Categories
Physician Finances

Paying For Your Child’s College Education

Raising a kid is expensive. And it all culminates with the cost of a college education. One of the most gratifying things about being a parent is seeing your child be successful and one of the best ways to ensure that success is a strong education. Thus, one of the most important gifts we can give our children is a college education. But that education is expensive and gets even more expensive every year.

Summary Points:

  • College costs rise faster than inflation.
  • To pay for a child’s college education, it is important to start saving as early as possible.
  • Saving options include (1) uniform gifts to minors accounts, (2) Coverdell education savings accounts, (3) Taxable brokerage accounts, (4) Roth IRAs, (5) 529 plans, and (6) loans.
  • The best option depends on the parents’ unique individual financial situation and the likelihood that at least one child will attend college.

The U.S. Bureau of Labor Statistics reports that for the 40 years between 1980 and 2020, the consumer price index rose by an average rate of 3.54% every year. The College Board tracks trends in college pricing and notes that the average annual increase in tuition and fees at four-year public institutions between 1980 and 2020 was 3.4% above inflation. For private nonprofit four-year institutions, the average annual increase over the same period was 2.6% above inflation. Taken together, these statistics indicate that the cost of college education has increased 7% per year for public colleges and 6% per year for private colleges over the past 40 years. The good news is that for the past year, college costs have risen less than the rate of inflation: between February 2023 and February 2024, college tuition and fees increased by 1.3% whereas the consumer price index increased by 3.2%. However, it is not clear whether this lower increase in the cost of college is sustainable – given the reductions in state government support for public higher education and the declining enrollment in U.S. colleges, it is more likely that college education inflation will return to its historic annual rates of 6-7% in future years.

The cost of college 18 years from now

The cost to attend college includes tuition, fees, books, room, and board. The price of tuition varies considerably, depending on whether a student attends an in-state public university or a private university. As an example, I have children that attended the University of Notre Dame (private), the Ohio State University (in-state public), and the University of Dayton (private). For this analysis, let’s assume an average annual inflation rate of 5% for the total cost of college with the assumption that tuition and fees will increase about 6-7% per year but room and board will be closer to the consumer price index average of 3% per year. For a freshman entering this year, the Ohio State University currently costs $27,241 for the first year and $108,964 for four years. The University of Dayton currently costs $63,240 for the first year and $252,960 for four years. The University of Notre Dame currently costs $80,071 for the first year and $320,284 for four years. But with an annual increase of 5%, in 18 years, those costs will rise to $282,566 (Ohio State), $655,978 (Dayton), and $830,562 (Notre Dame). If I was starting my family today, it would cost me more than $2.4 million to put my four kids through college.

You can’t count on financial aid

The most recent data from the U.S. Department of Education’s National Center for Education Statistics showed that 72% of undergraduate students receive some form of financial aid. 55% received federal aid, 23% received state aid, and 28% received institutional aid. The most common type of aid received were grants and scholarships (64%) followed by student loans that the students took out themselves (36%), work-study (5%), federal direct plus loans that parents took out (4%), and veterans education benefits (2%). The average total annual financial aid package was $14,100.

Because much of financial aid is based on income, children of physicians (and other well-compensated professionals) are usually only eligible for athletic or academic scholarships. As a result, if you are a physician, attorney, dentist, or business executive, your dependent children will not be eligible for most forms of financial aid because your income is too high. Because a college education is projected to be so expensive, you need to start saving for your child’s education starting on the day that child is born.

A colleague of mine in academic medicine had not given a lot of thought about saving for college until his children were in high school. When the first tuition bills came due, he did not have enough saved up and so he took out a second mortgage on his house to pay for his kid’s college education. He ended up postponing his retirement by several years in order to pay back the money he had to borrow. The lesson is that you cannot start saving for college too early but you can start too late.

Six ways to save for a child’s college education

There are several different ways to save for college and each has advantages and disadvantages. In my opinion, 529 college savings plans are the best way to go for most people but I will review other options as well.

(1) Uniform Gifts to Minors.

This program was created in 1956 by the Uniform Gifts to Minors Act. A very similar program in some states is the Uniform Transfers to Minors. It allows parents to give their children financial assets. The parent (or some other designated adult) is appointed as the custodian and controls those assets until the child reaches the age of majority. The age of majority varies by state but in most states is between 18 and 21-years-old. The money in the account can be used for any purpose. Additionally, these gifts are irrevocable, meaning that the parent cannot take the money back to use for some purpose other than support of the child. Any unearned income from the investments can be reported on the parent’s federal income tax returns as “kiddie tax” meaning that the first $1,250 of unearned income is not taxed, the next $1,250 is taxed at the child’s income tax rate, and anything over $2,500 is taxed at the parent’s income tax rate. There is no limit to the amount that a parent can put into a uniform gifts to minors account but contributions greater than $18,000 per year are subject to federal gift tax laws.

The biggest disadvantage of uniform gifts to minors (or the similar uniform transfers to minors) is that because the account is the property of the child, that child can use the money for whatever he or she wants after reaching the age of majority. If the age of majority is 18-years old in your state, then when the child turns 18, that child can use the money to buy a Corvette instead of using it for college and there is not a thing you can do about it. This happened to a friend of mine who regularly saved for his son’s college education by contributing to a uniform gifts to minors account. His son ended up getting a scholarship and then when he turned 21 (the age of majority in his state), he had $75,000 in spending money that he used to travel around the world. The father would have liked to use that money to pay off the mortgage on the family home but there was nothing that he could do about it.

The main advantage of the uniform gifts to minors accounts is that they can be used for anything for the child and not just the child’s education. Because the first $1,250 of annual unearned income (interest, dividends, and capital gains) are not taxed, this can be a great way to save up for expenses such as summer camp, skiing lessons, or a car for the child before that child reaches the age of majority for your state. But as a way to save for college, there are better options.

(2) Coverdell education savings accounts.

These are accounts that can be opened for a child under age 18 to pay for educational expenses. The money in the account grows tax-free and withdrawals are not taxed as long as they are used for educational purposes. Unlike the uniform gifts to minors accounts, any residual funds that the child does not use for his or her education can be transferred to another family member’s account. They are limited to parents with incomes of less than $220,000 (married filing jointly). The maximum contribution is only $2,000 per child per year. Because of the parental income limit, these accounts are generally not an option for most physicians or other well-compensated professionals.

(3) Taxable brokerage accounts.

If you (the parent) want to have the greatest flexibility for how the money you are saving can be used, then open a brokerage account in your name and contribute to it regularly with the intention of using the money in that account to pay for your child’s education. The account is in your name (just like any other investment account you have) so if your child does not need the money for a college education, then you can use it for your own purposes since it is your money.

The disadvantage of a taxable brokerage account is the taxes. You will pay capital gains tax when you sell the investments and you will pay regular income tax on annual unearned income (interest and non-qualified dividends) from the investments. Money used to pay for the child’s college education can also be subject to the gift tax limits which is $18,000 per child per year in 2024. There are ways around that limit, however. Money that you as a parent spend for tuition is not included in the gift tax limit as long as you pay the college directly from your own accounts (and not give the money to the child for him or her to write a tuition check from his or her account). Also, the gift tax limit is $18,000 per parent so if you are married, you and your spouse can each give the child $18,000 each year ($36,000 total) to cover their non-tuition living expenses.

(4) Roth IRAs.

Most people are familiar with using a Roth IRA to save for their own retirement. You take money that you have already paid income tax on and put it into a Roth account and then when you are retired, you can take money out of the Roth account tax-free. If you take money out of the Roth IRA before age 59 1/2, then you have to pay a penalty to the IRS. However, you can take money out of your Roth IRA before age 59 1/2 if you use it for educational expenses for yourself, your spouse, your children, or your grandchildren. The IRS will likely look at those early withdrawals so it is important to maintain careful records documenting your child’s enrollment in college and receipts for tuition, fees, books, and room and board. The nice thing about this college savings strategy is that any money that you don’t use for the child’s education can just remain in the Roth account for you to use in your own retirement.

There are some notable restrictions to Roth IRAs, however. You can only contribute directly to a Roth if your income is less than $240,000 (married filing jointly) and you can only directly contribute a maximum of $7,000 per year ($8,000 if you are over age 50). You can get around the income limit by doing a “backdoor Roth IRA”, meaning that you contribute first to a traditional IRA and then immediately convert the money in that traditional IRA into a Roth IRA. The maximum contribution to a traditional IRA is also $7,000 per year. Another noteworthy feature of Roth IRAs is that the penalty for early withdrawal before age 59 1/2 only applies to earnings from the money in the Roth IRA and not on the initial contributions. In other words, you can always take out an amount equal to the amount that you originally contributed to the Roth IRA anytime, for any purpose, without penalty. Note, however, that if you take more money than your initial contributions out of your Roth IRA to pay for your child’s college expenses, you will have to pay regular income tax on the amount of earnings withdrawals – you just don’t have to pay the additional 10% penalty. Withdrawals of earnings from a Roth IRA are also subject to the 5-year rule: the first contributions to the Roth IRA must have been at least 5 years prior to the earnings withdrawal to avoid a penalty (even if the withdrawals are used for educational expenses).

Because Roth IRA earnings are taxed when withdrawn before age 59 1/2 (even for educational purposes), the best way to use a Roth IRA for your child’s college education is to limit the amount of withdrawals to the amount that you initially contributed to the Roth account. As an example, say you put $8,000 into a Roth IRA this year when your child is born and 18 years from now, that Roth IRA is worth $32,000 ($8,000 initial contribution plus $24,000 earnings from interest, dividends, and capital gains). You can take $8,000 out of your Roth IRA for your child’s college expenses without penalty and without paying tax on it, leaving you with $24,000 in the Roth IRA that you can keep there to eventually withdraw tax-free in your retirement. If you were to take the full $32,000 our of your Roth IRA for your child’s college expenses, you would have to pay regular income tax on $24,000 (the earnings portion), but you would not have to pay the additional 10% penalty since it is for a qualified education expense.

(5) 529 plans.

These are accounts that are in the child’s name but that the parent controls. The investment grows tax-free and when withdrawals are used for educational expenses, the withdrawals are not taxed. Each state has its own 529 plan with its own investment options. Also, each state has different tax rules regarding 529 contributions. For example, here in Ohio, we can deduct the first $4,000 of contributions to each child’s Ohio 529 account, each year from our Ohio state income taxes. In 14 states, contributions are not tax-deductible from state income taxes. It is important to familiarize yourself with the tax rules unique to your particular state of residence.

Because the parent controls withdrawals and because those withdrawals can only be used for educational expenses, there is no risk that a child can take the money out to buy a Corvette on their 18th birthday. In addition, if there is money left over after one child finishes college, you can roll the residual funds over into another child’s 529 account. Or roll those funds into a 529 account for a grandchild. Or if you want to go back to school to get a Master’s degree, roll the funds into a 529 account for yourself. Living in Ohio, the tax advantages and the flexibility of the 529 plans make them unbeatable as a tool to save for college.

However, like any investment, you have to critically study exactly what it is you are investing in. Because each state’s 529 plan has different investment options, some states offer investments into mutual funds that charge relatively high expenses or that underperform compared to other mutual funds. As an example, when I first started contributing to 529 plans, Ohio only offered a group of managed mutual funds with high expense ratios and that had fairly low rates of return. Instead of contributing to Ohio’s 529 plan, I opened an account in Iowa’s 529 plan because they offered low-cost Vanguard index mutual funds. At the time, I had never even stepped foot in the state of Iowa. Once Ohio’s 529 plan changed to low-cost index funds, I transferred the money from Iowa’s 529 plan into Ohio’s 529 plan in order to reap the benefits of the tax deduction on contributions on my Ohio state income tax return.

The only disadvantage to 529 plans is that if you withdraw the money for something other than educational expenses, you get penalized. These penalties include paying federal and state income tax on the earnings withdrawals, a 10% federal penalty, and state-specific penalties. Nevertheless, even if you don’t use all of the money in your child’s 529 plan for their education and you don’t have any other family members with 529 plans to roll the residual funds into, you can still take the withdrawals and pay the penalties. This at least leaves you with something, unlike the uniform gifts to minors accounts where all of the withdrawals go to your child to spend anyway they want. Also, there are some exemptions to the 10% penalty, for example, if your child attends a U.S. military academy, gets a tax-free scholarship, or dies.

(6) Loans.

This is the least desirable option to pay for college. These can take the form of a government student loan taken out by the parents (such as federal direct plus loans), a loan taken out from a commercial lending company such as a bank, or re-financing the mortgage on a house. The interest that you will pay on these loans is expensive, especially now with mortgage interest rates are in the 6-7% per year range. A significant problem with student loans taken out by the parents is that those parents are generally in their 40’s our 50’s and the payments on these loans represent money that the parents could have been investing for their retirement. As a result, the parents will either have to retire at an older age than they had planned or have to live on a smaller annual income in retirement than they had planned.

Education loans taken out by the child are a bit different. Attending college is an educational investment in one’s career, allowing that person to have a broader range of job opportunities and allowing that person to have a higher income from those jobs than if they did not attend college. Thus, the loan is paid off by the child’s future working income rather than the parent’s future retirement income. Furthermore, if the child takes out federal direct student loans and then after college gets a job in a government organization or a non-profit company, then the principal on the loan can be forgiven after 10 years of working through the federal Public Service Loan Forgiveness program. Therefore, loans taken out by the child are not as bad of an option as education loans taken out by the parents for that child. Whether or not to the child should resort to taking out education loans depends on the parent’s financial ability to save for the child’s college education over 18 or 20 years and how much the parents prioritize education.

So, how much do you need to save?

If we go with the assumption that college education expenses continue to increase at 5% per year, then you should plan on your child’s college education account having at least enough to cover 4 years at a state-supported public college in 18 years for a child born today. Using the Ohio State University as an example, this means that you will need to have $282,000 in that child’s account in 18 years. There are several ways to get to this amount. The key is to take advantage of compound interest, meaning that the earlier you start, the easier it is to end up with $282,000 in the account. Ideally, you should put in an initial contribution at birth and then contribute a smaller amount every month for the next 18 years. Here are three options, assuming an 8% average annual rate of return on the account’s investments:

  1. Initial contribution of $20,000 plus $417 per month for 18 years.
  2. Initial contribution of $10,000 plus $500 per month for 18 years.
  3. Initial contribution of $0 plus $583 per month for 18 years.

If your goal is to send your child to a private college such as the University of Notre Dame, then plan on saving even more. You will need to have an initial contribution of $25,000 plus $1,500 per month for 18 years!

My recommendations

There is no single best solution for every parent. The more likely that a child will attend and complete college, the more important it is that the parents start saving early for that child’s college education. If one parent graduated from college, then the chances of a child going to college increases. If both parents attended college, then those chances increase even more. The more children you have, the more likely it is that at least once of them will attend college.

High chance at least one child will go to college. In this situation, the 529 plans just cannot be beat, especially if you live in a state like Ohio that overs a large tax deduction from state income taxes on annual 529 contributions. If the oldest child does not go to college (or gets a full scholarship to college), you can roll the money from that 529 account into another child’s 529 account. In the worst-case scenario and none of your children go to college you can withdraw the funds from their 529 plans for your own use – you will have to pay income tax and a 10% penalty on the earnings (but not the amount of your original contributions). Thus, you will still have made money off of the investments in the 529 plan, just not as much as if you had put the money directly into a taxable brokerage account in your own name. We had 529 plans for each of our four children and when each one graduated from college, we rolled the residual balance in their 529 account into the other children’s 529 accounts. Now that we have grandchildren (all out of state), we have opened accounts for each of them in Ohio’s 529 plan.

Low chance that your only child will go to college. If you only have one child and you are uncertain whether that child will attend college, you may want to put money in a Roth IRA instead of a 529 plan. Then, if a child does end up attending college or vocational school, you can withdraw the amount of your original Roth IRA contributions without penalty to pay for their education. You will still have all of the earnings that you made off of those contributions remaining in the Roth IRA for you to use in your retirement. If your child does not end up attending college, then just leave the money in the Roth IRA for you to take out tax-free in retirement. If both you and your spouse contribute the maximum to a Roth IRA (currently $7,000 per year per person), then in 18 years, there will be a total of $252,000 of contributions in your Roth IRAs, nearly enough to pay for 4 years of public university education 18 years from now. However, you should only use this strategy if you have additional other ways of saving for retirement, such as a 401(k), 403(b), 457, SEP IRA, etc. Otherwise, the total amount that you have saved for retirement will fall short.

Low chance that your multiple children will attend college. If you have more than one child and you are not sure if any of them are going to attend college but want to be prepared in the event that two or more do eventually go to college, then you can start with the Roth IRA plan as in the previous paragraph. By maximizing Roth IRA contributions for both you and your spouse, there should be enough in the Roth IRA contributions to cover one child’s college education without having to tap into the Roth IRA earnings. Then open a taxable brokerage account in your own name that you earmark to tentatively use for a second child’s education. You will have to pay annual income tax on interest income and non-qualified dividend income and you will have to pay capital gains tax when you sell the investment (for most people, the capital gains tax rate is lower than their effective income tax rate). However, these taxes will be less than the income tax and 10% penalty that you would have to pay if you had put the money in a 529 plan and then withdrawn the 529 earnings should your children not attended college.

The child is not going to college but will have other monetary needs after high school. Maybe your child’s dream is to open a pet daycare center and will need seed money to start their business. Maybe your child wants to be an Uber driver and will need money to buy a car. Maybe your child is a sculptor and will want to travel abroad for for artistic inspiration. In these situations, a 529 plan is not a great idea because you cannot take the money out of the account without penalty since it will not be used for bonafide educational expenses. Uniform gifts to minors savings may be a better option since this allows the child to use that money to launch his or her career.

The most important thing you can give your child

I’m one of those people who thinks that his life is great but that the lives of the next generation are going to be even better. But more than any other time in human history, that depends on education. The most important gift a parent can give to a child is education and I prioritize education much more than gifts of things like clothes, cars, or exotic vacations. For me, Ohio’s 529 plan was clearly the best choice to save for my children’s education. For you, another option might be preferable. But whatever you decide to do, start saving early and save at least a little bit every month. There will come a time in your life when watching your children succeed in life is more important to you than your own successes.

March 19, 2024

Categories
Physician Finances

Your Inflation Rate Is Not My Inflation Rate

Inflation is the increase in the cost of goods and services over time. A little inflation is a good thing and indicates adequate consumer demand and a healthy, growing economy. But too high of an inflation rate can be a sign of an unhealthy economy. The biggest danger of inflation is when the inflation rate is higher than the simultaneous increase in wages – in this case, a person’s net purchasing power decreases, meaning that the person is unable to afford as many goods and services as in they could in the past.

To understand inflation, you first have to be able to measure it. In the U.S., the most commonly used measurement of inflation in the consumer price index (CPI), which is reported monthly by the U.S. Bureau of Labor Statistics. When most people talk about the CPI, they are talking about the “Consumer price index for all urban consumers: US city average, all expenditures“. There are some caveats about this measure, however. It only includes people living in urban and metropolitan areas. Although this accounts for a little over 90% of the U.S. population, it does not include rural residents, farming families, and members of the military – the inflation rate for these latter groups could be higher or lower than the inflation rate for urban residents. The CPI is reported in three ways: (1) as an index compared to the benchmark of prices during the period of 1982-1984, (2) as the percent change in CPI over the past 1-month and (3) as the percent change in the CPI over the past 12-months. The benchmark of prices in 1982-1984 is defined as an index of 100 and as prices go up, that index goes up. The index in February 2023 was 300.840 and the index in February 2024 was 310.326.

The percent change in CPI is also reported as “unadjusted”, and “seasonally-adjusted”. This is important because the price of some goods and services normally varies by season. For example, the price of fruit and vegetables normally goes down in the summer when these foods are freshly harvested whereas the price of gasoline normally goes up in the summer when vacation travel increases. The seasonally-adjusted CPI is generally preferred over the unadjusted CPI when looking at the 1-month change in CPI. The 12-month CPI does not require seasonal adjustment since it encompasses all four seasons of the past year.

In addition, there can be significant geographical differences in inflation depending on where in the United States a person lives. For example, for the 12-months between February 2023 and February 2024, the CPI increased by 3.2% for the U.S. in total. But the CPI increase in specific regions varied: northeast 2.4%, south 3.7%, west 3.2%, and midwest 2.8%. Even more specifically, the 12-month CPI increase for Cincinnati was only 1.1%, Milwaukee 1.8%, San Francisco 2.4%, Miami 4.9%, and Dallas a whopping 5.3%.

The CPI can be subdivided into different categories of goods and services and there can be tremendous variation in the 12-month change in prices of these categories. The graph below shows the 12-month CPI change for selected goods and services and ranges from automobile insurance that increased 20.6% to health insurance that decreased 19.7%. The average CPI for all goods and services was 3.2% (red bar below).

In February 2024, the 12-month increase in average hourly wages was 4.3% (green bar above). This means that the overall inflation rate (3.2%) is lower than the increase in wages, indicating that the average worker can buy more stuff with their earnings than they could a year ago. For any category of goods and services with a percent change in CPI less than the percent change in wages of 4.3%, the average worker can buy more of those goods and services. For any category with a percent change greater than 4.3%, the average worker could buy less of it. Therefore, even though the CPI for food cooked at home rose by 2.2% in February 2024, the average worker could buy more food at the grocery store with his or her paycheck whereas that worker could buy fewer restaurant meals, which increased by 4.5%. Inflation is often said to be hardest on retirees with fixed incomes. But this can be misleading because fixed incomes are not always really fixed. For example, in 2023, Social Security checks increased by 8.7% in order to keep up with increases in the cost of living.

Your personal inflation rate

How inflation affects you personally depends on how much your income increases each year relative to the increase in the CPI. It also depends on the increases in the CPI of individual things that you spend your money on and where in the U.S. you live.

For me personally, I live in the midwest where the CPI increased less than for the U.S. in general. I also do not spend much on goods and services that have had a large increase in price: my house is paid off so housing costs are negligible, I rarely eat in restaurants, and I don’t smoke cigarettes. What I do spend money on are goods and services that have decreased in price: I heat my house with natural gas, I recently booked airline tickets for 3 trips, I rented a car for one of those trips, and I just bought a new computer to replace my 10-year old laptop. So, my personal inflation rate is quite low and overall, I am paying less for the goods and services that I buy than I did a year ago. The bottom line is that my personal economy is currently not just good, it is outstanding! On the other hand, a smoker who lives in Texas, eats at restaurants a lot, and rents an apartment is facing a relatively poor personal economy (public service announcement: if you are a smoker, you can make your personal economy a lot better this year by quitting).

The aggregated CPI is very useful from a macroeconomic standpoint for government policy makers looking at the country as a whole. But it is less useful for individuals whose spending patterns and geographic location can vary considerably compared to the average. Making an annual household budget every year and then incorporating data from the Bureau of Labor Statistics CPI reports into that budget is a great way to ensure that your personal inflation rate does not unexpectedly bite into your checking account mid-year

The cycles of life

Our lives go through a series of cycles. We start in our education years, followed by our early working years, our child-raising years, our wealth-accumulation years, and finally our retirement years. Inflation affects us differently at each of these stages. It also affects us by the expenditure choices that we make during each of these stages. The way to make your personal economy beat inflation is to make those expenditure choices wisely: when the CPI for eating at restaurants goes up, cook your meals at home. When the CPI for airline travel goes down, book a vacation. Much of our personal inflation rate is ultimately under our own control.

March 13, 2024

Categories
Hospital Finances Operating Room Procedure Areas

Financing Medical Equipment: Purchase vs. Pay-Per-Use?

Innovations in technology have given us better and more powerful medical equipment but have also increased the cost of those devices. A reader recently asked when is it better to purchase medical equipment outright as opposed to pay-per-use financing? As always, the answer is… it depends.

When purchasing a high-cost piece of equipment outright, the hospital (or medical practice) either pays for the entire cost upfront or pays for it in installments. It is like buying a new car – you can either pay cash at the time of purchase or you can finance it over a period of a few years. A second method of acquiring that same piece of high-cost medical equipment is by a pay-per-use contract. In this acquisition model, the manufacturer lends the hospital the equipment for free and instead charges the hospital each time that equipment is used. There are situations when outright purchase is better and there are other situations when pay-per-use is better. For this post, I’ll use the example of a surgical robot but the principles apply to any high-cost piece of medical equipment. The total cost of a surgical robot system varies depending on model, price negotiation, and types of robotic arms used. But we’ll assume a fairly typical $2 million purchase price, $2,000 per operation consumables (eg, robotic arms), and $180,000 annual service contract.

First, create a pro forma

In hospital financing, a pro forma is a document that projects the total costs and total revenue from a proposed new service or piece of equipment purchase over time. Because of the high cost of a surgical robot, no hospital will purchase one just because a surgeon goes to the CEO and says the justification is “Because I want one“. Instead, the hospital is going to want to know whether in the long run the hospital is going to make money or lose money on the surgical robot. However, when I look at a pro forma, it is not just the dollars and cents that are important. There can be non-monetary benefits that can justify purchase of a surgical robot, even if the hospital is not going to make money on the robotic procedures. For example, shortened time in the operating room per surgical procedure, shorter patient recovery vs. non-robotic surgery, fewer surgical complications, improved patient satisfaction, attraction of new patients who prefer to have robotic surgery, etc.

When drafting a pro forma for outright purchase of a medical device such as a surgical robot, you need to look at all of the costs. This includes the purchase price of the equipment, the cost of consumables (such as the surgical arms that can only be used for a fixed number of surgeries), the cost of a service contract, and the cost of personnel. When possible, convert non-monetary factors into dollar-equivalents – for example, determine the cost per hour of an operating room and then include cost savings of a shorter OR procedure time with a robotic versus non-robotic operation. Conversely, if the robotic surgery will take longer than a non-robotic surgery, include this as a cost rather than a cost savings. The type of physicians and the types of procedures will need to be estimated. For example, if the surgical robot will be used by general surgeons, colorectal surgeons, gynecologists, urologists, and ENT surgeons then the relative costs of each of these different types of robotic surgeries needs to be included. Other costs to be factored in can include the cost of any building renovation required to accommodate the new equipment, the cost of training personnel to use the new equipment, the cost of insuring the new equipment, the cost of advertising the availability of the new equipment, etc. The service contract costs must be factored in as well. If a surgical robot is used 18 times per year and the service contract is $180,00 per year, then that works out to an expense of $10,00 per case. On the other hand, if the surgical robot is used 500 times a year, the expense is only $360 per case.

The revenue from a surgical robot will require an estimation of the volume of surgeries performed each year and the expected reimbursement. Reimbursement needs to be stratified by all of the different procedures that will be performed, for example, a robotic cholecystectomy vs. a prostatectomy vs. a hysterectomy. This can be pretty complicated because the reimbursement for an operation such as a cholecystectomy can vary depending on whether it is being paid for by Medicare, commercial insurance, Medicaid, or self-pay (note: self-pay usually translates to no-pay).

Central to a pro forma is the concept of depreciation. This is the expected number of years of life of that piece of equipment before you have to buy a new one. Medical equipment is often depreciated over 5 years. For example, a surgical robot that costs $2 million to purchase and is expected to last 5 years can be depreciated over those 5 years at $400,000 per year. In this example, the pro forma should include tables for each of the 5 years of depreciation. If the hospital projects doing 500 robotic cases per year, then the capital equipment costs would be $800 per case ($400,000 per year ÷ 500 cases per year).

Once you create a pro forma for outright purchase, you then need to create a pro forma for pay-per-use financing. Include all of the costs and revenues you used with the outright purchase pro forma but instead of equipment cost depreciated over the depreciation period (eg, 5 years), include the total annual pay-per-use costs over those 5 years. It is essential to clarify whether servicing the equipment is included in the pay-per-use contract. Usually it is but if the hospital is required to purchase a separate $180,000 per year service contract, then the financial advantages of pay-per-use acquisition can disappear.

Hospitals are unique environments compared to business and manufacturing. Proposals for capital equipment purchases should not be finalized until they have been evaluated and approved by the biomedical engineering department, the infection control department, the staff responsible for structural engineering, radiation safety personnel, etc.

Variables affecting the decision to purchase outright vs. pay-per-use

The decision of whether to buy a piece of medical equipment or pay-per-use is much more complex for a hospital than the decision of whether to acquire a piece of manufacturing equipment by outright purchase or pay-per-use for a factory. There are variables that are inherent in healthcare that do not exist in manufacturing and these variables can have a profound effect on how to pay for a new medical device. Here are some of the variables that the hospital must factor in to the decision-making process.

  1. The number of physicians who will use it. If only one surgeon or one physician group will use a piece of equipment, then there is the risk that if that surgeon or group leaves the hospital to practice elsewhere, then the hospital could be stuck with an expensive device that just gathers dust in a closet. Just like it is risky to put your entire retirement investment portfolio in a single stock (as opposed to a mutual fund), it is risky to base the entire pro forma on the equipment’s use by just one physician.
  2. The number of specialties that will use it. In the example of a surgical robot, it is far better to buy a robot that will be used by general surgeons, cardiothoracic surgeons, urologists, ENT surgeons, and gynecologists rather than just one of these specialties alone. This ensures that the device can be used every day, Monday through Friday, all year. This overcomes specialist slow downs due to medical conferences, outpatient clinic days, procedure seasonality, etc.
  3. The hospital’s cash flow and budget. A $2 million purchase for a surgical robot can wipe out most of a small hospital’s annual new equipment budget. If the hospital lacks sufficient cash to purchase an expensive piece of equipment, then a pay-per-use model may be preferable since there will be an immediate return on investment. Otherwise, it could take several years of use to generate enough revenue to cover the cost of outright purchase.
  4. Anticipated volume. If you anticipate a relatively low procedure volume each year, then it could take many years before you recoup your return on investment for the purchase and you’d be better off with the pay-per-use model. The more procedures you can do, the more likely you will be better off purchasing equipment outright.
  5. Expectation of a new model in the near future. Medical equipment manufacturers usually keep dates of release of new models of their equipment secret until the last minute (sort of like Apple staying mum about new iPhone models until they are ready to be released). Nevertheless, a little detective work can give you an idea of whether a new version is on the future horizon. If so, you are often better off with pay-per-use initially and holding off on purchasing until the new model comes out. This also holds if you would be happy with the older (current) model since manufacturers will generally discount them to clear out their inventory once a new model comes out. The surgical robot model costing $2 million this year might drop to $1.5 million next year when the next model is released.
  6. Commitment by the physicians. I got burned several years ago when our gastroenterologists insisted that we needed to start doing endoscopic ultrasound pancreatic biopsies. We spent a half million dollars on new endoscopic equipment that could only be used for those procedures and also invested in cytology telemedicine so that cytopathologists at another hospital could read the needle aspirates real-time during the procedure. Five years later, the gastroenterologists had not done a single endoscopic ultrasound procedure at our hospital and we basically wasted the money. If there is any uncertainty about whether the doctors will use the equipment, then a per-use model (at least at first) is preferable until the doctors prove that they will actually use it.
  7. Procedure payer mix. A manufacturing company can determine the price it will charge for a product and base it’s pro forma on just one sales price. In medicine, however, the hospital gets paid different amounts by different payers for doing any given procedure or service. This means that creation of an accurate pro forma requires the hospital to not only project the total annual volume of procedures to be performed with a new device but also the projected payer mix for those procedures and the financial margin for each payer. Reimbursement from Medicare and Medicaid is fairly easy to project since they are fixed by CMS. However, each commercial insurance company will reimburse different amounts for any given procedure, depending on the hospital’s negotiated contract with that insurance company. Imagine the complexity of a manufacturer who projects that by installing new factory equipment, it can make and sell widgets. But sales contracts dictate that 30% of customers pay $10 per widget, 15% of customers pay $5 per widget, 25% of customers pay $18 per widget, 15% of customers pay $27 per widget, and 15% of customers don’t pay anything and get their widgets for free. In general, per-procedure hospital reimbursement is highest for commercial insurance, a bit lower for Medicare, lower still for Medicaid, and negligible for self-pay. We once had a surgeon who specialized in surgically implanting very expensive medical devices. When we did the initial pro forma, it looked like the hospital would net a small profit each year on the procedures. But after a couple of years, we noticed we were losing tens of thousands of dollars. It turned out that the surgeon was performing implants on commercially insured patients at a private hospital in town and only operating on Medicaid and self-pay patients at our hospital.
  8. Non-monetary benefits. The decision of whether to purchase a piece of equipment outright or utilize a pay-per-use financing should not depend solely on the expense vs revenue columns on a pro forma. There can be non-monetary benefits that the hospital may value, even if the new equipment does not increase revenue. These can include attraction of new patients, improved patient satisfaction scores, reduced mortality, reduced complication rates, shortened operative times, etc. It is also important to keep the doctors happy because if the physicians really want to use a new piece of medical equipment and the hospital won’t buy it, those physicians will leave to go practice at another hospital that will buy the equipment. In this case, a pay-per-use acquisition model may allow the hospital to keep the doctors happy while eliminating or at least minimizing financial loses.
  9. Connectivity. In an increasingly electronically interconnected world, the ability of medical equipment to connect to the monitors, electronic medical record, scheduling software, and billing software is essential. If there is concern about electronic compatibility, then pay-per-use might be a better option until optimized connectivity issues can be resolved.

The bottom line: its complicated

All too often in hospitals, the person who is the most eloquent, loud, or otherwise persuasive is the one who most heavily influences purchasing decisions. And this person is usually a powerful, silver-tongued physician. The hospital’s best defense against undue influence is the requirement to create a pro forma. This can guide the hospital about whether it is better in both the short-term and the long-term to purchase an expensive piece of equipment outright or utilize a pay-per-use acquisition model. One hospital may find that outright purchase is preferable whereas another hospital in the same town may find that pay-per-use is preferable. An accurate and well thought out pro forma is like a vaccination against future regret. No big-ticket equipment purchase should be put on the hospital’s final annual budget without one.

March 12, 2024

Categories
Outpatient Practice

Your Hospital Needs Palliative Care Telemedicine

One of the good things to come out of the COVID pandemic was the expanded use of telemedicine. It allowed us to provide on-going care to our patients during lock-down periods early in the pandemic and later allowed us to care for patients who were uncomfortable coming into a place where they could potentially become infected. It became clear from the beginning that some specialties were more amenable to telemedicine than others. Telemedicine was less useful for those visits that require a more detailed physical exam or required in-office procedures. Telemedicine was more useful for those visits that were mainly for counseling. A recent study in JAMA demonstrated the value of telemedicine in palliative care for non-cancer diseases.

The study involved 306 patients two Veteran’s Administration health systems between October 2016 and April 2020. Patients all had either COPD, interstitial lung disease, or heart failure. Patients were randomly assigned to either usual care or a telehealth group that received 6 phone calls from a nurse and 6 phone calls from a social worker. Patients were evaluated with a multi-domain quality of life survey (the FACT-G score) and disease-specific quality of life scores. After 6-months, the telehealth group reported significantly better quality of life than the usual care group. There are several important conclusions we can make about palliative medicine telehealth based on this study:

  1. It does not require expensive specialists. The RN and social worker who performed the telephone calls had 10 hours of training. Physicians who have completed palliative medicine fellowships are in short supply and there are not enough of them to provide telehealth services for all hospitals. Registered nurses and social workers are much more widely available (and less expensive) than board-certified palliative medicine physicians. This study shows that at least some of palliative care telehealth can be provided by RNs and social workers with a minimum of training. This would free up palliative medicine physicians (and nurse practitioners) to provide programatic oversight and to provide selective telehealth encounters when the RN or social worker identified need for advanced care and decision-making.
  2. It works for patients with non-cancer diagnoses. In many hospitals, palliative medicine is largely relegated to the care of patients with cancer. Furthermore, palliative medicine is often funded by the hospital’s cancer program. This study shows that the quality of life of patients with COPD, interstitial lung disease, and heart failure improve with palliative medicine telehealth.
  3. It overcomes transportation and mobility barriers. Patients with advanced COPD, interstitial lung disease, or heart failure generally have limiting dyspnea with exertion and are often on supplemental oxygen. This creates a barrier to traveling to an outpatient clinic site with the result that many patients who could benefit by palliative medicine do not receive it. This is especially true of patients who live a great distance from the palliative medicine clinic location.
  4. It did not affect hospitalization rates. The total number of patients in the study was small with only 154 patients randomized to palliative care telehealth and 152 patients randomized to usual care. The primary outcome for which the study was powered was for quality of life scores and a secondary outcome was hospitalization. At the end of 1 year, 109 of the palliative care group and 119 of the usual care group had been hospitalized, a difference that was not statistically significant. There was also no statistical difference in mortality at 1 year: 6 patients in the palliative care group and 5 patients in the usual care group died. Healthcare utilization, in terms of annual total healthcare costs, was not reported so it is unknown if palliative care telehealth reduced healthcare expenditures.
  5. The population studied was limited to Veterans Administration patients. Care at VA medical centers is very different than care at other healthcare facilities. There is easy access to inpatient and outpatient care. Co-pays and deductibles for medical care are relatively low or waived. Additionally, medications are free or available with a relatively low co-pay. In this study, most patients were male and Hispanic. It is unknown if the results can be extrapolated to a more diverse group of patients or patients at non-VA hospitals.

Advantages of palliative medicine telehealth

Any physician who has ever performed a home visit will tell you that you get important information by seeing the patient in their own home environment that you cannot get when seeing the patient in a clinic exam room. During a video-telehealth visit, you can often get a good idea of the patient’s environment that can clue you into home health needs. Assessment of entry ways, stairs, and bathrooms can indicate measures that can be taken to reduce falls. Assessment of home oxygen equipment can ensure adequate (and safe) oxygenation. The need for durable medical equipment can be identified.

The advantages of using telehealth to reach patients who have mobility, transportation, or geographic distance barriers cannot be overstated. Some physicians will argue that in-person visits for palliative care are superior to telemedicine visits; however, a telemedicine visit is vastly superior to no visit if the patient is unable to come to the physician’s office. This is particularly true for patients with conditions such as end-stage renal disease who are bound to their locality three days a week for dialysis, those who are wheelchair-dependent, and those who have limiting dyspnea on exertion.

During COVID, it quickly became clear that telemedicine was more effective for some specialties than others. Diseases that require the patient to undergo regular testing (blood tests, EKGs, pulmonary function tests, etc.) are not as amenable to telemedicine since the patient must come to the clinic for the tests, anyway. Similarly, diseases that require an in-person physical examination for regular assessment are not as amenable to telemedicine compared to those diseases that only require counseling. Palliative medicine is primarily counseling and generally does not require regular testing or procedures. Thus, palliative medicine is in many ways the ideal specialty to utilize telemedicine.

Telehealth has the potential to reduce palliative medicine outpatient no-show rates. When a patient cancels an outpatient appointment on short notice, there is no bill generated and no income to cover the overhead expense of the clinic or the physician’s salary for that period of time. Even if a patient is feeling too unwell to travel on the day of their office appointment or if their transportation is unexpectedly unavailable, that patient can still have a billable telehealth visit which can reduce or eliminate the financial loss of a late cancellation or no-show.

Paying for it

The recent study does not address cost of care. A disadvantage of using a registered nurse to perform palliative care telehealth is that those encounters are generally not billable. Thus, the funding must come from other sources. Alternatively, telehealth can be performed by a physician, nurse practitioner, or physician assistant who can generate revenue by making it a billable telemedicine encounter. Future studies are needed to determine if per-person annual healthcare costs are lowered by palliative medicine telehealth in non-cancer diseases. If so, then managed care programs and insurance companies could be approached for funding. Similarly, health systems participating in value-based-purchasing models and bundled-care payment models could internally fund palliative care telehealth if it is shown to be reduce hospitalizations or annual cost of care.

Palliative medicine is rarely financially self-sufficient. In most hospitals, palliative care is heavily subsidized by the hospital since it is not possible to cover the salary of palliative medicine physicians or advance practice providers on professional revenue billing alone. This study has shown that palliative medicine telehealth improves patient quality of life. However, the current U.S. healthcare system does not pay hospitals to improve quality of life. Hospitals get paid by outpatient testing, surgeries, and inpatient admissions. They use the profits from these services to cover the cost of services that they lose money on. Palliative care has to compete with a myriad other hospital services for funding. In deciding which of these services to monetarily support, hospital leaders rely on clinical research studies and publications to guide them. This recent study will help to provide needed justification for expansion of palliative care telemedicine services. Indeed, palliative medicine and telemedicine are perfect for each other.

March 8, 2024

Categories
Procedure Areas

Should Race Be A Factor In Pulmonary Function Test Interpretation?

When interpreting pulmonary function tests (PFTs), a patient’s test results are compared to a group of normal people in order to determine that patient’s percent predicted value for each result. Those normal values are based on a person’s age, height, and gender. Until recently, we also used race as one of those variables – but should we?

Height, age, and gender

Height is an important variable in PFT interpretation. Taller people have larger lungs than shorter people. In pulmonary function testing, the overall size of the lungs is measured by the total lung capacity, which is the total volume of air in the lungs. If a patient’s total lung capacity is below the 5th percentile of normal people of a similar height, that patient is considered to have restrictive lung disease. Interstitial lung disease, muscle weakness, pregnancy, and chest wall deformities are some of the common causes of restrictive lung disease. If we did not stratify normal populations by height, then shorter people would be incorrectly diagnosed with restrictive lung disease, which could trigger unnecessary expensive diagnostic testing to determine the cause of the restriction. The graph below shows the relationship between a normal person’s height and their total lung capacity. Normal for a 170 cm (5′ 6″) man is 6.0 liters whereas normal for a 190 cm (6′ 3″) man is 8.0 liters.

Age is another important variable in PFT interpretation. As a child grows older (and also taller), the child’s lung volume increases. But after adulthood, our lung become smaller as we age. For example, the average forced expiratory volume in 1 second (FEV1) at age 30 is 4.4 liters but the average FEV1 at age 70 is 3.2 liters.

We define obstructive lung disease as an FEV1/FVC ratio below the 5th percentile of normal. Once again, we see that what we consider to be normal changes with age. In addition, we see that there are also gender differences in what constitutes normal values. As people age, the normal FEV1/FVC decreases and for any given age, men have a lower FEV1/FVC than women. So, for example, the FEV1/FVC that we would define as obstructive lung disease for a man at age 20 would be 0.73 but for a man at age 80 would be 0.62. A 20-year-old woman would have obstructive lung disease with an FEV1/FVC of less than 0.76 whereas a 20-year-old man would not be considered obstructed until his FEV1/FVC is less than 0.73.

Race and ethnicity

In the past, race was also factored into the determination of normal PFT values. Not for nefarious reasons but for the simple fact that when large numbers of normal people were tested, there are racial differences in the average PFT values after age, gender and height were all accounted for. Last year, the American Thoracic Society recommended eliminating race in PFT interpretation because of a concern that it implied biological differences between people of different races and ethnicities but those changes are actually due to social and environmental factors as well as structural racism. So, should we stop using race and ethnicity in defining normal values in pulmonary function test interpretation?

What is a person’s race, anyway?

My grandmother’s mother was White and her father was Chinese. She was not allowed to attend Atlanta public schools because in the eyes of the school board she was considered Chinese if one of her parents was from China. Genetically, she was just as much White as she was Chinese. Similarly, if you ask 1,000 Americans if Barack Obama is White or Black, 999 of those Americans will say he is Black. His father was from Africa but his mother was Caucasian of Irish ancestry. Like my grandmother, he is genetically just as much White as he is Black. The point is that we assign race labels using social criteria as much as (or more than) true ancestral heritage. When those large numbers of healthy people were tested to determine normal values for PFTs, they were grouped by self-reported race and not by sending gene tests off to 23andMe to determine their genetic ancestry. In the melting pot that is the United States, the vast majority of us have very complex ancestry. Lumping everyone into categories of White, Black, Asian, Hispanic, Native American, etc. is often arbitrary and not very accurate.

But differences do exist…

There are clearly problems fitting many people into one specific race or ethnicity group. But for those people who do self-report themselves belonging to one group or another, there are racial and ethnic differences in normal values. The NHANES III normal values are most commonly used in pulmonary function test interpretation. The NHANES III data set indicates that for a 5′ 9″ 65-year-old man, the average forced vital capacity (FVC) is 4.60 liters for normal Whites, 4.52 liters for normal Hispanics, and 3.87 liters for normal Blacks. There are similar racial differences for women. The normal values were obtained by testing a large number of healthy non-smokers. A valid criticism of the NHANES III data set is that it stratified people into only three groups: White, Black, and Hispanic; other racial and ethnic groups were not included.

A second commonly used data set of normal pulmonary function test values is the Global Lung Initiative (GLI) that stratified people into five groups: Caucasian (Europe, Israel, Australia, USA, Canada, Mexican Americans, Brazil, Chile, Mexico, Uruguay, Venezuela, Algeria, Tunisia), Black (African American), Northeast Asian (North China & South Korea), Southeast Asian (South China, Taiwan, Hong Kong, and Thailand), and other/mixed. Using the GLI data set for a 65-year-old man who is 5′ 9″, the average normal FVC for Caucasian is 4.30 liters, Black 3.63 liters, Northeast Asian 4.13 liters, Southeast Asian 3.82 liters, and other/mixed 3.96 liters.

So, for any given height, gender, and age, normal people who identify as being Southeast Asian or Black have lower lung volumes than those who identify as being Northeast Asian, White, or Hispanic. But that does not mean that race biologically caused those differences. Instead, race and ethnicity may merely correlate with other factors that affect lung volumes.

Factors that correlate with race and ethnicity

When differences exist between people of different races or ethnicities, it does not necessarily mean that those differences are caused by the person’s race – it usually means that those differences are correlated with the person’s race. There is a big difference between causality and correlation. For example, say you are studying the incidence of vitamin D deficiency and you find that Whites in Norway have a higher rate of vitamin D deficiency than Hispanics from Guatemala. Race did not cause the vitamin D deficiency – living at a high latitude with little sunlight caused the vitamin D deficiency. Race merely correlated with vitamin D deficiency because of Hispanics in Guatemala live at a lower latitude than Whites in Norway. Here are some of the factors affecting pulmonary function that correlate with (but are not caused by) race and ethnicity.

Genetics. Lung volumes can be affected by a person’s genes. Just like all of the members of a family might have big ears, all of the members of a family might have big lung volumes. We often define race by skin color. But race is a poor surrogate for genetics and there is no good reason to believe that the genes that determine the amount of pigment in a person’s skin should also dictate the size of a person’s lung volumes.

Socioeconomic status. When English physician John Hutchinson invented the spirometer in 1846, he used it to show differences in lung function between people in different professions, which was a crude estimate of socioeconomic status. There are a lot of reasons why people from lower socioeconomic groups could have lower lung volumes than those from higher socioeconomic groups. Crowded living conditions can lead to more frequent childhood respiratory infections and greater exposure to environmental tobacco smoke. Air pollution in lower class residential areas can affect lung function. Poor nutrition in childhood can have a profound impact on both height and lung function in adulthood. Inadequate treatment of childhood asthma due to limited access to healthcare in childhood can result in lower pulmonary function values in adulthood. When we identify racial and ethnic differences in many health metrics, often what we are really identifying is the socioeconomic differences in those metrics, with race just being a reflection of socioeconomic status.

Maternal health. Maternal smoking during pregnancy, lower birth weight, and premature birth can all affect lung development in infancy. There are significant racial differences in access to maternal healthcare that can impact a child’s lung function.

Obesity. Body weight is not used as a demographic variable in PFT interpretation but obesity can have a profound effect on lung volumes, causing them to be lower. African American adults have a high prevalence of obesity (38.4%) compared with Hispanic American adults (32.6%) and White American adults (28.6%).

Occupation. Certain occupations can affect lung health and thus lung function. Exposure to airborne chemicals, toxins, and dusts can impact lung volumes and flow rates. These are often lower-paying occupations that disproportionately employ workers from minority races and ethnicities.

Altitude. People who live their entire lives at higher altitude have higher lung volumes than those who live at lower altitudes. Studies of inhabitants from Peru, Korea, and Tibet have found that people living at high altitudes have higher values for forced vital capacity (FVC) and forced expiratory volume in 1 second (FEV1). This is presumed to be an adaptive mechanism since people living in high altitudes with lower atmospheric PO2 levels must maintain a higher minute ventilation to maintain normal tissue oxygenation.

The danger of ignoring race and ethnicity in PFT interpretation

One of the arguments against using race and ethnicity in PFT interpretation is that by separating patients into different racial or ethnic groups, we are encouraging health disparities. However, an equal argument can be made that if we do not use race and ethnicity in PFT interpretation, we are actually causing health disparities.

Several years ago, I got a panicked call from a family medicine physician who had gotten a spirometry test that showed a low FVC interpreted as indicative of restrictive lung disease and he was worried he had interstitial lung disease. I obtained a new full set of pulmonary function tests and confirmed that both his FVC and total lung capacity were below the 5th percentile of normal, indicating restrictive lung disease. But he was from India and moved to the U.S. when he was a teenager. Our PFT machine utilized the NHANES data set that did not include a racial designation of Southeast Asian (or even just Asian) so he was compared to normal values for Whites. I told him that people from India normally have lower lung volumes compared to White people from the U.S. and that I believed that he was healthy. However, he was very anxious and ended up getting a high resolution chest CT and a cardiopulmonary exercise test just to prove that he did not have interstitial lung disease.

This case illustrates that if we do not use race and ethnicity in PFT interpretation, then we run the risk of incorrectly labeling many Southeast Asian and Black patients as having restrictive lung disease when in fact, they are normal. In addition, by including all racial and ethnic groups in the calculations of normal values, we end up with lower values for the 5th percentile of normal for White, Hispanic, and Northeast Asian patients. As a result, we can miss restrictive lung disease in these racial and ethnic groups.

PFTs are also used to determine life insurance premiums and suitability for certain occupations. I recently got an email from one of the nurses at our hospital whose son was unable to enter firefighter school because his FEV1 was too low (he is healthy with no known lung disease). Abnormal PFT values can keep a person from entering the military or becoming a commercial pilot. PFTs are used in disability determination, in pulmonary rehabilitation eligibility, and in pre-operative assessment for lung cancer surgery. By eliminating race and ethnicity, we could inadvertently prevent African Americans and Southeast Asians from getting certain jobs or getting needed lung cancer surgery. Similarly, we could make it more difficult for Northeast Asians and Whites to get disability benefits or get into pulmonary rehabilitation.

PFT interpretation is as much art as it is science

When I was a resident, one of my mentors who was a cardiologist told me that the non-cardiologist at a patient’s bedside could interpret that patient’s EKG better than the cardiologist reading that EKG who has never seen the patient. That is because tests such as EKGs are best interpreted in the context of the individual patient’s clinical presentation and the person in the best position to know that clinical presentation is the physician at the beside taking care of that patient (provided that the physician is well-trained in EKG interpretation).

Pulmonary function tests are similar in this way to EKGs. If a patient is 8 months pregnant or has severe scoliosis on physical exam and that patient’s PFTs have a computer interpretation of restrictive lung disease, I am not going to do an extensive work-up for interstitial lung disease because my physical exam shows me that the PFT changes are due to diaphragm limitation by a gravid uterus or to chest wall abnormalities caused by scoliosis. If we do not include race in the demographics entered into the PFT computer and the computer interpretation shows mild restrictive lung disease, I will be less concerned if I know that patient is from India.

Using race and ethnicity in PFT interpretation is a conundrum – we are damned if we do and damned if we don’t. At the workshop that led to the new American Thoracic Society guidelines, 30 out of 33 attendees recommended to eliminate race and ethnicity in PFT interpretation. For this reason, it is likely that in the near future, race/ethnic demographics will not be requested when entering data into PFT machines and those machines will use race-neutral data sets of normal people in the determination of percent predicted values. It will be incumbent on all of us who use pulmonary function tests to ensure that we do not create healthcare disparities in our attempt to eliminate healthcare disparities when race-neutral data sets are used.

February 10, 2024

Categories
Epidemiology Outpatient Practice

Is It Dangerous To Vaccinate Pregnant Women And Children Against COVID?

Last fall, I was hiking and birdwatching in a nature preserve in coastal North Carolina. A woman walked by talking on her cell phone loudly enough for me to overhear her conversation 50 feet away. She spoke about her outrage that children were being vaccinated against COVID and that her internet research from the Children’s Health Defense organization indicated to her that COVID was a hoax propagated by Bill Gates and that COVID vaccines cause autism. I rolled my eyes, kept my mouth shut, and went back to watching egrets.

It reminded me of another conversation that I had with one of our family medicine physicians about 15 years ago. It was October and she was pregnant. I had arranged an influenza vaccination station in the hospital physician lounge and told her about it so that she could get vaccinated. She said that she wasn’t going to get a flu shot because she believed that flu shots in pregnant women cause autism in their children. I tried to convince her otherwise but she was firm in her beliefs. That winter, when she delivered her baby, she had active influenza. Her newborn ended up in the neonatal ICU at Nationwide Children’s Hospital with an intracranial hemorrhage.

The lesson is that misinformation abounds, even among intelligent and educated people. The main defense against misinformation is scientific research. In the short-run, misinformation can persist but in the long-run, science eventually prevails. Beliefs such as the sun revolves around the earth, the earth is flat, and smoking cigarettes is beneficial to your health were all held as incontrovertible truths in the past but eventually were dispelled by science to all except the most gullible. This week, two new scientific studies were published that will help to dispel misinformation about COVID vaccines and children.

The first was a study in JAMA that looked at all newborns in Sweden and Norway between June 2021 and January 2023; in total, 196,470 infants. 48% of the infants were born of mothers who were vaccinated against COVID during pregnancy and 52% were born of unvaccinated mothers. The results are striking. The babies born from unvaccinated mothers were twice as likely to have intracranial hemorrhage compared to babies born from mothers who were vaccinated during pregnancy. In addition, compared to babies whose mothers got vaccinated, the babies of unvaccinated mothers were twice as likely to die and 50% more likely to have hypoxic encephalopathy. The benefits of maternal vaccination did not stop there. Newborns of unvaccinated mothers were also more likely to have anemia, bleeding, thombosis, lower birth weight, septicemia, seizures, heart failure, feeding problems, and necrotizing enterocolitis. This was a study that involved a huge number of subjects and made all the stronger because all children born in the two countries for a year and a half were included in the analysis.

The second study was also published in JAMA and looked at 2,959 children between ages 5-17 at 6 U.S. study sites in Texas, Arizona, Oregon, Michigan, Utah, and Washington. 25% of the children received a bivalent COVID vaccine and 75% were not vaccinated with a bivalent COVID vaccine. The results were not surprising – the unvaccinated children were more likely to get both asymptomatic COVID infections and symptomatic COVID infections compared to the vaccinated children.

These two studies will not convince all anti-vaxxers but they will hopefully loosen the hold of misinformation on some of them. For some people, beliefs are just too hard to break – there are still those among us who believe that there are bands of bigfoot roaming rural Ohio, stealing chickens and throwing rocks at passing cars. Similarly, like the woman at the North Carolina nature preserve, there are those who are ardent believers of Robert F. Kennedy, Jr. (the founder of the Children’s Health Defense organization) who publicly stated about COVID vaccines: “It is criminal medical malpractice to give a child one of these vaccines”. In 1887, Abraham Lincoln famously said “You can fool all of the people some of time; you can fool some of the people all of the time, but you can’t fool all the people all the time.” Kennedy has made millions of dollars for himself by fooling some of the people all of the time.

But physicians can now tell their pregnant patients with confidence that getting a COVID vaccination will improve their chances of having a healthy baby and improve the chances that their baby will live through its first month after birth. COVID vaccines do not provide 100% protection against the infection. But then neither do kevlar vests provide 100% protection in a mass shooting. However, wearing a kevlar vest will improve your chances of surviving and improve your chances of avoiding major injury. COVID vaccines are like wearing a kevlar vest against the virus for pregnant women and for children.

February 7, 2024

Categories
Physician Retirement Planning

Should You Contribute To A Roth IRA After Age 65?

For most of us, retirement is a time to travel and do the things we did not have time to do while working. But that means having the money in your retirement portfolio to do them and making that money last for the rest of your life. Roth IRAs are an essential component of a balanced retirement investment portfolio.

Conventional investing wisdom holds that you should preferentially invest in Roth IRAs when you are young and have a lower taxable income and then preferentially invest in tax-deferred investments (such as a 401k or traditional IRA) when you are older and have a higher taxable income. The premise behind this is that you pay income tax on the money in a Roth IRA when you contribute the money during your working years and pay income tax on tax-deferred investments when you take the money out during your retirement years. Because most people have their lowest taxable income in their early working career years, a higher taxable income in their retirement years, and the highest taxable income during their later working career years, this strategy results in paying the lowest amount in taxes over one’s lifetime.

But should you contribute to a Roth IRA after you retire? The answer is… it depends.

First, you have to have an income

In order to contribute directly to an IRA, you have to have earned income, either as a salaried employee or from contract work. With the former, your income is reported on a W-2 form and with the latter, your income is reported on a 1099 form. If your taxable income is low enough, you can contribute directly to a Roth IRA; otherwise, you can only contribute by doing a “backdoor Roth IRA” by first contributing to a traditional IRA and then promptly converting that money into a Roth IRA. The income limits are complicated so you should review the 2024 IRS rules to see how your specific situation affects your ability to contribute. But as an example, for a single person who does not have access to an employer-sponsored retirement plan, the income limit for direct contribution to a Roth IRA is $146,000 and for a married couple filing jointly, the income limit is $230,000. Many Americans over age 65 are no longer working full-time for an employer but instead are working part-time as contract workers and are thus not eligible for an employer-sponsored retirement plan.

If all of your income comes from a pension, 401(k), 403(b), 457, Social Security, and/or traditional IRA, then you cannot directly contribute to a Roth IRA – you must have annual income that you have earned during that year. Furthermore, you cannot contribute more than you actually earned. The IRA contribution limits in 2024 are $7,000 if you are younger than 50-years-old and $8,000 if you are over age 50. If you do not have any earned income, then you cannot contribute directly to a Roth IRA or do a backdoor Roth contribution. However, anyone can do a Roth conversion, regardless of whether or not they have any earned income.

Roth conversions

If you have money in a tax-deferred retirement account (traditional IRA, SEP IRA, 401k, 403b, or 457), you can convert some or all of that money into a Roth IRA. The catch is that the amount that you convert adds to your taxable income for the year of the conversion. As a result, the more you convert, the higher your taxable income will be and consequently the higher your marginal income tax rate will be.

There are two ways of doing Roth conversions: a direct rollover and an indirect rollover. In a direct rollover, the administrator of your tax-deferred retirement account delivers the converted amount directly to the financial institution holding your Roth IRA and you never touch the money. Direct rollovers are simple and low-risk. In an indirect rollover, you withdraw funds from your tax-deferred retirement account and put those funds into your checking/savings account and then you transfer that money into your Roth IRA yourself. Indirect rollovers have a minor element of risk – you only have 60 days from the time you receive the distribution from your tax-deferred account to the time you deposit it into your Roth IRA. After 60-days, you are no longer permitted to put that money into your Roth IRA.

Before doing a Roth IRA conversion, it is essential that you have an idea of when you will need to eventually withdraw the money from your Roth IRA because conversions are subject to the IRS 5-year rules.

The 5-year rules

The IRS looks at each Roth IRA as having three components: contributions, earnings, and conversions. Contributions are the dollar amount that you put into the Roth IRA each year that you do a direct contribution. Earnings are the dollar amount that the initial direct contributions grew by before you withdraw them from the Roth IRA. Conversions are the dollar amount that you either did with a backdoor Roth, a direct rollover, or an indirect rollover. Each of these components have different rules regarding when you can withdraw them from a Roth IRA. These 5-year rules can impact whether or not it makes sense for you to contribute to a Roth IRA after age 65.

  • Contributions. These can be withdrawn anytime from your Roth IRA without penalty.
  • Earnings. These can only be withdrawn after (1) you turn 59 1/2-years old and (2) at least 5-years have elapsed since your very first contribution to the Roth IRA. Early withdrawal results in significant penalties.
  • Conversions. These can only be withdrawn after (1) you turn 59 1/2- years old and (2) at least 5-years have elapsed since the amount withdrawn was converted. Each conversion has its own 5-year requirement so, for example, you can take the amount of your 2023 conversion out in 2028 but you cannot take the amount of your 2024 conversion out until 2029.

There are also separate rules regarding the timing of withdrawals from inherited Roth IRAs. The rules are complex but in general, if you inherit a Roth IRA from someone other than your spouse, you are required to withdraw all of the money from that Roth IRA within 10 years of the inheritance if you are listed as a designated beneficiary on the Roth IRA. If you are not listed as beneficiary and instead just inherit it through a will, then you only have 5 years after the date of inheritance to withdraw all of the funds.

So, I’m older than 65, should I put money in a Roth IRA?

The decision of whether or not to contribute to a Roth IRA or do a Roth conversion requires some strategic planning. Here are some situations where it can be advisable or not advisable to put money into a Roth when you are over age 65-year-old.

People who should put money in a Roth IRA:

  • You anticipate that your taxable income is going to go up in the future. In your first year or two of retirement, you may be living off of your cash or your regular (non-retirement) investments. You probably will not yet be taking Social Security. If this is the case, then you are only paying taxes on your investments’ interest, dividends, and capital gains resulting in your taxable income being fairly low. This is a good time to either contribute to a Roth IRA (if you have some earned income from part-time work) or do a Roth conversion because you will have a lower marginal income tax rate (i.e., you will be in a lower income tax bracket) than you will be in the future.
  • You anticipate that tax rates are going to go up in the future. We are living in an era of historically low income tax rates that went into effect in 2017. However, these tax rates automatically expire at the end of 2025. Unless congress passes new tax laws to extend these cuts, everyone’s income tax rates are going to go up in 2026. If tax rates do go up, then 2024 and 2025 will be good years to put money into your Roth IRA. This is especially true for Roth IRA conversions – you will pay less in taxes to take out money from your 401k or traditional IRA now to convert into a Roth IRA than you will to take that same amount of money out of your 401k or traditional IRA to spend starting in 2026. We may have a more clear picture about future tax rates after the 2024 elections.
  • Your investments have recently lost value. The goal of investing is to buy when it is low and sell when it is high. When you do a Roth conversion, then you are essentially buying shares of that Roth investment. The value of stocks and bonds goes up and goes down. If you convert a traditional IRA or 401k when it has recently lost a lot of value, then you will pay less in taxes on that conversion than you will when the value of that traditional IRA or 401k eventually goes up. In the summer of 2022, the stock market tanked and lost 27% of its value – that was a great time to do a Roth conversion. Since 2022, the stock market has regained that 27% and you will incur a lot more in taxes to convert any given percentage of your traditional IRA or 401k today than you would have in September 2022. If the stock market continues to go up in the next few years, then 2024 could still be a good year to do a Roth IRA conversion but no one has a investment crystal ball to predict the future.
  • You anticipate RMD pain. When you turn 73, you are required to take a certain percentage out of your tax-deferred retirement accounts such as your traditional IRA, SEP IRA, 401(k), 403(b), and 457. These are called required minimal distributions (RMDs) and they add to your annual taxable income. If you have a lot of money in these accounts, then starting at age 73, your annual taxable income could go up significantly. As your taxable income goes up, so does your marginal income tax rate, meaning that you will pay exponentially more in taxes. You can lower the amount of the RMDs by doing Roth IRA conversions before age 73 to reduce the overall value of your tax-deferred investment accounts. Your RMD is based on your life expectancy – as an example, the RMD on a $1,000,000 tax-deferred account for someone turning 73 this year is about $40,000 per year. Unlike tax-deferred retirement accounts, Roth IRAs are not subject to RMDs.
  • You want to maximize your estate for your heirs. If you do not anticipate needing to use the money in your Roth IRA for yourself during your lifetime then you may be able to  allow the value of that Roth IRA to increase undiminished by required minimum distributions, thus leaving more for your heirs to inherit.

People who should not put money in a Roth IRA:

There are certain situations when you want to avoid doing Roth IRA conversions in retirement. Here are some considerations

  • If it makes your Medicare premiums go up. For the vast majority of Americans, Medicare Part A is free. But we all have to pay monthly premiums for Medicare Part B and the amount of those premiums is based on your income. Medicare Part D premiums vary by the specific Part D plan level you choose but regardless of the level, the amount of the premium also increases based on income. When you do a Roth conversion, your taxable income that year goes up by the amount of the conversion and this could push you into a higher Medicare Part B and Part D premium bracket. The tax advantages of a Roth IRA conversion can be wiped out by the increase in your Medicare premiums. For example, if your taxable income is $249,999 and you do an $8,000 Roth IRA conversion, you will pay a total of $3,090 in Medicare Parts B & D premiums. But if you do an $8,002 Roth IRA conversion (just $2 more), then your Medicare premiums will go up by $1,503 to $4,593.
  • If it moves you into a higher capital gains tax bracket. Regular income tax is a marginal tax rate system meaning that your tax rate increases incrementally for every additional dollar of taxable income. Short-term capital gains occur when you hold an investment for < 12 months and are taxed at your regular marginal income tax rate. Long-term capital gains occur when you hold an investment for > 12 months before you sell it. The long-term capital gains tax is not based on your regular marginal income tax rate but is instead based on your capital gains tax bracket. The capital gains tax rate is not a marginal tax, thus if your income pushes you into a higher marginal tax bracket, you will pay that higher tax rate on all of your capital gains. If you have a lot of capital gains, either because you were selling and buying investments over the course of the year or because you were taking money out of non-tax-deferred investments, then a Roth IRA conversion could push you into a higher capital gains tax bracket and those higher capital gains taxes could erase any tax advantages of the Roth IRA conversion. Here are the 2024 capital gains brackets:
  • After age 73, things change. Once your tax-deferred retirement accounts become subject to required minimum distributions at age 73, you cannot use those RMD amounts to do a Roth IRA conversion. If you are working after age 73, you can still contribute earned income into a Roth IRA. You can also so a Roth IRA conversion on any money you take out of your tax-deferred retirement accounts over and above your RMD for that particular year. But for many people over age 73, doing a Roth IRA conversion on top of RMDs can push them into a higher marginal tax rate that erases any tax advantages of the Roth IRA conversion.
  • You plan to give a large amount to charity. Once you turn 70 1/2, you can donate up to $105,000 directly from your tax-deferred accounts to charity via a qualified charitable distribution without having to pay income tax on the amount of those donations. And as a bonus, if you are over age 73, the amount of those donations count toward your RMDs! In this situation, Roth IRA conversions when you are younger can be counterproductive to your future tax-minimization strategy of charitable giving after age 73.

Diversify, diversify, diversify!

One of the most important reasons to have a Roth IRA (or Roth 401k or Roth 403b) is to have a diversified retirement portfolio. Ideally, you should have money in four buckets: tax-deferred accounts, Roth accounts, regular investments, and fixed income sources. Each of these different types of retirement income sources have different income tax implications. By strategically adjusting how much you withdraw from each of these different sources every year, you can keep your income taxes to a minimum. In a year during your retirement when you have a lot of expenses (for example, buying a vacation home), you can withdraw more from your tax-free Roth IRA and avoid having a high taxable income that year. In a year in retirement when you do not have a lot of expenses, you can leave your Roth IRA alone and instead withdraw from your tax-deferred retirement accounts. Your retirement portfolio withdrawal strategy should be based on minimizing taxes over your lifetime and that strategy requires having the flexibility of a diversified portfolio. For this reason, I believe that everyone needs a Roth IRA (or Roth 401k or Roth 403b). The challenge is determining when is the best time to put money into that Roth IRA. For many people, putting money into a Roth IRA by contributions or conversions after age 65 can make sense.

January 15, 2024

Categories
Hospital Finances Medical Economics Physician Finances

Beware Of Health Care Sharing Ministries

Health care sharing ministries are an alternative to regular health insurance but they are a poor substitute for most patients and an annoyance (at best) for most hospitals and physicians. The basic idea is that people of similar religious beliefs pool their money in order to help each other pay for their medical bills. The concept arose from Amish and Mennonite communities that do not normally participate in programs like health insurance.

As an example, a number of years ago, I was the attending physician in our medical intensive care unit when a young Amish man was transferred from a rural hospital with a cardiac sarcoma, a rare malignant tumor of the heart muscle that is usually incurable and fatal. He lived on a mechanical ventilator for a couple of weeks before dying and in the process, generated a huge medical bill. Like most Ohio Amish at the time, he did not have health insurance. A few months after his death, an older Amish man walked into the MICU carrying a bundle of cash and handed it to the unit clerk. Their community had taken up collections to pay for his hospital charges. This was their normal practice to pay for medical bills.

About 30 years ago, this concept expanded to other Christian communities in the United States and became known as health care sharing ministries (HCSMs). When the Affordable Care Act was passed in 2010, it was estimated that about 100,000 Americans participated in HCSMs but that number has grown to now more than 1.7 million Americans. Participants are attracted by the like-minded religious beliefs of other members and by the lower monthly costs compared to regular health insurance.

Any time the word “ministries” is included as an attributive noun, it implies that the other noun that it is describing is virtuous, righteous, and morally principled; however, all too often, HCSMs are anything but. Instead, HCSMs can limit patient access to healthcare, burden patients with unexpected healthcare costs, and leave physicians unpaid.

What is a health care sharing ministry?

There are currently 107 HCSMs certified by the U.S. Department of Health and Human Services. HCSMs are registered as 501(c)(3) non-profit charity organizations. Rather than paying monthly health insurance premiums, participants pay monthly membership fees. These fees are usually less expensive than health insurance premiums. Membership is limited to people who share a common religious faith and often must attest to regular attendance at a specific church. Because they are not considered to be regular health insurance companies, HCSMs are not regulated by state insurance commissioners in most states. When participants incur medical bills, they then submit those bills to the HCSM for payment.

There are a number of coverage restrictions. HCSMs can decide what conditions they will and will not cover and frequently do not cover healthcare expenses for conditions that they find morally objectionable, such as abortions, out-of-wedlock maternity expenses, contraception, sexually-transmitted diseases, obesity-related conditions, or smoking-related diseases. HCSMs are also not required to cover pre-existing conditions or cap out-of-pocket costs.

The problem with health care sharing ministries

On the surface, HCSMs sound like a fabulous idea – it is like getting health insurance without having to pay for all of the bureaucratic overhead costs. Furthermore, it eliminates having to pay for other members’ healthcare costs that are incurred by “immoral” behavior. But there is a dark side of HCSMs that can be financially ruinous to patients. Here are some of the specific problems with HCSMs:

  1. They do not have to cover pre-existing conditions. Most HCSMs will have definitions of pre-existing conditions such as any disease that you have had to be treated for anytime in the past 3-5 years. As a result, participants tend to be young, otherwise healthy individuals whereas older people who are more likely to have diabetes, hypertension, or high cholesterol can be denied. Some HCSMs will cover the care of certain pre-existing conditions (such as hypertension) but those participants are charged a higher monthly fee.
  2. Many conditions are not covered. Each HCSM can decide what conditions will and will not be covered. Some of the common uncovered conditions include those that result from tobacco use, drug abuse, alcohol use, obesity, or “non-Biblical lifestyles”. Most HCSMs do not cover mental health expenses. Durable medical equipment is often not covered. Most HCSMs will have a limit on the number of months any new medical condition will be covered – for example, only covering the first 3 months of prescription medications for newly diagnosed diabetes.
  3. Maternity care is often limited. Pregnancy is considered a pre-existing condition by most HCSMs and so they will not pay maternity expenses for the first 10 months of a participant’s membership. In addition, maternity costs are often only covered for married women. Abortions are generally not covered, with no exception for rape.
  4. Preventive care is generally not covered. This can include regular physical exams, check-ups, health screenings, cancer screenings, well-child visits, and vaccinations.
  5. Provider network restrictions. Some HCSMs will only cover expenses from in-network physicians and hospitals. These are usually very limited in number, making it difficult for participants to find a participating doctor. This is especially true if the participant requires hospitalization and may not have a choice in their ER physician, surgeon, hospitalist, anesthesiologist, radiologist, or pathologist. Other HCSMs will allow participants to see any physician and then the HCSM will attempt to negotiate fees with the physician or hospital after the fact.
  6. Participants get charged “standard charges”. Every hospital and every physician group has publicized standard charges for every service and procedure. The thing is that the only people who have to pay standard charges are those who are uninsured – patients with health insurance always pay less. The reason is that every health insurance company will negotiate contracts with every hospital and every physician group and those contracts will include an agreement for the maximum amount that the insurance company will pay for every service and procedure. If the hospital’s “standard charge” is less than the insurance company’s contractual limit, then the patient and the insurance company only has to pay the standard charge. However if the standard charge is higher than the contractual limit, then the patient and the insurance company only have to pay the amount of the contractual limit. Because of this, every hospital and every physician group in the country sets their “standard charge” higher than the most that they can get from their highest-paying insurance company contract. To put this in perspective, most hospitals and physician groups set their standard charges at several times higher than the maximum amount that Medicare will pay. In other words, no one with health insurance pays the sticker price – only the uninsured pay the sticker price. HCSM participants are considered to be uninsured so they have to pay the standard charge amounts. The result is that HCSM members get charged a lot more for any given service or procedure than people with health insurance are charged.
  7. No guarantee of payment. The HCSMs are not legally obligated to pay for medical bills. In months when the member fees are less than the members’ health expenses, the members may only receive a prorated amount of the funds to cover their healthcare bill. As a result, the members never know up front how much of their medical bill will be covered by the HCSM and how much they will be responsible for themselves.
  8. The maximum coverage amount is usually capped. Most HCSMs will have a maximum amount that will be paid for any given participant’s healthcare costs – for example, a $50,000 per year and $1,000,000 lifetime limit. Any healthcare costs above these limits are the responsibility of the individual participant. When being billed “standard charges” by the hospital and the physicians, few patients can get through an ICU admission for less than $50,000.

HCSMs are bad for doctors and hospitals

One of the most basic metrics in healthcare finance is the number of days in accounts receivable (AR). This is how many days it takes to get paid after a bill is sent out and generally ranges between between 30 – 70 days. If your average days in AR is greater than 50 days, it is a sign of problems in your revenue cycle department. As the treasurer of our Department of Internal Medicine, I would monitor our days in AR every month. For insured Americans, the hospital (or doctor) first sends the bill to the insurance company (or Medicare) and then bills the patient for the amount of their co-pay or deductible. Medicare and insurance companies are generally pretty quick in getting those bills paid. But with HCSMs, the patient gets billed and not the HCSM. The patient then submits their bill to the HCSM to have the their bill “shared” with the other HCSM participants. This process can take months and as a result, days in AR can skyrocket.

The patient is responsible for the doctor bill or hospital bill and will be charged the amount of the “standard charges”. This is often tens of thousands of dollars that most people do not have sitting in their checking accounts. HCSMs will often advise their members to request that the bill get written off as charity care or to set up a payment plan with the doctor or hospital rather than pay the full amount of the bill. That way, the member does not have to pay the full amount of the standard charges all at once and can spread out payments until the HCSM determines whether it will cover the bill and if so, how much of the bill it will cover. If the patient does not initially pay their medical bill on time with out-of-pocket funds, then the hospital or physician group typically sends that bill out to a collection agency which takes a percentage out of whatever money it collects on that bill, reducing the amount that the doctor or hospital ultimately gets paid. If the patient sets up a monthly payment plan, then the hospital or physician group’s cash flow suffers since payment may be spread out over a year or longer. In addition, the hospital or physician group has to pay someone to send out the monthly payment plan bills to the patient and monitor whether or not the patient actually pays those bills – this adds additional overhead expenses in the revenue cycle department.

For catastrophic illnesses, the HCSM will have a limit on the amount that it will cover, for example, $50,000.Once that limit is exceeded, the patient becomes responsible for everything over that amount. This can often be considerably more than patients have in savings with the result that they have to sell some of their assets in order to pay their medical bills. This can result in very late payment to the hospital or physician group and can result in legal fees incurred by the hospital or physician group. As an example, I had a patient who was a healthy farmer in his 40’s that decided to go without health insurance. He unexpectedly developed pancreatitis complicated by respiratory failure and was in the ICU for several weeks. If he had health insurance, the negotiated charges would have been about $300,000 and he would have had out-of-pocket co-pay expenses of a few thousand dollars. But since he was uninsured, we legally had to bill him the hospital’s standard charges which totaled more $1 million. He eventually had to sell the farm that had been in his family for generations in order to pay his medical bills and it took the hospital 2 years to finally get paid.

Many HCSMs will negotiate fees on behalf of their members, but only after the member submits their medical bills. This can result in a lot of frustrating haggling between the HCSM and the hospital or doctor. It would be like trying to run a restaurant and having the customers trying to negotiate a lower price for their meal after they have finished eating. Any business prefers to negotiate the price of a service before they provide the service rather than several months after they provide that service; doctors and hospitals are no different.

HCSM lessons from Ohio, Missouri, and Colorado

Liberty Healthshares is an HCSM based out of Ohio. It served 70,000 Christian faith families between 2014 and 2020. It had an annual budget of $56 million and employed 470 workers. Members sued Liberty alleging failure to pay for medical bills and that Liberty funneled money to the company’s founders. The State Attorney General additionally reached a settlement agreement with Liberty agreeing to pay thousands of dollars in fines. Last year, ProPublica reported that the family that founded Liberty used tens of millions of dollars of members’ monthly fees to buy the family a marijuana farm, $20 million in real estate, and a private airline company. Since it was an HCSM, it was not subject to the regulatory oversight required of traditional insurance companies and as a result, it got away with misuse of funds for years.

Medical Cost Savings was an HCSM based out of Missouri. Last year, its founder pleaded guilty in federal court to an $8 million wire fraud conspiracy that cheated hundreds of members. Medical Cost Savings paid only 3.1% of healthcare claims and in some years paid none of its claims at all. The founder and his co-conspirators pocketed more than $5 million.

Colorado is unique among states in that it requires financial reporting by HCSMs operating in the state. In the most recent annual report by the Colorado Department of Regulatory Agencies, Colorado HCSMs collected $78 million in annual membership fees in 2022 and paid out $66 million to cover members’ medical bills. However, in that same year, members submitted $180 million in healthcare bills to these HCSMs. In other words, the HCSMs only paid 37% of submitted medical bills. In Colorado, HCSMs used advertising, social media, and “producers” (independent brokers) to recruit new participants. Four of the 16 HCSMs operating in Colorado reported the amount they paid these producers, totaling $1.8 million. HCSMs also reported marketing themselves to employers to offer to their employees. Some HCSMs required members to first request charity care and financial support from local governments and consumer support organizations in paying the member’s health care bills before the HCSM would consider paying those bills.

Caveat emptor

Let the buyer beware is nowhere more pertinent than health care sharing ministries. Operating outside of the insurance regulatory environment, they can pretty much cover whatever healthcare costs they choose to cover and are particularly susceptible to fraud and abuse of funds. Although most HCSMs are legitimate non-profit organizations run by well-meaning members of religious faiths, some are run by scammers who prey on the devout by appealing to their faith-based values.

So, are HCSMs appropriate for anyone? The only people who should even consider using an HCSM instead of health insurance are those who are young, have no medical conditions, take no medications, are not obese, do not have sex outside of marriage, are non-smokers, non-drinkers, and are willing to pay for their preventative healthcare out-of-pocket. Even then, if you are hospitalized for a serious injury, diagnosed with a chronic disease like cancer, or hospitalized with an unexpected serious infection then it could still cost you hundreds of thousands of dollars and result in financial ruin. Using an HCSM is better than being totally uninsured, but not by much.

For hospitals and physicians, taking care of patients who use HCSMs causes an additional overhead expense and often results in no payment at all. In the best of circumstances, the HCSM results in a delayed payment for services rendered that puts an added burden on the revenue cycle staff. As a doctor, I’ll take a patient with regular medical insurance over a patient with an HCSM any day. Even Medicaid beats an HCSM.

January 13, 2024

Categories
Physician Retirement Planning

Here Is How To Make Your Medicare Premiums Tax-Deductible

Health insurance in the United States is expensive and Medicare premiums are no exception. If you are a physician or in another high-income profession, you are going to pay even higher Medicare premiums. Fortunately, there are three ways that you can make those premiums tax-deductible.

The vast majority of Americans enroll in Medicare when they turn 65-years-old, regardless of whether or not they are still working. For most Americans, Medicare Part A (inpatient care) is free. But there are monthly premiums for Medicare Part B (outpatient care). There are additional premiums for Medicare Part C (Medicare Advantage plans) and Medicare Part D (Medicare drug coverage). For those who do not enroll in a Medicare Part C plan, purchase of a Medicare supplemental policy (Medigap) is advisable to pay for those charges not covered by Medicare Parts A & B. All of these additional coverage plans have their own premiums and consequently, most seniors pay far more for health insurance than just their monthly Medicare Part B premiums.

But amount that you pay for Medicare Part B and Medicare Part D premiums is based on your income. As a result, if you are still working after age 65 or if you have a lot of retirement income from a traditional IRA, 401(k), 403(b), or 457, then you are going to pay more for your Medicare premiums than other seniors. Medicare will check your most recent federal income tax return to determine your income-based premiums. For example, to determine your 2024 premiums, Medicare will look at the tax return you filed in 2023 which would cover your income during the 2022 tax year. Here is how your 2022 modified adjusted gross income will affect your annual Medicare premiums in 2024:

In the table above, the annual Medicare Part B premiums are listed. Part D premiums vary depending on which specific policy is purchased but for any policy, there is an annual add-on amount based on your income that is listed in the table. Your income does not affect premiums paid for Medicare Part C (Medicare Advantage plans) or supplemental Medicare insurance (Medigap plans).

Options to make your Medicare premiums tax-deductible

Many Americans will find themselves paying more for health insurance premiums after they go on Medicare than they did before going on Medicare. This is because during your working years, employers will generally pay for part of the cost of health insurance as an employment benefit. The employee will usually pay a share of the cost of the premiums but for most employer-sponsored group health insurance plans, those premiums are paid out of your pre-tax income, which is equivalent to making these premiums tax-deductible. Once you go on Medicare, you have to pay for the entire cost of premiums yourself. Unlike employer-sponsored group health insurance, what you pay for Medicare premiums is not automatically tax-deductible However, there are three situations that will allow you to take a tax deduction for your Medicare premiums: (1) using health savings accounts, (2) itemizing deductions, and (3) having self-employment income.

Use a health savings account (HSA)

As an investment, HSAs are a true triple threat when it comes to tax advantages. When you put money into an HSA, those contributions are tax-deductible. You don’t pay any annual taxes as the HSA accrues in value. And then when you eventually take money out to pay for health expenses, you don’t pay any taxes on the withdrawals.

However, not all Americans are eligible to have an HSA. First, you cannot make contributions to an HSA after you enroll in Medicare at age 65. For those people younger than 65, only those who purchase an “HSA-eligible health plan” can contribute to an HSA. These health plans are also called high-deductible health insurance plans – they come with lower annual premiums but have higher out-of-pocket costs compare to other plans. Unfortunately, most employer-sponsored HMO or PPO health insurance plans do not qualify. But, if you are self-employed and purchasing health insurance through the Health Insurance Marketplace or if your employer offers high-deductible health insurance plans, then you may elect to enroll in an HSA-eligible health plan. High-deductible health plans are defined by the IRS. For example, for 2023, the IRS defined these plans as having a deductible of at least $3,850 for individual HSAs with maximum out-of-pocket spending of no more than $7,500. If married, both spouses can have their own HSA. There is a limit to the how much you can contribute to an HSA each year – for 2024, that limit was $4,150 for an individual HSA ($5,150 if over age 55). 

For those people who are eligible to contribute to an HSA, they are truly a great deal. Even if you never get sick or injured a day in your entire life, you will still have to pay Medicare premiums after age 65 and you can use HSA withdrawals to pay for those premiums. Note, however, you cannot use HSA withdrawals to pay for Medigap premiums.

Itemize deductions

Most Americans do not itemize deductions. The income tax cuts resulting from the 2016 tax law increased the standard deduction (currently at $14,600 if filing single and $29,200 if filing jointly for the 2024 tax year). The standard deduction increases after age 65 by an additional $1,950 if filing single or $3,100 if filing jointly. You can only itemize your deductions if the total deduction amount exceeds the standard deduction amount. Things that can be itemized include charitable deductions, certain taxes (local, state, and property taxes up to a maximum of $10,000 in total), business expenses, and mortgage interest. Healthcare expenses can be itemized only to the extent these expenses exceed 7.5% of your adjusted gross income for the year.

If you have a lot of out-of-pocket healthcare expenses, then it may make sense to itemize those expenses, including the expense of your Medicare premiums. One strategy to increase your deductions over the standard deduction amount is to make charitable deductions every other year. By contributing twice as much to charities in one year, those charitable deductions can push your total deductions above the standard deduction amount, thus allowing you to deduct healthcare expenses (to the extent that they exceed 7.5% of your income that year). Then the next year, you do not make any charitable deductions and instead take the standard deduction. If you really want to be able to contribute to a charity every year, then consider opening a donor-advised fund. You can contribute a large amount to the donor-advised fund one year and and take a tax deduction on the amount contributed as an itemized deduction. Then, you can make contributions to individual charities each year from the donor-advised fund and on those years, just take the standard deduction.

The current tax cuts expire on December 31, 2025 and unless there is new Congressional legislation to extend those cuts, income tax rates will increase and the standard deduction amount will fall in 2026. At that time, more Americans may be eligible to itemize deductions, including their Medicare premiums.

Have self-employment income

If you have income that is reported on Schedule C, then you have self-employment income. This could be from consulting, from honoraria, or any other employment income that is reported on a 1099 form. This does not include Social Security income, pension income reported on a 1099-R form, or investment income reported on a 1099-DIV or 1099-INT form. You can deduct your Medicare premiums from your Schedule C self-employment income. However, you cannot deduct more than you earn so your Medicare premium deductions cannot exceed the amount of your Schedule C income. If you have any Schedule C income then you should definitely deduct your Medicare premiums.

If you are self-employed, you can deduct Medicare Part B premiums, Medicare part D premiums, Medicare Advantage plan premiums, and Medigap premiums. There is an important caveat, however. You cannot deduct your Medicare premiums from self-employment income if either you or your spouse is eligible for an employer-subsided health plan.

Healthcare is expensive

It is unavoidable – healthcare is expensive. And the older you get, the more you are going to end up paying. CMS reports that the average male child (under age 18) generates $4,415 per year in healthcare costs; female children are slightly lower at $4,009. A man during his working years generates $8,3,13 of healthcare costs per year. Women in their working years generate $9,989, considerably more largely due to reproductive expenses. After age 65, annual healthcare costs increase to $22,597 for men and $22,162 for women. After age 85, per capita healthcare costs increase further to $35,995 per year. Because of this, commercial health insurance during one’s working years has to cover a much lower healthcare cost per person than Medicare has to cover after age 65. We pre-pay a portion of our Medicare premiums via payroll taxes during our working years, otherwise, the annual Medicare premiums we pay after age 65 would be exorbitant. But even so, Medicare premiums for seniors are very costly and can account for a significant amount of one’s disposable income after age 65.

Before age 65, everyone pays the same for health insurance premiums but after age 65, your Medicare premiums are based on your income. So, if you have saved diligently into tax-deferred retirement accounts, or if you have a pension, or if you continue working after 65, then you are likely going to have a relatively high income in retirement. That’s a good thing overall but it does mean that you are going to pay more for Medicare. But careful planning can allow you to make your Medicare premiums tax-deductible and thus take some of the bite out of those premiums.

January 3, 2024

Categories
Intensive Care Unit

Your ICU Needs More Toothbrushes

Hospital-acquired pneumonia is disturbingly common, affecting about 1% of hospitalized patients. Hospitals have adopted all sorts of strategies to reduce these infections but we have overlooked what is arguably one of the simplest – brushing patients’ teeth.

A new study published this week in the journal JAMA Internal Medicine examined the effects of brushing patients’ teeth on the outcomes of hospital-acquired pneumonia, hospital and intensive care unit mortality, duration of mechanical ventilation, ICU and hospital lengths of stay, and use of antibiotics. This was a meta-analysis that included 15 published clinical trials in 8 different countries. There were 10,742 patients (2,033 ICU patients and 8,097 non-ICU patients); however, after adjustment for cluster analysis (by one study that randomized hospital wards, as opposed to individual patients, to intervention versus control), the total number of patients included in the meta-analysis was reduced to 2,786.

Outcomes

Pneumonia. Overall there was a significant reduction in hospital-acquired pneumonia in all patients randomized to toothbrushing with a risk ratio of 0.67. A similar benefit was noted in reducing pneumonia in ICU patients (risk ratio = 0.64) and patients on mechanical ventilators (risk ratio = 0.68). To put these statistics into perspective, brushing 12 patients’ teeth prevented 1 ventilator-associated pneumonia. There was no benefit to brushing teeth more frequently than twice a day. 

Mortality. There was also a statistically significant reduction in ICU mortality in patients assigned to teeth brushing, with a risk ratio of 0.81. 

Lengths of stay. There was a significant reduction in average duration of mechanical ventilation in patients randomized to toothbrushing (1.47 fewer days on the ventilator). There was also a significant reduction in average ICU length of stay (1.36 fewer days in the ICU).

Other outcomes. There was no significant reduction in total hospital length of stay but only 2 of the 15 studies reported this outcome. There was also no significant reduction in antibiotic use but only 3 of the studies reported this outcome. 

Implications

It has long been believed that oral hygiene is important in ICU patients. To date, most studies have focused on the use of chlorhexidine mouthwashes and older guidelines recommended the routine use of chlorhexidine mouthwashes in order to reduce ventilator-associated pneumonias. However, more recent studies and meta-analyses have not demonstrated a significant benefit of chlorhexidine and newer guidelines have not made recommendations regarding the use of chlorhexidine. In addition, concerns have been raised about the potential harm from drug allergy, chlorhexidine aspiration, and development of resistant bacteria.

Dentists mostly focus on the importance of toothbrushing after eating in order to reduce dental caries. But most patients in the ICU (and all intubated patients) are NPO and thus not eating. The reason to brush teeth in ICU patients is not to prevent cavities but to prevent pneumonias. Because teeth carry a large burden of oral bacteria, toothbrushing can be seen as analogous to hand washing to prevent infections.

Any study of toothbrushing is by necessity non-blinded since it is obvious to the ICU staff whether or not they are brushing their patients’ teeth for them. Therefore, this new data is not as strong as data from randomized, double-blinded, placebo-controlled clinical trials, for example in clinical trials of new experimental medications. Also, it is unclear if there is an advantage to having dental assistants versus nurses do the toothbrushing or an advantage of using a regular toothbrush versus an electric toothbrush. Similarly, it is unclear what kind of toothpaste (if any) is best. In all likelihood, any method of reducing the amount of gunk on patients’ teeth will be effective.

Toothbrushing is simple. And in the ICU, we should do it more often.

December 20, 2023