A few years ago, I was talking to one of the young gastroenterologists at our hospital who told me about how he had listened to a financial pundit who emphasized the importance of being debt-free and therefore dedicated his finances to paying off his student loans early. He had two young children at home and his wife did not work. He was proud of his recent debt-free accomplishment – I didn’t have the heart to tell him that he had just made a big financial mistake.
Student loan debt is an enormous problem for physicians. Currently, 70% of graduating medical students have student loan debt, averaging $228,000 per physician. After medical school, physicians must complete 3 – 7 years of residency and fellowship, depending on the specific specialty. Resident income is relatively low, with first year residents averaging about $67,000 per year. Most physicians do not complete their training and enter the attending physician workforce until they are in their early 30’s. The temptation to pay off student loans early once earning an attending physician income can be very strong. But I will argue that physicians should not make extra payments on those loans in an effort to be debt-free.Instead, physicians should be debt-smart.
Why not pay off student loans early?
Let’s take my gastroenterologist colleague as an example and go through the reasons why paying off his student loans early was a mistake.
He is an employee of a not-for-profit hospital. I asked him about PSLF, the public service loan forgiveness program, and he said he had heard about it but didn’t know if he was eligible. PSLF was signed into law by President Bush in 2007. To be eligible, people with Federal Direct student loans have to work full-time for 10 years for a government or non-profit organization, make 120 on-time monthly payments on the loans, be on an income-driven payment plan, and submit a PSLF certification form every year. At the end of the 10-year period, the Federal government will forgive the remaining balance of the loan. Because he wasn’t aware that he qualified for PSLF, the gastroenterologist had not submitted annual PSLF certification forms to the government. The result was that his 6 years of residency and fellowship at a non-profit hospital could not be counted toward PSLF. Had he submitted those certification forms during residency and fellowship training, the government would have forgiven the remaining balance on his loans after 4 years of being an attending gastroenterologist at our university medical center (qualifying as both a state government university and a non-profit hospital). No one should never pay off student loans early if they qualify for PSLF since it reduces the amount of the loan that the Federal government will ultimately forgive.
His wife does not work outside of the home. Federal Direct student loans are repaid on an income-based repayment plan, meaning that the higher your annual income, the higher your monthly payments. If you are married filing jointly for Federal income taxes, then the income-driven repayment plan is based on you and your spouse’s combined incomes. If your spouse does not have an income, then your monthly student loan payments will be lower, leaving more loan principal that can be forgiven under PSLF. Since my gastroenterologist colleague’s wife did not have an income, he could have had a sizable amount of his student loans forgiven under PSLF.
He has two children. College education is expensive and tends to increase in cost at a rate higher than inflation. Vanguard estimates that in 18 years, a 4-year education at a state-supported public university like the Ohio State University will cost $290,000 and a private university like the University of Notre Dame will cost $860,000. The only way most parents can come up with that kind of money is to start saving early and make regular contributions to their child’s college education fund. This allows the magic of compound interest to work for them and amplify the amount of money in that education fund. In order to have $290,000 to pay for four years of a college education at a public university in 18 years, a parent would need to make an initial investment contribution of $16,000 for a child born today and then contribute $465 every month for the next 18 years with an average annual return of 8%. That works out to a total of $60,640 in contributions but compound interest will turn that into $290,000 in 18 years. The longer you delay contributing to a child’s college education fund, the less benefit you get from compound interest and consequently, the more money you have to contribute to cover the cost of college. Because the gastroenterologist prioritized paying off his student loans early, he had not yet started to contribute to his kids’ college education funds.
He might have been able to deduct the interest on the student loan… maybe. You can deduct up to $2,500 of annual student loan interest on your Federal income tax returns if you meet income thresholds. For a married couple filing jointly, the modified gross annual income limit is $170,000 for the full deduction and $200,000 for a partial deduction. Most gastroenterologists earn more than $200,000 a year but many primary care physicians earn considerably less than $200,000 and can qualify for the student loan interest deduction.
He is not adequately funding his retirement. A recent post on the website The White Coat Investor noted that 25% of physicians retire with less than $1 million in net worth. A million dollars may sound like a lot but net worth includes all of your investments plus everything you own, like your house and your cars. Even if you retire today with $1 million in investments, using a 4% per year withdrawal strategy, that only yields an annual retirement income of $40,000 per year from your investments. Add in an average Social Security benefit of $24,000 per year and you end up with a total annual retirement income of $64,000. Far too many physicians have to either accept a less expensive lifestyle in retirement or work beyond their desired retirement age because they have not saved enough during their working years. Once again, compound interest works its magic best the sooner you start to invest in your retirement account. Assuming an average annual return of 8%, investing $10,000 per year will result in $1.8 million in 35 years. Investing $20,000 per year will result in $3.7 million in 35 years. Investing $30,000 per year will result in $5.6 million in 35 years. By putting money into paying off his student loans early, the gastroenterologist did not have enough money to maximize his contributions to his 403(b) retirement plan.
But wait, isn’t it better to pay off the loans early so you can avoid paying all of that loan interest? Not necessarily. If y0u have an extra $10,000 at the end of the year, you are almost always better off in the long run putting that money into a 401(k) or 402(b) rather than making extra payments on a student loan. Even assuming a loan interest rate of 8% and an annual investment return also of 8%, you are better off putting the money in a 401(k) or 403(b). The reason is that those 401(k) or 403(b) contributions reduce your taxable income and thus reduce your marginal income tax rate, thus reducing the amount you have to pay the Federal government in income tax. In addition, the 401(k) or 403(b) contributions reduce your modified adjusted gross income, thus reducing your monthly student loan payments on an income-based repayment plan. Factoring in the loan interest, the investment return, today’s income tax effects, and the income tax eventually paid in retirement when taking 401(k) or 403(b) withdrawals, I calculate that the total financial benefit to putting $10,000 into a 401(k) or 403(b) instead of making early payments on a student loan to be $23,000 after 20 years in favor of the 401(k)/403(b) contributions. If you participate in PSLF, then that amount could be even greater by resulting in a larger loan balance to be forgiven at the end of 10 years.
What does being “debt-smart” mean?
In an ideal world, we’d all be debt-free. But education (especially medical education) costs a lot of money and that education can be a tremendous investment that can pay huge dividends in earning power. Education loans can be healthy debt if the education gets you a job with a high annual income. Education debt can also be unhealthy debt if it does not result in a job after college that more than pays for the cost of eduction loans. Doctors have a high enough income that student loan debt is almost always healthy debt. Be sure to make your full monthly repayments every month but do not pay them off too early, particularly if early repayment causes you to neglect other aspects of financial health such as:
Have an emergency fund with enough money to cover 3 – 6 months of living expenses.
Contribute to your 401(k), 403(b), 457, or SEP plan.
Contribute to your children’s college education plan.
On the other hand, avoid unhealthy debt, particularly early in your career. Ways to avoid unhealthy debt include:
Always pay your credit cards off every month to avoid high interest charges.
Don’t buy a more expensive car than you can really afford and then face high car loan interest rates.
Don’t buy a bigger house than you can afford.
Make an annual budget at the beginning of each year and then stick to it.
Be adequately insured including home, automobile, term life, health, and disability insurance (and probably an umbrella insurance policy for good measure).
Physicians spend years training for one of the hardest jobs in the world. But that training doesn’t include learning about financial health. All too often, we rely on someone’s talk show, podcast, or website to tell us how to manage our finances, including student loans. Understanding how those loans uniquely fit into one’s personal financial health is a responsibility for each of us.
In October, the U.S. Department of Education released its final rule on the Public Service Loan Forgiveness program (PSLF). The 36-page document is available online in the Federal Register. The central tenet of the rule is that it gives the Secretary of the Department of Education the ability to disqualify organizations as being eligible for PSLF if the Secretary determines that the organization has a “substantive illegal purpose”. Employees of those organizations would then no longer be able to count their years of employment toward public service loan forgiveness. This now allows the Executive Branch of the federal government to use PSLF as a weapon against hospitals and universities.
What is PSLF?
The Public Service Loan Forgiveness program was established by the U.S. federal government in 2007 under President George W. Bush as a way to help college graduates who enter a career or public service pay for college education by forgiving a portion of their student loans. The specific criteria are:
Be employed by a federal government, state government, local government, tribal government, or qualifying not-for-profit organization.
Work full-time
Have federal direct student loans
Make 120 qualifying monthly payments on the loans.
Once those criteria are met, any remaining principal and interest on the loan is forgiven. Thus far, 694,900 government workers and 305,500 workers at non-for-profit organizations have met all of the PSLF criteria and had the remainder of their student loans forgiven. The amount of loan forgiven for the average government worker was $73,100 and for the average worker at not-for-profit organizations was $82,200. Combined, 1,000,400 people have had loan balances forgiven at an average of $75,900 per person. 163,900 employees of healthcare organizations (mostly doctors and nurses) have had loans forgiven under PSLF.
Not all non-profits companies or organizations qualify as employers for PSLF purposes. Those that that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code do qualify. Other non-profit organizations that devote a majority of their full-time equivalent employees to providing certain types of services also qualify. These services are: civilian service to the military, emergency management, National Guard, public safety, law enforcement, public interest law, early childhood education, public service for individuals with disabilities, public health (including physicians and nurses in a clinical setting), public education, public library, school library, school-based services, and public service for the elderly.
For physicians and nurses, this means that most public universities and most non-profit hospitals qualify as PSLF employers. Physicians can currently count their employment during residency and fellowship for PSLF purposes – there has been federal legislation proposed to no longer count residency toward the 120 loan repayment months but thus far, this legislation has not been voted on. Because most physicians do their residencies at non-profit hospitals, they can count 3-6 years of residency and fellowship toward the 10 years of required loan payments. 70% of medical students have education debt with an average of $220,000. The “One Big Beautiful Bill” now limits federal direct student loans for medical students to $200,000. Because federal direct student loan monthly payments are based on one’s income and because residents have a low income ($67,000 for a first year resident), it is very advantageous for physicians to begin paying off their direct student loans during residency since this results in a greater amount of principal that is forgiven at the end of 10 years.
What organizations will the Department of Education disqualify for PSLF?
The Department of Education’s new rule will permit the Secretary of the Department of Education to disqualify an organization if it engages in activities with a “substantive illegal purpose”. This is defined in the rule:
The activities indicative of a substantial illegal purpose include aiding and abetting violations of Federal immigration laws, supporting terrorism or engaging in violence for the purpose of obstructing or influencing Federal Government policy, engaging in the chemical and surgical castration or mutilation of children in violation of Federal or state law, engaging in the trafficking of children to another State for purposes of emancipation from their lawful parents in violation of Federal or State law, engaging in a pattern of aiding and abetting illegal discrimination, and engaging in a pattern of violating State laws.
The rule is proactive and goes into effect in July 2026. Organizations that are disqualified by the Secretary of the Department of Education have to wait 10 years to reapply as a PSLF qualifying organization unless the Secretary approves a corrective action plan for that organization.
The rule gives the Secretary of the Department of Education broad authority to determine what constitutes activities indicative of a substantial illegal purpose. Some of the criteria include:
“Chemical castration of children”. The rule defines chemical castration of children as:
The use of puberty blockers, including GnRH agonists and other interventions, to delay the onset or progression of normally timed puberty in an individual who does not identify as his or her sex.
The use of sex hormones, such as androgen blockers, estrogen, progesterone, or testosterone, to align an individual’s physical appearance with an identity that differs from his or her sex.
Child means an individual under 19 years of age.
This essentially means any hospital or other organization that provides gender-affirming care to patients under age 19. It also means that physicians employed by hospitals cannot themselves provide gender-affirming care to anyone younger than age 19. By defining a child as younger than age 19 (rather than younger than age 18), the rule means that physicians at university student health clinics are not able to prescribe or refill sex hormone medications as part of gender-affirming care, even if those medications were initiated by the student’s personal (non-university) physician.
Aiding and abetting illegal discrimination. The Trump administration has taken the position that all DEI (diversity, equity, and inclusion) activities are discriminatory and thus illegal. Many hospitals and universities have had a variety of DEI initiatives and any of these could be considered as illegal by the Secretary of Education. Because the Secretary is given sole authority for determine what constitutes substantive illegal activities, the Secretary could choose to categorize transgender athletes, race or ethnic-specific college clubs, or implicit bias training programs, or race/religion/ethnicity-based scholarships as discriminatory.
Aiding and abetting violations of Federal immigration laws. Once again, the Secretary of the Department of Education has the authority to determine if an organization has violated immigration laws. Will this include schools that enroll students who are undocumented? Will it include hospitals that provide non-emergency medical care to undocumented immigrants? Will this include universities where students protest ICE activities? Will it include homeless shelters and food pantries that do not require proof of citizenship to get in the door?
Engaging in a pattern of violating state laws. This is very broad and gives the Secretary authority to disqualify organizations for any violation of a state-specific law. The rule does state that: “Organizations will not be penalized if their actions are legal in the State in which they are operating.” However, many organizations operate in more than one state. So, if a hospital organization has a hospital in Texas where abortion is illegal and has a second hospital in New Mexico where abortion is legal, will the organization be disqualified if it performs abortions in New Mexico since it also operates a hospital in Texas? The Secretary’s interpretation of this will be final.
Engaging in violence for the purpose of obstructing or influencing Federal Government policy. The current administration has already demonstrated that it has little tolerance for behaviors opposing its policies. When Sean Charles Dunn threw a Subway sandwich at an ICE agent in August 2025, he was arrested and charged with felony assault of a Federal officer. A jury subsequently found him not guilty. But next summer, if a university student throws a sandwich at an ICE agent, there will be no jury trial – if the Secretary decides that it constitutes assault, then the university could be determined to have activities of a substantive illegal purpose. The Secretary will be the sole arbitrator of whether a student protest is violent or not.
This is going to be huge…
The Department of Education states that the average amount of loan forgiveness is $75,900 per person. The new rule estimates that it will eliminate $1.616 billion in loans. This works out to 21,291 people who currently qualify for PSLF to be disqualified because they work for an organization that the Secretary of the Department of Education will disqualify. The implication is that the Department has already determined that it will be disqualifying a large number of organizations in July 2026. In looking over the definition that the new rule is using for “activities with a substantive illegal purpose”, it appears that the rule will mainly be implemented against public universities and non-profit hospitals.
The Trump administration has used similar justification for freezing Federal grants and withdrawing accreditation to effect policy and idealogical change at universities. It follows that the administration will use this new rule for disqualifying organizations for PSLF in a similar fashion. It is an extraordinarily powerful weapon, indeed. Because 70% of graduating medical students and 69% of nursing students have student loans, any hospital that becomes disqualified for PSLF will have a very, very hard time recruiting residents, attending physicians, or nurses. At particular risk are residents and nurses employed by university hospitals since any activities that happen on campus that the Secretary of the Department of Education deems to be “activities with a substantive illegal purpose” will result in those residents and nurses no longer being able to count their employment toward their 120 months of PSLF employment. Residents locked into a 3-5 year residency contract could face significant financial harm. Universities such as Harvard, Columbia, and Cornell that have already been extensively targeted by the Trump administration could be at highest risk.
Way too much power in one person’s hands
When the new rule was open for public comments, many commenters questioned how the determinations would be made and what the process for appeals would be. The Department of Education responded: “The Secretary will weigh any evidence presented showing that an organization’s activities violated any laws and make a determination if those violations rise to the level of substantial illegal purpose.” In other words, whatever Secretary of the Department of Education Linda McMahon says is the final word. There is no option for an appeal. This places enormous power in the hands of a single individual who is a political appointee not elected by the general populace.
I personally agree that there are organizations that are dangerously terroristic should not qualify for PSLF, such as the Klu Klux Klan and Al-Qa’ida. But the vagueness of the new rule now allows Secretary McMahon to decide what rises to a level of substantial illegal purpose. Normally in the United States, an action is determined to be illegal by conviction in the court system. The sixth amendment of the U.S. Constitution guarantees the right of citizens to a trial by jury for non-petty crimes. But in the new Department of Education rule, there is no court, Linda McMahon alone becomes the prosecutor, judge, and jury. And there is no court of appeals.
A changed mission for the Department of Education
The U.S. Department of Education’s official mission statement is “To promote student achievement and preparation for global competitiveness by fostering educational excellence and ensuring equal access.” The Department’s new rule on PSLF indicates that will use existing personnel to enforce the new rule and estimates an annual cost of $1.5 – $3 million per year. The rule represents a substantial departure from the Department’s stated mission and will now shift the Department’s mission to forcing ideologic and policy to eliminate “wokeness” and left-wing bias at our nation’s universities and hospitals. The Department of Education has now become a weapon to be used against any non-profit organization that the administration disagrees with.
Every physician, nurse, and resident who works at a university hospital or non-profit hospital should be afraid… very afraid.
Three months ago, I presented an OSU MedNet webcast on Physician Financial Health. Included were what I call the 15 commandments of healthy finances that apply to everyone (not just physicians). One of those 15 is to “Eliminate Excessive Debt“. One of the easiest ways to create excessive debt is to over-spend on credit cards. Doctors are particularly vulnerable to credit card marketing – they spend 8 years taking out loans for college and medical school, then 3 to 7 years in the low-paying job of resident and fellow with a poor credit rating. And then all of a sudden, when they become attending physicians, their income skyrockets and their credit rating increases. They start buying stuff. Fine dining starts meaning more than Chinese take-out. Vacations go beyond 5 nights in a Motel 6 on the outskirts of Myrtle Beach. And the banks that issue credit cards want to make money off of all of those purchases.
How banks make money off of credit cards
There are three ways that banks commonly make income from the credit cards that they issue – late payment interest charges, processing fees to sellers, and annual fees to cardholders.
Amazingly, 50% of Americans carry a balance over on a credit card at the end of the month. The interest on those carry over balances is really, really high – averaging 20% for all credit cards and over 24% for newly issued credit cards. So, the banks that issue credit cards to you are highly motivated for you to use your credit cards because they know that a large percentage of Americans will have carry over balances that they can charge high interest rates on.
Banks that issue credit cards also charge sellers processing fees that are typically between 1.5% and 3.5% on every credit card purchase. So, the more stuff you buy using your credit card, the more money the bank makes on processing fees, regardless of whether or not you ever pay an interest penalty. There is a reason why many stores and restaurants will charge you an extra 3% if you pay with a credit card – they are just passing on their own processing fee expenses.
Lastly, many premium credit cards charge you an annual fee. In exchange, that credit card comes with perks, such as free access to private airport lounges, discounted hotels, free points, and complimentary streaming service subscriptions. For example, the Chase Sapphire Reserve card has an annual fee of $795 and the American Express Platinum card has an annual fee of $695 per year. Credit cards without annual fees have fewer of these perks.
The result is that Americans are inundated with advertisements for credit cards. It seems like you can’t turn on the TV without watching an ad for Capital One or Discover cards. Every time I fly, a flight attendant makes an announcement about the benefits of that airline’s credit card. I seem to get more junk mail than legitimate mail in my U.S. Postal Service mailbox and much of that junk mail is from banks marketing their credit cards.
The banks are smarter than you
On the surface, the points and perks that travel credit cards and cash-back credit cards offer seem like a bargain for the consumer. But here is the catch… the banks know that statistically, the average credit card holder will not use all of their points and perks. Unless you travel very frequently and have long layovers between flights, you probably aren’t going to use the Capital One lounge or the Delta Sky Club lounge very often. And that $200 credit toward dinners at select restaurants doesn’t help you if you don’t travel to the cities where those restaurants are located.
For travel credit cards, most banks will require you to use the bank’s own travel service to make airline and hotel reservations. These services are similar to Travelocity or Expedia and generate commissions when people book travel through them. In addition, the credit card travel portals often charge more for airfare than booking directly through the airline’s website. For example, thepointsguy.com found that the Capital One travel portal was 0.05% higher than direct booking, the American Express travel portal was 1.19% higher, and the Citi travel portal was a whopping 9.32% higher (notably, the Chase travel portal was 0.44% less than booking directly with the airline). If there is a problem with your flight, such as a cancellation or major delay, it is often easier to re-book on a different flight if you bought the ticket directly from the airline’s website versus having bought it through the credit card travel portal.
To make things even better for the bank issuing the credit card, there are often restrictions on how the points earned from credit card purchases can be used. For example, milage points for a travel credit card often can only be used on the bank’s own travel portal or there may be restrictions on which airlines those milage points can be used on. A cash back credit card may issue the cash back in the way of a gift card and banks love to issue gift cards because they know that people don’t always fully redeem them. Maybe the person loses the gift card; maybe they forget about it; or maybe they use $93 of a $100 gift card and the card ends up in the back of a desk drawer with the unused $7. One study found that 47% of Americans have at least one unused gift card in their homes. The bottom line is that when the credit card issuing bank gives you a gift card for your cash back rewards, that bank knows that statistically, it will be keeping a sizable amount of the money on that card for itself.
Are the credit card’s perks and points for stuff you don’t really need?
I have a friend who uses a United Airlines credit card to book all of his air travel. Although he pays $195 for annual fees, he gets priority boarding and one free checked bag on each flight. But now he only flies on United Airlines, even if there are other airlines offering direct flights, less expensive flights, or more convenient departure times. And frequently, he only takes a carry-on bag and doesn’t even have a checked bag. Before getting an airline-specific or company-specific credit card, ask yourself if you really want commit your loyalty to that airline or company.
Most travel credit cards incorporate airport lounge access as a perk. We’ve all had the experience of a flight delay resulting in an unexpected 3 or 4 hour layover – in those times, the American Airlines Admiral’s Club lounge looks mighty desirable. But if the other 10 times that you fly that year you either have on-time 40 minute flight connections or just take direct flights, are you really going to use an airport lounge? Unless you fly frequently using connecting flights (as opposed to direct flights), you probably don’t really need airport lounge access.
Many of the perks of travel credit cards are monetary credits for staying at participating hotels. But is the participating hotel really your top choice for that particular travel destination? And how far does a $200 credit go when the hotel charges $450 a night and an equally nice hotel a few blocks away only charges $250 a night? The same goes for credit cards offering monetary credits for eating at specific restaurants. During your weekend trip to Boston, does the $100 credit for a fancy steakhouse where dinners cost $150 a person truly have value to you when you were really in the mood for a small out of the way Italian restaurant where dinner and a glass of wine will run you $35?
Cash back credit cards often advertise 5% cash back on selected purchases, for example, restaurant dining. But a meal out at a nice restaurant is a whole lot more expensive than cooking at home or a burger at your local pub. So, are you spending 30% more than you normally would in order to get that 5% cash back? The 4% cash back on groceries might sound pretty appealing until you realize that it is only for the first $6,000 in grocery purchases each year and then after that, the cash back falls to 1% on all of your purchases for the rest of the year. The 8% cash back promise on entertainment purchases sounds great on the surface, but is it encouraging you to buy tickets for professional sports event, concerts, and Broadway shows that you were not really all that interested in attending and wouldn’t have gone to if you didn’t have that credit card reward?
Have you ever heard someone say that they only went to some restaurant or bought tickets for some event because they needed to use up their points? It happens a lot more often than you think. Every U.S. dollar bill says “This note is legal tender for all debts, public and private” – the same is not true for credit card points and miles.
So, what should a responsible person actually do?
First, and absolutely most important is to always, always, always pay of your credit card in full at the end of each month. The interest penalties on a late payment will wipe out any points or cash back benefits in no time at all. Everyone needs to have at least 3 and preferably 6 months of living expenses in an emergency fund held in cash (checking account, savings account, or money market account). Always set your credit card up for autopay from one of those cash accounts. Personally, I prefer to manually authorize each credit card payment from my checking account every month so that I can be sure that I am keeping enough money in that checking account to maintain a positive balance. But I have those credit cards also set for auto payment so that if I forget to manually authorize a payment one month, I have a back-up to ensure that my entire credit card balance gets paid off and I don’t generate any interest penalties.
Prudent credit card use starts with a budget. Before you apply for a credit card, create an annual budget to determine how much you will be spending on major categories like groceries, travel, utilities, entertainment, etc. Then stick with that budget and do not be tempted to overspend in one category just because of the allure of getting more points or cash back rewards. This requires you to monitor your expenditures regularly but fortunately, most credit cards will allow you to see what category of expenses you’ve been generating year-to-date so that you can track your expenses to be sure that you are staying within your budget for each category.
Sometimes simple is best. A 1.5% or 2% cash back on everything credit card can be used for most purchases. You could probably save a few hundred dollars each year by having a handful of cash back credit cards that each offer higher cash back percentages for various categories of expenses, but who wants to carry around 10 credit cards and then try to decide for each purchase at the grocery store, gas station, and fast food restaurant which card is “best” for each individual purchase. It is kind of like being a compulsive coupon clipper – do you really want to devote that much time and effort to over-think every purchase? Ideally, that cash back credit card should allow you to transfer the cash back balance directly into your checking account, thus avoiding the dreaded gift cards or credits toward purchases at a particular store. Have one simple workhorse credit card that is your default card for most of your daily purchases.
Expand beyond one credit card strategically. Experian reported that last year, the average American had 3.84 credit cards. I was listening to an interview with a travel guy who has 15 credit cards! Having more than one credit card has several advantages – say you lose one, or you have a big purchase that reaches your monthly credit limit on one card, or a card gets stolen and you have to freeze purchases to that account. But after choosing your workhorse credit card, other cards should be for specific categories. For example, if you live in Atlanta (a Delta Airlines hub), are self-employed, and have to travel frequently with a lot of equipment for your work, then having a Delta SkyMiles travel credit card that gives you a free checked bag and doubles your SkyMiles per trip can save you a bunch of money without steering you toward purchases of stuff you don’t really want. If you are moving into a new home and plan to buy a lot of new furniture to outfit the new home, you can save a lot of money by opening a credit card account with the furniture store but then only use the card for those specific purchases. If you buy lots of stuff from Amazon and regularly shop at Whole Foods, then an Amazon Prime VISA card for those specific purchases may make sense. But if you have too many of them, it gets harder to regularly monitor them – if someone steals your credit card number and you are not monitoring that account regularly, you can end up with thousands of dollars of charges that are not yours. And if you have too many credit cards, it is easy to forget about one of them when it comes time to pay it off at the end of the month. One credit card is probably too few but six is probably too many for most people.
Think critically about credit cards that have an annual expense. There is a reason that banks make money on these cards and that reason is you and the way you actually use those cards. Is unlimited airport lounge access worth it if you only use an airport lounge twice a year and then have to pay $50 for your spouse to get in with you? Will you actually use the hotel and restaurant credits every year? Many people open elite credit card accounts such as the Chase Sapphire Reserve card or American Express Platinum card because of the perceived status symbol that these credit cards imply. But do your friends and neighbors even know what credit card you use for on-line purchases and if they did, would they even care? Don’t open a credit card with an annual expense unless you are absolutely certain that the perks that come with that card are for things that you would be buying anyway or for things that you personally really, really value highly.
Are there hidden charges and rules that will wipe out the benefits of a specific credit card? A card with a 2% cash back reward sounds great until you realize that there is a 4% foreign transaction fee. That big vacation to France that you are planning could wipe out most of the cash back reward for the next 6 months of credit card purchases in the U.S. Alternatively, are there hidden benefits that favor one card over another? For example, does the credit card provide car rental insurance that allows you to avoid purchasing costly insurance from a car rental company? Do the points expire after 6 months if you don’t use them?
Life is not a game of whoever gets the most credit card points wins. Some people try to get as many credit card points and miles as they can because it makes them feel important. It is kind of like playing only one video game exclusively, just so you can get higher and higher personal best scores. But those points and miles can come at a cost – the cost of free choice. The bank issuing the credit card is directing your choices by offering those points and miles for specific purchases.
If you open a new credit card, can you get rid of an old one? Closing credit card accounts is inconvenient at best and frustratingly complicated at worst. After you have had a credit card for a few years, life happens. Maybe you rarely use the airline that you originally took out a card with. Maybe you no longer travel for work and the benefits of your travel credit card no longer exist. Maybe the card’s annual fee increased enough that it is now costing you more than the benefit you are getting from it. Maybe a similar credit card has a great initial offering if you open a new account with them. Or maybe you’ve been using a different credit card because the points or cash back rewards are better than an older credit card. Excess credit cards are excess baggage in your financial life – if you are not using one of them, get rid of it.
The house always wins
The reason that banks spend tens of millions of dollars advertising credit cards is because they know that they are going to make hundreds of millions off dollars off of the consumers who use them. Even if you are happy with your credit card giving you 2% cash back on everything, realize that the bank is charging everyone you buy stuff from a 3% transaction fee and those sellers are going to then increase their prices by 3% to cover their costs. But in a society that is becoming increasingly cashless, having credit cards are pretty much a necessary part of life.
The banks that are tempting you with generous-sounding points and cash back credit card offers are not doing so out of benevolence because they want to do something nice for you. They are making those offers because they know that in the long run, they are going to benefit from you far more than you are going to benefit from them.
As a college psychology major in the 1970’s, I studied B.F. Skinner’s theory of operant conditioning. In a nutshell, this theory explains how complex human behavior is shaped by systems of rewards. When it comes to credit cards that offer points and miles as rewards, we are being operantly conditioned to make certain types of purchases. A cynic would say that the banks issuing credit cards are manipulating consumer behavior by directing cardholders toward specific purchases and encouraging cardholders to make more and more of those purchases. An optimist would say that cardholders are getting free or discounted stuff. A realist would say “Take the free stuff but be aware that you are being manipulated“.
A provision of the 2025 HR 1 federal budget bill (aka “One Big Beautiful Bill”) allows new parents to receive $1,000 for newborns in “Trump Accounts”. Every new parent should take advantage of this because it is free money, and after all, no one should turn down free money. But Trump Accounts are complicated and add even more complexity to an already hopelessly complex federal tax code. Ultimately, a Trump Account is basically a traditional IRA for a newborn child and the U.S. government contributes the first $1,000 to it. However, parents are better off contributing their own money to other types of investments for their children’s futures
What is a Trump Account?
In short, the U.S. government will contribute $1,000 to newborns and that money grows until adulthood at which time the money can be withdrawn. But there are a lot of caveats. There are also many uncertainties about how these funds will work so we should expect either congress or the IRS to tweak the Trump Account rules over the next year. Here are the details:
Trump Accounts will apply to any child born on or after January 1, 2025. However, the program will not roll out until 12 months after H.R. 1 was enacted. This means that no Trump Accounts will actually be created until July 2026. Therefore, we have a year to digest the wording of the “One Big Beautiful Bill” before we actually have to open and manage Trump Accounts, even for those children born in calendar year 2025.
Only children born between 2025 – 2028 are eligible to receive the $1,000 initial contribution from the federal government. Once a newborn who is a U.S. citizen gets a social security number, the federal government will automatically enroll that newborn and allocate $1,000 toward that child’s Trump Account. Parents must go to their bank or other financial institution to activate that account and claim the $1,000.
Parents can contribute up to $5,000 of their own money per year to their child’s Trump Account. This is after-tax money and these contributions are not tax deductible.
Parents can open a Trump Account for any child under age 18 but the federal government will only contribute the $1,000 to Trump Accounts for children born in 2025, 2026, 2027, and 2028. Parents can contribute up to $5,000 of their own after-tax money to Trump Accounts for children who are under age 18 but born in 2024 or earlier.
The money in the account can only be invested in a broad index U.S. stock mutual fund with an annual expense of < 0.1% of the value of the account. An example would be an S&P 500 index fund. The money cannot be invested in any other type of investment until after the child turns 18 years old.
Employers can elect to contribute up to $2,500 to their employees’ children’s Trump Accounts as a fringe benefit. The combination of employer contributions and parent contributions cannot exceed $5,000 per year. Neither the employer nor the employee would have to pay taxes on these fringe benefit contributions. Note that self-employed persons and partners in a partnership are considered independent contractors rather than employees from an IRS standpoint. Thus, the language of H.R. 1 indicates that self-employed persons and partners in a partnership would not be eligible to make the up to $2,500 pre-tax contributions to their children’s Trump Funds as employers. Instead, they can only make the up to $5,000 after-tax contributions as parents.
The money in the Trump Accounts grows tax-deferred, meaning that the individual does not have to pay any tax on annual interest, dividends, or capital gains as long as the money remains in the account.
There are several withdrawal rules:
Money may not be withdrawn before age 18.
Withdrawals are taxed at the individual’s regular federal income tax rate.
After age 18, withdrawals can be made without penalty for education expenses (unlimited) and for purchase of a first-time home (up to a $10,000 limit). Otherwise, the Trump Accounts function like a traditional IRA with withdrawals before age 59 1/2 subject to IRS early withdrawal penalties (currently at 10% of the amount of the withdrawal). This penalty is in addition to the income tax rate applied to those early withdrawals. There are several other exceptions to the 10% penalty such as birth or adoption expenses ($5,000 limit), death, disability, federally-declared disaster losses, and health insurance premiums while unemployed.
For money contributed by parents, the basis is not taxed but the gains are taxed at the individual’s income tax rate when the money is withdrawn. The basis is the amount of the original contribution by the parents (or employer). This is similar to a traditional IRA that has been funded with both pre-tax contributions and after-tax contributions. Importantly, this requires you to keep careful records of any annual parental or employer contributions so that when money is ultimately withdrawn, the amount of those withdrawals that are taxable can be determined. Not only that, but those records must be given to the child when he or she becomes an adult since when the child takes withdrawals 20, 30, or 70 years from now, that child will need to know what amount of the withdrawals is taxable and what amount is not taxable.
Is a Trump Account better than a 529 plan account to save for a child’s college education?
The short answer is absolutely not! Yes, you should accept the $1,000 government initial contribution but no, you should not contribute your own money into the Trump Account to save for college. There are several reasons why:
Trump Account withdrawals get taxed. When you withdraw money from a 529 plan for educational expenses, it is not taxed. That means that there is more money to go toward college expenses than with a Trump Account.
Trump Account assets cannot be diversified. An important tenet of investing is diversification with a mixture of different types of investments and that mix changes as the investment horizon changes. Ideally, an investment portfolio should consist of U.S. stocks, foreign stocks, U.S. bonds, foreign bonds, and real estate. If you won’t need the money for a long time (more than about 15 years), then the portfolio should be heavily weighted toward stocks. If your investment horizon is shorter, then the portfolio should be weighted more heavily with bonds. In a 529 plan, you would normally start off the account mainly invested in stocks when the child is born and then gradually increase the amount invested in bonds as the child gets older. By age 18, it should mostly be in bonds and money markets with very little in stocks. Trump Accounts can only be invested in broad U.S. stock market index funds until the child turns 18.
You lose parental control of the money. In a 529 plan, the parent is the custodian of that account and can control distributions, thus preventing junior from taking the money out to buy a new Corvette rather than pay his college tuition. Once a child turns 18, that child can take the money out of a Trump Account to buy that new Corvette (but has to pay income tax plus the 10% early withdrawal penalty).
Trump Accounts cannot be rolled over into a Roth IRA. If there is money left over in a child’s 529 plan after the child graduates from college, the residual balance can be rolled over into a Roth IRA belonging to that child and those rollovers are not taxed. There are some rules, such as the 529 plan must have been opened for at least 15 years and there cannot have been new contributions for the past 5 years. There are also rollover limits of $7,000 per year with a total lifetime limit of $35,000. Because Trump Accounts are similar to a traditional IRA, they can be converted into Roth Accounts but that conversion is taxed at a person’s regular income tax rate. In other words, a rollover from a 529 plan is not taxed but a conversion from a Trump Account is taxed.
Trump Accounts cannot be transferred to another child. I had a 529 plan account for each of my four children. Every time one of them graduated from college, I transferred the balance into the other children’s accounts. You can also transfer residual balances into a grandchild’s 529 account. Trump Accounts are not transferable.
No state income tax advantages for Trump Account contributions. Many (but not all) states offer tax incentives for residents to contribute to 529 plans. For example, here in Ohio, we can deduct up to $4,000 from our state income taxes each year for contributions made to each child’s Ohio 529 plan. With four children, my wife and I were able to deduct a total of $16,000 from our state income taxes every year by contributing to their four 529 accounts. And now, we keep getting to take state income tax deductions for contributions to our grandchildren’s Oho 529 plans. There is no state income tax advantage to contributing to Trump Accounts in any states (at least as of now).
Is a Trump Account better than a uniformed gift to minors account?
The answer is an emphatic… maybe. Under the uniform gifts to minors act (UGMA) and the uniform transfers to minors act (UTMA), a parent can deposit up to $19,000 (or $38,000 for a married couple combined) into a UGMA/UTMA account in their child’s name. Each year, unearned income from that account (interest, dividends, and capital gains) are exempt for the first $1,350, then taxed at the child’s income tax rate for unearned income between $1,350 and $2,700, and finally taxed at the parents’ income tax rate over $2,700 (aka, the “kiddie tax”). When the child reaches the age of majority (18 to 25, depending on the state), that money in a UGMA/UTMA account is the child’s do to whatever he or she wants to do with it.
Advantage Trump Account: The Trump Accounts grow tax-free whereas any annual unearned income greater than $1,350 in a UGMA/UTMA is subject to annual income tax.
Advantage UGMA/UTMA account: When money is withdrawn from a Trump Account, the withdrawals are taxed at the regular income tax rate. When money is withdrawn from a UGMA/UTMA account, the withdrawals are taxed at the capital gains rate. For the majority of Americans, the capital gains tax rate is lower than the income tax rate. And for single Americans with an annual income less than $48,350, the capital gains tax rate is 0%. This means that if that child is a college student with a negligible taxable income, he or she may pay no capital gains taxes at all on the withdrawals. Other advantages of the UGMA/UTMA accounts include:
Greater contributions limits ($19,000 per each parent for UGMA/UTMA vs $5,000 for both parents combined for Trump Accounts)
Ability to withdraw money before age 18
No penalty for early withdrawal before age 59 1/2 if not used for one of the IRS-approved early withdrawal exceptions.
Investment options not limited to broad index U.S. stock mutual funds.
Is a Trump Account better than putting money in the parents’ brokerage account?
Well… maybe. Many parents help pay for their children’s college education or their children’s wedding by paying out of the parents’ own investment accounts or checking accounts. Maybe the parents didn’t want to put money in a 529 plan because they think that their child will get full ride college scholarship. Of maybe the parents are reluctant to open a 529 account because they aren’t sure whether or not the child will even go to college. Is it better for the parent to contribute money to a Trump Account in their child’s name or contribute to a brokerage account in the parent’s name? The answer is… it depends.
Advantage Trump Account #1: The Trump account will grow tax-free whereas money in the parent’s brokerage account will generate taxable interest, dividends, and capital gains each year.
Advantage Trump Account #2: Withdrawals from the Trump account for IRS-approved exceptions to the 10% withdrawal penalty (such as education expenses or purchase of a new home) are taxed at the child’s regular income tax rate. Withdrawals from a parent’s brokerage account is taxed at the parent’s capital gains tax rate. If that child (now a young adult) has a low taxable income, for example as a non-working college student, then their income tax rate may be less than the parent’s capital gains tax rate.
Advantage parent’s brokerage account #1: If the goal is to fund something other than one of the IRS-approved exceptions to the 10% early withdrawal penalty, then withdrawals from the parent’s brokerage account will be taxed at their capital gains tax rate. On the other hand, withdrawals from the child’s Trump Account will be taxed at the child’s income tax rate plus the 10% early withdrawal penalty. In most cases, this will be higher than the parents’ capital gains tax rate. Just remember that the IRS gift limit is $19,000 per parent so if two parents are trying to fund their child’s $50,000 wedding, then they should either gift the child money over two years or arrange to pay the wedding venue, caterer, dressmaker, and limo driver directly from the parent’s checking account.
Advantage parent’s brokerage account #2: What if the parents’ are saving for the child’s wedding and the child decides to never get married? Or the parents are saving for the child to buy a new car and the child moves to a city where a car is unnecessary? If the parents put that money in a Trump Account intending it to be used for one of those purposes, then the child gets to keep the money to use for anything. If the parents put that money in their own brokerage account, then they could keep the money for themselves if there is no wedding or no new car.
Is a Trump Account better than a Roth IRA?
Absolutely no! If a child has earned income, for example from a summer job, then parents can open a custodial Roth IRA in the child’s name and contribute up to $7,000 of the child’s earned income each year. If your kid complains about you putting $7,000 of the money earned from babysitting into a retirement account, then just increase their allowance by $7,000 a year and it will be just as if you funded their Roth IRA and they get to spend the amount that they earned. If your purpose is to fund your child’s retirement, there are several advantages of contributing to a Roth IRA instead of a Trump Account.
Lower taxes on custodial Roth IRA contributions. Like a Trump Account, contributions to a Roth IRA are made in after-tax money, that is, money that you have already paid income tax on. For Trump Account contributions, the parents make contributions after paying income tax at the parents’ tax rate. But for a custodial Roth IRA, the contributions are made after paying the child’s income tax rate. Most teenagers earning money working at the pool or mowing lawns during the summer have such a low income that they pay little or no income tax.
More investment options for custodial Roth IRAs. Like 529 plans, custodial Roth IRAs can be invested in many different types of investments whereas Trump Accounts are limited to broad U.S. stock index mutual funds.
Potentially higher contribution limits for a custodial Roth IRA. The most a parent can contribute to a Trump Account is $5,000 per year. But a parent can contribute up to $7,000 of a child’s earned income each year to a custodial Roth IRA.
No tax on Roth IRA withdrawals. When a person takes withdrawals from their Roth IRA after age 59 1/2, there is no income tax on the withdrawals. Trump Account withdrawals are taxed at the person’s regular income tax rate.
No required minimum distributions for Roth IRAs. After age 73, traditional IRAs (and presumably Trump Accounts) are subject to annual required minimum distributions. Roth IRAs are not – the Roth IRA owner is not required to take some minimum amount out of the account each year.
And the child can still make withdrawals from the Roth IRA for college or a first home. You can withdraw money from a Roth IRA before age 59 1/2 for qualified exceptions to the 10% early withdrawal penalty. However, even if you have one of those exceptions, you would need to pay income tax on the withdrawals at your regular income tax rate (just like a Trump Account). In other words, early withdrawals from a custodial Roth IRA to pay for college tuition or the purchase of a first home are going to be taxed exactly like withdrawals from a Trump Account.
Is a Trump Account better than nothing?
Yes! The only reason to not open a Trump Account is if the name “Trump” causes you more than $1,000 worth of consternation. It is free money from the American taxpayers to your kid. By the time that child turns 18, that $1,000 will have grown to $4,000 at a compound interest rate of 8% per year and $6,000 at an interest rate of 10% per year to use for college expenses or for the purchase of a new home. If the child uses it like an IRA and waits to take the money out at age 65, then that $1,000 will have grown to $180,000 at 8% annual interest and to $650,000 at 10% annual interest. Think of the Trump Account as being a free traditional IRA just for being born an American citizen.
And if your employer offers to contribute to your child’s Trump Account, then by all means accept it. Once again, it is free money. Even if your employer requires you to match their contributions, it is still worth it to get free money. If your employer offers a $2,500 contribution each year, then by the time your child is 18, the account will grow to $100,000 at 8% annual interest and $125,000 at 10% annual interest. That will be enough to pay for 3 semesters at a public university 18 years from now. And if that 18-year-old child just leaves the $125,000 in the Trump Account until age 65, it will be worth a whopping $13 million at 10% annual interest! At 8% annual interest, the child would only have a “measly” $4.2 million.
But beware…
The banks and other financial institutions that administrate Trump Accounts are going to try to convince parents to add annual contributions of their own to their children’s Trump Accounts. Those financial institutions make their income by charging expenses on investment accounts. A total U.S. stock market index fund generally has an annual expense of about 0.04%. The Trump Funds permit a total annual expense of 0.10%. So if ACME Bank offers a Trump Fund invested in a total U.S. stock index fund with at 0.10%, then the banks stands to make a 0.06% profit each year on the invested money. ACME Bank is going to be highly motivated to get parents to contribute the maximum of $5,000 each year to their child’s Trump Fund because that is all the more profit for the bank. So, we can expect a lot of financial institutions to have advertising campaigns extolling the virtues of Trump Accounts starting next year and pressuring parents to contribute. For most American parents, DON’T DO IT.
And the bottom line is:
Take the free money from the government and activate a Trump Account for your child born in 2025, 2026, 2027, or 2028. And if your employer offers to put money in a Trump Account as a fringe benefit, take that free money, too.
But don’t make any parental contributions of your own to a Trump Account. If your goal is to fund their college education, then contributing to a 529 plan is far better. If your goal is to fund their retirement, then a custodial Roth IRA is far better. And if your goal is to help them start a business, pay for their wedding, buy a car, or buy a home when they are an adult, then a uniformed gift to minors act account is far better.
The 2025 federal budget bill, H.R. 1 (aka “One Big Beautiful Bill”) includes several provisions that affect charitable donations. Simultaneously, other actions by the federal government will be affecting issues important to physicians including new limits to student loan amounts that will affect the ability of medical students to afford to attend medical school, reductions in insurance coverage for vaccinations of children and pregnant women, reductions in federal support for research grants, etc. These actions have resulted in many physicians wanting to donate money to charities to address these issues. S0, how should they do so in view of the new laws affecting charitable donations?
As a whole, physicians (1) have higher incomes and (2) generally pay more in state income taxes, local income taxes, and property taxes than other Americans. These two factors also result in the new laws regarding donations to charity affecting physicians more than most other professions.
Changes to the SALT deduction limit
On your federal income tax returns, you have the option of either taking the standard deduction or itemizing deductions on Schedule A. If the total of your itemized deductions is less than the standard deduction, then it is better to take the standard deduction. On the other hand, if the total of your itemized deductions is greater than the amount of the standard deduction, then it is better to itemize. Expenses that are commonly itemized on Schedule A include charitable donations, mortgage interest, student loan interest, capital losses, property tax, state income tax, local income tax, and sometimes sales tax.
In the past, the amount of the standard deduction was relatively low and many people itemized their deductions. For itemizers, writing off charitable donations was relatively easy. You simply entered the amount of money donated to a qualified charity on Schedule A of your federal income tax returns and your taxable income for that year would be reduced accordingly.
In 2018, that all changed when the amount of the standard deduction for individuals nearly doubled from $6,350 to $12,000. For married couples filing jointly, it increased from $12,700 to $24,000. Coincident with that, the amount a taxpayer could deduct on their Schedule A for state and local taxes (SALT) was limited to $10,000 (prior to 2018, there was no limit on the amount of this deduction). Notably, SALT includes not only state and local income taxes but also includes property taxes. The result was that in 2018, the amount of itemized deductions other than SALT had to exceed $14,000 ($24,000 – $10,000) for a married couple filing jointly to exceed the standard deduction. For most people, itemizing became less advisable than taking the standard deduction. By 2024, that same couple with $10,000 or more in SALT deductions would need to have $19,200 of additional itemized deductions to make itemization preferable to taking the 2024 standard deduction of $29,200.
The 2025 budget bill increases the limit of the state and local tax deduction from $10,000 to $40,000. In 2025, the standard deduction will be $15,750 for single filers and $31,500 for married filing jointly. The net effect of these changes is that many physicians who pay a large amount in property tax, mortgage interest, state income tax, and local income tax will now find it more advantageous to itemize deductions instead of taking the standard deduction in 2025. And remember, if you have a second home that you use as a vacation property, you can include the property taxes paid on the second home in your SALT deduction as well. Physicians who are newly able to itemize deductions because of the higher SALT limit can now reap greater tax benefits by donating to charity than they could in past tax years.
One caveat is that the increased state and local tax deduction limit of $40,000 only applies to those with an income less than $500,000 per year. For those with incomes over that amount, the SALT limit drops in a phased-in fashion down to $10,000 per year.
New rules for charitable deductions
There are two provisions in H.R. 1 that affect the amount of money taxpayers can deduct for contributions to charities – one that affects itemizers and one that affects non-itemizers. Importantly, these provisions take place beginning in 2026 (NOT in 2025).
Non-itemizers. These are taxpayers who take the standard deduction of $15,750 single filers or $31,500 joint filers. Even though they do not itemize deductions they still get to take a small deduction for charitable contributions of up to $1,000 for single filers or $2,000 for joint filers.
Itemizers. These are taxpayers who do not take the standard deduction because the amount of their itemized deductions is greater than the standard deduction. Here is where things get complicated. There is a “floor” on the amount of charitable contributions that can be deducted of 0.5% of your adjusted gross income. What this means is that you can only deduct charitable contributions that exceed 0.5% of your adjusted gross income. As an example, if your adjusted gross income in 2026 is $300,000, then you cannot deduct the first $1,500 of charitable contributions ($300,000 x 0.5%). Any amount over $1,500 can be deducted on your Schedule A. The maximum amount that can be deducted is 60% of your adjusted gross income – any amount over that can be carried over to the following year’s income tax return.
The net result of these changes is that for taxpayers who have lower amounts of state and local taxes (including property taxes), there will a tax advantage to making small charitable contributions. For those with higher amounts of state and local taxes, there is no tax advantage of making small charitable contributions (< 0.5% of adjusted gross income) but there is a tax advantage of making larger charitable contributions (> 0.5% of adjusted gross income.
2025 is a particular good year for doctors to donate to charities
Because these new rules for charitable deductions don’t go into effect until 2026, but the state and local tax deduction (SALT) increase to $40,000 goes into effect in 2025, there are tax advantages for physicians and other people with relatively high incomes and/or high property taxes to donate to charities this year (2025) as opposed to next year (2026). In 2025, you will be able to deduct all of your charitable contributions whereas beginning in 2026 only contributions exceeding 0.5% of your adjusted gross income can be deducted. This makes 2025 a window of opportunity to take advantage of the increase in the SALT limit without the 0.5% of adjusted gross income “penalty” of the charitable deduction floor. In other words, your charitable contributions will be more tax deductible this year than next year.
What about donor-advised funds?
A donor-advised fund is a way that a taxpayer can take a large tax deduction in one year and then spread out the charitable distributions from that deduction over several years. Here is how they work: First, you open a donor-advised fund from an investment company (such as Vanguard or Fidelity) or from a community foundation (such as the Columbus Foundation in Central Ohio). Next, you contribute an amount to that donor-advised fund in a particular year and you can deduct that amount on that year’s income tax return. Then you can “advise” your donor-advised fund to distribute the money to various charities over a several year period. As an example, a person contributes $25,000 to a donor-advised fund in 2026. That person then takes a $25,000 tax deduction in 2026 and then directs the fund to distribute $5,000 to the American Red Cross every year for the next five years.
An advantage of donor-advised funds is that if a taxpayer has an unusually high taxable income in one year, that taxpayer can make a large contribution to the donor-advised fund that year, thus reducing their taxable income and reducing their effective income tax rate. That individual can then make charitable distributions from the fund in other years when their taxable income is lower. A disadvantage of donor-advised funds is that they typically come with management expenses that can erode the value of the money held in the donor-advised fund.
For taxpayers who normally do not itemize and who normally donate < $1,000 filing single or < $2,000 filing jointly, there is no tax advantage to using a donor-advised fund. Instead, you are better off just taking the up to $1,000 or $2,000 annual charitable contribution deduction each year. For non-itemizers who normally donate more than $1,000 filing single or $2,000 filing joint, there may be a tax advantage to contributing a one-time large amount to a donor-advised fund and then itemizing that particular tax year. But you have to do the math to decide whether you benefit more by taking a larger tax deduction in one year by itemizing or benefit more by taking the $1,000 or $2,000 deduction as a non-itemizer over several years. Also, determine whether the management expenses of the donor-advised fund outweighs the tax benefit.
For taxpayers who normally itemize and who normally donate less than 0.5% of their adjusted gross income to charity, a donor-advised fund can result in tax savings. By making a large contribution to the donor-advised fund in one year that exceeds 0.5% of adjusted gross income, you can add that contribution to your itemized deductions for that single year and then advise the fund to distribute to charities over the next several years. As an example, a married couple who itemize their deductions and who have an adjusted gross income of $300,000 normally donates $1,200 to their church each year. Since $1,200 is less than 0.5% of their adjusted gross income, they are not able to deduct that $1,200 on their Schedule A. However, if they contribute $6,000 to their donor-advised fund in 2026, they can deduct $4,500 on their 2026 tax return ($6,000 minus 0.5% x $300,000). They can then “advise” the fund to donate $1,200 to their church in 2026, 2027, 2029, 2029, and 2030.
Taxpayers who normally itemize and who normally donate more than 0.5% of their adjusted gross income to charity can also get a tax savings by utilizing a donor-advised fund for their charitable contributions. For example, a married couple with a gross taxable income of $300,000 who itemize normally donates $10,000 per year to their alma mater’s scholarship fund. Because charitable contributions amounting to the first 0.5% of their gross taxable income ($1,500) is not tax deductible, over the course of 5 years, they will contribute $50,000 to their alma mater but only $42,500 will be tax deductible over that 5-year period. If they instead contribute the entire $50,000 to a donor-advised fund in 2026, then $48,500 will be deductible in 2026. They can then “advise” the fund to distribute $10,000 to their alma mater in each of 2026, 2027, 2028, 2029, and 2030. By using a donor-advised fund strategy, the couple was able to deduct $8,000 more than if they had made annual charitable donations without using a donor-advised fund.
What about taxpayers older than age 70 1/2?
Tax laws permit people over age 70 1/2 to contribute to charities directly from a traditional IRA. By doing so, those withdrawals from the IRA do not appear as taxable income for those individuals. These are called “qualified charitable distributions” (QCDs). There is a limit of up to $100,000 of QCDs per year per individual over age 70 1/2. Also, QCDs can only be made from traditional IRAs and cannot be made from other tax-deferred retirement plans such as 401(k)s, 403(b)s, and 457s. In addition, the QCD must be paid directly from the traditional IRA to the charity. In other words, the taxpayer cannot take money out of the traditional IRA, put it in their checking account, and then pay the charity from their checking account. QCDs are not listed on your Schedule A; instead, they will appear as a non-taxable distribution on your traditional IRA’s 1099 form that is then reported on your 1040 form.
For married couples filing jointly, each spouse over age 70 1/2 can do an annual QCD of up to $100,000 so if both spouses are over age 70 1/2, then they can each take up to $100,000 from their own traditional IRA for a total of $200,000 between the two of them combined.
QCDs do count toward required minimum distributions (RMDs) which is the minimum amount a person must withdraw from a tax-deferred retirement plan each year after age 73. Importantly, each tax-deferred retirement account has its own RMD every year so if a taxpayer has traditional IRA, a 401(k), and a 403(b), a certain amount needs to be withdrawn from each of them every year. Therefore, although up to $100,000 of a QCD from a traditional IRA can count toward the required minimum distribution from that IRA, the taxpayer would still need to take additional RMDs from their 401(k) and 403(b). However, there is a work-around; the taxpayer can roll the 401(k) and 403(b) over into the traditional IRA and then the next year, that taxpayer would only have the RMD from the traditional IRA to contend with. This can make RMD management much, much easier but can be a bit complicated, so it is best to consult with a tax professional before age 73 to carefully plan rollovers in advance so that you do not inadvertently create a tax headache by not adhering to IRA rollover rules and RMD rules. Note that Roth accounts, such as a Roth IRA, are not subject to required minimum distributions.
Because of qualified charitable deductions, many of the tax advantages of donor-advised funds do not apply for those over age 70 1/2, so it may be less advantageous for those over age 70 1/2 to contribute to a donor-advised fund from an income tax standpoint. However, there are other features of donor-advised funds that may make them attractive to those over this age, such as permitting shares of stock to be contributed to donor-advised funds, thus avoiding capital gain taxes when those stocks are sold; having the balances of donor-advised funds grow tax-free; and the ability to name a successor advisor to permit charitable donations from the donor-advised fund after an individual’s death.
The U.S. tax code is hopelessly complex…
Every year, congress adds some provisions to our tax laws, eliminates some existing provisions, and revises yet other provisions. The result is a complicated tax system that has become nearly impossible for average Americans to navigate on their own. Most of us get help from either a professional tax preparer or from tax software programs. The 2025 budget bill adds even more complexity to the tax code.
Legally and ethically, we all need to pay our appropriate share of taxes as dictated by the tax code. But none of us should pay more than we are legally required to pay. Carefully planning the timing of your charitable deductions and consideration of a donor-advised fund can ensure that you pay your fair share of income taxes without overpaying those taxes.
In every federal budget bill, everyone can find something to like and everyone can find something to hate. The “One Big Beautiful Bill” (H.R.1) of 2025 is no different. One provision that doctors and nurses will like pertains to changes in the rules for 529 plans.
529 plans have been around for many years and have been primarily used to save for children’s college expenses. These plans allow a parent (or grandparent) to contribute post-tax dollars into a child’s 529 account and then those dollars can be invested in a variety of mutual funds. The money grows tax-free and when money is taken out of the account for qualified educational expenses, the withdrawals are not taxed. Furthermore, many states offer additional incentives to contribute to 529 plans. As an example, in Ohio, we can deduct up to $4,000 on our state income tax returns every year for contributions of up to $4,000 into each child’s account. I have 4 children and when saving for their college expenses, I could annually contribute $4,000 to each of their accounts and then deduct $16,000 on my Ohio income tax return. Parents (and any adults) could also contribute to a 529 plan in their own name to use for their own higher education expenses, for example, getting a master’s degree. Lastly, any residual funds in the 529 account after a child finishes college can be rolled over into another child’s or grandchild’s 529 account. These features have made 529 plans unbeatable as a mechanism to save for college.
The One Big Beautiful Bill Act of the 119th Congress in 2025 makes important changes to 529 plans that will benefit physicians, nurses, and any healthcare provider who must take certification exams or continuing education in order to maintain licensure or credentials. Section 70414 of the bill allows 529 withdrawals to be used for “certain postsecondary credentialing expenses treated as qualified higher education expenses for purposes of 529 accounts”. The actual wording of section 70414 of the budget bill is shown in the next 5 images (further discussion below images).
The wording of Section 70414 implies that the cost of board examinations and maintenance of certification programs could be covered by 529 withdrawals:
“For purposes of this section…The term ‘qualified postsecondary credentialing expenses’ means:
(A) tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary in a recognized postsecondary credential program, or any other expense incurred in connection with enrollment in or attendance at a recognized postsecondary credential program if such expense would, if incurred in connection with enrollment or attendance at an eligible educational institution, be covered under subsection (e)(3)(A)
(B) fees for testing if such testing is required to obtain or maintain a recognized postsecondary credential, and
(C) fees for continuing education if such education is required to maintain a recognized postsecondary credential.”
In addition, it implies that the cost of one’s state medical license could be covered by 529 withdrawals as well as the cost of continuing medical education required to maintain a medical license:
“For purposes of this section… the term ‘recognized postsecondary credential’ means… any occupational or professional license issued or recognized by a State or the Federal Government (and any certification that satisfies a condition for obtaining such a license)…”
But… be cautious!
How any tax law affects an individual depends on two things; (1) the wording of the law and (2) how courts interpret the law. Even though the wording of the 2025 budget bill appears to give us the ability to use 529 withdrawals for board exams, license fees, and continuing medical education expenses, it is possible that the Internal Revenue Service might deny them for some reason and courts could side with the IRS. My reading of the bill indicates that this would be highly unlikely but there remains a risk (albeit small) that the IRS could interpret Section 70414 differently than I do.
Regardless, do not be overzealous with what you use 529 withdrawals for. As an example, the provision allows for withdrawals to be used for continuing education. Logic would imply that a physician could use 529 withdrawals to cover the registration fees for a continuing medical education conference. But the IRS may not allow you to use withdrawals for the cost of a hotel room and meals at the conference.
Many physicians file a Schedule C on their annual federal income tax returns for consulting and other self-employment income. If a medical license and/or continuing medical education is required for the physician to do those Schedule C activities, many physicians deduct license fees and medical conference expenses on Schedule C. For some physicians, the tax benefit of that Schedule C deduction may be greater than the tax benefit of paying those expenses using 529 funds. It is unlikely that the IRS will permit physicians to both use 529 withdrawals and take a Schedule C deduction for the same expense of attending a medical conference (a Schedule C deduction is supposed to only apply to Schedule C income earned in that year).
Here is what physicians should do now
Open a 529 account in your name. If you have children or grandchildren, then there is little risk because even if you personally do not use those funds, you can always roll the funds over to a child’s or grandchild’s account.
Get to know your state’s 529 plan. Every state has different rules around 529 plans with many states (such as Ohio) allowing a certain amount of annual contributions to be tax-deductible from that state’s income tax returns. In other states, contributions are not tax-deductible.
Talk to your tax preparer. I am not a tax attorney nor a certified public accountant. Your own attorney or accountant may interpret Section 70414 very differently than I do so consult whoever assists you with your taxes before you do anything.
If you usually submit a Schedule C, do some math. Say your effective federal income tax rate is 17%. If you get less than a 17% return on your investment in a 529 plan after 1 year, then you’d be better off taking the cost of your medical license and continuing medical education as a deduction on Schedule C instead of using 529 withdrawals. If you do not normally file a Schedule C, then using a 529 account would be prudent.
Watch the news. Many Americans may consider the provisions of Section 70414 to be a loophole that mainly benefits the wealthy. Political pressure could result in restricting or eliminating some of these provisions in future legislation. The 2025 budget bill will significantly increase the nation debt and congress could close loopholes in attempts to minimize that debt.
Keep records. The IRS may choose to target tax returns that include 529 withdrawals for audit. Be sure to keep receipts for medical licenses, medical education conferences, and board examinations in case you are audited.
ETFs (exchange traded funds) and mutual funds are both composed of stocks in many different companies. There are important differences between them and because of these differences, many investors perceive ETFs as being preferable to mutual funds because ETFs have lower annual expenses and generate less tax. But if you are invested in index mutual funds, it turns out that there really is not any significant difference when it comes to either expenses or taxes. The only real difference is in the time of day that you can sell an ETF versus a mutual fund. I will argue that for the vast majority of long-term investors, the time of day you sell the investment is irrelevant and there is virtually no advantage of an ETF over a mutual fund or vice versa.
What is a mutual fund?
Most investors lack the time and expertise to research and follow individual stocks. To be successful requires careful analysis of the company’s business plan, earnings, expenses, board of trustees opinions, sales outlooks, market competitors, etc. This can turn into a full-time job when owning just a handful of stocks. Instead, most people invest in shares of mutual funds. These funds in turn invest in many different stocks with the result that the individual investor can maximally diversify investments by investing in just one fund. The greater the diversification, the lower the overall risk.
There are basically two types of mutual funds: managed funds and index funds. In a managed fund, you pay for a fund manager(s) to pick which companies will be included in the mutual fund and how much of each company’s stock to include in the fund. In an index fund, the fund simply buys stocks proportionate to their company’s presence in an index. Common indexes include the S&P 500, the total U.S. stock market, the European stock market, the total U.S. bond market, etc. Because you have to pay stock analysts’ salaries, managed funds are more expensive than index funds.
You might think: “I don’t mind paying the higher expense of a managed fund since there is a stock expert picking the best stocks to include in the fund“. However, counterintuitively, index funds actually outperform managed funds on average. There is always the occasional stock savant like Warren Buffett but most fund advisors fall far short of Buffett’s investment returns. If you have read my previous blog posts, you will know that I have long been in favor of index funds, not only for physicians but also for anyone saving for retirement. Index funds are less expensive and have a higher rate of return than managed funds.
There are two key characteristics of mutual funds that every investor should be aware of. First, every time a stock held in that fund is sold at a higher price than it was purchased, it generates capital gains with the result that most years, an investor holding a mutual fund will have capital gains reported to the IRS and will owe capital gains taxes, even if the investor did not sell any shares of the mutual fund themselves. Second, when an investor does sell shares of a mutual fund, those shares are sold at the end of the trading day, when the stock market closes.
What is an ETF?
Like a mutual fund, an ETF is composed of stocks from many different companies. The vast majority of ETFs are invested in an index (similar to an index mutual fund) and only a minority of ETFs are actively managed. For this reason, the annual expense of most ETFs (“expense ratio”) is similar to that of an index mutual fund and much less than that of a managed mutual fund. ETFs handle capital gains differently than mutual funds and tend to be less likely to incur regular annual capital gains taxes; those capital gains are largely deferred until the investor eventually sells shares of the ETF. An individual investor can buy or sell shares of an ETF anytime of the day while the stock market is open, unlike mutual funds which are only sold at the time of market closing.
ETFs have become very popular with Americans. As of December 2023, there were a total of 3,108 U.S. ETFs holding $8.1 trillion and accounting for 24% of U.S. investment company assets.
Costs, taxes, and performance of ETFs vs mutual funds
ETFs are often touted as being less expensive than mutual funds and it is true that ETFs are less expensive than managed mutual funds. But there is little difference between the expense ratios of ETFs and index mutual funds. As an example, the Vanguard Total Stock Market ETF (VTI) has an annual expense ratio of 0.03%. The Vanguard Total Stock Market Index mutual fund (VTSAX) has an expense ratio of 0.04%. Similarly, the Schwab 1000 Index ETF and mutual fund both have expense ratios of 0.03%. Thus, there is really no significant difference in cost between an ETF and its corresponding index mutual fund.
ETFs are also touted as having lower capital gains taxes (i.e., greater tax efficiency). Capital gains are incurred whenever the fund sells shares of a component stock held by that fund. Index funds tend to sell shares infrequently whereas managed funds are actively buying and selling different stocks that the fund managers think will improve the returns on the fund. Thus, managed mutual funds generate more annual capital gains than index mutual funds simply because there is more annual turnover of the individual component stocks in a managed mutual fund. Moreover, when an index fund does sell shares in stocks that are losing value, the fund can take advantage of tax loss harvesting to offset the capital gains realized from the sale of stocks that are increasing in value. At the end of the day, you will pay the same in cumulative capital gains taxes when you eventually sell shares of an ETF as you will when selling shares of a similar index mutual fund. It is just a matter of whether you prefer to pay those capital gains taxes incrementally every year that you own the fund (managed mutual funds) or when you eventually sell your shares in the fund (ETFs and most index mutual funds).
Overall, the net returns (after expenses and taxes) on an ETF are virtually identical to the net returns on a similar index mutual fund. As an example, the average annual return after taxes and expenses over the last 10 years of the Vanguard Total Stock Market Index ETF was 9.93%. The Vanguard Total Stock Market Index mutual fund return was identical, also 9.93%. Similarly, the 5-year return on the Schwab 1000 Index ETF (SCHK) after expenses and taxes was 11.30% and the 5-year return on the Schwab 1000 Index mutual fund was 11.29%.
The bottom line is that when comparing ETFs to similar index mutual funds from large investment companies, there is no difference in annual returns, expenses, or cumulative net taxes paid.
The real difference between ETFs and mutual funds: the time of day of trading
As mentioned above, shares of an ETF can be bought or sold anytime of day when the stock market is open but a mutual fund is only sold at the moment that the stock market closes at the end of the day. That gives the ETF an advantage if you need money right away and cannot wait until the following day to get it. But this is almost never the case with your own personal finance strategy – you should be drawing from your cash accounts for expenses you need to pay immediately and should not be drawing from your investment accounts. This is why every person should have an emergency fund in cash (checking, savings, and/or money market accounts), sufficient to cover 3-6 months of normal household expenses. The main reason to buy and sell investments in the middle of the trading day (as opposed to the end of the trading day) is if you think you have the wisdom to know the exact minute that the investment has reached its highest price for the day. But here’s the thing, no one is that smart. There is truth to the adage “time in the market is more important than timing the market”.
To investigate market timing to sell an ETF versus selling a mutual fund at the end of the day, I looked at the daily performance of the S&P 500 index over a 12-month period from July 11, 2023 to July 11, 2024. Every day, the S&P 500 index had an opening price, a maximum high price, a minimum low price and a closing price. The graph below shows the difference between the opening price and the closing price for every day the market was open. There is really no pattern to it. Overall, there were 141 days that the closing price was higher than the opening price, 107 days that the closing price was lower than the opening price, and 4 days that they were the same. The implication is that it is very difficult to predict at the beginning of the day where the S&P 500 index will be at the end of the day. This is why investing in stock market futures is notoriously high-risk and is more like gambling than investing.
But the past 12 months has been a particularly good year for stocks – the S&P 500 is up 26.5% over the past year. So, I next looked at the 10-years from July 11, 2014 to July 11, 2024. Overall, there were 2,517 trading days during this 10-year period. On 1,337 of these days, the closing price was higher than the opening price, on 1,157 days the closing price was lower than the opening price, and on 22 days the closing price was the same as the opening price. On average, the closing price was 0.02% higher than the opening price but the range was from 5.49% higher to 5.71% lower. The graph below shows the data from all 2,517 trading days. Once again, it is not possible to predict the closing price of the stock market from its opening price.
What about the daily market high price? If you are seeking to maximize your return on an ETF, then you should seek to sell it at the moment that the ETF hits its highest price in the middle of the trading day. From the graph below, it is clear that on most days, the S&P 500 index trades at a higher price at some time in the middle of the trading day than it is at the close of the trading day. So, if you sell your ETF at that time, you’ll have a higher return than if you sell a mutual fund at the end of the day.
The problem is that price of the S&P 500 can also be lower in the middle of the trading day than it is at closing. The graph below shows that on the vast majority of days that the stock market is open, at some time during the day, the price of the S&P 500 drops below the price that it eventually closes at.
The bottom line from this analysis is that you are just about as likely to sell your ETF in the middle of the day at a price lower than the closing price as you are to sell it at a price higher than the closing price. You can drive yourself crazy trying to time the market without coming out ahead. For this reason, there is really no advantage to investing in an ETF that you can trade anytime of the day versus investing in a mutual fund that only trades at the close of the day.
So, should you own an ETF or a mutual fund?
If the choice is between an ETF and a managed mutual fund, the ETF is better. But that is only because for the average investor, the advantage of the ETF is because it is ultimately an index fund. When the choice is between an ETF and an index mutual fund, there really is no difference and no compelling reason to choose one over the other.
When choosing an ETF or index mutual fund, it is more important to look critically at what the index is invested in. A “large cap growth index fund” from one investment company may be invested in very different companies than a fund with the same title from another investment company. Even within the same investment company, a large cap index ETF may have different holdings than the investment company’s large cap index mutual fund.
Personally, for equities, I primarily invest in total stock market index mutual funds. That gives me the broadest diversification and since it gets bought and sold at the close of the trading day, I don’t have to waste time fretting about the price of the stock market every hour. Instead, I can just enjoy my day and not worry about brief fluctuations in the market.
Physicians rely on high reimbursement rates from commercial health insurance companies in order to balance out for lower rates from government payers such as Medicare and Medicaid. But every physician group negotiates independently with each health insurance company to settle on the amount that the company will pay the physician for every service and procedure. All of this is done in private so one physician group does not know what another physician group gets paid by any given insurance company to provide the same medical services. Conversely, one insurance company does not know how much another insurance company pays any given physician to provide the same medical services. In a previous post, we looked at the variables that go into a physician’s payer mix and found that for most physicians, commercial insurance rates are higher than those of Medicare or Medicaid. But different physicians do not get paid the same rates from any given insurance company.
To illustrate this, let’s look at an example of two physicians. Dr. Smith and Dr. Jones who both have a listed charge (“sticker price”) of $1,800 to perform a laparoscopic appendectomy. If a patient has Medicare, they both get paid the standard Medicare amount of $605 and if a patient has Medicaid, they both get paid the standard Medicaid amount of $435. But for patients with commercial health insurance, Dr. Smith gets paid anywhere from $756 to $1,512 – all rates higher than Medicare. On the other hand, Dr. Jones gets much less by each insurance company, ranging from $580 (less than Medicare) to $650 (slightly greater than Medicare).
So, why does Dr. Jones get paid so much less than Dr. Smith by each insurance company to do the same surgical procedure? The answer is that Dr. Smith negotiated a better deal with each insurance company contract than Dr. Jones did. In this post, we’ll delve into the variables that can affect physician reimbursement by commercial health insurance companies.
Physician group size matters
In the U.S., employers select a health insurance company and then the health insurance company selects the doctors that will be “in-network”. Employees get whatever insurance company their employer has contracted with and consequently, whatever in-network physicians the insurance company has contracted with. If the doctors that the employees want to see are not in the insurance company’s network of physicians, then the employees complain to their employer and the employer looks for a different insurance company to contract with to provide health coverage for its employees. The bottom line is that if the insurance company does not contract with the physicians that the employees want to see, that insurance company is going to eventually lose business.
If there are 100 self-employed cardiologists in a city, then the insurance company can afford to give them a take-it-or-leave-it offer with low reimbursement. If a few of the cardiologists say “no”, then there are still plenty of in-network cardiologists in the city for the people covered by the insurance company to see so few people will complain. On the other hand, if 20 of those cardiologists are member sof a single large physician group and another 40 are employed by a single hospital, then the insurance company can be forced to pay the 40 hospital-employed cardiologists higher rates than the private 20-physician group that in turn will have higher rates than the remaining solo practice cardiologists. The reason is that the largest physician group can demand higher rates because the insurance company cannot afford to lose that many physicians from their in-network physician list.
The greater a physician group’s local market share, the higher the commercial rates they can command. As a result, a multi-physician specialty practice will almost always get paid more by an insurance company than a solo practitioner.
Insurance company marketshare also matters
The size of an insurance company’s marketshare in a community also affects the amount that insurance company will pay physicians to provide medical care for the insurance company’s patients. In this case, the larger the insurance company’s marketshare, the lower the rates it has to pay physicians. This is because a physician group can afford to walk away from negotiations with an insurance company that only brings a small number of patients to the physician group’s practice. Consequently, that smaller insurance company has to offer higher rates in order to get the physicians to agree to see their relatively few patients. One study found that insurers with a marketshare of >15% paid 21% less for primary care visits than insurers with a marketshare of <5%.
Geography matters
There are enormous differences in the cost of medical care in different parts of the country. Medicare realizes that there is a higher cost of living in some areas than others and applies a “geographic modifier” to the Medicare conversion rate to account for cost of living differences. Thus the national average Medicare payment for a level 4 new outpatient visit is $167.10. But in San Francisco, it is $200.69 and in Mississippi it is only $154.51. These geographic cost differences are even greater for commercial insurance reimbursement. The graph below from the Congressional Budget Office shows average physician reimbursement by state compared to Medicare reimbursement.
Physicians in Wisconsin command the highest commercial insurance company rates at more than 175% of Medicare on average. Alabama has the dubious distinction of the lowest physician reimbursement with commercial insurance companies paying Alabama physicians less than Medicare rates on average.
What commercial insurance companies pay hospitals also varies considerably by state. The graph below (also from the Congressional Budget Office) shows that in all states, the average hospital reimbursement is greater than Medicare hospital reimbursement, ranging from a high of Massachusetts at 400% of Medicare to a low of Arkansas at 150% of Medicare.
This is well-illustrated by lung transplants. My patients with end-stage lung disease requiring a transplant who had high-quality health commercial health insurance could get their transplant here in Ohio at either the Ohio State University or the Cleveland Clinic – these health insurance companies were willing to pay OSU and Cleveland Clinic high fees so that insured patients could get their transplant done locally. On the other hand, I had patients with low-cost, poor coverage health insurance who had to travel to Missouri or Kentucky to get a lung transplant at lower-cost transplant centers.
Specialty matters
Specialists rightfully should be paid more than primary care physicians – specialists require more years of training and thus enter the workforce at an older age than primary care physicians. It is appropriate for specialists to be compensated for the extra skill and expertise that comes from those years invested in more training. There are far fewer physicians in any given specialty than there are primary care physicians and the more specialized a physician gets, the fewer and fewer similarly specialized physicians there are in a community. Those highly specialized physicians can demand much higher reimbursement from commercial insurance companies since they do not have much competition in the local market.
Not only does the number of physicians in a particular specialty in the community affect rates but whether those specialists are likely to be hospital-based or outpatient-based has a huge affect on rates. The specialties with the highest commercial rates are anesthesiologists, critical care physicians, and emergency medicine physicians. These are specialists who work exclusively in hospitals and patients going to that hospital cannot chose a doctor. If the emergency squad takes you to your local hospital, you are going to see whichever ER doctor is on-duty that day. If you go to the hospital to get a hip replacement, your anesthesiologist will be determined by the anesthesiology department’s work schedule. And if you have respiratory failure from COVID, you are going to be cared for by the critical care doctors covering the ICU on the days of your ICU stay. Because of this, insurers are willing to pay more for these hospital-based physicians in order to be sure that they are in-network.
In addition, anesthesiologists, critical care physicians, and emergency medicine physicians are often hospital-employed and the rates for their professional services are generally negotiated with the same insurer contracts as the hospital’s. In general, hospitals command higher commercial insurance rates than physicians. Nationally, commercial insurance prices for outpatient hospital services average 240% of Medicare reimbursement and inpatient hospital services average 182% of Medicare reimbursement. Commercial insurance prices for primary care services average 118% of the Medicare rate and for specialty services average 163% of the Medicare rate. During negotiations for health insurance contracts, rates for these hospital-based physicians are often bundled in with the high hospital rates with the result that hospital-employed anesthesiologists, critical care physicians, and emergency physicians often command much higher rates from commercial insurers than other physicians.
Quality matters
High performance on quality measures can translate to higher reimbursement rates from commercial health insurance companies. The graph below from the Congressional Budget office report shows that hospitals with high ratings on the Medicare star quality rating system were more likely to have commercial insurance reimbursement >276% of Medicare rates whereas those hospitals with low Medicare star quality ratings were more likely to have commercial reimbursement <216% of Medicare rates.
There are three ways that physicians can use favorable quality measures to obtain higher commercial insurance rates. First, hospital-employed physicians at hospitals with high quality metric measures can often have the physician fee schedule negotiation bundled with hospital negotiation with insurers, resulting in higher physician reimbursement. Second, many insurers will have bonus payments for quality performance built into physician contracts. Third, savvy negotiators can use historical favorable physician quality metrics to bargain for higher reimbursement rates from insurers when negotiating contracts.
Rural vs. urban physicians
In general, physicians practicing in rural areas have incomes 5-10% higher than those practicing in urban areas. This is in part due to rural hospitals paying physicians more to attract physicians to rural areas that are often perceived as being less desirable to live in compared to urban areas. However, in many cases, rural physicians have an advantage over urban physicians when it comes to negotiating with commercial insurance companies for reimbursement contracts because with fewer physicians in a rural area, the physicians have more of a monopoly in the healthcare delivery market. If you are the only cardiologist in the county and the next closest cardiologist is 60 miles away, then insurers will be willing to pay you more to keep you in-network for the patients in that county. A number of years ago I got a cold call from a small hospital in rural western Ohio offering me just over double the salary I was making in Columbus but I learned that I would be the only pulmonary/critical care physician in the area and would essentially be on-call for the ICU every night, every day of the week – definitely not worth the money!
Acquisition by private equity firms
Over the past two decades, there has been an increase in private equity firms buying physician practices, especially dermatology, ophthalmology, gastroenterology, and primary care practices. Between 2012 and 2021, the number of private equity firm acquisitions increased 6-fold. Overall, 8,000 physician practices have been bought by private equity firms in the past decade for a total price of $1 trillion.This can result in single ownership of many, previously independent, small group practices. One study found that in 28% of metropolitan areas, a single private equity firm has more than 30% market share of physicians in at least one specialty, and in 13% of metropolitan areas, a single private equity firm owns 50% of marketshare of at least one specialty. With single ownership comes a larger number of physicians and more efficient economies of scale when it comes to managing overhead expenses, electronic medical records, and billing operations. Private equity firm ownership can also bring better business management and better bargaining power when it comes to negotiating commercial health insurance contracts.
The graph below shows the increase in commercial health insurance rates for physician services for practices after acquisition by private equity firms. The largest increase was for oncology practices that saw a 16.4% increase in reimbursement by insurers after the practices were acquired by private equity firms.
When private equity acquisitions resulted in a large local marketshare for a specialty, the increase in reimbursement by insurers was even greater. For example, reimbursement for gastroenterology services increased by 14% overall after acquisition by private equity but increased by 18.2% when the marketshare commanded by a private equity firm exceeded 30% of the gastroenterologists in a metropolitan area.
The goal of the private equity firm is to improve the profitability of the physician practices so that those physician practices can then be re-sold at a profit in the future. In other words, the strategy for private equity is “buy-buff-sell“. A typical goal will be to sell the practice within 5 years at a 50% profit. More than half of practices purchased by private equity firms are resold within 3 years of initial acquisition. In order to ensure a 50% return on their investment, private equity firms will seek to eliminate unfavorable payers in their payer mix with tactics such as eliminating Medicaid patients, limiting self-pay patients to those who can pay in full in advance, and in some cases, eliminating Medicare patients. This can make it increasingly hard for low-income patients to find medical care in their communities and places an additional burden on not-for-profit physician groups to provide that care.
The Patient population matters
When a commercial insurance company contracts with an employer to provide healthcare for the employees, the demographics of those employees can have a huge impact on healthcare utilization and can have an impact on the health insurance premiums the insurer charges the employer. Physicians can use this information in their own contracts with the commercial health insurance companies. For example, insurers are permitted by the Affordable Care Act to raise premiums by up to 50% to cover people who use tobacco. Insurers can charge premiums for older people up to 3 times what they charge for 21-year-olds.
So, for example, an insurance company whose biggest contract is with the local factory that has been in operation for 50 years employing people straight out of high school will have a large percentage of older smokers. On the other hand, if the insurance company’s biggest local contract is with a software company that just started up 5 years ago employing college-educated people, there will be a lot of younger non-smokers. Knowing this may allow the physician group to negotiate higher rates from the insurance company that brings a lot of patients with more complex medical problems since those patients can translate to more uncompensated patient phone calls, greater risk of malpractice suits, more time-consuming prior authorizations, and more office staff time to manage.
Tactics to improve commercial insurance rates paid to physicians
Now that we have examined some of the factors that affect the rates that commercial insurers pay physicians, if the physician practice develops a business strategy to increase its commercial insurance rates, there are several tactics the practice can implement to achieve this goal.
Don’t settle for the insurance company’s standard physician fee schedule. This is like paying the sticker price for a new car – sometimes you have to do it but most of the time you can negotiate for a better price.
Set your “standard charges” appropriately. No insurer will pay you more than your publicly stated standard charge for any service or procedure. If you set your charges at 130% of Medicare, the most any insurer will pay you is 130% of Medicare. You don’t want to set your charges so high that it scares patients away but you should set them higher than the best reimbursement rates you can hope to negotiate with your best-paying insurer.
Join a larger physician practice. The days of the independent solo practitioner are all but gone. Solo practitioners have no negotiating power with insurers and have to settle on commercial insurance rates at or below Medicare rates. A larger group practice will have better leverage when it comes to insurance contract negotiations and can usually get higher rates than solo or small group practices.
Become hospital-employed. There is a very good reason that the percentage of physicians who are hospital-employed has grown so rapidly in the past 20 years. Hospitals can negotiate higher commercial insurance rates than physician practices can. In addition, the hospital can charge an insurer (including Medicare) more when a patient is seen in a hospital-owned outpatient facility than a physician group can charge when a patient is seen in a privately-owned facility. Thus hospitals can afford to subsidize physician salaries over and above what the physician can bill for professional services alone.
Limit (or eliminate) self-pay and Medicaid patients. This is usually only practical by for-profit physician groups since 501(c)(3) organizations (non-profit organizations) are required to provide charity care to maintain tax-exempt status through the IRS.
Move to a rural area. In a rural area that has fewer physicians, your ability to negotiate for higher rates from a commercial insurance company improves since there will be more pressure on the insurer to have you in-network to care for local patients.
Move to a different state. Just moving from Alabama to Wisconsin can double the rates that you can get from commercial insurers. Physicians completing their residency or fellowship would be well-advised to not just look at payer mix when looking at a job but should also look at what the commercial payer rates are in the state that they would be practicing in.
Monitor and report quality metrics. Insurers make money when the people that they are insuring don’t get sick. A physician practice that can show its effectiveness with smoking cessation, weight loss, cancer screening, and vaccination rates can position itself for higher reimbursement rates.
Target insurers with a small marketshare. A commercial health insurance company with a relatively small number of insured people in a community will often be willing to pay higher physician reimbursement rates to ensure that those insured people have access to local healthcare.
Be willing to walk away. If a physician practice drops an insurer, then that physician practice becomes out-of-network for all of the insurer’s patients. That translates to higher co-pays and deductibles for the patients and many of them will leave the practice to find an in-network doctor. This can be painful to the physician who has long-standing doctor-patient relationships but it can free up space in the practice to see more of the patients covered by a better-paying insurance plan.
Negotiate terms other than just professional fees. The contracted reimbursement amount is one thing but actually getting paid is something else. Sometimes, a practice will have to spend a lot of time and effort just to be sure that it is actually getting paid for services. This extra time and effort means extra overhead expense. In many cases, negotiating for terms such as time to submit claims, time to appeal claims, which services or procedures require prior authorization, expedited prior authorizations, and the process of adding new physicians to the insurance plan can greatly reduce expenses and this can be just as beneficial as getting paid more.
Negotiate higher rates for certain services or procedures. This is where knowledge of your own practice’s strengths can pay big rewards. If your practice is particularly experienced and skilled in a certain procedure, then use that to negotiate a higher rate for that particular procedure. For example, if you are an endocrinologist with particular expertise in thyroid needle biopsy, you may want to negotiate a price of 170% of Medicare reimbursement for that procedure and 130% of Medicare for everything else you do.
Sell the practice to a private equity firm. I was often approached by solo practitioners who wanted our physician group to buy their practice when they retired. But the reality is that physicians rarely buy other physician’s practices anymore. However, private equity firms will buy them. In the short-term, this can bring a big payoff to the physicians. But the private equity firms’ strategy is to increase productivity and decrease overhead costs of the practices in order to re-sell those practices at a profit in a few years. That means that the doctors will usually be required to see more patients per day and that RNs will be replaced by MAs and LPNs. For some physicians, this can mean a loss of control of their clinical practice and burn-out.
Negotiate better. If there was a class in insurance contract negotiation in my medical school, I missed it. Physicians are trained to take care of patients and not negotiate business deals. A successful insurance contract negotiation requires research and interpersonal skills. If you want to get higher rates from a commercial insurer, you have to know your own practice – its strengths and weaknesses – and be able to effectively communicate the value of the strengths. You also need to know what the insurance company values so that you can appeal to those values. You don’t necessarily need an MBA to do this but some additional training other than medical school can help – take a course or two at the local business school or enroll in a training program directed toward physicians in management.
Hire a consultant. If the physician practice is still not getting the reimbursement rates from insurers that it thinks it should be getting, it may be time to bring in a consultant who has better knowledge of what the achievable rates are in the community and how to better negotiate with insurance companies to get those rates.
It’s all about a balanced payer mix
As physicians, we feel best about ourselves when we provide medical care to the people who need it the most. The majority of physicians want to find ways to give back to their community and that often means treating patients who are low-income and disadvantaged, either on Medicaid or uninsured. The only way we can do that is if we can increase our reimbursement from commercial insurers to balance out for the financial losses associated with altruistic care of Medicaid and self-pay patients. In countries with universal healthcare systems, physicians can concentrate their professional efforts in direct patient care and do not have to spend time and resources in commercial insurance contract negotiation. But in the U.S., it is necessary for every physician to have a strategy to regularly and successfully negotiate with insurers for the best possible rates they can get. More than ever before, medicine is a business.
Physicians and hospitals get paid from many different sources including commercial insurance, Medicare, Medicaid, self-pay patients, etc. The percentage of payments from each of these sources is called the payer mix and can vary widely between different physicians and different hospitals. Payer mix is the single most important factor in determining income for physicians and financial well-being for hospitals. Knowing your payer mix and understanding the factors that affect payer mix is essential for anyone managing healthcare operations. Note: “payer” mix and “payor” mix are both correct spellings and can be used interchangeably; in this post, “payer” will be used.
How is payer mix defined?
Broadly speaking, the payer mix is the percentage of various payers in a hospital or physician practice. In most practices, the main payers are Medicare, Medicaid, a variety of commercial insurance companies, and self-pay patients. Depending on the physician practice or the hospital, less common payers can include worker’s compensation, CHIP, the Department of Veterans Affairs, the Department of Defense, the Department of Indian Affairs, vocational rehabilitation, research grants, disability-granting entities, etc.
There are several ways that these percentages can be expressed and it is critical to know the method being used when analyzing a practice’s payer mix. Each method has advantages and disadvantages so it is best to use more than one when analyzing the business operations of a physician practice or a hospital.
Payer mix based on the population of patients in the practice. In this method, the total number of patients in the practice is determined and the payer mix is expressed as the percentage of patients in the practice with each type of payer. If there are 1,000 patients in the practice and 450 of them have commercial insurance, 300 have Medicare, 150 have Medicaid, and 100 are uninsured, then the payer mix would be 45% commercial, 30% Medicare, 15% Medicaid, and 10% self-pay. This is a very simple way to express payer mix but it suffers from a serious flaw. Because not all groups of patients receive the same types of medical services, it does not tell you much about income or physician effort. For example, because Medicare patients are by definition either disabled or over age 65, they have more physician office visits per year, more hospitalizations, and undergo more surgeries than younger patients covered by commercial insurance. Similarly, uninsured patents are less likely to undergo expensive elective surgeries such as joint replacement or spine surgery.
Payer mix based on receipts. In this method, the total annual income for the practice is determined and the payer mix is expressed as the percentage that each type of payer contributes to the practice’s income. For example, if the same practice’s total annual receipts from billing for clinical services is $100,000 with $50,000 from commercial insurance, $30,00 from Medicare, $19,000 from Medicaid, and $1,000 from self-pay patients then the payer mix would be 50% commercial, 30% Medicare, 19% Medicaid, and 1% self-pay. The advantage of this method is that it tells you where your money is actually coming from. However, it does not give accurate information about the time, effort, and expense it takes to care for patients since some payers pay considerably less than others and self pay patients pay little or nothing at all for healthcare. It also does not help you when trying to determine write-offs for charity care.
Payer mix based on charges. In this method, the total amount of charges is used in the denominator and the percentage of those charges allocated to each type of payer is calculated. The major criticism of this method is the charges are generally based on the practice’s listed price for every service and procedure and no one actually pays the list price. Every hospital and physician sets their list prices for some amount higher than the amount that their best-paying payer will pay them to perform that service or procedure. That way, the practice never leaves money on the table. No matter what the listed price is, Medicare will only pay the physician the standard Medicare physician fee schedule – the same goes for Medicaid. Similarly for hospitals, Medicare will only pay the hospital the Medicare standard reimbursement for the DRG diagnosis of the patient, regardless of the hospital’s listed price per diagnosis or per hospital day. The majority of self-pay patients are too poor to afford health insurance and those bills are either written off as charity care or reduced to some nominal amount based on the patient’s income.
Payer mix based on patient days. This method applies to hospitals and not to physician practices. The hospital first determines the daily census (usually defined as the number of patients in the hospital at midnight) and then looks at the payer for each patient in the hospital that day. This is repeated for every day of the year and the payer mix is expressed as the number of total patient-days for each payer over the course of the year. This method will generally show a higher percentage of Medicare and a lower percentage of Medicaid and commercial insurance in the payer mix than other methods because Medicare patients are older with more complex medical conditions that result in longer hospital stays than younger patients. As a result, nationally, 18.9% of hospital revenue comes from Medicare but 35.6% of patient days are attributed to Medicare. On the other hand, 13.5% of hospital revenue comes from Medicaid but Medicaid only accounts for 9.4% of hospital days due to Medicaid patients tending to be younger with fewer chronic medical conditions.
Payer mix based on RVUs. For physicians, this method can provide important information. It tells you what the payer mix is for the actual time and effort that the physician is practicing medicine. For example, if a physician generates 4,000 wRVU in a given year and 1,600 were billed to commercial insurance, 1,200 billed to Medicare, 800 billed to Medicaid, and 400 billed to self-pay patients, then the payer mix would be 40% commercial, 30% Medicare, 20% Medicaid, and 10% self-pay. On the surface, it might seem using RVUs would give similar results as using charges. But charges do not necessarily correlate with actual physician effort. For example, a multi-specialty physician group might set their charge for an hour of critical care at 250% of Medicare reimbursement and set their charge for a new outpatient primary care visit at 150% of what Medicare would reimburse. For this reason, payer mix based on RVUs provides different information than payer mix based on charges for physician services.
What is the average payer mix?
To understand the financial health of a practice, you must be able to benchmark its payer mix to some regional or national standard to know whether the practice has a healthy payer mix. If the payer mix is better than the benchmark, then the practice is likely to be financially sustainable. On the other hand, if the payer mix is substantially worse than the benchmark, then the practice is likely to be unsustainable without other sources of financial support. Once again, there are several methods to determining the benchmark.
Payer mix based on insurance coverage of large populations.
In this method, the payer sources for a large population of people is determined, for example, the payer sources for all Americans. This can be a reasonable benchmark for a practice that cares for a broad demographic of patients, for example, a family medicine practice that cares for all ages of patients. However, this benchmark is irrelevant to a pediatric practice that would be expected to have no patients over age 65 and thus no Medicare patients. Similarly, a geriatric medicine practice would be expected to have few or no patients under age 65 and thus would have no patients with CHIP coverage and few (if any) uninsured patients or patients with commercial insurance as primary coverage. One of the best estimates of payer mix for the entire United States comes from table HIC-4_ACS on the U.S. Census website and is summarized in the graph below.
Note that because some Americans have health insurance from more than one source (for example, both Medicare and Medicaid), the total number of all of the percentages exceeds 100%. Overall, 67% of Americans are covered by commercial health insurance, either from an employer, by direct purchase, or through TRICARE. 37% of Americans are covered by publicly funded health insurance, either Medicaid, Medicare, or Veterans Affairs. 8% of Americans were uninsured in 2022. There are notable geographic differences within the U.S. that can arise due to differences in the percentage of retired individuals in a state, whether the state participated in Medicaid expansion, the poverty level of the state, and state-specific universal health plans. For example, the percent of uninsured state residents varies from a low of 2.4% in Massachusetts to a high of 16.6% in Texas. Table HIC-4_ACS from the U.S. Census also reports healthcare coverage for each state in the U.S. and is summarized later in this post.
The problem with using population at-large as a benchmark is that not all groups of people utilize healthcare equally. For example, patients with Medicare coverage are by definition older and consequently have more medical problems, see doctors more often, and are hospitalized more than younger patients who are insured by commercial insurance. On the other hand, uninsured patients often avoid routine outpatient healthcare because many physician practices require advance payment by uninsured patients before they are seen in the practice and most uninsured persons cannot afford to pay out-of-pocket. Commercially insured persons are predominately working adults younger than 65 and their children; these individuals are generally the healthiest Americans and utilize healthcare services much less than Americans on Medicare.
Payer mix based on healthcare expenditures of large populations.
In this method, the total U.S. healthcare expenditures in a year are calculated and then broken down by who paid for these expenditures. This gives a better assessment of the payer mix of Americans who actually utilize healthcare and also more accurately assesses those Americans who disproportionately utilize healthcare more frequently (such as those over age 65). CMS reports annual U.S. healthcare expenditures on its website. In 2022, Americans spent a total of $4.46 trillion on healthcare. Of this, $1.35 trillion was spent on hospital care and $0.88 trillion ($880 billion) was spent on physician services. The remaining $2.23 trillion was spent on a variety of expenditures including prescription drugs, nursing homes, dental care, non-physician professional services, home health care, medical equipment, etc. If we drill down on the hospital and physician services expenditures, we see that private health insurance accounts for the largest percentage of U.S. healthcare expenditures, followed by Medicare and Medicaid (graph below). However, when all federal and state government programs are considered together, 47% of physician services and 55% of hospital services are paid for by government sources.
Reimbursement varies by payer
If everyone in the U.S. paid the same amount for a given medical service, then there would be no need to look at a practice’s payer mix. But the reality is hospitals and physicians charge different groups of patients different amounts for the same service or procedure. If you have ever looked at a medical bill, you will generally see something like “Hospital Charges“. Consider this to be the sticker price. Below that will be an amount for something like “Insurance Contractual“. This is what the insurance company has negotiated with the hospital or physician to be paid for the service or procedure. Next will be an amount for “Current Balance” or something similarly phrased. This is your co-pay for the service or procedure, that is, the amount you pay out-of-pocket and will determined by the terms of your health insurance policy. Last, there will be an amount for “Adjustments” or something similar. This is the difference between the hospital charges (sticker price) and the amount that you and the insurance company actually pay.
No one actually pays the sticker price.
In the past 10 years, there has been a consumer movement to require hospitals to publicly report their charges for various procedures and services. The problem with this is that no one actually pays these hospital charges. If a patient has Medicare, Medicaid, or some other government source, it doesn’t matter what the hospital’s sticker price is – Medicare will only pay a standardized amount and the patient will only be held to their usual Medicare co-pay. In other words, for a Medicare or Medicaid patient, the sticker price is totally meaningless.
Commercial insurance works similarly. Every insurance company negotiates payment rates with every hospital and every physician in the country. These negotiated rates are NOT publicly available and are considered trade secrets by the insurance companies. The reason for this is simple – insurance companies pay different hospitals different amounts to do the same thing depending on how well a hospital can negotiate for higher rates. The same goes for physicians – one insurance company will pay different doctors different amounts to perform the same service or procedure. In a future post, I will delve into the factors that affect commercial health insurance reimbursement for hospital and physician services. But to simplify, the more an insurance company wants a particular hospital or physician to be included in the insurance company’s in-network list, the more that insurance company will be willing to pay that particular hospital or physician. In the case of commercial insurance, the “Insurance Contractual” amount on a patient’s medical bill is the amount that the insurance company has contracted with the hospital or physician for that particular service or procedure and the “Adjustments” amount will be the sticker price minus the contractual amount.
Every hospital and every physician negotiates in secret with every insurance company individually. As a physician, I don’t want Aetna to know how much I get paid to do a bronchoscopy by Medical Mutual. Otherwise, when I negotiate rates with Aetna, they will demand the same or a lower rate as Medical Mutual. It is sort of like not showing the other guy your cards when you are playing poker. Hospitals and physicians cannot negotiate rates with insurance companies that are higher than their sticker prices. For that reason, hospitals and physicians always set their charges (sticker prices) higher than the amount that their best-paying commercial insurance company will pay. If a patient gets medical care from an out-of-network doctor or hospital, their heath insurance will cover less of the charges than for an in-network doctor or hospital. This can result in the patient paying a much larger co-pay or in some situations, be responsible for the entire charge.
The only group of patients that are actually charged the sticker price are uninsured patients. In rare cases, a wealthy patient will be uninsured and will have to actually pay the sticker price (for example, a Saudi billionaire coming to the U.S. for heart surgery). But far, far more commonly, uninsured patients are poor and do not have the financial resources to pay their medical bills. The majority of the nation’s hospitals and physicians will make allowances for this with substantially reduced charges if patients can provide documentation of having a low income. The bottom line is that practically no one pays the sticker price.
From a payer mix standpoint, hospitals and physicians strive to keep the percentage of self-pay patients as low as possible. Physicians consider a self-pay patient to equate to a no-pay patient. Strategies to keep the percentage of self-pay patients in the payer mix as low as possible include not accepting self-pay patients into outpatient physician practices, encouraging self-pay patients with moderate incomes to obtain direct purchase commercial insurance through the the Insurance Marketplace at the Healthcare.gov website, and assisting low-income patients to sign up for Medicaid coverage.
Medicaid rates.
Medicaid reimbursement as a percent of Medicare reimbursement for all medical services for all states
Medicaid is government health insurance for low-income Americans. In most states, Medicaid pays doctors less than Medicare for any given service or procedure. Because it is funded partly by the federal government and partly by individual state governments, the amount that Medicaid pays to hospitals and doctors varies from state to state. Overall, the U.S. average for Medicaid reimbursement for all medical services is 72% of what Medicare pays. However, this varies by specialty – Medicaid reimbursement for primary care services is 67% of Medicare reimbursement whereas Medicaid reimbursement for obstetric care is 80% of Medicare reimbursement. The average Medicaid reimbursement for all medical services compared to Medicare reimbursement for each state is listed in the table to the right (click on the table to enlarge).
Because Medicaid reimbursement is so low, many physicians do not accept any patient with Medicaid in their practice and other physicians limit the total number of Medicaid patients. Currently, about 1/3 of U.S. physicians do not accept Medicaid patients. From a payer mix standpoint, a lower percentage of Medicaid patients is better from a financial standpoint in most states.
Commercial insurance rates.
It turns out to be difficult to get information about commercial health insurance reimbursement since both insurance companies and hospitals consider their negotiated rates to be trade secrets. However, there have been a few published studies in the literature that shed light. In general, hospitals get paid more by commercial insurance companies than by Medicare. Indeed, most hospitals lose money on Medicare and Medicaid patients and then make up those losses by charging commercial insurance companies higher rates. This can be seen in the following graph from the Congressional Budget Office:
In 2018, Medicare reimbursement only covered 86.6% of the cost for hospitals to provide services whereas commercial insurance reimbursement covered 144.8% of hospitals’ costs to provide the same services. According to the Milliman consulting firm, currently, on average, commercial insurance pays about 148% of what Medicare pays for professional services. Therefore, the larger the percentage of commercially insured patients in a hospital’s payer mix, the better off that hospital will be financially.
Physicians are similarly dependent on higher reimbursement from commercial insurance to make up for losses from self-pay patients. In a previous post, I outlined how Medicare reimbursement to physicians has not kept up with inflation and in fact, when adjusted for annual inflation, physicians are currently being paid only 1/3 as much per RVU as they were in 1992. For this reason, most physicians cannot sustain a clinical practice from Medicare patients alone. Since Medicaid pays physicians even less than Medicare, high commercial insurance rates are necessary for a physician to stay in business. Like hospitals, the larger the percentage of commercially insured patients in the physician’s payer mix, the better off that physician’s practice will be financially. However, because these commercial rates are negotiated individually with each physician group, smaller physician groups with less bargaining power often end up with commercial insurance rates that are similar or even less than Medicare rates.
Payer mix varies by hospital size
In general, the larger a hospital, the higher the percentage of commercial insurance and Medicaid is in the payer mix. The graph below shows payer mix in small versus large hospitals based on the 2023 Medicare Cost Report. Note that in this report, commercial insurance is combined with self-pay patients. In this graph, payer mix is expressed as hospital patient-days.
Hospital size also affects the payer mix for physician practices. Physicians who practice in a smaller hospital will be expected to have a payer mix that mirrors the small hospital payer mix and physicians who practice in larger hospitals will have a payer mix similar to the large hospital payer mix.
Payer mix varies by type of hospital
Different types of hospitals care for different populations of patients and these populations can vary by age, income, and the degree of chronic medical conditions. The graph below shows payer mix expressed as hospital patient-days.
Once again, the type of hospital a physician practices in affects that physician’s own payer mix. Consequently, physicians practicing at a psychiatric hospital tend to have a relatively high percentage of commercially-insured patients and a low percentage of Medicare patients due to a younger age of hospitalized psychiatric patients (averaging 42 years of age). Physicians practicing in a critical access hospital will have a high percentage of Medicare patients and lower percentage of commercially-insured patients in their payer mix.
In the graph above, pediatric hospitals are not listed separately but would be expected to have a very low percentage of Medicare in the payer mix and a higher percentage of Medicaid, CHIP, and commercially-insured patients. Pediatric hospitals (and pediatricians) should have a very low percentage of self-pay patients since most families that earn too much to qualify for Medicaid but not enough to afford commercial insurance will qualify for CHIP to provide healthcare for their children.
Payer mix varies by geography
Click on table to enlarge and open in a separate window
Every state has a different payer mix determined by the age of the state’s population, the presence of military installations, the poverty level, employment opportunities, and whether or not the state participates in Medicaid expansion. Because these population subgroups have different healthcare coverage, the overall population payer mix of the state will be affected. Consequently, a state with a high percentage of retirees over age 65 will have a high percentage of Medicare patients whereas a state that people tend to leave after retiring will have a lower percentage of Medicare patients. For example, 23% of Florida residents are on Medicare but only 12% of Vermont residents are on Medicare. Similarly, states with a lot of military bases will have a high percentage of the population covered by TRICARE. For example, 8% of Hawaii’s residents are covered by TRICARE due to its numerous military installations whereas only 1% of Michigan’s residents are covered by TRICARE. The table to the right shows population health coverage data from CMS for 2022 (note that some persons have coverage from more than one payer source so the percentages add up to >100%).
The ideal payer mix
We have now seen that different methods for expressing payer mix provides different types of information. We have also seen that commercial insurance usually pays better than Medicare, Medicare pays better than Medicaid, and Medicaid pays better than self-pay. The ideal payer mix would be 100% commercial insurance. However this is not achievable for a variety of reasons. Non-profit hospitals and non-profit physician practices are required to provide some amount of charity care to maintain their tax-exempt status and thus must have some percentage of self-pay and/or Medicaid patients (for-profit hospitals and physician practices do not have this requirement and can refuse self-pay and Medicaid patients). Only a very few hospitals in the U.S. do not accept Medicare and the EMTALA law requires hospitals participating in Medicare to provide emergency care to any patient, regardless of payer source. Furthermore, most physicians and hospitals have a sense of obligation to the communities that they serve and would be uncomfortable limiting their care to only commercially insured patients.
So, for the hospital or physician practice that is attempting to balance the need to serve the entire community with the financial pressures to maintain a large number of commercially insured patients, there are ways to optimize payer mix but must first determine what that optimal payer mix should realistically be.
First, look at how the population in your area is covered for healthcare. The table above showing population coverage by state is a good starting point.
Next, adjust that population coverage based on the type of patients you care for. If you do not provide care for veterans or military personnel, then you can eliminate percentages of VA and TRICARE from your desired payer mix.
Next, look at the age range of the type of patients you care for and adjust payer percentages accordingly. For example, a geriatric medicine practice should have nearly all patients who are on Medicare with some also having commercial insurance. There should be no self-pay patients in a geriatric practice except for low-income non-U.S. citizens who are not eligible for Medicare.
Next, adjust each payer group based on the size and type of hospital you practice in using the graphs shown above. Smaller hospitals and critical access should have a higher percentage of Medicare patients than larger hospitals. Larger hospitals and psychiatric hospitals should have a higher percentage of commercially-insured patients than smaller hospitals.
The result will give you rough idea of what the average hospital or physician practice’s payer mix should look like based on the state’s patient population.
You can then compare your actual payer mix to this average payer mix to determine how your payer mix compares to your peers. If your payer mix is worse than the average for your peers, then you need to take steps to improve your payer mix.
Improving your payer mix
It is hard to change your payer mix once you have an established practice. Hospitals are generally tied to the demographic characteristics in their local community. It is difficult for physicians to just stop providing care for patients already in their practice. However, there are some tactics that can improve payer mix in certain situations.
If the percentage of self-pay patients in your practice or at your hospital is too high, devote administrative resources to assist eligible low-income patients to enroll in Medicaid and assist higher-income patients to enroll in the Insurance Marketplace at healthcare.gov during the annual open enrollment period from November 1 through January 15. When Ohio began participating in Medicaid expansion, by using this tactic, our hospital self-pay percentage fell from 13.5% to 3%.
For self-pay patients who do not qualify for Medicaid or direct-purchase commercial insurance, set up an income-based reduced payment plan and require advance payment for non-emergency services.
If these measures are unsuccessful, determine whether it is possible to limit new self-pay and Medicaid patients in the physician practice.
An option for some physician practices with large numbers of Medicaid patients is to apply for supplemental payments through the Medicaid Upper Payment Limit Program. The UPL programs are state-specific and allow certain physicians (often state-employed physicians) to be paid commercial insurance rates for seeing Medicaid patients. I was one of several physicians who went to our statehouse 15 years ago and lobbied our state legislature to allow physicians employed by the Ohio State University to be eligible for UPL payments. We were successful and our payer mix improved dramatically overnight.
If the percentage of commercially-insured patients is low, expand the type of medical services offered by the hospital or physician group that attracts patients younger than age 65. These can include breast cancer screening programs, colon cancer screening programs, psychiatric services, bariatric & weight loss programs, and transplant programs.
Offering free wellness programs directed toward members of the community who are younger than 65 can attract commercially-insured patients into the practice.
It is essential that there is adequate access for new primary care patients since these are often young adults new to the area who once captured into the practice, can be a source of commercial insurance for decades in the future.
Advertising that is directed to consumers under age 65 can result in new commercially-insured patients. Liaising with employers and trade unions can also help to recruit more commercially-insured patients.
Because educated, working adults are more savvy with information technology than uninsured patients, enhancing the practice’s IT experience including a robust patient portal within the electronic medical record, ability to schedule on-line, and a digital payment system can draw commercially-insured patients.
Negotiate favorable contracts with commercial insurance companies. In a future post, I will outline this in more detail but suffice it to say that every contract needs to be approached as a bargaining session and the key to being in a more favorable bargaining position is to know your hospital’s or practice’s strengths and capitalize on them. Contract negotiation is a skill and in most practices, only a few individuals possess sufficient skill and experience to negotiate successfully. Try not to settle for the insurance company’s “standard fee schedule” which is often lower than Medicare’s physician fee schedule.
It takes money to make money
Monitoring, analyzing, and improving payer mix requires a lot of resources including administrative staff time, advertising, IT upgrades, and contract negotiation. And those resources cost a lot of money. Larger physician practices and hospitals are better able to invest in payer mix management and the effect on reimbursement can make the difference between a thriving practice and a struggling practice.
There has been a seismic change in physician employment models over the past two decades with most physicians now being hospital-employed. The days of physicians in solo or independent small group practices are largely over. The main driver for this shift in employment is that physician reimbursement for professional services has fallen to such an extent that most physicians simply cannot make a reasonable living without salary subsidization. The cause of the fall in physician reimbursement is that Medicare has not even come close to keeping up with inflation when it comes to payment for physician services.
Physicians have been paid by the RVU since 1992.
The amount that Medicare pays per RVU is called the conversion factor and has not changed significantly since 1992.
Inflation has resulted in average price of goods in 2024 being 2.17 times higher than prices in 1992.
When adjusted for inflation, physicians in 2024 are getting paid one-third of what they were paid in 1992 to perform the same services.
Salary supplementation by hospitals has become necessary to maintain physician incomes.
The RVU (Relative Value Unit) system
Central to coding and billing is the RVU or relative value unit. When I first started practicing medicine, there were no RVUs. Physicians simply set their own fees for services and then they got paid those customary charges by patients and insurance companies. But in 1992, the federal government rolled out a new system that standardized payment for Medicare services for all doctors. That meant that if a Medicare patient came to the hospital with pneumonia, any doctor doing the patient’s admission history and physical exam would be paid the same rate. The way that Medicare standardized physician reimbursement was by assigning a relative value unit to every service and procedure.
The RVU is composed of three separate components. The work RVU (wRVU) accounts for the physician’s time, skill, training, and the intensity of work to perform any given service. This is the amount of money that a physician should expect in take-home pay after expenses. The practice expense RVU (peRVU) accounts for the overhead cost to perform that service including rent, equipment, supplies, and office staff. The malpractice RVU (mpRVU) accounts for the average malpractice insurance premium cost to perform that service. Adding these three components together gives you the total RVU. Each year, Congress determines how much money an RVU is worth and this is called the RVU conversion factor. For 2024, the Medicare conversion factor is $33.29 per RVU.
The conversion factor has not kept up with inflation
When the RVU system was implemented in 1992, the conversion factor was $31 per RUV. The conversion factor peaked in 2008 at $38 per RVU. Currently, an RVU is worth $33.29. To put that into perspective, based on inflation, $31 in 1992 would be worth $69 in 2024. That means that if the Medicare conversion rate had kept up with inflation, then the conversion rate should be $69 per RVU in 2024 rather than $33.29. So, in other words, in inflation-adjusted dollars, physicians today are getting paid about one-third of what they were paid per RVU in 1992.
wRVUs have not significantly changed
We have now seen that the Medicare conversion rate has been essentially flat for the past three decades. But have the number of RVUs associated with each physician service increased in order to keep up with inflation? The answer is decidedly… no. One of the criticisms of the RVU system in its first years was that the work RVUs for procedures were very high whereas the work RVUs for evaluation and management CPT codes were relatively low. As a consequence, primary care physicians were felt to be under-compensated whereas specialists performing procedures were felt to be over-compensated. Medicare attempts to keep the combined total number of RVUs constant every year. As a result, if Medicare increases the RVUs for one service or procedure, it must decrease the RVUs with some other service or procedure. Over the years, Medicare has increased the wRVUs associated with some services and procedures and decreased the wRVUs associated with other services and procedures in order to eliminate perceived inequities between different specialties in the early years of the RVU system. The result has been an increase in reimbursement for primary care physicians accompanied by a decrease in reimbursement for surgeons, radiologists, and other procedure-oriented specialties.
This can be seen in the following graphs comparing the work RVUs, practice expense RVUs, and malpractice RVUs for selected services and procedures in 2003 and 2024. Medicare maintains an archive of the physician fee schedule for every year since 2003 so I have selected 2003 RVUs to compare to current RVUs. The first set of graphs compares RVUs for evaluation and management codes. Depicted are the RVUs for a level 2 new inpatient visit (CPT code 99222) and a level 4 new outpatient visit (CPT code 99204). These RVUs have increased since 2003, largely as a result of Medicare’s efforts to increase reimbursement to primary care physicians. For a new inpatient visit, since 2003, the wRVU has increased by 21% (2.14 RVU to 2.6 RVU), the peRVU has increased 40% (0.75 RVU to 1.05 RVU), the mpRVU has increased 185% (0.08 RVU to 0.23 RVU), and the total RVU has increased 31% (2.97 RVU to 3.88 RVU). The changes for a new outpatient visit are similar with increases in wRVU of 30%, peRVU of 46%, mpRVU of 140%, and total RVU of 40%.
The second set of graphs show the changes in RVUs for two common procedures: an outpatient EKG performed in a physician office and an outpatient colonoscopy performed in a hospital-based endoscopy center. For an EKG, the wRVU was unchanged (0.17 RVU both years), the peRVU decreased 63% (0.50 RVU to 0.24 RVU), the mpRVU decreased 33% (0.03 RVU to 0.02 RVU), and the total RVU decreased 39% (0.71 RVU to 0.43 RVU). For colonoscopy, the wRVU decreased by 12%, peRVU increased by 3%, mpRVU increased by 110%, and total RVU decreased by 3%. The notable reduction in practice expense RVU for outpatient EKGs is multifactorial with contributions including lower costs for EKG machines and lower reporting costs due to electronic medical record efficiencies.
The third set of graphs show the changes in RVUs for two common surgical procedures: laparoscopic cholecystectomy (usually performed by general surgeons) and total knee replacement (performed by orthopedic surgeons). In both surgical procedures, the work RVUs have fallen since 2003. For cholecystectomy, the wRVU decreased by 5% (11.09 RVU to 10.47 RVU), peRVU increased 36% (5.01 RVU to 6.81 RVU), mp RVU increased 134% (1.33 RVU to 2.64 RVU), and total RVU increased 16% (17.23 RVU to 19.92 RVU). For total knee replacement, the wRVU decreased 30%, peRVU increased by 1%, mp RVU increased by 34%, and total RVU decreased by 14%.
The overall trend has been an increase in the work RVUs for some services and procedures offset by a decrease in work RVUs for other services and procedures. Malpractice RVUs have overall increased with rare exceptions, such as outpatient EKGs. Malpractice insurance premiums are closely tied to the overall national inflation rate and Medicare has chosen to increase the malpractice RVUs to keep up with inflation. Similarly, the change in practice expense RVUs tends to coincide with the overall national inflation rate since overhead costs (rent, utilities, staff salaries, supplies, etc.) are tightly associated with inflation. However, the implementation of electronic medical records has improved office efficiency and reduced many overhead costs to partially offset the effect of inflation on overhead expense.
The overall effect of inflation
We have now seen that work RVUs have not increased enough to keep up with inflation and the Medicare conversion rate has essentially not increased at all over the past 32 years. By combining the effects of the conversion rate and changes in work RVUs, we can see the net effect of inflation on reimbursement for physician services and procedures over the past two decades. Since 2003, the cost of living has increased such that in 2024, it would take $165 to purchase the same amount of goods that could be purchased for $100 in 2003. Therefore, to keep up with inflation, a physician would need to earn $165 in 2024 to perform the same service or procedure that he/she would have earned $100 to perform in 2003. As shown in the table below, this has not been the case.
In this table, the “2003 wRVU $” is the 2003 wRVU multiple by the 2003 Medicare conversion factor; this is the amount of money that a physician would expect to personally be paid to perform a service or procedure, after overhead expenses and malpractice insurance premiums in 2003. The “2003 wRVU $ adjusted for 2024 inflation” is the amount that the wRVUs for services or procedures would be worth in 2024 if the 2003 reimbursement was increased by the increase in cost of living (inflation). The “Actual 2024 wRVU $” is the 2024 wRVU multiplied by the 2024 conversion rate; this is the amount that a physician is acutally personally paid to perform a service or procedure in 2024. The “Lost value since 2003” is the difference in what physicians are actually paid to perform the work of a service or procedure in 2024 versus what they would have been paid is the 2003 reimbursement rates had simply kept up with inflation.
In every case, physicians are being paid less to perform services and procedures in 2024 than they were in 2003, when adjusted for inflation. In order to avoid a loss of purchasing power of their total annual income, there are only two options for physicians: (1) see more patients and do more procedures or (2) get hospitals to subsidize their income. In many cases, physicians have been able to see more patients and perform more procedures in 2024 than they could in 2003 due to efficiencies brought by electronic medical records, improved scheduling software, faster operating room turn-over times, etc. However, these increases in efficiency can only increase physician take-home income so much. Thus, most specialties now rely on hospitals to subsidize incomes. This has been a major reason for physicians to shift from being privately-employed to now being hospital-employed. Even physician private practices now contract with hospitals for financial support in exchange for providing medical care to the hospital’s patients.
Commercial health insurance companies have done a better job of keeping up with inflation and commercial insurance companies pay physicians considerably more per RVU than Medicare. According to the U.S. Census, in 2022, 54.8% of Americans are covered by commercial insurance insurance provided by an employer and another 13.9% are covered by a directly-purchased commercial insurance plan; 18.5% are covered by Medicaid, 21.2% are covered by Medicare, 2.7% are covered by TRICARE, and 2.2% are covered by the Veterans Affairs. Another 8.0% of Americans are uninsured (note that because many Americans have insurance from more than one source, the percentages add up to greater than 100%). However, these percentages do not equate to most physician’s payer mix because older persons and disabled persons have more medical problems, get sick more often, and use medical services more than younger persons. For this reason, Medicare and Medicaid account for a disproportionately large percentage of physician income.
Data from the National Health Expenditure Fact Sheet from CMS indicates that in 2022, 39% of U.S. healthcare expenditures for physician services came from private health insurance, 26% from Medicare, 12% from Medicaid, 2% from TRICARE, 2% from Veterans Affairs, 1% from CHIP, 1% from worker’s compensation, 1% from other Federal programs, 7% from other private revenue, and 8% from patient out-of-pocket payments. Medicare patients will comprise an increasingly large percentage of physician’s practices as the U.S. population over age 65 is projected to increase from the current 18.8% in 2023 to a future 23% in 2060. Increases in commercial insurance payments are not sufficient to make up for the reductions in inflation-adjusted medicare payments.
Implications
Given that Medicare is projected to become insolvent in 7 years (in 2031), it is exceedingly unlikely that physicians can expect to have a significant correction to the loss in inflation-adjusted Medicare reimbursement in the near future. In fact, it is more likely that physicians will see even greater reductions in inflation-adjusted reimbursement due to future inflation, even if the U.S. is able to achieve the Federal Reserve’s target of 2.5% per year increase in inflation. This will drive even more physicians to hospital-employed or hospital-subsidized employment models over the next several years.
Physicians in some specialties may be relatively immune to these forces, however. For example, physicians who care largely for commercially insured patients, such as those whose patients are mostly between 18 and 64 years old. Also, physicians who rely on out-of-pocket payment for elective procedures, such as cosmetic surgeons.
Hospital executives often ask “Why are so many of our doctors asking for money?”. The reason is simple, it is because they have to – it is no longer possible for most physicians to survive on professional revenue alone due to the decline in inflation-adjusted Medicare reimbursement.
