

October 30, 2020

Categories
Operating Room

Operating Room Block Scheduling Versus Open Scheduling

There are some healthcare services that hospitals lose money on and some services that hospitals make money on. Hospitals tend to lose money on medical admissions and uninsured/Medicaid patients but make money on surgeries. Specialty hospitals, such as orthopedic surgical hospitals, take advantage of this and consequently can be quite profitable. However, for community hospitals to meet their obligation to align the healthcare resources of the hospital with the healthcare needs of the community, those community hospitals must maintain an adequate ratio of surgical to non-surgical services. But it also means that the hospital’s operating rooms must consistently function at maximum efficiency. And that is where OR scheduling can make or break a hospital’s financial bottom line.

In simplistic form, there are basically two ways to schedule surgeries: block scheduling and open scheduling. In block scheduling, a block of time is assigned to a specific surgeon or surgical group and no other surgeon can schedule cases in that particular operating room during that particular time and day. In open scheduling, surgical cases are booked in an operating room based on first-come, first-served and many surgeons may book cases in any given room in the OR area on any given day. As an analogy, block time is like a restaurant reservation – you reserve a table days in advance and you know when you walk in the restaurant that you are going to have a table at that particular time and day without having to wait. There are certain guiding principles to block time:

1. Block time belongs to the hospital

2. Block time is an extremely valuable asset

3. The hospital must designate a guardian of the block time

Block scheduling has certain advantages. It allows for specific operating rooms to be dedicated to specialized equipment (laparoscopic equipment, robotic equipment, fluoroscopy, etc.). It is allows the surgeon to make the most efficient use of his/her time by clustering cases at one time so that the surgeon does not need to be constantly racing between the office and the operating room. The surgeon can then schedule other times during the week to be seeing outpatients, thus making that surgeon’s office practice more efficient. It can allow the hospital to make most efficient use of a given operating room since the same surgeon will be physically present and ready to go as soon as the next patient is brought into the OR.

Similarly, open scheduling can have certain advantages. It allows accommodation of urgent or emergent cases. It can result in more consistent use of the operating room, nursing staff, and anesthesiology staff during regular work hours. It can result in less use of staff overtime. There is no need for a block time release policy or monitoring of block time utilization.

What really constitutes a block?

In order to maintain optimal utilization of the operating room, it is best to avoid half-day blocks and instead grant full-day blocks, whenever possible. It takes time to set up an operating room for a spine surgery case if that OR has been used for ENT surgeries all morning and therefore there is less down-time when reconfiguring a room for a second half-day block. Furthermore, no surgeon can predict with perfect accuracy how long it will take to do a particular surgery – there are inevitably unexpected delays or complications that can make a surgery go longer and there are inevitably last minute cancelations that can make the schedule shorter. If either of these happen during a morning half-day block, then it can result in either the OR going unused at the end of the morning or the surgeon with the afternoon half-day block having to wait to start her/his surgeries. It may be operationally most efficient to have some blocks end at 3:00 PM rather than at 5:00 PM.

Some surgeons may not need a full-day block each week. In these situations, scheduling an every-other-week block for that surgeon can make sense and be preferable to scheduling a weekly half-day block. Usually, you can find a second surgeon who also needs an every-other-week block to counter balance scheduling.

Surgeons frequently define their value by block time

When a hospital recruits a new surgeon, one of the first things that surgeon will ask for is block time. From the surgeon’s perspective, it is an indication of how much the hospital values her/him and the surgeon with block time will have a perception of having a greater chance of success. Indeed, to recruit the best surgeons, a hospital must be willing to offer block time. And if that surgeon can reliably fill their block time, then it is a win-win financially for both the surgeon and the hospital. However, the philosophical question will always remain: “Is block scheduling a right or a privilege?”. The bottom line is that a surgeon’s pride is often enhanced by having block time but the hospital’s financial viability is enhanced by the surgeon consistently filling that block time.

Some surgical specialties are better suited for block time

Surgeries that can be planned weeks in advance are the most efficient users of block time. For example, orthopedic joint replacements, spinal operations, and hernia repairs are elective surgeries and can be scheduled far in advance – these are best suited for block time scheduling. On the other hand, cholecystectomies, fracture repairs, and dilation & curettage procedures are often scheduled with only 24 – 48 hours notice – these are best suited for open scheduling. Sometimes, it is necessary to have a dedicated block that is not scheduled weeks in advance, for example, a trauma block. Although some trauma cases need to go to the OR emergently, most trauma cases can wait until the next morning. Having a dedicated block in the mornings for hip fracture repairs may be necessary for a hospital that is a designated trauma center.

Block vs. open scheduling is not an either/or proposition

A high-functioning hospital must use both block scheduling and open scheduling. The challenge is getting the right ratio of block to open scheduling in order to perform the maximum number of surgeries each week with the most efficient use of the surgeons’ time. To do this, there has to be rules for which surgeons get block time, how block time is released when the surgeon does not have cases to fill his/her block time, the amount of open scheduling necessary to meet the demands of urgent surgeries, and the amount of utilization that a surgeon must maintain in order to keep her/his block time. All of this means that the hospital must have good data including data on utilization, data on how accurately individual surgeons estimate it will take to do a given surgical procedure, and how often the operating room runs overtime. In order for the surgeons to believe the data, it has to be accurate, timely, and transparent.

So, what is the ideal ratio of block:open scheduling? As with most things in hospital management, it depends. For a hospital that does a lot of joint replacements and spine surgeries, a block ratio of 80% block time may be appropriate. For a hospital that depends on emergency department admissions to fill their operating rooms with trauma cases and appendectomies, then a ratio of 60% block time may be appropriate. For most hospitals, the maximum percentage of block time should not exceed 75-85%.

Not only is it necessary to have an optimal overall monthly block ratio, but it is necessary to have an optimal daily block time ratio. There are certain days of the week that are more desirable for surgeons to operate on than others. Surgeons who do inpatient surgeries tend to prefer Mondays, Tuesdays, and Wednesdays so that their patients can be discharged by Friday and so they do not have to round on the weekend. But Monday is also a day that typically has a high utilization of open schedule cases for all of the patients admitted over the weekends with fractures and acute cholecystitis. For the hospital to function at peak efficiency, it has to maintain a constant census throughout the week and so some surgeons will necessarily have to be assigned the less desirable Thursday and Friday blocks. This is often newer surgeons which allows the hospital to reward those surgeons with the highest block time utilization with the most desirable block times.

The importance of a block release policy

Sometimes, a surgeon does not need their block time. Maybe they have a planned vacation or will be attending a medical conference. Maybe they may just not have enough cases to do that week. In order to avoid the operating room being unused on those occasions, there must be a robust mechanism for releasing that surgeon’s block time so that other surgeons can schedule cases into that time. Vacation and time off for conferences needs to be communicated to the OR scheduling desk as soon as the surgeon knows she/he will be taking time off. If this is two or three months in advance, it allows another surgeon to pick up an extra day of block time that week. However, if this is only two or three days in advance, then no other surgeon will have enough notice to schedule a full block of elective cases and that OR will need to be filled by open scheduling.

Because individual operating rooms may have specialized equipment (robot, imaging capability, etc.), it may be preferable to have a staged block release policy in order to most efficiently use that operating room. So, for example, the orthopedic joint replacement surgeon’s block time gets first released to other orthopedic surgeons and then later gets released to all of the other surgeons if none of the orthopedic surgeons want that time.

Be prepared for concerns by your surgeons

  1. If I release my block months in advance of a conference I’ll be attending, will that be held against me?
  2. If a patient is unexpectedly sick or cancels an elective surgery at the last minute, will that be held against me?
  3. Am I going to be penalized if I operate faster than other surgeons and finish my block earlier in the day?
  4. Am I going to be penalized if the OR staff take excessively long to turn the room over between my surgeries so that I finish late?
  5. If I don’t have block time am I going to be stuck doing all of my elective cases at 4:00 in the afternoon?

Block time management requires resources

Perhaps nowhere else in the hospital does the adage “You have to spend money to make money” apply better than the OR scheduling desk. Optimized block time management requires the hospital to invest in a robust OR scheduling program, ideally one that is embedded in or communicates with the hospital’s electronic medical record. But the hospital cannot rely on a computer program alone – there has to be a human being who is overseeing the OR scheduling process. Block time optimization is a data-driven process and so there has to be a mechanism to have reliable information about individual surgeon first case start times, case duration times, block finish times, case cancelation rates, percent of blocks released, and room turnover times. There also has to be physician leadership intimately involved in block time management and data review. This will ideally involve a dedicated medical director of preoperative services but also a committee of involved surgeons in order to provide self-monitoring of block utilization. Ideally, block utilization data should be posted regularly (weekly or monthly) in a location that all of the surgeons can see.

Ideally, a given block should be utilized 80% of the time. If it is less than that, then the OR is likely to be frequently sitting idle in the afternoon. If it is more than that, then the OR is likely frequently running overtime into the evening and the surgeon may be developing a back-log of cases.

Block time management is complicated and can be costly. Within the hospital, it can be politically charged. But when done right, it can make the surgeons happy and the hospital profitable.

October 25, 2020

Categories
Physician Retirement Planning

Strategies For Asset Allocation In Your Retirement Accounts

In the past, I mainly advised new physicians in our department about retirement investment options at our university. More recently, my children have asked advice about their retirement planning. After you have made the decision about how much money you can invest in your retirement accounts, how do you go about deciding on what kind of investments to direct that money into? A few years ago, one of the wisest physicians at our university had recently retired and lamented to me that every year he had dutifully contributed the maximum he was allowed to his 403b plan but that he had allocated all of it to a very low interest money market fund and consequently, the value of his 403b was not enough to cover his expenses in retirement. Successful retirement planning means getting the right investment allocation in your retirement accounts and that allocation will vary depending on the type of account and your age.

The 4 Types of Retirement Accounts

There are many different types of retirement plans and all of the various plan numbers and names can be overwhelming at times. The plans you have access to will depend on your employer. For example, if you work for a for-profit company, you may have access to a 401k. For a non-profit company, it may be a 403b. And for a government agency, it may be a 457. Your employer may or may not provide a pension plan. However, all of the retirement investments can be divided up into four general categories:

  1. Roth accounts (including the Roth IRA, Roth 401k, and Roth 403b). These are investment accounts that you purchase after paying income taxes. They grow tax-free and when you take money out of them in retirement, you do not have to pay tax on the withdrawals.
  2. Deferred compensation accounts (including the traditional IRA, SEP IRA, 401k, 403b, and 457). These are investments that you direct pre-tax income into. The investments grow tax-free but when you take the money out in retirement, you pay regular income taxes on the withdrawals, based on whatever your income tax bracket is the year you withdraw the money.
  3. Post-tax accounts. These are investments that you purchase with money that you have already paid income tax on and are not subject to withdrawal rules in retirement. These can be broken down into financial investments (such as savings accounts or shares of stocks) and non-financial investments (such as artwork or real estate properties). For the purposes of this post, I am only going to consider the financial investments. The tax you pay on these investments depends on the type of investment: interest is taxed as regular income, dividends are usually taxed as capital gains but some types of dividends are taxed as regular income, and investment appreciation is taxed as capital gains.
  4. Defined benefit plans. These include pensions and social security. They generally give you a fixed income every month for as long as you live and you pay regular income tax on the monthly payments. Nearly every American has some form of a defined benefit plan since most Americans are eligible for Social Security. However the amount that each person gets from their defined benefit plans can vary widely – Social Security will pay out a relatively small amount where as a pension may pay out a very large amount each year. An annuity works similarly, with a portion of the fixed monthly payments being subject to regular income tax. The specific investments in most defined benefit pension plans and annuities are chosen by the company or institution that administers the pension or annuity so the individual investor does not have a choice of how the funds in the pension or annuity are invested.

Roth Account Allocations

Not all Roth accounts are the same. For example, the Roth IRA is not subject to required minimum distributions at age 72 (the IRS requires you to take a certain amount out of a regular IRA, 401k, 403b, or 457 each year after age 72). However, the Roth 401k and Roth 403b do have required minimum distributions after age 72. You can get around this by rolling your Roth 401k or Roth 403b over into a Roth IRA. Because the Roth IRA is not subject to required minimum distributions, many people will not start taking withdrawals from their Roth IRAs until well after age 72. For this reason, the investment horizon for your Roth IRA should be further in the future than the investment horizon for your deferred compensation accounts. The result is that your investment allocation will be different for your Roth IRA than for your other accounts. Strategies for your Roth IRA include:

  • A higher percentage of equities. Because your investment horizon is longer for the Roth account, you can and should invest in more higher risk stocks rather than lower risk bonds compared to the investment mix in your other retirement accounts.
  • No tax-free investments. Certain types of investments grow tax free, mainly municipal bonds. These generally pay lower interest rates than other bonds but the interest is not taxed. Since you do not have to pay income tax on Roth account withdrawals anyway, there is no advantage to investing in tax-free bonds, only the disadvantage of getting lower interest rates.
  • No cash investments. Cash investments include money in your checking account, savings account, or money market account. Although not exactly cash, I would also lump short-term certificates of deposit into this category. The main cash investment that most people will have access to in a Roth account is a money market fund. Because money market funds pay very low interest rates, you really lose the tax advantages of the Roth account by putting Roth money into a money market.
  • Use your Roth account to re-balance. Periodically, you should re-balance your retirement investments to be sure that you are maintaining a desired percentage of stock and bonds. You do not incur capital gains tax when you sell shares of mutual funds within your Roth account in order to exchange those shares for a different mutual fund. However, when re-balancing, remember that your Roth account should be more heavily weighted to stocks than your deferred compensation accounts. Also, be aware that you may be charged administrative fees every time you sell or exchange shares of mutual funds so do not get carried away and be exchanging shares too frequently.

Deferred Compensation Account Allocations

For many people, the majority of their retirement investments will be in a deferred compensation fund: 401k, 403b, 457, or traditional IRA. You do not pay any tax on these accounts until you withdraw money in retirement. Then, you pay regular income tax on the withdrawals. At age 72, the required minimum distribution rules come into play, meaning that the IRS requires you to withdraw a certain percentage from your deferred compensation accounts every year.

  • Get the right mix of stock and bonds. The first issue to be addressed is what ratio of stocks to bonds should you have. There is not a one-size-fits all answer to that question and the ratio will depend on your age, how long you plan to work, and how much in defined benefits you can expect. As a starting point, the percentage of stocks in your account should be 120 minus your age. Next adjust that percentage upward if you plan on a later retirement age or downward if you plan to retire early. Then adjust the percentage upward if you have relatively more defined benefit income in retirement, for example, a large pension. I am 62 years old, so using the equation, I should have 58% of my retirement investments in stocks; however, I will have a pension from our State Teacher’s Retirement System so I have adjusted that percentage upward to 66% in my deferred compensation accounts.
  • Be more conservative than you are in your Roth account. Because of the required minimum distributions starting at age 72, most people will start to withdraw from their defined benefit account several years before withdrawing from their Roth account. By spending down your deferred compensation amount, you can avoid being pushed into a higher tax bracket at age 72 when you may be required to take more out of your deferred compensation account than you actually need to meet your annual expenses.  Because of this shorter withdrawal horizon, you should have a lower percentage of stocks in your deferred compensation account than you do in your Roth account.
  • No tax-free investments. Similar to a Roth account, you should avoid tax-free municipal bonds in your deferred compensation plan since you will not realize any tax advance from the interest in a deferred compensation account and you will get a lower return on your investment.
  • No cash investments. Similar to a Roth account, you should avoid cash investments such as money markets in your deferred compensation accounts, at least until you reach retirement.
  • Use your deferred compensation account to re-balance. Similar to a Roth account, you will not pay capital gains tax every time you exchange one mutual fund for another within your deferred compensation account. But again, be aware of administrative fees charged when you sell or exchange shares of mutual funds within your deferred compensation account.
  • Chose funds with low expense ratios. Small differences in the expense ratio for different mutual funds can translate to big differences in total costs. Let’s take a mutual fund with an expense ratio of 0.75% – it seems like such a small number on the surface – less that one percent. But if you have $500,000 in your deferred compensation fund, you will pay $3,750 each year in expense fees. On the other hand, the same amount of money in a mutual fund with an expense ratio of 0.05% will result in only $250 annual expenses. In other words, you would be spending $3,500 more each year to be invested in the mutual fund with the higher expense ratio. As a general rule, index funds will have lower expense ratios than actively managed funds.
  • Are balanced mutual funds right for you? The default investment in many deferred compensation accounts will be an age-adjusted balanced fund such as a “Retire in 2035” fund. These will have a mix of stock and bonds, both domestic and foreign, with the mix pre-determined by the investment company based on one’s age. As you get older, the investment company automatically re-balances the components with thin these funds based on what is appropriate for your age. For investment novices, these are a great choice (which is why they are often the default investment) but they tend to be 2-3 times more expensive than their component index funds if you were to select the individual index funds yourself. Also, the balance of stocks and bonds in these funds may not be optimal for you if you have additional retirement investments in Roth accounts and post-tax accounts. And if you have a sizable pension, the balanced funds may be inappropriately conservative for your overall portfolio.

Post-Tax Account Allocations

The amount that you can save each year in a 401k, 403b, or 457 plan is limited. For most people, and especially for physicians with relatively high incomes, those deferred compensation accounts will not be enough to fund retirement. Anyone can supplement these by contributing to a post-tax traditional IRA (and then promptly converting it to a Roth IRA) and some people can contribute to both a 403b and a 457 each year (for example, employees of state-supported universities). However, when you maximize your annual contributions to these investments, you will probably still need to add more money into your retirement investments. This usually comes from the income that you have already paid regular income tax on, which I will call post-tax accounts. These accounts are not subject to the same IRS regulations that deferred compensation accounts and Roth accounts are but they have very different tax implications that can affect your asset allocations within them.

  • Here is where you should keep your cash investments. The whole purpose of having cash in your retirement portfolio is to be able to weather downturns in the stock market. In addition, you need to have 3-6 months of cash in an emergency fund in case you lose your job. In both situations, you want to have immediate access to money without withdrawal penalties. This is the where you should have your money market account.
  • This is the place for tax-free investments. Tax-free municipal bonds are not for everyone. The interest is considerably lower than for non-tax-free bonds and the tax advantages are primarily for the very wealthy. But for some people, having a portion of their retirement investments in tax-free bonds can be an important part of a balanced investment portfolio that will allow the retiree to strategically withdraw money from different funds in order to optimize their tax bracket. If you do chose to invest in tax-free bonds, they should be in your post-tax accounts where you can take advantage of the tax-free interest benefits.
  • Minimize re-balancing. Whenever you sell a stock, bond, or mutual fund, you will have to pay capital gains tax on the appreciated value of that investment. If you purchase $1,000 worth of a mutual fund and then sell it a year later for $1,120, then you have to pay capital gains tax on the $120 of appreciated value. The capital gains tax rate varies, depending on your annual taxable income. For married couples filing jointly, their capital gains tax rate is: 0% if making < $78,750; 15% if making $78,751 – $488,850; or 20% if making > $488,850/year. Therefore, if your joint taxable income is < $78,750, you do not pay any capital gains tax so you can sell or exchange your mutual funds all you want and you do not have to pay tax on the appreciated value. On the other hand, if your joint taxable income if > $488,850, then you will be paying the higher capital gains tax rate of 20% and you are better off holding on that investment until you are in retirement and may have a lower taxable income. One caveat to this is during periods when the stock market declines, such as the 2009 recession or the March 2020 COVID-19 market crash, re-balancing post-tax accounts will incur less capital gains tax since there will be relatively little appreciated value of the funds at that time.

My personal philosophy is that everyone should have retirement investments in each of these 4 types of accounts in order to reap the rewards of a fully diversified investment portfolio. Because each of these accounts has different tax implications, the ideal mix of investments in each type of account is going to be different. Begin planning those allocations as soon as you start to save for retirement.

October 12, 2020