Physician Finances Physician Retirement Planning

End Of The Year 11-Point Financial Health Checklist

The end of the calendar year is the time to do a check-up of your personal finances and investments. As we enter December, there are a few important things to do in order to ensure that you are taking advantage of tax breaks, performing needed investment portfolio maintenance, and adapting your personal finances for inflation. Here is a short list of eleven tasks for your financial health to do before the end of the year.

Eleven point financial checklist

1. Do a “backdoor” Roth IRA.

I believe that everyone should have a Roth IRA as part of a diversified retirement portfolio. Unlike a traditional IRA, 401k, or 403b, once you put money into a Roth IRA, you never have to pay any taxes when you withdraw money from it. This allows you to withdraw money in retirement from different types of investments in order to take maximal advantage of your income tax situation in any given year of retirement. If your income is less than $129,000 (or $204,000 if filing a joint income tax return), then you can directly contribute to a Roth IRA using post-tax income. If your income exceeds these amounts, then you cannot directly contribute to a Roth IRA but you can do a “backdoor” Roth by first contributing post-tax income into a traditional IRA and then promptly doing an IRA conversion by transferring that money from the traditional IRA into a Roth IRA. For 2022, you can contribute $6,000 to an IRA if you are under age 50 and $7,000 if you are older than age 50.

The best time to do a backdoor Roth is when the stock market has fallen. Stocks inevitably go up and down – your goal is to buy stocks when the market falls so that you can make the most money when you sell those stocks in the future. Stocks have taken a real beating this year… and that is good for the long-term investor since this creates a buying opportunity. For example, the S&P 500 index has fallen 17% since January 1, 2022. By contributing to a backdoor Roth today, when the stock market eventually recovers to its January 2022 value, you will have made a 17% return!

In 2021, Congress proposed eliminating the backdoor Roth in the Build Back Better Act but the legislation died in the Senate leaving backdoor Roths alone for now. With the U.S. House of Representatives and the U.S. Senate now controlled by different political parties, the resultant gridlock makes backdoor Roth elimination in the next 2 years unlikely. However, predicting Congressional legislation is difficult so anything is possible. Nevertheless, now is the best time to do a backdoor Roth – when they are still legal and when the stock market is down.

2. Do a Roth IRA conversion.

If you already have money in a traditional IRA, then you can convert some (or all) of that money into a Roth IRA without doing a backdoor Roth conversion. There are 2 ways that you can contribute to a traditional IRA, with pre-tax income or with post-tax income. If your current annual income is less than $129,000 (or $204,000 if filing a joint income tax return), then you can contribute pre-tax income into the traditional IRA and then when you withdraw money from that traditional IRA in retirement, you pay regular income tax on the entire amount. If your current annual income is higher than these values, then you cannot contribute pre-tax income into the traditional IRA but you can contribute post-tax income into a traditional IRA. In this latter situation, your tax on withdrawals in retirement gets complicated – you do not pay income tax on the amount of money that you originally invested but you do pay income tax on the accrued value of the investment. This requires you to keep careful record of the amount of your contributions over the years and then do some mathematical gymnastics to calculate the percentage of any given year’s withdrawals that are taxed and not taxed.

I see no reason why anyone should put post-tax income into a traditional IRA and leave it there since you would have to pay income tax on the accrued value when you take withdrawals in retirement. If you had instead converted that post-tax money in the traditional IRA into a Roth shortly after making the original contributions to that traditional IRA (i.e., a backdoor Roth), you would never have to pay taxes on the withdrawals in retirement. So, if your traditional IRA is composed fully (or mostly) of post-tax contributions, convert that traditional IRA into a Roth now in order to minimize your taxes.

Traditional IRAs composed of pre-tax income are different and the decision of whether or not to convert these traditional IRAs into a Roth IRA requires some strategic financial analysis. Your overall goal is to pay the least amount in income taxes. When your traditional IRA is funded by pre-tax income, then when you convert money from that traditional IRA into a Roth IRA, you have to pay income tax the year that you do the conversion. In other words, that conversion to a Roth IRA counts as a withdrawal from the traditional IRA for income tax purposes. There are 2 situations when it is advantageous to do convert money from a pre-tax traditional IRA into a Roth IRA:

  1. When your income tax rate today is lower than your income tax rate in retirement. This is difficult to know with certainty since no one can predict what the income tax rates will be 30 years from now – tax rates go up and go down, depending on how much money the federal and state governments need to keep running. As a general rule, your income tax rate is likely to be lower when you are early in your career and higher after you have been working for 20-30 years. Therefore, doing a Roth conversion in your early working years is generally preferable to doing a Roth conversion later in your career.
  2. When the stock market is down. Since you pay regular income tax on any withdrawals from a traditional IRA that was originally funded with pre-tax income, you will pay less tax if you do a Roth conversion when the stock market has fallen and the overall value of the traditional IRA is lower. Then, when the stock market recovers, all of the accrued value will be in your Roth IRA and you will not have to pay income tax on it when you take withdrawals in retirement. Conventional wisdom is that when it comes to stocks, you should sell when the value of a stock is high. In order to minimize taxes when doing a Roth conversion it is just the opposite: sell (convert) when the value of the traditional IRA is low. Since the stock market is currently down 17% compared to January 1, 2022, now is a great time to do a traditional IRA to Roth IRA conversion in order to minimize the total amount of income tax that you will pay over the course of your lifetime. However, don’t forget that the amount of the conversion will add to your adjusted gross income for the year of the conversion and will result in an increase in your income tax rate that year. You will need to weigh the cost of the increased income tax rate against the benefit of the IRA conversion.

3. Contribute to a 529 plan.

The 529 college savings plans allow you to invest money today and then never have to pay any taxes when you withdraw money for college expenses in the future. Think of 529 plans as Roth IRAs for college savings. That tax-free feature of 529 plans make them an unbeatable tool to save for college and you can use the money to pay for college for yourself, your spouse, your children, or your grandchildren. There are several reasons to consider contributing to a 529 plan in December.

  1. Get a tax deduction. Each state has its own 529 plan and they all vary considerably with respect to their state income tax advantages. For example, here in Ohio, residents of the state can deduct the first $4,000 of annual contributions to an Ohio 529 plan. That tax deduction applies to each child’s account you hold so if you have 3 children, you can deduct $4,000 of annual contributions from each child’s account for a total of $12,000 state tax income deduction!
  2. The best time to contribute is when the market is down. The 529 plans are designed to be long-term investments. When you open an account at the birth of a child, that money will not be withdrawn for at least 18 years. The U.S. bond market is down 13% this year and the U.S. stock market is down 17%. This means that stocks and bonds are the cheapest that they have been in 2 years. Now is a time when you can “buy low”.
  3. They make great Christmas presents. I have a granddaughter who lives in a different state. Last year, I opened an Ohio 529 plan in her name when she was born. This year, we’ll contribute to her 529 plan for her Christmas present. Older children usually expect tangible stuff for Christmas but for toddler grandchildren, a 529 plan contribution is perfect. A Lego set will hold a kid’s attention for a couple of weeks but an education lasts a lifetime.

4. Maximize your deferred income retirement contributions.

In 2022, the maximum amount that you are permitted to contribute to a 401k, 403b, or 457 plan is $20,500 if you are younger than 50 years old and $27,000 if you are over 50. Some people (such as employees of state universities) can contribute to both a 403b and a 457. This can bring your annual contribution up to $41,000 ($54,000 if you are over age 50). If you have not yet contributed the maximum allowed amount this year, you still have time to do a one-time contribution in December to bring you up to the annual contribution limit.

In addition, this is also the time to change your monthly 401k, 403b, or 457 plan contributions. In 2023, the contribution limit to these plans will increase to $22,500 for people younger than 50 and $30,000 for people older than age 50. Be sure to get the contribution forms submitted to your human resources department now so that your monthly contributions increase in January.

5. Consider tax loss harvesting.

Tax loss harvesting is when you sell an investment that has lost value (capital loss) on in order to offset a profit that you make selling another investment that increased in value (capital gain). The amount of capital gains tax that you pay is the total of all of your capital gains minus all of your capital losses for that year. If you have more losses than gains, then you can take up to $3,000 of the excess losses and apply them as a tax deduction to your regular income tax. December is normally the best time to decide if selling an investment for tax loss harvesting makes sense and to determine how much of that investment should be sold to optimize your taxes. Because the stock market has fallen so low this year, many people have lost money on investments making tax loss harvesting a viable financial option for more people than in previous years.

There are a couple of important caveats to tax loss harvesting. First, the losses only apply when the selling price is lower than the purchase price. For example, the S&P 500 has fallen in value by 17% in 2022 but it increased in value by 27% in 2021. Therefore, if you bought an average stock on January 1, 2022, you would have a capital loss. But if you bought that same stock on January 1, 2021, you would have a capital gain if you sold the stock today, even though that stock lost value in 2022.

Second, tax loss harvesting is more of a capital gains tax-deferral strategy than a capital gains tax-reduction strategy. If you sell a losing stock today to take advantage of tax loss harvesting and then turn around and invest the proceeds of that stock sale into a second similar stock that has also lost value recently, then when that second stock eventually increases in value in the future, you’ll pay more capital gains taxes on the sale of the second stock because your capital gains will be higher. For example, say Ford and GM shares are always the same price. You buy shares of Ford in 2021 at $100 per share and then today, Ford has fallen to $80 per share. You then sell your shares of Ford for tax-loss harvesting purposes and turn around and buy shares of GM at $80 per share. In 2024, you sell your shares of GM at $120 per share. If you had held onto Ford until 2024, then you would have $20 per share in capital gains when you sold it in 2024. Instead, you would have $40 in capital gains when you sell the GM stock in 2024. In other words, tax-loss harvesting just postpones when you pay capital gains tax if you re-invest the proceeds of your investment sale.

Tax-loss harvesting can be to your benefit if you take the capital losses as an income tax deduction since most people’s federal income tax rate is higher than their capital gains tax rate. However, this can be tricky since you have to be able to estimate what your 2022 income tax rate will be in order to ensure that it is less than your capital gains tax rate. Also, many people forget that their mutual funds will usually have capital gains each year since the fund managers are constantly buying and selling the component stocks within that fund so even if you do not sell any of your shares of that mutual fund this year, you may still have capital gains from that mutual fund. You have to calculate what all of those mutual fund capital gains will be this year in order to be sure that your capital losses from tax-loss harvesting exceed those mutual fund capital gains so that you can apply those capital losses as an income tax deduction. And remember, the maximum income tax reduction from tax-loss harvesting is $3,000.

6. Optimize schedule A deductions.

The Tax Cuts and Jobs Act of 2017 increased the standard income tax deduction from $12,700 in 2017 to $24,000 in 2018 (married filing jointly). This reduced the amount of income tax that most Americans paid but it also eliminated itemized deductions for most Americans. The standard deduction for 2022 is $25,900 (married filing jointly). Therefore, you cannot make any itemized deductions unless those itemized deductions total more than $25,900. Itemized deductions can include charitable donations, mortgage interest & points, medical & dental expenses, and taxes paid (property, state, and local). However, the maximum amount of property and other taxes that you can apply to itemization is $10,000.

December is the time to estimate the amount of your itemized deductions. If those itemized deductions are close to your standard deduction amount ($25,900 if married filing jointly), then you may be able to increase your itemized deductions now so that those itemized deductions exceed the standard deduction amount. For example, you could make extra charitable contributions now rather than in 2023. Or, you could pay your next property taxes early, before December 30th. Or, you could buy the new eye glasses now that you had planned to wait until next summer to buy.

7. Contribute to an SEP.

An SEP (simplified employee pension plan) is a deferred income retirement account for self-employed people. Even if you have a regular employer but have a side gig doing consulting, getting honoraria, or selling artwork, you can open an SEP for the income that you earn from that side gig. The SEP allows you to invest pre-tax income and then pay taxes on the the withdrawals from the SEP when you are in retirement. In that sense, the SEP is functionally similar to a 401k, 403b, 457, or traditional IRA. Although you have until April 2023 to make contributions to an SEP for your income earned in 2022, it may be better to contribute to an SEP now, since the stock market has lost so much value recently – in other words, contribute to an SEP now, while stocks are “on sale”. You can contribute up to 25% of your total self-employment income and up to a maximum contribution amount of $61,000. December is a time that you should be able to reasonably estimate your total self-employment income for the past year and then calculate the amount that you can contribute to an SEP.

8. Review your beneficiaries. 

Every investment account should have a designated primary beneficiary and secondary beneficiaries in the event of your death. If you are married, the primary beneficiary will probably be your spouse. If you have children, they will probably be your secondary beneficiaries. By specifying beneficiaries on those investment accounts, you can make it faster for your family to access those funds in event of your death. Also, your heirs can avoid costly legal fees that would be incurred if no beneficiaries were listed and the accounts need to go through probate court. For most investment companies, you can do this quickly and easily online.

9. Rebalance your portfolio.

This has been a wild year for investors. The bond market is down, the stock market is down more, and real estate is down even more. Meanwhile, inflation is reducing the value of fixed income pensions and increasing the interest rates on certificates of deposit. The net result is that the relative percentages of stocks, bonds, real estate, and cash in most people’s investment portfolios has changed significantly since January.

Now is the time to rebalance those portfolios to ensure that the percentage of each type of investment is at its desired amount. For example, since real estate investments have fallen more than stocks, you may need to sell some shares of your stock mutual fund and buy some shares of a real estate investment trust (REIT) fund to rebalance. Since stocks have fallen in value more than bonds, you may need to sell some shares of your bond mutual fund and buy some shares of a stock mutual fund. Rebalancing not only ensures that your portfolio has a healthy diversification but it also results in you “selling high and buying low” in order to maximize your overall returns.

10. Increase disability and life insurance policy amounts.

The U.S. inflation rate has risen with the result that the consumer price index has increased 13% over the past two years. In other words, you need 13% more money today to buy the same amount of stuff you bought in 2020. However, most disability insurance policies and life insurance policies have not changed their values. The $100,000 life insurance policy that you bought in 2020 would only be effectively worth $87,000 in today’s money. December is a good time to critically evaluate those policies to see if the payout amounts are still appropriate – in many cases, you may need to increase those amounts to ensure that should you become disabled, you will still have enough money to live on. Or, should you die, your family will still have enough money to live on.

11. Update next year’s budget.

Inflation does not affect everything you buy equally. For example, for the 12 months ending in October 2022, the price of food was up 10.9%, gasoline was up 17.9%, new cars were up 8.4%, and clothes were up 4.1%. This means that the amount that you budgeted for all of these items a year ago has changed. Each family’s inflation is a little different. So, although housing costs nationwide are up 11%, if you bought your house a year ago and have a fixed monthly mortgage, then your housing costs may not have gone up at all. Similarly, if you heat your house with electricity, your energy costs went up 14.1% in the past year but if you heat your house with fuel oil, your costs went up 68.5% in the past year.

To prepare next year’s budget, start with your credit card statements. Most credit card companies will divide each of your purchases into different categories, for example, groceries, transportation, housing, utilities, etc. You can often do the same with your checking account. This will give you a reasonable idea of where you spent your money over the past year. You can then use the Bureau of Labor Statistics Consumer Price Report to estimate how much each of those categories will need to be increased for your next year’s budget. Keeping to that budget ensures that you will have enough cash to pay off your credit cards and loans each month without dipping into your cash emergency fund.

Your annual financial checkup should be in December

The end of the year is the best time to do your annual financial checkup. By December, you should have a good idea of your total 2022 income and know whether you are likely to get a raise next year. Retirement account contribution limits usually change in January giving you the opportunity to change your monthly contributions. Also, you should be able to estimate how much you can spend  this year on charitable contributions, 529 account contributions, IRAs, and SEPs. The best way to start the new year is to finish the old year on solid financial ground.

November 30, 2022

Medical Economics Physician Finances

Inflation Is Like A Disease – Here Is The Cure

As a physician, I have spent decades diagnosing diseases and then prescribing treatments. For many diseases, there is more than one single cause and there are more than one possible treatment. Sometimes the treatment is easy but sometimes the treatment is worse than the disease. Inflation is no different. Here is how to fix inflation from a physician’s vantage point, when we look at inflation the way we look at a disease.

What causes inflation?

In 1976, my college macroeconomics professor said that understanding inflation at its basic level is simple – it is too many dollars chasing too few goods and services. 46 years later, that central tenet is still true: inflation occurs when demand exceeds supply. In this sense, inflation is similar to a medical condition like respiratory failure. In respiratory failure, the patient gets short of breath when the body’s demand for oxygen exceeds the supply of oxygen that the lungs can deliver. The treatment of respiratory failure is to either increase the supply of oxygen being delivered to the body’s tissues or reduce the demand for oxygen by the body’s tissues. Preferably, you do both.

Like respiratory failure, there is usually not just one simple cause of inflation but instead there are several alterations in the things that cause demand for goods and services as well as the things that affect the supply of goods and services. Although demand can be affected by changes in what consumers want to purchase, it is more often caused by the amount of money consumers have in their hands to make purchases. In our nation’s current bout of inflation, there are contributions from both the supply side and the demand side. In addition, there is an effect of the national psychology attendant to inflation expectations.

  1. Alterations in demand for goods and services:

    1. Increased disposable income from COVID relief programs. When COVID surged, the U.S. unemployment rate spiked and the government response was to inject money into the economy in the form of COVID relief checks. This resulted in many Americans having cash on hand and no place to spend it during the COVID isolation period. In 2021 and 2022, when isolation restrictions eased up, many Americans started to spend these built up cash reserves and we all started to buy stuff.
    2. Exceptionally low interest rates to borrow money since 2010. Borrowing money has never been less expensive in the U.S. as it has been for the past 12 years. Low interest rates result in more people buying houses and cars. Low interest also result in companies borrowing more money to expand their business operations. As more people borrow money, there is more money circulating in the economy and that results in more money available to spend on goods and services.
    3. Historically low federal income tax rates enacted by the 2018 income tax cuts. The current U.S. income tax rates are among the lowest Americans have had in generations. This graph shows the effective income tax rates for all incomes in 2016 (before the 2018 tax cuts) and in 2020 (after the 2018 tax cuts). As a result of these tax cuts, all Americans had more money to spend on goods and services over the past year.
    4. Federal student loan forgiveness programs. In August 2022, President Biden authorized $10,000 per person federal student loan forgiveness ($20,000 for those with Pell grants). This week, former students can start to apply for those funds. The economic effect of this will not be felt until individuals get their forgiveness applications approved but many affected Americans have already changed their spending habits based on the expectation that they will have $10,000 or $20,000 more to spend on goods and services than they had budgeted for earlier this year.
    5. Increasing federal deficit spending since 2002. The U.S. government has a long habit of spending more money than it takes in each year. In fact, the only years that the government ran an annual surplus in recent memory were in 1998 – 2001 due to combined efforts by Democratic president Bill Clinton and Republican House Budgetary Chairman John Kasich. When the government spends money, it primarily goes to purchasing goods and services and puts more money in the hands of Americans that produce those goods and services.
  2. Alterations in supply of goods and services:

    1. COVID brought supply chain disruptions. These disruptions made it difficult to get foreign-produced products into the United States. These supply chain disruptions also made it difficult to get raw materials and production components into the U.S. resulting in decreased domestic production. As a result, products such as appliances made abroad and U.S.-manufactured cars that depend on foreign-made computer chips became suddenly scarce.
    2. Changes in consumer buying patterns during COVID. As a result of the pandemic, Americans wanted computers in order to work from home and wanted new suburban homes to work and live in. This resulted in heightened demand for houses and computers. There were also transient demand spikes for toilet paper and subscription video streaming services, like Netflix. During the pandemic, consumers could not spend money on services (like travel, restaurants, and concerts) and shifted their spending patterns to goods, like appliances, TVs, and furniture. Quite rapidly, the demand for these goods exceeded the supply of these goods.
    3. COVID rebound spending. As isolation practices eased, Americans started to act on their pent-up consumption appetite. We started eating out at restaurants again. We began planning vacations involving air travel and car rental. We started buying new clothes to wear as we returned to the office. But restaurants had just recently laid off staff, airlines had stopped replacing retired pilots, and car rental companies had sold off their rental car stocks. As a result, these industries were unable to meet the rebounded demand for their goods and services.
    4. War in Ukraine. The global disruption in gas and oil supply resulting from global sanctions on Russia after its invasion of Ukraine has been felt in most Western nations, including the United States. As a result, the worldwide supply of gasoline exceeded the supply and the price per gallon spiked.
    5. Foreign import tariffs. A tariff is a tax on imported goods. By making these goods more expensive, the demand for those goods drops and is replaced by demand for more expensive domestically-produced goods. In addition, tariffs can cause foreign manufacturers to redirect their sales to other countries that do not have tariffs in order to maximize their profits. As a result, the amount of foreign-produced goods falls and U.S. consumers pay more for a given item. Tariffs introduced by President Donald Trump resulted in a drop in supply of many foreign-produced goods.
    6. Low unemployment rates. The supply of services is often reflected in the unemployment rate. When the unemployment rate rises, there are too many workers competing for too few jobs and when the unemployment rate falls, there are too many jobs for too few workers causing employers to increase wages to attract workers. The pandemic resulted in many workers retiring early and also restricted the flow of immigrants and seasonal foreign workers into the United States thus shrinking the labor pool. Consequently, we now have too many job openings for too few workers, particularly for low wage jobs and farm workers.
  3. Alterations in the expectation of inflation:

    1. Worker expectations. When workers think inflation is getting worse, they proactively demand increased wages. This was evidenced recently but the increase in unionization over the past year with the assumption that by unionizing, they could use collective bargaining to get pay raises.
    2. Manufacturer and employer expectations. Forecasts of inflation also affects the costs of goods and services – when companies forecast inflation in the near future, they increase the price of their goods and services in anticipation of increased costs to produce those goods and services in the future.
    3. Consumer expectations. The psychology of inflation is often discussed in terms of worker and employer expectations but consumer psychology is just as important. When consumers hear that inflation is going up, they come to believe that they should be paying more for goods and services. This can result in a mentality of: “Well, normally I’d never pay $25 for a pizza but inflation is happening so I guess it is OK to spend that much”.

How do we cure inflation?

With disease, we often focus too often on treating the symptoms rather than treating the underlying cause. Symptom-based treatments can provide transient relief but do not cure the underlying disease. You can give a patient with sepsis Tylenol and make his fever go away but he’ll still die of sepsis. Similarly, a disease with multiple causes requires treating all of the underlying causes and not just one. When a trauma patient is bleeding from 5 different gunshot wounds and you only suture one of them up, the patient will still bleed to death. Treating inflation is no different – you have to treat the underlying causes. Some of these treatments are relatively easy but others can be too politically painful to realistically implement.

Treating alterations in demand for goods and services:

  1. Eliminate COVID relief spending. Much of this has already occurred but many state and local governments still have unspent federal COVID relief funds and they are looking for things to spend that money on. Unspent funds should be returned to the Federal government to prevent further cash injection into the economy.
  2. Increase interest rates. The Federal Reserve is already addressing this by progressively increasing the federal fund rate. The downstream effect is rising mortgage rates and car loan rates that in turn reduce demand for new house construction and automobiles.
  3. Raise income taxes. This is probably the single most effective way for the federal government to cool off inflation. It takes money out of worker’s pockets and thus reduces their demand for goods and services. However, increased taxes is viewed as a politically nuclear option and no elected official wants to go on record for voting for higher taxes. Even politicians who lean to the left usually only want to increase taxes on the wealthy. However, selectively increasing taxes on the wealthy can increase federal government revenues but has less effect on inflation. The wealthy tend to spend their extra income on investments and luxury goods but to really cool off inflation, one must decrease the demand for everyday goods. For that reason, for tax increases to be effective in reducing inflation, everyone would have to pay higher taxes, not just the wealthy.
  4. Eliminate loan forgiveness programs. Unfortunately, once you promise people money, it is exceptionally difficult to then take it away – it would be political suicide. Nevertheless, even lowering the income threshold for loan forgiveness eligibility would effectively take cash out of the economy.
  5. Decrease federal spending. Much of the huge spike in federal spending from 2020 – 2022 was on COVID programs such as vaccines, medications, and testing. The public health advocate in me wants to continue free access to vaccines and tests but to reduce inflation, it is better to start asking Americans to pay for these goods and services themselves. Belt-tightening inside the Washington Beltway is never popular but to fight inflation, federal spending should be limited to only those programs and federal departments that are vital to keep the country running safely.

Treating alterations in supply of goods and services:

  1. Improve supply chain disruptions. Many of the COVID supply chain issues have been resolving over the past year as the country has gotten back to work. However, transportation bottlenecks still exist in some areas and union strikes could cause additional transportation disruptions in the near future.
  2. Re-set consumer buying patterns. The free market is already doing this to an extent. Computer sales are falling as people return to the office after working from home. Netflix subscriptions are falling. Home sales are decreasing due to a combination of people no longer fleeing to the safety of the suburbs to avoid COVID, no longer needing more space to work from home, and no longer being able to buy houses with rock-bottom mortgage rates.
  3. Temper COVID rebound spending. The government can’t just tell people to stop buying stuff. But fortunately, the combination of a year of high inflation plus a year of spending down COVID-related household cash reserves has already tempered America’s recent buying spree.
  4. End the war in Ukraine. This one is not under the United States’ control but until the war ends, normalization of trade relations with Russia as well as resumption of Ukrainian agricultural and manufactured goods exports will continue to cause international inflationary pressure. In addition, Western countries, including the U.S., are spending much cash on military items with the downstream effect of that cash going into military production worker wages.
  5. Lift foreign import tariffs. There are compelling political reasons to continue some tariffs but from an economic standpoint, the more inexpensive goods we get into the country, the better from an inflation standpoint. First, increased imports reduce the cash supply by getting U.S. cash out of the country and thus out of circulation in the U.S. economy. Second, increased imports keep the cost of American-made goods lower by increasing competition.
  6. Increase the unemployment rate. It would be politically poisonous to simply eliminate jobs but if the unemployment rate increases, circulating cash is taken out of the economy as the supply of workers drops. In addition, employers would no longer have to keep increasing wages to attract workers. However, an alternative strategy could be more palatable, namely, increase the number of workers by increasing foreign immigration. We currently have too many foreigners trying to get into our country illegally in order to find employment and escape unsafe living conditions. By legalizing the presence of many of these undocumented foreigners, we can increase our workforce, particularly for lower wage jobs and farm work jobs. Our immigration problem and our low unemployment problem are the solutions to each other.

Treating alterations in inflation expectation:

  1. Politicians as psychologists. Changing the psychology of an entire country is hard, but not impossible. This is where the charisma of individual leaders can have an impact. Another ways by having agreement between the political parties. Getting Republicans and Democrats to come together on  anything is hard anytime but even more so in an election year. During election years, it is far too easy for both parties to point the blame for inflation on each other. It is far to easy for a political party to say “Elect us because the other guys are going to make inflation worse”. Nevertheless, consensus on legislation portrayed as being inflation-reducing can send a powerful psychological signal that can help Americans of both parties.
  2. Just do something. In medicine, doctors often prescribe antibiotics for bronchitis and sinusitis even though they know that the infection is most likely viral and the antibiotics won’t do anything. But it is the patients’ expectation that something is being done to cure their disease. If Americans see no-one doing anything to reduce inflation, their expectation will be that it is just going to keep on going until someone does something. Thus far, the public face on inflation control has been the Federal Reserve and to give the Fed credit, they have made aggressive interest rate increases. But ideally, there should also be executive branch action and legislative branch action to fight inflation so that our country’s perception is that war is being fought and will soon be won.

It really is like a disease

Admittedly, I am neither an economist nor a politician. But as a doctor, I see so many similarities between inflation and disease. In fact, inflation can be seen as a disease of the country’s economy. And just like most diseases, you can’t just treat the symptoms and hope that it goes away on its own, you have to treat the causes of the disease, preferably all of the causes.

October 19, 2022

Physician Finances

Choosing A 529 Plan

At the time of writing this post, there are still 3 days to contribute to a 529 plan to take advantage of tax savings this year. So, if you haven’t maximized your annual contribution, now is the time to do so. For most families, life’s five biggest expenses are food, housing, healthcare, taxes, and children’s college education. The 529 plans uniquely allow you to lower your overall costs of two of these: your children’s education and your taxes. I funded all 4 of my children’s college costs through 529 plans and now I am looking at 529 plans for a grandchild.

What is a 529 plan? College is expensive. The average 4-year public college currently costs $102,640 and the average private college costs $215,796. Given the projected annual inflation in college costs, 18 year from now, a public university will cost $265,700 and a private college will cost $559,604. Financial aid and scholarships reduce these costs for most families but physicians generally have a high enough income that exempts them from financial aid and most scholarships. A 529 plan allows a parent (or grandparent or just about anyone) to put money into a 529 investment where it grows tax-free and when distributions are taken out for educational expenses, there is no tax on those distributions. These tax advantages make the 529 plans the absolutely best way to save money for a child’s college education. The account owner is usually a parent or grandparent; the account beneficiary is the child. If the account owner has several children/grandchildren in the 529 accounts that he/she owns, then residual funds in the account of one child can be rolled over into the account of another beneficiary after the first child completes their education. In addition to using 529 plans to pay for college, the money in a 529 plan can also be used to pay for K-12 tuition of up to $10,000 per year – this can be useful for children attending private elementary and secondary schools.

Each state has its own 529 plan. The 529 plans are state-specific and no two states’ plans are exactly alike. Most states will offer a variety of specific mutual funds within the 529 plan that you can choose from. Some states allow you to deduct contributions from your state income tax. Some states provide modest matching contributions. The annual expenses charged to the 529 account vary from state to state. The good news is that you do not need to live in a state to open a 529 plan in that state but the bad news is that tax deductions and matching contributions usually only apply when contributing to a 529 plan when you are a resident of that particular state. In general, the money in the 529 plans can be used for a college anywhere in the country and not just colleges located in the state administering the 529 plan.

Savings plans versus pre-paid tuition plans. Most 529 plans are savings plans that are essentially investment accounts that allow withdrawals for any education-related expenses (tuition, books, and room & board) for any college anywhere in the country. Five states currently also offer pre-paid tuition plans that allow the 529 contributions to purchase tuition for colleges in that state (Florida, Maryland, Michigan, Mississippi, and Nevada). This essentially allows you to lock in tuition purchases at today’s tuition prices and given how rapidly tuition costs have risen each year, there can be an attraction to the pre-paid tuition plans. I personally do not like the pre-paid tuition plans and even when Ohio did have a pre-paid tuition plan in the past, I avoided it. The reason is that if the child elects to go to a college in another state, the tuition credits cannot be used for out-of-state colleges. So, unless you live in one of the five states with pre-paid tuition plans AND your are 100% certain that your child will go to a public college in that state AND you are 100% certain that your child will not get a scholarship to attend that college, it is best to use a 529 savings plan rather than a 529 pre-paid tuition plan.

How to choose a 529 plan

Know whether your 529 plan contributions are tax-deductible. If the state that you live in offers a tax deduction (or a tax credit) from state income tax on contributions, then your state’s 529 plan is the one you should go with. Seven states even allow residents to deduct contributions made to 529 plans in other states (Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania). However, some states do not have state income tax and consequently there is no tax deduction advantage to residents of these states: Alaska, Florida, New Hampshire, Nevada, South Dakota Tennessee, Texas, Washington and Wyoming. Other states do have state income taxes but do not allow you to deduct 529 contributions: California, Delaware, Hawaii, Kentucky, Maine, New Jersey and North Carolina. For the rest of the states, the annual amount that is tax deductible varies from $500 ($1,000 if filing jointly) in Rhode Island to $20,000 ($30,000 if filing jointly) in Colorado. Here in Ohio, the amount that is tax deductible is $4,000 (regardless of whether filing single or jointly) but if you contribute to 529 accounts for multiple children, you can deduct contributions of up to $4,000 for each child from your Ohio state income taxes each year. If you live in a  state where there is no tax deduction, then you should base your 529 choice on the mutual fund options and annual expenses – this may mean investing in a 529 plan from a different state than the state that you live in.

Know what the fees are. There are many different fees that can be associated with each state’s 529 plan. In many cases, the amount of fees charged by the plan may be the deciding factor in selecting one state’s 529 plan over another state’s. Fees can include program management, maintenance, and administrative fees charged by the 529 plan itself. In addition, there will be investment fees charged by the mutual funds within the 529 plan. Many states offer “advisor-sold plans” where there is a company that actively manages the investment selections and charges additional advisor fees. All of these various fees can add up and can erode the value of the account if the fees are excessively high. The good news is that with different 529 plans in all 50 states plus the District of Columbia, competition between the states has helped to keep 529 fees down.

Know what the investment options are. Each 529 plan has multiple different mutual funds that you can select. These may include various stock funds, bond funds, age-based funds, advisor-directed accounts, certificates of deposit, and savings accounts. As a general rule, the younger a child is, the more aggressive option you should choose. As an example, a stock market index fund would be best for a 1-year old and a bond fund or certificate of deposit is preferable for a 17-year old. In 529 plans, I like the age-based funds because you can put money in the fund and then the investment company will automatically adjust the ratio of stocks:bonds each year based on the child’s age. Because of the lower expenses, I also prefer index funds over more costly advisor-directed funds.

Is there a match to contributions? In a few states, there is a small match to initial contributions for residents of that state. These can be an initial incentive to open new accounts. For example, Rhode Island will contribute $100 to 529 plans opened by Rhode Island residents for children before their first birthday. Illinois has a $50 contribution to new 529 plans for Illinois residents. In other states, a portion of initial contributions will be matched for low or middle income families. For example, California will match initial contributions up to $200 for California residents making less than $75,000 per year.

Where to get information. Start by checking with your state’s 529 plan website to learn whether contributions are tax-deductible, what the fees are, and what the investment options are. If you are in a state that does not allow you to deduct contributions from state income taxes, then you should compare different states’ 529 plans and chose one based on other factors, such as annual fees and mutual fund options. There are several good websites that allow you to compare 529 plans from different states, for example, and The 529 plans are constantly changing, so a plan that may be best for you one year may not be the best the next year. Forbes, Investopedia, and Morningstar rate 529 plans each year and these websites can provide useful recommendations.

What about grandparents?

For the past 3 decades, I based my 529  strategy based on the needs of my own children. Now that I am a grandfather, there are a number of other factors to consider when contributing to a 529 plan for a grandchild.

  • A child can be the beneficiary of more than one 529 account. Most typically this will happen if a parent has a 529 plan and one or both sets of grandparents want to open their own 529 account for the child. Or, the parents are divorced and both want to have separate 529 plans for their child.
  • If the 529 plan is in a state that considers contributions as tax-deductible, the grandparent can deduct contributions regardless of whether the 529 plan is owned by grandparent or owned by the parent (as long as the grandparent is a resident of that state).
  • Since the state tax deduction usually only applies when a grandparent contributes to his/her state of residency’s 529 plan, it is best to open a second 529 plan if the child’s parents live in another state and have their own 529 plan in that state.
  • A 529 account from one state can be transferred to a new 529 plan in a different state once per year. This can be an advantage if the 529 owner (parent or grandparent) moves from one state to another and wants to take advantage of state income tax deductions in the new state. It can also be an advantage if a different state’s 529 plan becomes more attractive due to lower expenses or better investment options.
  • The amount of money in a 529 plan that a parent owns will affect a child’s eligibility for financial aid in the FAFSA application. However, the money in a 529 plan that a grandparent owns is not factored into financial aid calculations for FAFSA purposes until that money is withdrawn for the child’s education (at which time, it will be considered as part of the child’s non-taxable income on the FAFSA form). Therefore, the best strategy is to use the parent’s 529 account for the first two years of college (when financial aid applications from FAFSA will be submitted) and then use the grandparent’s 529 account for the child’s last two years (when the FAFSA forms have already been submitted). This strategy optimizes the child’s financial aid and scholarship eligibility.
  • In most states, the ownership of a 529 plan can be transferred (for example, from a grandparent to a parent when the child gets close to college age).
  • Contributions to 529 plans are considered as a gift for federal income tax purposes. Therefore, they are subject to the maximum of $15,000 per person that can be gifted to an individual per year without that person having to pay income tax on the gift. If the grandparents (or parents) are married and file jointly, then each grandparent (or parent) can gift $15,000 for a total of $30,000 from the 2 grandparents (or the 2 parents). A unique feature of 529 funding is that the IRS allows people to do a 5-year front load to the 529 fund without incurring gift taxes. So, a grandparent or parent can contribute $75,000 initially to the 529 plan and then not do any contributions for next 4 years. This can allow more money to grow tax-free with the result of a larger balance in the account when the child reaches college age.
  • In addition to funding a 529 plan, grandparents can also pay tuition directly to the college once the grandchild is enrolled. A provision in the tax code exempts these direct tuition payments from the $15,000 per person per year gift limit ($30,000 if married and filing jointly). This is a strategy that parents often use to help pay for a child’s college expenses without exceeding the annual gift amount limit but it also applies to grandparents. For example, tuition at the University of Notre Dame (one of my children’s alma mater) is currently $58,843 per year. If a grandparent writes a check to a grandchild for that much money, the grandchild would have to pay income taxes for everything over $15,000 (in this case, that would be $43,843 of taxable income). On the other hand, if the grandparent pays the University of Notre Dame the $58,843 directly, then none of it appears as taxable income for the grandchild.

What I did

When 529 plans first came into existence, the Ohio plan was not very good – the mutual funds offered were expensive, the fund’s performance was poor, and the tax breaks were not attractive. So, I initially invested in Iowa’s 529 plan (at the time, I had never stepped foot in Iowa). The reason was that Iowa offered Vanguard index mutual funds with low expenses. When Ohio later changed to offer Vanguard funds and the tax deduction became more attractive, I moved my 529 fund from Iowa’s to Ohio’s. I selected age-based Vanguard index mutual funds for each of my four children and then did monthly direct deposits from my checking account into the Ohio 529 fund. By the time each child was in college, I had enough saved in their 529 accounts to pay for tuition, books, room & board for an in-state public university. When each of my children graduated from college, I rolled over the residual balance in their 529 account into one of my other children’s accounts. I am still using the residual fund balance in my youngest child’s 529 plan to help him out with his medical school costs.

For my new grandchild, I will open a new account in my Ohio 529 plan under my ownership to take advantage of the tax deduction on contributions to the plan. In the unlikely event that there is a residual balance in my son’s 529 account when he finishes medical school, I will roll that balance over to my grandchild’s account. If/when I have additional grandchildren, I will open new Ohio 529 accounts under my ownership for each of them so that if one of them gets a college scholarship or does not go to college, I can roll their fund balance over into one of the other grandchildren’s 529 accounts. I will likely hold off on taking distributions out of their 529 accounts until their junior and senior years of college in order to avoid negatively impacting their financial aid eligibility.

The time to act is now

This year, New Years Day falls on a Saturday so most state offices are closed on December 31st for a state holiday. Therefore, you have until December 30th to make contributions to a 529 plan this year in order to take advantage of a 2021 state tax deduction (if your state allows 529 contributions to be tax-deductible). Education is one of the best gifts that you can give to a child and 529 plans are the best way to invest in that education.

December 28, 2021

Physician Finances Physician Retirement Planning

‘Tis The Season… For Tax Loss Harvesting

Who doesn’t like free money? “Tax loss harvesting” is an investment tactic that does just that – gives you free money. And December is just the time to do it. Careful use of tax loss harvesting can take off up to $3,000 from your taxable income this year, just in time for the Christmas holidays.

What is tax loss harvesting?

In brief, tax loss harvesting allows you to off-set capital gains or regular income with capital losses from investments. Here is how it works. When you have an investment such as a stock or mutual fund that increases in value, the difference between the price that you paid to buy it and the price when you sold it is capital gains. If that difference is a positive value, you pay taxes on those capital gains based on your capital gains tax rate which in turn depends on your income level. There are two types of capital gains: short-term and long-term. Short-term capital gains are those on investments that you have held for less than 1 year and are taxed at your regular income tax rate. Long-term capital gains are on investments you have held for more than 1 year and are taxed at your capital gains tax rate. Most people fall into the 15% capital gains tax rate bracket.

IMPORTANT: capital gains taxes only apply to regular investments and not retirement accounts such as a 401(k), 403(b), 457, or IRA. You will pay regular income tax on all withdrawals from retirement accounts.

One the other hand, if that investment lost value from the time you bought it to the time you sold it, you have a capital loss and this is where tax loss harvesting comes into play. There are two types of tax loss harvesting:

  1. Use a capital loss to offset a capital gain. You get taxed on your net capital gains when you add up all of the investments you sold that you made money on and lost money on. So, if you made $5,000 in long=term capital gains from the sale of one investment but had $5,000 in long-term capital losses from the sale of another investment, the gains and the losses balance out so you do not owe any money in capital gains taxes that year. You have to track and report short-term and long-term capital gains/losses individually and the IRS requires you to first apply short-term losses against short-term gains and apply long-term losses against long-term gains before you can apply short-term losses against long-term gains and vice versa so the IRS reporting on your tax forms can get a bit complicated.
  2. Use a capital loss to offset regular income. What happens if you either do not sell any investments for a capital gain this year or if you sold more investments for a loss than you sold for a gain? You can apply net capital losses up to $3,000 against your regular income. In other words, you can reduce your taxable regular income by $3,000. If your effective income tax rate is 18.00%, that means that you can avoid paying $540 in income tax on that $3,000. In addition, that reduction of $3,000 from your taxable income will drop your effective income tax rate to 17.93% which in turn will drop your income tax by an additional $180 for a total reduction of $720 in income tax.  The net effect: you get $720 in free money!

What are the rules?

First, you have to be able to calculate your cost basis (what you actually paid when you originally purchased an investment). To do that, you have to know the date that you bought an investment and the date that you sold an investment. You also need to know the amount of money that you originally paid for that investment when you bought it and the amount of money you sold it for. This can get a little tricky if you purchased shares of a stock (or mutual fund) on different dates. It can also get tricky if you are automatically re-investing dividends from a stock (or mutual fund) to purchase additional shares of that stock (or mutual fund). Fortunately, most of the large investment companies will track your mutual fund investments for you and will be able to tell you what your short-term and long-term capital gains are at any given time with just a click of your mouse. This allows you to calculate how many shares of a mutual fund you need to sell in order to have a $3,000 capital loss.

Second, you have to avoid a wash sale. The IRS does not allow you to sell an investment to take a loss and then turn around and immediately buy back that investment right away – this is called a wash sale. To avoid wash sale penalties, you have to wait at least 30 days before you purchase shares of the stock (or mutual fund) that you just sold. You can, however, sell a losing stock (or mutual fund) and use the proceeds to buy a different, dissimilar stock (or mutual fund).

Third, you have to fill out IRS form 8949 when you fill out your annual income tax forms. This form summarizes all of the investments that you sold during that tax year. The total amount from form 8949 then has to be reported on schedule D of your 1040 form. Schedule D is where you can deduct up to $3,000 from your taxable income.

What should I sell?

We are living in the longest bull market in U.S. history. Except for the 6 months between February and August 2020 (onset of COVID), the overall stock market has been steadily going up for the past 11 years. As a consequence, most broad market mutual funds and most individual stock have increased in value rather than decreased in value so you may not have any investments to qualify for tax loss harvesting. However, certain specific types of investments have lost money over the past few years. For example, many U.S. and foreign bond mutual funds have lost value over the year and energy sector mutual funds have lost value over the past 10 years. Check all of the specific stocks and mutual funds in your investment portfolio – those that have lost value since you purchased them are eligible for tax loss harvesting.

It is important that you keep sight of your overall investment strategy which should involve maintaining a diversified portfolio of individual investments. Beware of selling off too much of any one type of investment if it puts your overall portfolio out of balance. For example, don’t sell all of your bond funds in order to harvest a tax loss or you will end up with a portfolio comprised exclusively of stocks and thus making you vulnerable to your portfolio losing too much money if/when the stock market falls in the future. If you sell shares of an energy sector stock mutual fund for tax loss harvesting purposes and you feel compelled to have energy stocks for long term investment purposes, just remember that you have to wait more than 30 days before you can buy new shares of that energy fund.

My investment philosophy has always been to “buy and hold”since investment should be for the long term. Stocks and bonds will go up and down in value and the wise investor will ride out the downs in order to take advantage of the inevitable ups. Tax loss harvesting is one exception to this strategy that can reduce your taxes and put more money in your pocket.

December 3, 2021

Physician Finances

Marginal Income Tax Brackets Versus Effective Income Tax

Forget about everything that you think you know about income tax brackets… they are one of the most misunderstood parts of the American tax system. How many times have you heard someone say “More income might push me into a higher tax bracket”? Yes, it will but no, you shouldn’t care in the least. The reason is that Federal income tax brackets are marginal tax brackets. Because of this no American pays income taxes at the tax rate of the bracket that they are in. Instead, we pay the effective tax rate which is always lower than the marginal tax bracket. The following table shows the current Federal income tax brackets.

Many people mistakenly think that their income tax rate is the same as whatever the tax bracket that their taxable income falls into. But that is not exactly correct. The marginal tax system results in everyone paying the same tax rate (10%) on the first $19,751 that they make. Then everyone pays the same tax rate (12%) on the next $60,500 that they make and so on up each tax bracket. The graph below illustrates how this works:

The result is that for any given taxable income a person earns, their federal income is a blend of the individual tax rates for each of the brackets that comprise their total income. In addition, each taxpayer can take the standard deduction from their gross income: $12,400 if filing single and $24,800 if married and filing jointly. The standard deduction results in everyone’s taxable income being lower than their total gross income. As a result, even people in the lowest income tax bracket pay a smaller effective tax rate than the marginal tax rate of that bracket. The next graph shows the current marginal tax brackets for Federal income tax in the dotted line and the effective tax rate in the solid line.

From this graph, you can see that the effective tax rate (what you actually pay) is always less than the tax bracket that you are in. It also shows that the effective tax rate does not jump up when your income increases enough to put you into a higher marginal tax bracket. Instead, the effective tax rate goes steadily up at a relatively constant rate for every dollar more you earn. Periodically, congress will set new tax brackets. The graphs below compare the 2016 and 2020 brackets.

As you can see, trying to figure out what those tax bracket changes mean for any one person at any given income is difficult. So, let’s look at how the 2020 brackets affect people at different incomes:

The above graph shows the tax brackets at the end of the Obama administration (blue) versus the tax brackets at the end of the Trump administration. Just looking at a tax bracket table can be hard to interpret – what is important is your effective tax rate and not the marginal tax bracket. The table below shows the effective tax rates during the two administrations:

The effective tax rate that taxpayers of every income dropped during the Trump administration. The reduction in effective tax rates was fairly consistent across all incomes, ranging from a drop of 3.7 to 5.9 percentage points. Some people focus on the top tax bracket (currently $622,051 and 37%). But as was demonstrated earlier in this post, no one pays an effective tax rate as high as their marginal tax bracket. So even a person with an extremely high gross income of $700,000 per year only pays an effective tax rate of 26.7%.

Tax rates go up and down with different administrations. Tax cuts are an enormous crowd-pleaser for voters. However, eventually, deficits catch up with tax cuts – the government cannot spend money on services that voters demand and then tax raises ensue. In general, taxes go up when Democratic presidents are in office and go down when Republican presidents are in office. The graph below shows the marginal tax rate for the highest tax bracket over the past 36 years:

So, don’t fear being in a higher income tax bracket. Indeed, you should try to be in as high of an income tax bracket as you can. But it does make retirement planning complicated. Let’s say you have an option of putting retirement savings in a regular 401(k) or a Roth 401(k) this year. If you put money in the regular 401(k), the money will be invested pre-tax and then you will pay regular income tax on the withdrawals when you take the money out in retirement. If you instead put money in a Roth 401(k), then you will pay income tax on the money now and then you will pay no tax on the withdrawals when you are retired.  The strategy is to pay income taxes when you have the lowest effective tax rate. The problem is that you cannot predict today what the effective tax rates are going to be when you retire.

As an example, assume you are making a taxable income of $150,000/year today. Your effective tax rate in 2021 is 14.1%. Now assume you will have a taxable income of $100,000/year when you retire. If tax rates are the same in your retirement year as they are now, then your effective tax rate will be 11.7% in retirement and so you would be better off putting your money in a regular 401(k) today to minimize your overall tax burden since your retirement income tax rate will be lower than your current income tax rate. However, if whoever is president when you retire goes back to the same tax rates we had in 2016, then that taxable income of $100,000/year in retirement will result in an effective tax rate of 15.6%. This would be higher than your current tax rate on your taxable income of $150,000 today of 14.1%. So, in that situation, you’d be better off putting your retirement investment in the Roth 401(k) since your tax rate will be higher in your retirement year.

No one has a crystal ball to predict the tax rates of the future. More than likely, they will go up some years and go down other years. So, should you put your retirement investment in a regular 401(k) or a Roth 401(k)? The best option is to do both and split your investment with half in a regular 401(k) and half in a Roth 401(k). When you are retired, if the effective tax rates go up one year, then take money out of your Roth 401(k) that year. On the other hand, if the effective tax rates go down the next year of your retirement, then take money out of the regular 401(k) that year. Your best defense against variable tax rates in your retirement years is a diversified portfolio that includes both the regular 401(k) and the Roth 401(k). If you work for a non-profit company, then the same goes for a regular 403(b) and a Roth 403(b). If your company does not offer the Roth 401(k)/403(b), then put some money in the regular 401(k)/403(b) and some money in a Roth IRA (depending on your income level, you may need to initially put money in a traditional IRA and then do a Roth IRA conversion to avoid penalties).

In a letter to Jean-Baptiste Le Roy, Benjamin Franklin famously wrote: “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” I would add to that that the only thing certain about taxes is that the rates will be different in the future.

March 15, 2021

Physician Finances Physician Retirement Planning

The 15 Commandments of Physician Financial Health

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

1. Have an emergency fund

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

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

2. Eliminate excessive debt

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

3. Buy insurance judiciously

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

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

4. Start saving for retirement early

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

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

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

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

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

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

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

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

7. Choose retirement investments strategically

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

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

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

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

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

9. Don’t buy individual stocks

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

10. Timing the market doesn’t work

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

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

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

12. Know your investment horizon

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

13. Diversify

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

14. Pay off student loans strategically

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

15. You are your finances best friend and worst enemy

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

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

March 11, 2021

Medical Economics Physician Finances

2021 Medicare Physician Fee Schedule Winners And Losers

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

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

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

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

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

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

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

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

December 23, 2020

Physician Finances

Retirement Planning In The Time Of COVID-19

I’m taking a break from rounding in the ICU this afternoon while waiting for 3 of my patients’ COVID-19 test results to come back. And I was trying to think of anything good that has come from the financial melt-down that has occurred over the past month. There is at least one small opportunity that the sudden drop in value of the stock market presents, namely, the opportunity to convert your traditional IRA into a Roth IRA with less negative tax implications.

Physicians are generally not able to contribute directly to a Roth IRA because they have too high of income. However, physicians (or anyone) can contribute to a traditional IRA with after-tax dollars. In a previous post, I outlined why I believe that traditional IRAs are an unwise investment option for most physicians. However, many physicians (and other people) have traditional IRAs that they have accumulated when rolling over a pension plan into an IRA. This often happens when changing employment and leaving one employer’s pension plan to join another plan.

I have been a long-standing proponent of annually contributing to a traditional IRA and then shortly thereafter, moving the money in that traditional IRA into a Roth IRA, a process called a Roth conversion. This is also called the “backdoor Roth”. In the past, the only mechanism for contributing to a Roth IRA was by people who have annual incomes less than $124,000 ($196,000 if filing jointly in 2020) contributing directly to the Roth with pre-tax dollars. However, several years ago, a law governing Roth contributions expired, allowing anyone (regardless of income) to “convert” a traditional IRA into a Roth IRA. This now allows a person making more than $124,000 to contribute to a traditional IRA with post-tax dollars then convert that traditional IRA into a Roth IRA.

The advantage of the Roth IRA is that it grows in value tax-free and then when you take the money out, you don’t have to pay any taxes on it. I believe that the Roth IRA is an important component of a diversified portfolio of retirement investments.

One consequence of converting a traditional IRA into a Roth IRA is that you have to pay regular income tax on increase in value of the traditional IRA at the time of conversion. So, if you originally contributed $2,000 to a traditional IRA and it increases in value to $3,000, then when you convert it to a Roth IRA, you have to pay regular income tax on the appreciation value of $1,000. Other than doing an annual “back door Roth” conversion, there are two times that it is smart to convert a traditional IRA into a Roth IRA: (1) when your income tax rate is low and (2) when the stock market crashes.

As I have stated in previous posts, my philosophy to retirement planning is to be able to have enough retirement savings that when you retire, you can withdraw enough out of your retirement funds to equal your current income. If you are successful with that, then you are not going to be in a lower tax bracket when you retire so option (1) for traditional IRA to Roth IRA conversions will not be possible. The COVID-19 outbreak and its effect on the world’s stock markets makes option (2) now very appealing.

When we changed our physician practice corporation in the early 2000’s, I rolled my former corporation’s pension plan into a traditional IRA. In 2009, the stock market dropped precipitously and I used that as an opportunity to convert about half of my traditional IRA into a Roth, thus minimizing the amount of income tax that I had to pay at the time of conversion. Over the next several years, the stock market regained all of its losses and then continued to grow in value so when I retire and take money out of my Roth IRA, I won’t have to pay any taxes on all of that increase in IRA value.

Over the past month, the stock market has fallen by about a third of its value. Consequently, most people’s traditional IRAs have fallen to their lowest value in many years. As a physician, I know that epidemics eventually pass and COVID-19 will eventually go the way of all other previous human epidemics. When that happens, the economy will get back into gear and the stock market will rise again. Therefore, this may be one of the best times in years to convert a traditional IRA into a Roth since you will pay considerably less in income tax on the conversion now than you would pay on withdrawals from the IRA in retirement.

One small silver lining an a sky otherwise full of dark gray COVID-19 clouds

March 21, 2020

Outpatient Practice Physician Finances

Should Doctors Bill For Phone Calls?

Beginning in January 2019, the Centers for Medicare and Medicaid Services (CMS) rolled out G2012 – a new CPT code for “Brief communication technology-based service (virtual check-in)”. This code can be used for patient phone calls as well as electronic medical record patient portal contacts initiated by a patient. For the first time, doctors can charge for patient phone calls – but should they?

The details behind G2012 are that the physician cannot have seen the patient for a regular billable encounter for 7 days prior to the phone/portal encounter or for 24 hours after the phone/portal encounter. The medical discussion should be between 5 – 10 minutes and has to be between the patient and the doctor/NP/PA and not the office staff. The patient has to give verbal consent acknowledging that the telephone/portal visit will be billed. The patient must have been seen by the physician or a physician in the physician’s group within the past 3 years. This CPT code is compensated at 0.41 RVUs ($14.78 for Medicare).

When Medicare released its plans to roll out G2012 a year ago, physicians all over the country breathed a sigh of relief and said “…finally!”. Every physician who is responsible for direct patient care in the outpatient setting knows the burden of patient phone calls. On a typical Monday, I have 15-20 phone messages in my electronic medical record “in basket”. On a Monday after a holiday weekend, that number can increase to 25-30 and it is not uncommon for me to spend 1-2 hours on those Mondays just returning phone calls. It has been estimated that the average primary care practice gets 21 calls per day for every 1,000 patients in the practice.

There are additional CPT codes that are designated for phone calls of various lengths of time for physicians (99441, 99442, and 99443) as well as for advanced practice providers such as NPs or PAs (98966, 98967, and 98968). However, Medicare does not currently reimburse these codes so they are generally not used unless a commercial insurance company recognizes them. Similarly, there is a CPT code for email responses to patients for physicians (99444) and advanced practice providers (98969) but these are also not currently reimbursed by Medicare.

Some phone calls are entirely legitimate, for example, a person who gets an asthma flare when traveling out of town and needs advice and a new inhaler. But some phone calls are simply because a patient does not want to come into the office or a patient wants to avoid an office visit co-pay. In these situations, the physician is providing free healthcare to the patient. And that equates to uncompensated physician time as well as malpractice vulnerability. There are pros and cons to billing for phone calls.


  1. It can reduce overall healthcare costs. The office overhead expense associated with a face-to-face office visit can be considerable. As opposed to a regular office visit, there is no need for registration staff, nursing staff, office space use, and checkout staff with a phone call.
  2. It allows more flexible use of the physician’s time. The doctor can return that call at a time when he/she has a few free minutes rather than committing the doctor to a fixed appointment time for an office visit.
  3. It is more convenient for the patient. Having a medical problem managed by a phone call can obviate the cost of travel to the doctor’s office and the time involved in getting to and from the doctor’s office. For the patient who is a student or who is working, it also obviates the need to take time away from classes or time off work to go to the doctor’s office.
  4. It improves doctor satisfaction. Physicians have provided free medical care over the phone ever since phones came into existence. Knowing that you are getting paid something (even if not very much) can eliminate that sense of being taken advantage of that you otherwise would have. From my perspective, this is one of the most important reasons to bill for patient phone calls.
  5. It can create a barrier for patients who abuse the system. Every physician who practices outpatient medicine has had the last minute cancelation by a patient who then calls the office an hour later asking if the doctor can call them back and manage by phone the medical problem that they were supposed to come in for. The physician still has to pay the overhead cost of that no-show on the schedule in terms of the nurse’s salary, office rent, the receptionist’s salary, and the the utility bills not to mention the physician’s own salary. Every physician also has the patient who sends lengthy messages via the EMR patient portal on a daily basis or calls multiple times a week. The awareness that the patient (or at least their insurance) will be billed for those calls can reduce abuse.
  6. It encourages use of email communications through patient portals. Phone calls create more overhead expense than emails. There is the time the office staff takes to answer and transcribe patient messages, the time it takes someone to answer the phone when the physician calls back, the time it takes for the patient to actually get on the phone, the time it takes the physician to document the call in the medical record, etc. An email communication eliminates much of that overhead cost of office staff and physician time. Furthermore, when the patient has the doctor on the phone (as opposed to an email message), it often results in additional medical questions that follow the comment: “Oh, and while I have you on the phone…” and this adds additional time as well as complexity of medical decision making. I can answer 3 patient emails in the time it takes me to return 1 patient phone call.


  1. The patient has a co-pay. Although the reality is that at $2.50, it is a bargain. Nevertheless, for patients used to getting free medical advice over the phone, the co-pay can be surprising.
  2. The patient has to give verbal permission/acknowledgement that the phone call will be billed. The easiest way to do this is to incorporate scripting into the nurse or office staff who initially answers the phone and starts the phone message.
  3. Phone calls do not pay much. The cost of your revenue cycle department to submit and collect the phone call bill may be nearly the $14.78 you will be paid by Medicare for the phone call.
  4. It is not usually covered by commercial insurance. Usually, it takes commercial insurance companies a year or two to catch up to new CPT codes introduced by Medicare. Currently, few insurance companies cover phone calls so the patient may be charged the full amount. This can result in patient dissatisfaction (although it can be a deterrent to patients who abuse phone availability).
  5. The phone call must be for analysis or decision making that requires the physician. In other words, you should not be billing for a patient phone call that is simply to request to reschedule an upcoming office visit. It is the physician’s time that must be > 5 minutes and not the nurse’s time or the office staff’s time.
  6. The phone call must be at least 5 minutes. It only takes 1-2 minutes to send in a prescription refill and so it would be difficult to justify billing for a phone call simply to request a refill. However, for a patient with a COPD exacerbation, by the time the doctor reviews the patient’s past history in the chart, takes an interval history over the phone, checks for allergies, reviews the current medication list for potential drug interactions, sends a prescription for an antibiotic and prednisone to the pharmacy, and then documents the telephone encounter, it almost always takes at least 5 minutes. Be sure that the time spent on the encounter is documented in the medical record. Because Medicare auditors can audit time stamps in the electronic medical record, the amount of time between the physician initially opening the telephone encounter in the EMR until the time the physician closes that encounter must be > 5 minutes.
  7. It creates a disincentive for the patient to come into the office. Although it is true that you can practice a lot of medicine over the phone or over the internet, sometimes a physical examination is essential, even if just to get an accurate set of vital signs. Moreover, it becomes more difficult to arrange a needed EKG, a pulmonary function test, a chest x=ray, or blood tests when you are managing a patient over the phone as opposed to the patient being in the office where those tests are readily available in the office. If patients believes that they can get just as good of medical care with a phone call as they can by a face-to-face office visit, then they may stop coming into the office. Not only can this have the potential to jeopardize high quality care, but since the reimbursement for telephone calls is so low compared to an office visit, physicians who do nothing but phone calls all day long will soon go out of business.

When used appropriately, billing for phone calls is a win-win-win. The patient wins by getting their medical problem addressed without having to take the time involved in going to the doctor’s office or the emergency room. The insurance company wins because that $14.78 phone call can often avoid a much more expensive trip to the ER or an urgent care facility. The doctor wins because she/he now gets paid at least something with the psychological benefit to the doctor being worth considerably more than the financial benefit.

December 1, 2019

Physician Finances

Why Doctors Should Be Really, Really Afraid Of Inflation

We have been living in an era of incredibly low inflation rates. In fact, for the past decade, the inflation rate has been the lowest in U.S. history since the 1930’s and has averaged only 1.77% per year since 2010. But economic history teaches us that inflation rates will inevitably rise in the future and when they do, that rise will be especially harmful to physicians.

In the year that I started medical school, 1980, the inflation rate was an astounding 13.5%! Along with high inflation came high interest rates – in April 1980, the average 30-year fixed mortgage rate was more than 16%. Inflation means that the cost of goods and services goes up. Inflation is often measured by the consumer price index, which is derived from the cost of 8,018 items weighted for the amount of each of those items purchased by consumers the previous month. Inflation is heterogeneous in that the cost of some items will rise more than other items thus affecting some groups of people differently. For example, if the cost of gasoline preferentially increases, then the independent long-haul trucker will be affected more than the person who works from home and does not drive a car. Alternatively, if the cost of food preferentially increases, then the family with 4 teenagers will be affected more than the empty nesters who live next door.

Overall, when the cost of goods and services increase, the average worker’s wage generally increases in tandem. The group that gets hurt the worst with inflation is people with a fixed income, for example, retirees living off of pensions or Social Security. But because of the the way healthcare financing works in the United States, doctors are also ultimately on a fixed income.

The reason is that about 64% of U.S. healthcare spending comes from governmental sources – mainly Medicare, Medicaid, the Veterans Administration, and CHIP (Children’s Health Insurance Program). Physician payments for most of these governmental sources are tied to the Medicare Conversion Factor which is the amount of money that doctors get paid per RVU (relative value unit). When inflation rises, the Medicare Conversion Factor does not keep up. In the graph, we can see the effect of inflation compared to the change in the Medicare Conversion Factor since 1998. So, for example, in 1998, the conversion factor was $36.69/RVU and remained relatively stagnant for the next 20 years so that by 2019, the conversion factor was $36.04/RVU. On the other hand, goods and services that cost $36.69 in 1998 cost $58.46 in 2019 due to increases in the consumer price index (inflation). In other words, doctors get paid about the same to do a given medical service in 2019 as they did in 1998 but the cost of all of the goods and services that doctors purchase has increased by 62%!

Despite the static conversion factor, doctor’s incomes have increased since 1998 and kept up with inflation. There are three main reasons for this. (1) There has been a shift toward optimizing physician work efficiency by improving office workflows and improving hospital throughput; this has resulted in physicians being able to increase patient volumes. (2) Computerization of medical practice has also improved efficiency and physician work output; this has also resulted in increased patient volumes per workday. (3) There has been a shift from physicians being self-employed to being hospital-employed with hospitals now subsidizing physician salaries.

These three things have allowed physician income to rise but will they be able to keep up with inflation in the future? Most physicians would say that they are currently at the limit of the number of outpatients that they can see in a day. Most hospitalists would say that they are at the limit of the number of patients they can take care of during a hospital shift. Most hospitals have streamlined operating room throughput so that surgeons would say that they cannot do many more surgical operations on a given day. In other words, gains from increased operational efficiency of medical practice cannot be further increased in the future. And that means that in the future, cost of living increases in physician incomes will have to come from greater subsidization rather than greater revenue from clinical care.

Inevitably, with subsidization comes loss of autonomy. And if/when the inflation rate increases, the degree of subsidization will likely increase since there is no reason to expect that the Medicare Conversion Factor is going to increase based on the precedent of the last 20 years. Fortunately, there are a few things physicians can do to protect themselves from inflation:

  1. Invest. Except for the decade of 2000-2009 (the “great recession”), the increased value of stocks has outpaced the rate of inflation every decade for the past century. Although there can be considerable year-to-year fluctuations in stock market returns compared to the consumer price index, over time, the stock market always beats inflation. Given that physicians have relatively high incomes compared to the U.S. average worker, one of the best hedges against inflation for physicians is to invest and invest early in one’s career.
  2. Have a good electronic medical record and use it efficiently. It is said that “A cheap tool is an expensive tool”, essentially meaning that you get what you pay for and electronic medical records (EMRs) are no exception. An inexpensive EMR that does not improve physician efficiency will result in lower net physician income over time compared to an expensive EMR that allows physicians to perform documentation in less time. Moreover, the EMR is evolving from a computerized patient documentation system to a computerized patient management system by incorporating decision-making algorithms and artificial intelligence into the EMR program. Therefore, your EMR should not just make your documentation more efficient, it needs to make your patient management more efficient.
  3. Incorporate industrial engineering principles into office practice. A high-functioning factory is one where there is a minimum of unnecessary motions made by the workers, workers are properly trained to perform their assigned tasks, workers have the right tools they need to perform each task, and each employee works at the top of their skillset. By optimizing office practice efficiency, physicians can reduce overhead expenses, reduce billing costs, improve patient throughput, and reduce patients no-shows & cancelations. Together, these process improvements can reduce the amount of each RVU that goes towards overhead expense and increase the amount that goes toward physician income.
  4. Develop mutually beneficial financial relationships with hospitals. Currently, there are more physicians employed by hospitals than in physician-owned practices. This is even more pronounced for younger physicians – 70% of doctors under age 40 are employed by hospitals and this portends a future where few physicians will be self-employed. Physician-hospital partnerships that result in lower length-of-stay, lower readmission rates, lower pharmacy charges, and higher patient satisfaction will be more mutually financially lucrative in the long run – a hospital with a larger positive financial margin can afford to subsidize its physicians more than a hospital with a lower financial margin.
  5. Advocate for contractionary monetary policy when economically indicated. When consumers have too much money to spend, inflation occurs. A government can reduce spending by enacting contractionary monetary policy that takes cash out of circulation and moves that cash back to the government and banks. There are essentially three tools a government has to do this: (1) Increase interest rates – this is primarily done by interest rate decisions made by the Federal Reserve Board. (2) Increase the reserve requirements which is the amount of money banks are required to maintain on reserve when making loans – this is also determined by the Federal Reserve Board. (3) Reduce money supply by increasing government bond rates and by increasing income tax rates. Most Americans have a visceral distain for higher interest rates and higher income taxes but sometimes these are necessary to rein in out of control inflation.

It has been nearly 30 years since the annual inflation rate exceeded 4% and consequently most physicians have never experienced the effect of high inflation rates. When it comes to inflation in the future, the saying “Hope for the best but prepare for the worst” is good advice for physicians. In the event of unexpectedly high inflation, physicians would likely see a decline in their relative income compared to other professionals.

November 24, 2019