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Hospital Finances Medical Economics Physician Finances

Beware Of Health Care Sharing Ministries

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

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

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

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

What is a health care sharing ministry?

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

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

The problem with health care sharing ministries

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

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

HCSMs are bad for doctors and hospitals

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

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

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

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

HCSM lessons from Ohio, Missouri, and Colorado

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

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

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

Caveat emptor

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

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

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

January 13, 2024

Categories
Physician Finances

Your Parents Were Wrong – A House Is Not Your Best Investment

With every monthly rent payment, you think to yourself: “Why am I just throwing my money away when I could be building equity if I buy a house?” Indeed, home ownership is often considered a core part of the American dream. On the surface, it does seem like it is financially wiser to buy a home rather than rent. After all, house values rise with time and when you eventually sell your house, you get all of that appreciated value back as an investment return. Plus, you’ll get back a lot of the monthly mortgage payments you made before selling the house and you get to write off interest and property taxes from your income tax. Well… not so fast. Buying a house as a primary residence is usually not a good idea from purely an investment standpoint. When we bought our first house in 1988, the conventional wisdom was that you have to own a house for 3 years in order to break-even on the sale of your house. But that number was probably incorrect in 1988 and it is definitely incorrect in 2023.

This year, the median price of an existing home in the United States is currently $416,100. There is tremendous geographic variation, however – the median price in Ohio is $219,903 whereas the median price in California is $750,080. The average size of a house in both states is 1,630 sq ft and 2 bedrooms. Newly build homes are generally more expensive and larger. Houses lose value in some years and gain value in others but on average, homes appreciate at 3-4% per year. The average cost to rent a 2 bedroom house in Ohio is $1,250/month and in California is $2,795.

So, let’s use Columbus, Ohio as an example. We’ll use the following assumptions based on the current Columbus median costs and tax rates:

  • Purchase cost of a 3-bedroom house of $285,000
  • Rental cost of a 3-bedroom house of $1,745 per month.
  • Rental inflation rate 2.5% per year
  • Appreciated value of the house at 3% per year
  • Real estate sales commission of 6%
  • Property tax of 2% of appraised value per year
  • Down payment of 20% ($57,000)
  • Mortgage interest rate of 7% on a 30-year loan
  • Homeowner’s insurance rate 0.4% of appraised value per year
  • Closing costs of 1.5% when buying
  • Closing costs of 0.75% when selling
  • Standard federal income tax deduction (married filing jointly) of $27,700
  • Average home repair and upkeep costs of 2% of appraised value per year
  • Cost to prepare house for sale of 1%
  • Average annual return of mixed stock/bond mutual fund of 7%

There are many costs that most homebuyers do not consider when purchasing a house. Yard maintenance, landscaping, and home repairs. Homeowners insurance. Property tax. Realtor’s commission when selling. Closing costs when buying. Closing costs when selling. The cost of staging and preparing the house to be sold. All of these hidden costs add up, often unseen at the time of purchasing a house – and they significantly erode the return on the investment of the value of the house. Furthermore, as the appraised value of the house increases each year, so does the amount of property tax, homeowner’s insurance, upkeep/repair costs, realtor’s commission, and closing costs.  In addition, there is another hidden cost – the lost income had the amount of the down payment been invested in stocks or bonds instead of used to purchase a house.

The difference between buying and renting

Using the numbers for Columbus, Ohio above, let’s look at what happens when you buy your own home and then sell after different numbers of years versus renting for the same number of years. We will include all of the various costs associated with the initial purchase, annual homeowner expenses, and sale of the house after that number of years, minus the equity in the home at the time of sale. For rent, we will compare the total amount of rent paid over those years minus the investment income had the amount of the house down payment been invested in stocks and bonds.

Year 1. Selling the house after only one year of ownership is very costly with a net expense of $43,859 compared to a net rental expense of $17,474. By doing the math, this means that you would spend $26,115 more to buy a house rather than rent a similar house.

Year 3. Selling the house after 3 years results in a net expense of $77,448 compared to a net rental expense of $53,199. This means that you would spend $24,249 more to buy a house rather than rent a similar house.

Year 5. Selling the house after 5 years results in a net expense of $110,394 compared to a net rental expense of $89,908. This means that you would spend $20,487 more to buy a house rather than rent a similar house.

Year 10. Selling the house after 10 years results in a net expense of $187,525 compared to a net rental expense of $185,411. This means that you would spend $2,115 more to buy a house rather than rent a similar house.

Year 11. We finally break even. Selling the house after 11 years results in a net expense of $201,832 compared to a net rental expense of $205,040. This means that you would spend $3,208 less to buy a house rather than rent a similar house. In other words, it requires owning a house for 11 years before it is more financially advantageous to buy versus rent the house.

But you might ask “What about those tax write-offs?” The changes to the federal tax code in 2016 included a significant increase in the standard deduction. In 2023, if you file single, the standard deduction is $13,850 and if you are married and file jointly, the standard deduction is $27,700. You can only take a tax deduction on your mortgage interest and your property tax if you itemize your deductions and you can only itemize if your deductions total greater than the standard deduction amount. On a $285,000 house, the mortgage interest plus the property tax would be $20,616 in the first year, falling substantially below the standard deduction amount of $27,700. Itemizing deductions is only advantageous if you have a lot of other deductions (such as charitable deductions) or if you buy a more expensive house (with higher annual mortgage interest and higher property taxes). The bottom line is that most people cannot deduct their mortgage interest and property tax on a $285,000 house.

These calculations are based on today’s economy. If and when mortgage interest rates fall, it may take fewer than 11 years to break-even on owning a home versus renting. Also, if Congress changes the tax code and reduces the standard deduction it may take fewer than 11 years. If you live in a state where the average housing costs are more expensive (such as California or Hawaii), then it may take fewer than 11 years for home ownership to be financially advantageous compared to renting.

The value of home ownership can be more than just money

There are plenty of reasons to buy a house other than financial. Maybe you want to re-do the landscaping or put in a basketball pole by the driveway. Maybe you want to paint the walls a different color or replace the kitchen counters. Maybe the neighborhood you want to move into has a lot of houses for sale but few houses for rent. Maybe you worry that your landlord will terminate your lease after a year or two in order to sell the house that you have been renting. Maybe owning your own home is just psychologically important to you.

But buying a house has risks. In 2007, the housing market crashed and home prices plummeted. It took years for home prices to recover to their pre-2007 prices. Many people who sold their homes during these years lost a lot of money. No one can predict what the housing market will be in the future and it is possible that if we have another crash in the housing market 10 years from now, it could take even longer than 11 years for buying a house to be financially more advisable than renting. There is also the risk of unexpected major expenses such as a new roof, new furnace, repairing damage from a broken water pipe, etc. These expenses can be tens of thousands of dollars that if you rent, your landlord has to cover but if you own the home, you’ll be stuck with the bill.

Your “forever home” won’t be

In past generations, many people bought a house and then lived in it for their entire life. When you are in your 20’s or 30’s, it is easy to think that the house you are buying will be the one you will stay in forever. But life happens and things change. Maybe you have a kid or have more kids. Maybe you or your spouse get a new job in another city. Maybe your income goes up and you want something nicer.

The average American expects to live in the home that they buy for 15 years. However, reality is very different – the mean duration of home ownership in the U.S. is only 8 years. For first-time home owners, the duration of ownership is even shorter at 3-5 years. The duration of home ownership increased after 2010, largely due to the housing market crash that resulted in people holding onto their homes rather than selling them for less than they bought them for. Prior to 2010, the median duration of home ownership was only 5-6 years. The bottom line is that most people do not live in their home for as long as they think they will.

So, should I buy or should I rent?

Based on the current interest rates and tax laws, you are financially better off renting if you stay in an average sized house in Ohio for less than 11 years. This is especially true for residents or fellows who do not know where they will be practicing in 3-5 years, when they finish their training. For people who anticipate living in a house for less than 11 years, the decision to buy a house should be because of the non-financial reasons of home ownership but with the realization that that those reasons come at a monetary cost. Each person should decide for himself/herself whether home ownership for less than 11 years is worth it.

December 6, 2023

Categories
Medical Economics Physician Finances

Impact of the 2024 Medicare Physician Fee Schedule

The final 2024 Medicare Physician Fee Schedule was published yesterday in the Federal Register. The fee schedule will impact different specialties differently and as usual, there were some winners and some losers but mostly losers – all physicians will see a reduction in their total Medicare reimbursement. The entire fee schedule is a 1,230 page document. Here are some of the key take-aways.

Summary Points:

  • The conversion factor will drop by 3.4% to $32.74 per RVU
  • Primary care physicians will get a supplement to outpatient E/M codes by using CPT code G2211
  • Telemedicine did not get cut
  • Different specialties will see different changes to their Medicare payments ranging from +3% to -4%
  • Caregiver training will now be covered by Medicare
  • There is better clarification of whether a physician or advance practice provider should submit a bill for split/shared encounters
  • Medicare will provide a $38.55 supplement for 4 different vaccines when given in a patient’s home

 

Overall lower reimbursement

The single most important item that affects how much physicians get paid is the annual conversion factor. This is the amount that Medicare pays physicians per RVU. In brief, each service or procedure performed by a physician is assigned a number of RVUs (Relative Value Units) that correspond with the complexity and amount of time it takes to perform that serve or procedure. There are 3 subcomponents of the RVU: a work RVU (physician effort), an expense RVU (overhead expense to perform that service or procedure), and a malpractice RVU (cost of malpractice insurance to perform that service or procedure). For example, a level 4 outpatient visit for a new patient is worth a total RVU of 5.44 (2.60 work RVU + 2.61 expense RVU + 0.23 malpractice RVU).

Every year, Medicare adjusts the conversion factor. Because Medicare is mandated to be budget-neutral, in most years Medicare reduces the conversion factor since there is not enough money to increase physician reimbursement while expanding Medicare coverage for new areas of spending. For 2024, Medicare will again lower the conversion factor, this time to $32.74, which is a decrease from 2023’s conversion factor of $33.89, 2022’s conversion factor of $34.61 and 2021’s conversion factor of $34.89. Thus, over the past 3 years, Medicare is has reduced physicians’ pay by 6.2%. During that same time, inflation has risen by 17.62%. To put these numbers in perspective, in 2021, an RVU could buy 9.8 gallons of milk but in 2024, an RVU will only buy 7.8 gallons of milk. This means that the purchasing power of 1 RVU has fallen by 20% since January 2021.

Given this rather enormous drop in the purchasing power of an RVU over the past 3 years, private practice physicians have few options to prevent lower income: spend fewer minutes with each patient or work more hours. Hospital-employed physicians require greater subsidy per physician from the hospital in order to overcome both inflation and the reduction in income generated by Medicare payments to the physicians.

Primary care got a boost

Primary care physicians have to do a lot of work behind the scenes to coordinate care among various specialists, fill out patient paperwork, negotiate with insurance companies for prior authorizations, answer phone calls, and respond to EMR patient portal questions. This additional work has not been compensated in the past. New for 2024 is an add-on CPT code, G2211, that accounts for this extra work performed by primary care practitioners after the patient leaves the office. It can be added onto most primary care office visit CPT codes, thus increasing Medicare payment for primary care services. Medicare estimates that it will eventually be used for 54% of all outpatient office visits that are billed using E/M codes. G2211 will be worth 0.33 RVUs (about $10.91).

Telemedicine did not get cut

The COVID pandemic resulted in Medicare loosening restrictions on telemedicine by allowing most outpatient E/M services to be paid when performed using telemedicine. Prior to the pandemic, telemedicine could only be performed in limited situations, such as when the patient lived in an isolated remote region of the country. During the pandemic, patients and physicians all throughout the country found that telemedicine was convenient, efficient, and in many situations just as effective as in-person office visits. In short, Americans liked telemedicine. As the pandemic has been winding down, there was fear that Medicare would revert to previous telemedicine restrictions, making telemedicine inaccessible to most patients and physicians. For 2024, Medicare has decided to extend the telemedicine waivers and will continue to pay for telemedicine through the end of 2024.

To bill for a telemedicine encounter, there must be both an audio and a video connection between the patient and the physician. This has been problematic for patients who lack high-bandwidth internet connections or lack video cameras on their computers or cell phones. In these situations, the encounter is generally converted to an audio-only telehealth encounter – essentially a phone call. In the past, Medicare would not pay for these phone calls but during the pandemic, Medicare did pay for phone calls when they were done as a telehealth encounter that substituted for an in-person office visit. For 2024, Medicare will continue to pay for audio-only telehealth encounters.

Prior to the COVID pandemic, telemedicine was difficult to perform in teaching settings since the resident and physician needed to be in the same physical location. For 2024, Medicare will permit the resident and the attending physician to be connected by video conferencing during a telemedicine encounter, thus permitting them to be in different locations.

Medicare had originally proposed that if a physician performed a telemedicine encounter from their home (rather than the office), that their home address would need to be registered on Medicare enrollment and billing forms. Presumably this would also apply to telemedicine encounters performed by a physician located in a hotel room, AirBNB, or family member’s home. An implication of this was that all of these various addresses would then need to also be approved by malpractice insurance companies as “medical practice locations”. This would place an enormous burden on physicians and practice administrators by adding a huge volume of paperwork to be completed anytime a physician performed a telemedicine encounter from any location other than their regular medical office. The good news is that Medicare decided to NOT make this requirement for 2024. Instead, when a physician performs a telemedicine encounter from their home, they can use their regular office as the site of service for billing purposes.

Changes in reimbursement for specialists

Every year, Medicare tinkers with the amount that it pays for any given service or procedure. 2024 is no exception and as a result, the RVUs for some services and procedures went up and for others, went down. Because of the budgetary net neutrality requirement, an increase in RVUs for one service must be accompanied by an equivalent decrease in RVUs for another service. The result of this is that some specialties will see an increase in their total annual Medicare allowable charges and other specialties will see a decrease in their allowable charges. Medicare estimates the impact of the 2024 Physician Fee Schedule on various specialties on page 79,468 of the Federal Register. The table below shows these estimates for selected physician specialties.

This table lists the charges by specialty, not the actual reimbursement. The change in charges ranges from +3% (endocrinology and family practice) to -4% (interventional radiology). When added all together, the charges have to total zero due to net neutrality requirements. The effect of the reduction in the conversion factor is on top of any changes to charges. Because the conversion factor will fall by 3.4% ($33.89 to $32.74), all specialities will actually see a drop in reimbursement. To see the actual estimated effect on Medicare reimbursement for any specialty, subtract 3.4% from the percentages in the table above.

New CPT codes

The American Medical Association creates CPT codes and then Medicare decides which codes will be reimbursed and the amount of RVUs assigned to each new CPT code. For 2024, the AMA announced that there will be 230 new CPT codes, 49 deleted CPT codes, and 70 revised CPT codes. This brings the total number of CPT codes to 11,163. It can take a while for a newly created CPT code to work its way through the RVU assignment process. The best resource to determine whether a CPT code is currently reimbursed by Medicare is the Medicare Physician Fee Schedule Look-Up Tool on the Medicare website. By entering a CPT, you can find out what the RVUs are for that CPT code and also the dollar amount that it reimburses. The 2024 data has not yet been entered into this on-line look-up tool but should be available in January 2024.

Although commercial health insurance companies tend to pay for the same CPT codes as Medicare, on occasion, a particular insurance company may reimburse for a CPT code that Medicare does not reimburse for. This adds a layer of complexity to the revenue cycle office of any medical practice. By billing for these CPT codes, the revenue cycle department accepts that there will be denials from those insurance carriers that do not reimburse for a particular CPT code. However, no one wants to leave money on the table from the insurance carriers that do cover that CPT code.

Caregiver training services now covered

New for 2024, Medicare will pay for providers to train caregivers (often family members). Although these codes will likely primarily be used by physical, occupational, and speech therapists, other providers (including physicians) can also bill for these services. These CPT codes should be used to support patients with certain diseases or illnesses (e.g., dementia) in carrying out a treatment plan. This can cover a broad range of skills, from assisting with activities of daily living to more complex tasks such as transfers, mobility, communication, and safety practices. These codes should be used when only the caregiver is present and the patient is not present.

  • CPT 97550 – first 30 minutes of caregiver training. It is valued at 1.00 work RVUs.
  • CPT 97551 – each additional 15 minutes of caregiver training. It is valued at 0.54 work RUVs.
  • CPT 97552 – group caregiver training. It is valued at 0.23 work RVUs.

Spit/shared evaluation and management services

Under Medicare, a service can be billed by only one practitioner, and if non-physician practitioners (for example, nurse practitioners) bill for a service, they receive only 85% of the physician rate. Frequently, a nurse practitioner will do an initial assessment and then the physician will follow the NP later to confirm the assessment and finalize management recommendations. In the past, it has been controversial about whether the bill for the service should go out under the NP or the physician in these situations when the clinical service is considered “split/shared”. In past years, Medicare has stated that it should be whichever of the two providers were responsible for the “substantive portion” of the visit but did not provide a good definition of substantive portion. For 2024, Medicare has defined “substantive portion” of a split or shared service to mean more than half of the total time spent by the physician and the non-physician practitioner. This should eliminate much of the administrative confusion.

The implication is that when physicians bill for split/shared visits, they should document that they performed the substantive portion in their progress note in case of a billing audit by Medicare carriers. Medicare carriers sometimes differ in their documentation requirements so physicians (or their billing staff) should check with their specific Medicare carrier to learn what chart documentation is sufficient. Most likely, it will be something along the lines of: “I personally performed more than 50% of the total time required for this split/shared visit in conjunction with the advance practice provider“. In other words, just one more lengthly phrase to clutter up progress notes in patient medical records.

Vaccinations given in a patient’s home

As a pulmonologist, I have personally given many influenza vaccinations to patients on mechanical ventilators during home visits. I have also given many flu shots to patients during home hospice visits. Those vaccinations were reimbursed at the same rate as if they were given in a physician office. In 2021, Medicare approved paying providers $35.50 extra to give COVID vaccinations in a patient’s home, over and above the usual charge for the vaccinations. This was done to encourage widespread use of the COVID vaccines, particularly in vulnerable patients who were confined to their home due to chronic disease.

For 2024, Medicare will continue to pay the supplemental reimbursement for COVID vaccinations given in a patient’s home and will also expand the list of vaccines that are eligible for this supplement to include pneumococcal pneumonia, influenza, and hepatitis B vaccines. This supplemental payment for 2024 will be $38.55 and will be added to the usual Medicare Part B payment of $32.57 for influenza, pneumococcal, and hepatitis B vaccinations and $43.43 for COVID vaccinations.

It will be harder to maintain a private practice

Over the past decade, it has become increasingly difficult for physicians to fund their salary from billing for professional services alone. Because such a large percentage of physician revenue comes from Medicare, the changes to the Medicare Physician Fee Schedule have played an out-sized role in the inability of physicians to rely on their billings alone. Currently, 33.4% of physician professional billing revenue in the United States comes from Medicare. Medicaid accounts for an additional 8.5%, private health insurance accounts for 38.4%, and out-of-pocket payments account for 7.6%. The remaining 12.2% is from other federal health programs such as the Department of Veterans Affairs, the Department of Defense, the Indian Health Service, and CHIP. The changes that Medicare makes to the annual Physician Fee Schedule are generally also made by other payers, especially Medicaid and the other federal health programs.

When adjusted for inflation, over the past 22 years there has been a 26% decline in Medicare payments to physicians During those same 22 years, there has been a 47% increase in medical practice expense. This reduction in physician income from professional billing coupled with this increase in overhead office expense has led to most physicians now being hospital-employed rather than in a private practice. As hospital-employees, physicians can receive monetary subsidies from the hospital in order to maintain salaries that cannot be supported by professional revenue alone.

Due to inflation during 2022 and 2023, we have seen many unions win contracts with double-digit wage increases for union workers whereas Medicare is reducing payment to physicians for clinical services. This further reduction in physician payments by Medicare in 2024 is likely to push even more physicians out of private practice and into hospital-employed models as private practice becomes increasingly unsustainable.

November 17, 2023

Categories
Hospital Finances Physician Finances

How Should Physicians Negotiate With The Hospital?

A reader recently emailed me to ask how his hospitalist group should negotiate with the hospital to get paid to do extra shifts. It turns out that this is a great question and one that applies to any physician group that provides shift-work care: emergency medicine physicians, anesthesiologists, intensivists, etc.

There are many situations where physicians could be asked to work extra shifts: unexpected inpatient census surges, resignation or retirement of other physicians, maternity or paternity leave, jury duty, illness or injury, FMLA leave, etc. In a private group practice, the physician partners generally just distribute the extra work among each other and pay themselves accordingly. However, for hospital-employed physicians, there is usually a physician contract dictating the expected number of shifts each physician will work each month.

The COVID pandemic put a new wrinkle in work expectations for hospital-employed physicians. Hospitals faced loss of income from cancelation of lucrative elective surgical procedures and diagnostic tests. The hospitals had no money to pay for extra shifts. In addition, most hospitalists, intensivists, and ER physicians felt a moral obligation to work extra shifts to cover the surge in COVID admissions, even if it meant little or no extra pay. But the COVID pandemic is now receding and physicians need to recalibrate expectations for compensation for extra shifts worked. Each hospital is a little different and there are several variables that will affect your best course of action.

This post is directed toward hospitalists who are asked to work extra shifts but could equally apply to any other physician specialty that is employed on a shift-work basis. In preparing to approach the hospital administration about getting paid for extra shifts, there are a number of considerations that you need to think about.

Are there multiple hospitalist groups? If so, the hospital could play the groups against each other so it would be important to have a unified approach to the compensation issue around extra shifts.

Are you hospital-employed or employed by an independent group that then contracts with the hospital? This is essentially who writes your paycheck. If you work for a separate, independent group, then the best approach is to have the group’s CEO, manager, or attorney deal with the hospital executive director or hospital CEO. If you are hospital-employed, then it is usually up to the lead physician to do the negotiation.

When in the calendar year are the contracts up for renewal? If it is January 1st, then insist on including extra compensation for extra shifts as part of the written contract. If it is later in the year, then you’ll have to decide whether to negotiate an addendum to your current contracts or whether to wait until the next contract cycle.

When does the hospital do its budget for the next fiscal year? Most academic hospitals use July 1st to correspond with the academic year and the University’s annual budget but private hospitals may have their budget cycle beginning on January 1st or some other time of the year. It is much easier for hospital administrative leaders to include a line item on the budget for anticipated overtime expenses. If you try to negotiate after the hospital budget is completed, then the administrative leaders would need to use money in their discretionary/emergency funds to pay for it and the hospital leadership will usually be less open to doing this since they get requests from all directions for that money on an almost daily basis

What do the competing hospitals do? Find out what other regional hospitals offer their hospitalists for doing extra shifts. This information often has the greatest impact on how receptive the hospital administration is to paying for extra shifts. Hospital administrators love benchmarks so find compensation benchmarks wherever you can.

How willing/able are you to walk away. This depends on the size of your geographic region – if there are a lot of local hospitals and hospitalists are in high demand, then you have greater negotiation power, particularly if those other hospitals are offering richer contracts. See if other regional hospitals have posted job descriptions for open hospitalist positions that includes payment for extra shifts – presenting the hospital administration with these kind of documents can be pretty persuasive.

Can you re-structure your shifts to make doing extra shifts more palatable? Options could include having some of the day shift hospitalists leave when they get their work done, rather than waiting until a defined shift change-over time (such as 6:00 or 7:00 PM). To do this, you have to have 1 or more hospitalists stay until check out time to cover admissions, inpatient calls, etc. This can have the impact of then having short and long daytime shifts and you can use the hours saved during the short shifts to apply to extra shifts. This is entirely dependent on the preferences of the hospitalists – for many years, we had 2 hospitalist groups – one group wanted to stick with a set 12-hour shift model and get payment for extra shifts required for census surges. The other group wanted to allow some of the hospitalists to leave once their work was done in the afternoon, allowing those hospitalists to get home in time for their kids getting off school and daycare; these hospitalists worked more shifts per month but the average shift was shorter. Also, if you have 2 or more hospitalists covering night shifts, is it possible to convert one (or more) of them into a shorter swing shift – in most hospitals, the majority of the nighttime ER admissions come between 6 PM and midnight so it may be possible to use hours saved by shortening the shifts to use toward extra shifts.

Do you need to get paid to do extra shifts or do you need another hospitalist? If you are dealing with one of your hospitalists being out for 6 months on FMLA, it may make more sense to bring in a locum tenens for 6 months rather than spread the work out among the rest of the hospitalists. If the hospital census is growing, maybe you would be better off hiring a part-time hospitalist. One of our hospitalist groups had several “1099 physicians” who were on our regular medical staff but were independent contractors who the group could ask to do shifts here and there when needed and were then paid per shift worked, rather than a fixed annual salary (thus getting an IRS 1099 form rather than a W-2 form at the end of the year). The hospital administration is likely used to using “traveler nurses” to supplement the nursing staff so the concept of 1099 physicians will not be foreign to them.

How does the hospital deal with extra shifts for other physicians, nurses, and pharmacists? If these hospital-employed professionals get paid for doing extra shifts during patient census surges, then use this as a bargaining point to have a similar arrangement for the hospitalists. Also, how does the hospital deal with other hospital-employed physicians who do shift work (for example, anesthesiologists and ER doctors)? The hospital will likely want to have consistency so if they are already paying ER physicians who do extra shifts, then you can use this to justify your request.

Be sure you know what you are asking for. How much are you asking to get paid for working extra shifts? For example, if the original expectation is that the hospitalists work 15 twelve-hour shifts each month with a compensation of $325,000 per year, that works out to $1,800 per shift.  So, will you ask for $1,800 per extra shift worked or ask for time and a half at $2,700 per extra shift worked? Will you want more per shift for undesirable shifts such as night shifts and holidays?

When possible, make extra shift voluntary. Some physicians value money more than time and others value time more than money. Mandating extra shifts can be viewed as punitive whereas monetarily incentivizing extra shifts can be viewed as an employment perk by physicians looking to increase their income by internally moonlighting. At our hospital, we had some hospitalists who were happy to get paid to work several extra shifts per month and some physicians who did not want to work extra shifts, no matter how much extra they would get paid.

How does the hospital manage physician professional income? Know how much money your group brings in from professional billing  – few (if any) hospitalists can cover their salary by professional billing alone and so most (or all) require supplemental monetary support from the hospital. Know how much your hospitalists bring in per day shift and per night shift, particularly if the hospital is doing the billing for your doctors and the professional revenue is being routed through the hospital’s finance department. These data will dictate how much you will ask the hospital to pay for extra shifts. If extra shifts are required due to an unexpected inpatient census surge, then there will be additional revenue from physician billing during those shifts and this will offset the amount that the hospital would be asked to compensate physicians who work those shifts. On the other hand, if the extra shifts are due to a hospitalist being out on maternity leave, then the anticipated revenue from physician professional billing would already have been budgeted for and the hospital would need to provide more for physicians who work the extra shifts.

Meet with the right people. This requires you to know who in your hospital administration has the authority to make the decision. This is usually a hospital chief operating officer but could be the hospital CEO. Many physicians think that they need to approach the chief financial officer but the CFO usually just passes those requests to someone else, like the CEO. The titles vary from hospital to hospital so schedule a meeting with the person who can actually respond to your request.

Data, data, data. Go into this meeting armed with data about how many extra shifts are being done per month or per year, how many hours your hospitalists are working, etc. It is useful to have a benchmark for this, such as the annual MGMA physician compensation report that lists the average hours per week hospitalists work.

Beware of becoming a clock-puncher. Physicians have historically been considered professionals when it comes to employment models. That means that their workday ended when they got their work done, rather than at some specified hour of the day. On the other hand, hourly workers clock in and clock out, getting paid for the number of hours that they work per day. Physicians who work shifts fall into a gray zone between these. The danger of too rigidly demanding payment for extra hours worked is that you run the risk of ceding autonomy to the hospital administration. The hospital CEO does not punch in and out of a time clock at work and if the CEO considers you to be employed in a professional model, then the two of you can be on an equal footing in a negotiation. On the other hand, if the CEO considers you to be an hourly worker, then the CEO owns you.

Make the right kind of appeal. Making demands and threats to the hospital administration usually gets their defenses up and makes them resistant to monetary requests. It is better to appeal to their humanity and to preservation of hospital quality. For example, employee burnout is an existential treat to hospitals so consider opening your meeting with the hospital administrative director with something like “We’re really concerned about some of our hospitalists who are showing signs of physician burnout due to the extra shifts that they are required to do and we’re worried that it will affect their performance and affect patient quality of care. We need some help figuring out a way to address physician burnout.” If you’re lucky, the hospital administration will offer extra compensation and think that it was their idea (rather than yours).

Extra payment for shifts done to cover hospitalists who are out due to FMLA or sickness is tricky. If the hospital views the hospitalist group as an independent business entity, then they will view their deal is with the group to provide coverage for a specific number of shifts per month and it is up to the group to figure out how to cover those shifts when a hospitalist is out on maternity leave, illness, or injury. If that is the case, then the group needs to anticipate the average amount of FMLA and sick time per year and build that into the annual contract as a cost of doing business. If the hospitalists are hospital-employed, then you have more power to negotiate FMLA/sick time coverage since the hospital is the “business owner” of the hospitalists. Your hospital likely does not require its nurses to do extra uncompensated shifts when one of the nurses is out on FMLA and you can use that as a point in your favor when meeting with administrative leaders.

Most physicians are uncomfortable asking for additional compensation; we would rather ask for additional patient care resources, such as additional nurse practitioners, a new operating room, or a new MRI machine. Many physicians go through their entire career without ever asking someone for a raise. Consequently, negotiating with the hospital for compensation for extra shifts worked can feel foreign. The key to overcoming this is preparation and the considerations above will help you to be prepared.

November 6, 2023

Categories
Physician Finances Physician Retirement Planning

When Is The Best Time To Rebalance Your Investment Portfolio?

An essential element of investment portfolio health is periodic rebalancing. This means evaluating your current mix of stocks, bonds, cash, and real estate investments, then selling and buying these various components to ensure that the actual proportions are the same as your desired proportions. For example, let’s say you want a portfolio that is 60% stocks and 40% bonds. If the stock market falls and you find yourself with 55% stocks and 45% bonds then you sell some bonds and buy some stocks to rebalance to the 60/40 mix. But how often should you rebalance and is there a best time of the year to rebalance? By using a little strategy in deciding when to rebalance, you can increase your overall investment returns.

Components of a diversified investment portfolio

The simplest way to think of portfolio diversification is stocks and bonds. As a general rule, when a person’s investment horizon is long, that person should have a higher percentage of stocks compared to bonds in their portfolio. On the other hand, when a person’s investment horizon is short, that person should have a  higher percentage of bonds compared to stocks in their portfolio. Consequently, a 25-year old who is 40 years away from retirement should be primarily invested in stocks. A 65-year old who is ready to retire should have a higher percentage of bonds and a lower percentage of stocks in their investment portfolio.

In addition to one’s investment horizon, one’s willingness to take investment risk also affects the stock:bond ratio in a portfolio. For any given investment horizon, a higher risk portfolio will have a greater percentage of stocks than a lower risk portfolio. Because of this, a higher risk portfolio will have a greater chance of larger long-term returns but also has a greater chance of short-term losses. Investment anxiety is one way of determining investment risk. For example, if you lose sleep every time your 401(k) falls in value, then you should take a lower risk approach to investing. On the other hand, if the ups and downs of the stock market does not bother you, you can adopt a higher risk approach to investing. Life expectancy also affects investment portfolio risk. For example, a person in excellent health who anticipates living to an old age can afford to have a higher risk portfolio since their investment horizon is quite long, even at the age of retirement. Having a pension serves as a buffer in the event of short-term losses, therefore, a person with a sizable pension can afford to have a higher risk portfolio. If a person’s anticipated monthly income from their retirement portfolio is considerably higher than their monthly basic living expenses, then that person can afford to not take money out of retirement investments in years that the market has fallen and thus that person can also afford to have a higher risk investment portfolio.

By combining one’s investment horizon (i.e., age) with one’s willingness to accept investment risk, an individualized stock:bond ratio for their retirement portfolio can be created and might look something like this:

Merely looking at the ratio of stocks to bonds is an over-simplification of investment diversification. A better way to diversify is to subdivide stock and bond investments into U.S. versus foreign and to add a real estate component. This results in 6 categories of investment components:

  1. Cash
  2. U.S. stocks
  3. Foreign stocks
  4. U.S. bonds
  5. Foreign bonds
  6. Real estate

Cash is any account that you can readily access for discretionary or emergency spending. Most people should have a minimum of 3 months and preferably 6 months of living expenses held in cash. Cash accounts include checking, savings, and money market accounts. Some people put certificates of deposit in the cash category but this can be risky. A 12-month CD results in money being tied up for 12 months before you can access it. This is fine for money you are planning to use for a down payment on a house you plan to buy a year from now but is inaccessible if you lose your job and need to buy groceries next month.

Stocks can be divided into those from U.S. companies and those from foreign companies. The difference between them can be confusing. For example, some foreign companies are traded on the New York Stock Exchange and many U.S. companies have a global presence by generating revenue from sales of products in other countries. Most mutual funds will specify whether their component stocks are from U.S. companies or foreign companies. So, for example, an S&P 500 index fund consists of 500 U.S. companies whereas a European index fund will consist of only European companies. However, the terminology can be confusing because a “global”, “international”, or “all-world” index fund may or may not include U.S. companies so it is important to understand the make-up of any given mutual fund.

Bonds can be divided into U.S. versus foreign but can also be divided into government bonds versus corporate bonds. As a general rule, corporate bonds have greater risk but higher potential returns than government bonds. Municipal government bonds are often tax-free whereas returns on U.S. treasury bonds are subject to tax.

Real estate can be an investment property that you personally own but most investors do not buy individual properties. Instead, they purchase REITs (real estate investment trusts) that are sort of like mutual funds for real estate. The REIT will own multiple properties (typically office buildings, hotels, apartment buildings, and shopping centers). The investor then buys shares of that REIT, just like they would buy shares of a stock mutual fund consisting of stocks from multiple companies.

Because the U.S. economy has historically out-performed most other nations’ economies and because the U.S. economy (and government) has also been more stable than most other nations’ economies, it is prudent to have a higher percentage of one’s investments in U.S. companies than in foreign companies. A typical tactic for stocks in a portfolio would be to maintain a ratio of 60% U.S. stocks and 40% foreign stocks. A typical tactic for bonds in a portfolio would be to maintain a ratio of 70% U.S. bonds and 30% foreign bonds. When it comes to risk and potential returns, REITs tend to fall in-between stocks and bonds. Therefore, it would be prudent to maintain a small percentage of one’s investment portfolio in real estate, for example, 5% of the total portfolio.

All of this can be complicated, so many people just purchase an “all-in-one” mutual fund that combines U.S. and foreign stocks and bonds in ratios depending on one’s investment horizon. These will sometimes be labeled as “Target Retirement 2045” for a person anticipating retiring in about the year 2045, for example. The following is the breakdown of Vanguard’s all-in-one mutual funds:

These all-in-one funds are a good choice for the investor who lacks the time, knowledge, or confidence to manage their own investment portfolio. An advantage of these funds is that the investment company does all of the rebalancing in order to maintain the desired ratio of stocks:bonds and then adjusts that desired ratio each year as a person gets older and their investment horizon shortens. However, these funds do not take into account the individual investor’s willingness or ability to assume risk and simply rely on investment horizon. Furthermore, the all-in-one funds generally do not include any real estate holdings, such as an REIT.

How often should you rebalance?

The largest investors on the planet are pension funds that can have billions or even trillions of dollars of invested assets. Although there is a lot of variation, most of pension funds rebalance monthly or quarterly. But for the individual investor, this is probably too frequent. For most of us, rebalancing once or twice a year is sufficient. The danger of rebalancing too frequently is that you can over-respond to short-term fluctuations in the market, resulting in a lot of buying and selling of investments. This can in turn result in a lot of investment transaction fees and a lot of capital gains. Those capital gains get taxed at either short-term or long-term capital gains tax rates. Short-term capital gains are on those investments that you sell less than 12 months after you purchased them; these are taxed at your regular federal income tax rate. Long-term capital gains are on those investments that you held for more than 12 months before selling and are taxed based on annual income levels at either 0% (for very low income investors), 20% (for very high income investors), or 15% (for most of us). As a general rule, your long-term capital gains tax rate will be lower than your short-term capital gains tax rate. The effect of this is that by rebalancing your non-retirement investment portfolio too frequently, you end up paying more in income taxes.

The danger of rebalancing too infrequently is that your investment portfolio can become too conservative (resulting in diminished long-term returns) or too aggressive (resulting in an excessively high-risk portfolio). Therefore, the timing of investment portfolio rebalancing is the intersection of patience and prudence.

I recommend doing a comprehensive rebalancing once a year and then doing an investment check-up every 3 or 6 months. During the check-up, if you find that your portfolio has become unexpectedly and significantly out of balance, then go ahead and rebalance at that time. What constitutes “significantly” out of balance is open for debate but I recommend using a 5% rule: if the percentage of one category of investments is off by more than 5 percentage points from your desired percentage, then it is significantly out of balance.

Take taxes into account

Investments can be grouped into three different categories: (1) regular investments, (2) tax-deferred retirement investments, and (3) Roth retirement investments. Regular investments are those that you purchase with your cash and you will pay capital gains taxes on them when you sell them. In addition, you will pay regular income tax on any interest or ordinary dividends that you earn from those investments each year.  You will pay capital gains tax on any qualified dividends you get from an investment each year. If you own a stock for less than 60 days before the dividend date, then those dividends are considered ordinary and if you own a stock for more than 60 days before the dividend date, then those dividends are considered qualified. Tax-deferred investments include the 401(k), 403(b), 457, and traditional IRA. You pay regular income tax on any withdrawals when you are retired. There is no additional annual tax on interest and dividends earned from those investments but you will pay regular income tax on money generated from interest and dividends when you withdraw that money in retirement. Roth retirement investments include Roth IRAs, Roth 401(k)s, Roth 403(b)s, and Roth 457s. For these investments, you pay regular income tax in the year that you originally earn the money and deposit it in the Roth account; that money then grows tax-free until you take withdrawals in retirement. There is no tax on interest, dividends, or withdrawals.

The investment horizon differs for each of these three categories of investments. In general, Roth accounts have the longest investment horizon because it is prudent to wait until you turn 72 years old to begin withdrawals from Roth accounts. This is because required minimum distributions from tax-deferred retirement accounts (such as a 401k) begin at age 72 so it is usually to one’s advantage to begin to spend down those tax-deferred retirement accounts prior to age 72. Roth accounts are not subject to required minimum distributions. Regular investments typically have the shortest investment horizon because these are often used for non-retirement purchases, such as a house, college education, etc. Because of these differing investment horizons, it is wise to have stocks comprise most or all of one’s Roth accounts, a mix of stocks and bonds in one’s tax-deferred retirement accounts, and a higher percentage of bonds and cash in one’s regular investments.

The differences in how these different investments are taxed has implications for portfolio rebalancing. Most people will have their highest annual taxable income during their middle or late working years (i.e., in their 40’s, 50’s, and 60’s). This equates to having a higher marginal income tax rate during those years. Because you will be taxed at your regular income tax rate for any short-term capital gains, you will end up paying more in income taxes if you rebalance using regular investments during those peak earning years. Instead, it may be wise to rebalance using investments in your tax-deferred retirement account during those working years when you have a high income.

The exception to this is when you can take advantage of tax-loss harvesting. For example, say you find that your stock:bond ratio is 65:35 but your desired ratio is 60% stock and 40% bonds. So, you decide to sell some of your stock investments and buy some more bond investments. If one of your stocks has lost money since you originally purchased it, you can sell it for a loss. Tax-loss harvesting works by off-setting up to $3,000 in taxable capital gains each year with those losses. If your losses from sales of securities are greater than your capital gains from the sale of other securities for the year, then you can also use tax-loss harvesting to reduce your annual taxable income by up to $3,000. As a result, you can reduce your federal income tax in two ways: you have less income subject to tax and because of that your marginal income tax rate falls. But remember that tax-loss harvesting only applies to regular investments and not to the sale of securities within tax-deferred retirements or Roth accounts.

Rebalancing checklist

Taking all of these various factors into consideration, late December is an ideal time for most people to do a comprehensive investment rebalancing. By then, you should have a good idea of what your annual taxable income will be for that year and you can determine whether tax-loss harvesting will be beneficial. Early July is a good time to do a 6-month investment check-up. The following are considerations to take into account when rebalancing:

  • What is the dividend calendar? Some funds pay dividends once a month but others pay dividends once a quarter or even less often. Many funds pay dividends in mid-December. Do not rebalance by selling an investment just before dividends are paid or you could lose out on those dividends.
  • How long have you held an investment? If you rebalance by selling an investment that you have held for less than 12 months, you could end up paying the higher short-term capital gains tax rather than the lower long-term capital gains tax.
  • Is your emergency fund sufficient? Every year, our basic living expenses increase due to inflation. But a new child adds considerably to those monthly expenses as does a new house with a larger mortgage or a new car loan. A marriage may increase or decrease the combined emergency fund needs of the two spouses, depending on individual circumstances. Reassess your current basic expenses to ensure that you have 3 to 6 months worth of those expenses held in cash.
  • Do you have new non-retirement expenses in the future? Maybe you are planning on buying a more expensive new house in a year or two. Or maybe a new car. Or maybe you need a knee replacement surgery. If you need money for these types of expenses in the next 2-3 years, then the money should be in a safe investment such as a certificate of deposit or a money market. If you anticipate needing money for an expense 3-5 years from now, then some of that money could also be in bonds (but not in stocks).
  • Have you lost money on some investment securities? If so, you may be able to take advantage of tax-loss harvesting.
  • Has your investment horizon changed? Did you change your mind about when you or your spouse plan to retire, either earlier or later?
  • Has your life expectancy changed? No one knows exactly how long they will live but in the past year, if you were diagnosed with cancer or developed congestive heart failure, then your life expectancy has likely decreased so you should adopt a lower risk investment strategy. On the other hand, if you successfully quit smoking, lost excess weight, and committed to a regular exercise program, then your life expectancy likely increased so you can adopt a higher risk investment strategy.
  • Did your pension status change? If you change jobs so that you are no longer eligible for a pension, then you should adopt a lower risk investment portfolio. On the other hand, if you just got a job at a Veterans Administration hospital and will now be eligible for a federal pension, then you can adopt a higher risk investment portfolio.
  • Did the total amount of your investments grow significantly? In retirement, the closer your annual income is to your annual basic living expenses, the less risk you can afford to take with your investments. This is because if the market falls, then you will have to deplete your retirement account faster than you anticipated in order to pay your living expenses. On the other hand, if your annual income in retirement is much higher than your basic living expenses, then you can reduce discretionary spending during years that the market falls and avoid depleting your retirement account. Consequently, if your retirement account has grown significantly in the past year, you may be able to adopt a higher risk investment portfolio. This is why the rich get richer – they can afford to.

Rebalancing is security

It is often said that money can’t buy you happiness. Although this is true, it can help you avoid unhappiness, which in not exactly the same thing. Annual or semi-annual investment portfolio rebalancing can increase your long-term investment returns. This can help to ensure that you have the money you need for a new home purchase, a wedding, or the life you dreamed about in retirement. But even more importantly, rebalancing forces you to critically evaluate your investment portfolio and this can give you confidence in your future and can give you a sense of control over your future. The real value of rebalancing is more than just the money.

June 16, 2023

Categories
Physician Finances

You Should Try To Pay More Taxes In 2023 And 2024 – Here’s Why

This month, public attention is focused on the banking crises, the Federal debt ceiling, and inflation. But people investing for the long-term should be thinking about taxes. Specifically, how paying more in taxes this year and next will save a lot more in taxes in the future.

We are currently living in an era of historically low federal income tax rates. The Tax Cuts and Jobs Act of 2017 had major effects on federal income taxes for nearly all Americans beginning in 2018. Specific provisions of the law included:

  • Across the board decreases in federal income tax rates
  • An increase in the standard deduction amount
  • Elimination of the personal exemption and reducing the advantages of itemizing deductions, including charitable deductions
  • Limiting deductions for state income taxes, local income taxes, and property taxes paid
  • Limiting the mortgage interest deduction
  • Reducing the number of Americans subject to the alternative minimum income tax

The law was time-limited and expires at the end of 2025. Unless it is renewed or replaced with new legislation, then the federal income tax system will revert to the pre-2018 tax system and this will have a significant impact on most Americans.

The Tax Cuts and Jobs Act of 2017 had the biggest impact on high income families. Taxpayers in the 95th to 99th income percentiles (those with income between about $308,000 and $733,000) received the biggest benefit with an average tax cut of about $11,200 or 3.4% of after-tax income. Although we all love tax cuts, they come with a societal cost and it is estimated that if the law is extended for an additional 10 years, the federal deficit will increase by $3.7 trillion between 2033 and 2042. It is impossible for anyone to predict at this time whether the the law will expire, be renewed, or be replaced. This will depend on the economy, the future federal budget, and which political party controls the legislature and presidency. But for now, there are some steps that you can take today to prevent an enormous surge in your federal income tax in 2026.

Do Roth IRA conversions in 2023, 2024, and 2025.

The best time to do a Roth IRA conversion is when your taxes are lower today than when they will be when you are in retirement. Because it is not possible to predict income tax rates that far in the future, your best bet is to have some money in Roth accounts (Roth IRA and/or Roth 401k) and some money in tax-deferred retirement accounts (401k, 403b, and/or 457). That way, you can selectively take money out of your Roth accounts when tax rates are high in retirement and selectively take money out of tax-deferred accounts when tax rates are lower in retirement. If the Tax Cuts and Job Act of 2017 does expire, then the next three years will be optimal for doing Roth conversions while federal income tax rates are lower. There are two ways to do a Roth conversion. Either convert money already in a traditional IRA (or other tax-deferred retirement account) into a Roth IRA or do a “back-door Roth IRA” by first contributing post-tax money from income this year into a traditional IRA and then immediately converting that money to a Roth IRA. Because any money converted into a Roth IRA is considered taxable income on the year of the conversion, you have to be careful how much you convert from an existing tax-deferred retirement account since the more you convert, the higher your total taxable income will be for that year. As your taxable income increases, so does your marginal income tax rate so you don’t want to convert too much or the increase in this year’s federal and state income taxes could offset the long-term benefit of the Roth conversion. A reasonable strategy is to do smaller Roth conversions in 2023, 2024, and 2025 to avoid an excessively high income tax rate during any one year.

Defer charitable contributions until 2026

The Tax Cuts and Jobs Act of 2017 resulted in charitable deductions no longer being tax deductible for most Americans. Each year, taxpayers can either take the standard deduction or itemize deductions, whichever value is higher. In 2022, the standard deduction was $12,950 for individual filers and $25,900 for joint filers. Most families have less than $25,900 in itemized deductions so most end up taking the standard deduction instead of itemizing. By giving to charity only on every other year or every third year, you can build up the amount of charitable deductions so that your total itemized deductions exceed the amount of the standard deduction. By doing this, you will have a larger total income tax deduction. If your annual contributions to charity are typically in the $10,000 – $15,000 range, then you would be best off deferring your planned 2023 contributions to charity until January 2024 and then making your planned 2025 contributions to charity early in December 2024. The result is that you would have little or no charitable contributions in 2023 and 2025 but a very large charitable contribution in 2024, thus pushing you over the standard deduction limit for 2024. Without congressional action, in 2026, the standard deduction will revert to the previous values which in 2018 were $6,350 for single filers and $12,700 for joint filers at which time, many Americans may find it more advantageous to itemize deductions each year rather than take the standard deduction. If the Tax Cuts and Jobs Act of 2017 does expire, then it may be more advantageous to defer 2025 (and potentially even 2023) charitable contributions until January 2026.

Pay your property taxes January 2026

The Tax Cuts and Jobs Act of 2017 put a cap on the amount of state, local, and property taxes that can be deducted from your federal income taxes. Prior to 2018, the amount that could be deducted was unlimited but after the law, the maximum amount of state, local, and property taxes that is deductible is $10,000. This amount is considered one of the itemized deductions so if your itemized deductions are less than $25,900 (filing jointly), then you must take the standard deduction and cannot deduct your state, local and property taxes. In most communities, property taxes are paid semiannually or annually in arrears. That means that you pay your 2022 property taxes in 2023, for example. The property tax bills are usually sent out in December and then you have until the end of January to pay that tax. If the Tax Cuts and Jobs Act of 2017 does end up expiring, then do not pay your property tax in December 2025 when you get your tax bill – instead wait until January 2026 when you will be able to apply your property taxes paid to your itemized deductions, thus reducing your 2026 taxable income when the marginal tax rates increase.

Pay your mortgage installment in January 2026

Mortgage interest is also considered to be an itemized deduction.  Most mortgage payments are due on the first of the month. If possible, make your monthly mortgage payment on January 1, 2026 rather than in late December 2025. This will add to your itemized deduction in 2026 when you will get a better tax benefit from itemized deductions. If you plan to cluster your 2023, 2024, and 2025 charitable deductions all in 2024 as described in the earlier section of this post, then use this same strategy for your December 2023 mortgage payment and then also pay your first mortgage payment in 2025 (due on the first of January 2025) a few days early in December 2024. This will maximize your itemized deductions in 2024 thus allowing you to have a higher amount of itemized deductions than the standard deduction in 2024.

Beware of the alternative minimum tax

Prior to the Tax Cuts and Jobs Act of 2026, the alternative minimum tax (AMT) was a shackle on many taxpayers – more than 50% of people with an income of greater than $200,000 per year had to pay AMT. When a person pays AMT, they no longer use the usual income tax brackets to determine their marginal income tax rate but instead use two brackets: 26% and 28%. This resulted in a much higher total income tax paid under the AMT than under the usual income tax schedule. The AMT was mysterious and had many different variables that together could push you into the AMT. Frequently, taxpayers would not know if they had to pay AMT or the lower usual tax amount until they actually sat down to fill out their federal 1040 form in the spring. For this reason, the AMT was uniformly hated by Americans who had to pay it. The Tax Cuts and Jobs Act of 2017 greatly reduced the number of taxpayers who were susceptible to AMT and this substantially reduced the federal income tax for those people who previously paid AMT. When the law expires in 2026, then if no new legislation is enacted, expect to see many more people paying AMT than pay it today.

The triggers that push you from the usual tax system into the AMT are complex and depend on many different variables. Some of the most important are total taxable income, exercising stock options, mortgage interest paid on a second home, high state income tax amounts, and high local income tax amounts. Fortunately, income tax preparation software (such as Turbotax) will do all of the calculations to determine whether you will be hit by AMT. For many years prior to 2018, I was subject to AMT and it added thousands of dollars to my annual tax bill.

Its not too early to start tax planning now

2026 seems like a long way off but for the long-term investor, particularly one investing for retirement, taking the right tax-related steps over the next two and a half years can save a great deal of money in the long-term. The most important steps are (1) to carefully analyze your financial position to determine if you should do Roth conversions and (2) to determine if you would be better off clustering two or three years of contributions to charity in a single year. In two years, we should have a reasonably good idea how economic and political forces will affect the expiration of the Tax Cuts and Jobs Act of 2017 and whether or not it will be replaced with some other tax legislation. Be watching to determine how that will affect the timing of your 2025 property tax and mortgage payments.

As responsible citizens, we should all pay the full amount of taxes that we owe. But, we should not fall prey to paying more than we legally have to.

May 5, 2023

Categories
Medical Education Physician Finances

Physician Income By Specialty: Does Length Of Residency Determine Compensation?

Physicians earn high incomes but those incomes come at a cost of investing between 7 and 12 years of education and training after undergraduate college. This post will examine the most recent physician compensation report and what it indicates about the relationship between income and the years of training required for each specialty.

Determining average physician incomes by specialty turns out to be a lot more difficult that it would seem. There are many physician compensation surveys and each of them reports compensation a bit differently with the result that it is difficult to accurately know how much the average specialist actually earns per year. Some of the most common surveys include:

  1. AAMC – American Association of Medical Colleges. This annual survey reports physician compensation from 153 U.S. medical schools and > 400 teaching hospitals that serve 124,000 physicians.
  2. MGMA – Medical Group Management Association. This annual reports surveys 3,400 U.S. medical practice administrators that serve 142,000 physicians and advanced practice providers. These group practices are largely mid-sized groups (typically 6 – 50 physicians).
  3. AGMA – American Group Medical Association. This survey represents 380 medical groups from large-sized groups (with > 100 physicians).
  4. Doximity. This survey is of self-reported total compensation from 31,000 full-time U.S. physicians.
  5. Medscape. This survey is of self-reported total compensation from 13,000 U.S. physicians.
  6. Various physician search firms and consultation firms. These are typically of small numbers of physicians and often limited to compensation reports of individual physicians that they have helped with job placement and physician groups that they have consulted with.

I tend to rely mostly on the AAMC and MGMA reports because they sample the largest number of physicians and have stricter methodology regarding what is (and is not) included in total compensation. For academic physicians, the AAMC survey is more comprehensive and generally reports higher incomes for academic physicians than the MGMA survey. For non-academic physicians, the MGMA report provides comprehensive data. For this post, I will use the 2022 MGMA physician compensation report. Total compensation is defined as salary and bonuses as well as physician contributions to retirement plans, health insurance, and life insurance. Notably, the reported compensation does not include employer contributions to retirement plans, health insurance, life insurance, or malpractice insurance.

This is particularly important when comparing academic from non-academic physician compensation since most academic jobs come with lucrative employer contributions. As an example, the Ohio State University contributes about $25,000 per year to their physician faculty member’s State Teacher’s Retirement Plan, life insurance, disability insurance, and health insurance. OSU also pays for medical malpractice insurance – the U.S. national average cost for a critical care physician’s malpractice premium is $20,215 per year. In other words, a typical OSU physician has a total of about $45,000 per year in fringe benefits as an academic physician that they would otherwise likely not have had if they were in a private medical practice. One of the reasons that the MGMA reports that academic physician compensation is much lower than private practice physician compensation is because these employer contributions provided by academic institutions are not included in the total compensation listed in the MGMA reports. If you were to factor in these employer contributions into total compensation, academic physicians’ compensation is closer to that of non-academic physicians.

The MGMA breaks reported compensation into mean, median, 25th percentile, and 75th percentile. For academic physicians, the MGMA additionally breaks down compensation by academic rank: instructor, assistant professor, associate professor, and professor. Other metrics of compensation and productivity are also included such as average total RVUs, average work RVUs, and total compensation per RVU for each specialty. Caution must be exercised when interpreting these data. For example, the mean compensation will include all non-academic physicians in a specialty, regardless of seniority. Physicians in their first years of practice after completion of training are less efficient, less productive, and less highly compensated than physicians in practice for 10, 20, or 30 years. Therefore, a newly-trained physician should not expect to earn the mean or median compensation for a specialty. Conversely, experienced physicians with many years of practice generally earn more than the mean or median. However, for simplicity purposes, this post will focus on the mean total compensation for various specialities for non-academic and academic physicians. The total compensations are summarized in the tables below:

Non-Academic Physician Compensation

This graph illustrates the mean total compensation for non-academic physicians reported by the MGMA in 2022, similar to the table above (to enlarge this graph, click on it to open it in a new window and then click on it again to enlarge). The most highly-compensated specialties were neurosurgery ($947,030), cardiovascular surgery ($829,072), cardiology electrophysiology ($747,947), orthopedic surgery ($715,399), and interventional cardiology ($702,019). At the low end of the compensation spectrum were pediatric specialties: pediatric hospitalist ($237,530), pediatric endocrinology ($239,072), general pediatrics ($252,575), and pediatric infectious disease ($256,364). In fact, of the 9 lowest compensated specialties, all but one (geriatrics) was a pediatric specialty.

Academic Physician Compensation

This graph illustrates the mean total compensation for academic physicians reported by the MGMA in 2022. The most highly-compensated specialties were cardiovascular surgery ($718,802), neurosurgery ($694,605), pediatric surgery ($588,934), thoracic surgery ($581,387), and plastic surgery ($525,215). At the other end of the compensation spectrum were again pediatric specialties: pediatric endocrinology ($184,479), general pediatrics ($189,178), pediatric infectious disease ($201,607), and pediatric hospitalist ($204,661).

In every specialty, academic physician total compensation was lower than non-academic physicians (academic pediatric-internal medicine compensation was not reported). The specialties with the greatest difference between non-academic and academic compensation were cardiology electrophysiology ($293,318), neurosurgery ($252,425), gastroenterology ($244,091), hematology/oncology ($237,720), and orthopedic surgery ($231,973). The large difference between academic and non-academic incomes explains why it has been so difficult for medical schools to keep gastroenterologists and oncologists since they can earn a quarter of a million dollars more per year in private practice. The lure of that much money is just too much for even the most noble of academic teachers and researchers. Specialties with the least difference between non-academic and academic compensation were pediatric hospitalist ($32,869), pediatric nephrology ($44,281), pediatric critical care ($47,283), and pediatric hematology/oncology ($53,152).

Compensation per work RVU

Physician work effort is often measured by the number of RVUs (relative value units) produced. Every physician service and procedure is assigned an RVU value by Medicare and then Medicare pays the physician based on the number of RVUs billed. Currently, Medicare pays $33.89 per RVU. Commercial insurance companies generally pay a higher amount per RVU and Medicaid pays a lower amount per RVU. The RVU is composed of three subunits, the work RVU (wRVU), practice expense RVU, and malpractice RVU. Of these subunits, the wRVU is most commonly used to measure physician productivity. Note that anesthesiology does not use RVUs and anesthesiologist productivity is instead measured by anesthesia units (1 unit = 15 minutes of time).

Physicians who earn a high dollar amount of compensation per wRVU generally require subsidization from hospitals.This is typically done either when the physician performs procedures that are highly lucrative for the hospitals (such as open heart surgery) or when the physician performs a lot of non-compensated work essential to the function of the hospital (such as hospitalists who take night-call). On the other hand, physicians earning a low dollar amount of compensation per wRVU have less (or no) hospital subsidization. These are usually outpatient specialties whose physicians are less often employed by a hospital.

Non-academic physicians with the highest compensation per wRVU are pediatric surgeons ($148/wRVU), pediatric hospitalists ($138/wRVU), pediatric infectious disease ($123/wRVU), neurosurgeons ($113/wRVU), and pediatric hematology/oncology ($112/wRVU). Those specialties with the lowest compensation per wRVU are pediatric/internal medicine ($54/wRVU), endocrinology ($59/wRVU), ophthalmology ($59/wRVU), family medicine ($62/wRVU), and general pediatrics ($62/wRVU).

For academic physicians, the specialties with the highest compensation per wRVU are pediatric hospitalist ($179/wRVU), pediatric surgery ($133/wRVU), internal medicine hospitalist ($123/wRVU), hematology/oncology ($117/wRVU), and infectious disease ($114/wRVU). The high compensation per wRVU for academic infectious disease physicians may reflect the impact of the COVID-19 pandemic when academic infectious disease specialists were called on to perform a great deal of administrative duties (subsidized by hospitals) in addition to their regular clinical duties. Academic physician specialties with the lowest compensation per wRVU are dermatology ($48/wRVU), neonatology ($50/wRVU), pathology ($51/wRVU), radiology ($55/wRVU), and interventional radiology ($55/wRVU). The MGMA survey did not report data for academic pediatric/internal medicine or for pediatric infectious disease.

Compensation per year of residency & fellowship training

Residency and fellowship can be viewed as an investment in a physician’s career. In theory, the longer the period of training, the greater the knowledge and skill of a physician in any given specialty. Residents and fellows do get paid but the average annual income is modest, starting at $61,000 for a first year resident (i.e., an intern) and that amount increases by about $2,500 for each additional year of residency and fellowship. During this time, residents and fellows are also required to start paying back student loans (payments averaging $4,000 per year during residency). As a consequence of residency and fellowship training years, most physicians finally enter the workforce when they are in their 30’s. The total duration of residency varies from the shortest at 3 years (internal medicine, pediatrics, and family medicine) to the longest at 7 years (neurosurgery, pediatric surgery, and interventional radiology). Fellowship training after residency further extends the total duration of training, for example, cardiology electrophysiology requires 8 years of training (3 years internal medicine residency, 3 years cardiology fellowship, and then 2 years cardiac electrophysiology fellowship). Longer residency/fellowship durations also equate to a shorter working career. The general internist with a 3-year residency will typically work 35 years before retiring at age 65 whereas the cardiology electrophysiologist will only work 30 years before retirement at age 65. Thus, the cardiology electrophysiologist sacrifices 5 of their lifetime income-earning years to do fellowship training after their internal medicine residency.

Do more years of residency/fellowship translate to higher incomes? One way to answer that question is to express physician compensation per number of years of training required for that specialty. In a completely free labor market, there would be a direct relationship between income and duration of training: every additional year of training for any given specialty would result in a predictable increase in annual income. In other words, the return on investment in terms of years of training should be constant across all specialties. This turns out to not be the case in reality.

For non-academic physicians, there is a wide variation in compensation per year of training. The specialties with the largest amount of total compensation per year of residency/fellowship are orthopedic surgery ($143,080 per training year), dermatology ($140,439 per training year), cardiovascular surgery ($138,179 per training year), neurosurgery ($135,290 per training year), and emergency medicine ($124,239 per training year). These specialties have a very high return on their investment of training time. At the low end are pediatric endocrinology ($39,845 per training year), pediatric infectious disease ($42,727 per training year), pediatric hematology/oncology ($43,808 per training year), pediatric nephrology ($44,756 per training year), and pediatric hospitalist ($47,506 per training year). These specialties have a low return on investment of training time.

The spread of total compensation per number of years of residency/fellowship training for academic physicians was similar. Specialities with a high compensation per year of training were cardiovascular surgery ($119,800 per training year), emergency medicine ($102,326 per training year), anesthesiology ($101,900 per training year), neurosurgery ($99,229 per training year), and thoracic surgery ($96,898 per training year). Once again, the least compensated per year of training for academic physicians were all pediatric specialties: pediatric endocrinology ($30,747 per training year), pediatric infectious disease ($33,601 per training year), pediatric hematology/oncology ($34,950 per training year), pediatric pulmonary ($35,946 per training year), and pediatric nephrology ($37,376 per training year). The MGMA survey did not report on pediatrics/internal medicine.

Several subspecialties were particularly noteworthy because their total compensation was less than their parent specialties. For example, pediatric hospitalists require 2 additional years of fellowship after completion of a pediatric residency and pediatric endocrinologists require 3 years of fellowship after pediatric residency. However, both non-academic pediatric hospitalists and non-academic pediatric endocrinologists make less money than non-academic general pediatricians who only completed the 3-year pediatric residency. Similarly, to specialize in geriatrics or endocrinology, a physician must first complete a 3-year internal medicine residency followed by a 1-year (geriatrics) or 2-year (endocrinology) fellowship. However, non-academic physicians specializing in geriatrics or endocrinology make less money than non-academic general internists who only completed the 3-year internal medicine residency.

In academic practices, there are even more specialities where subspecialty fellowship results in lower total compensation than the parent specialty. Academic pediatric endocrinologists make less than academic general pediatricians. Academic geriatric, rheumatology, endocrinology, and infectious disease specialists all make less than academic general internists. In these subspecialties, not only does the additional years of fellowship training not result in greater income, but the those physicians are actually financially penalized for their additional years of training by making less money than if they had just stopped after their pediatric or internal medicine residency.

It is noteworthy that there are more factors to consider than just years of training when comparing total compensation between different specialties. Some of the specialties with the highest compensation per year of training are also those with the most grueling on-call schedules, such as cardiovascular surgery, anesthesiology, emergency medicine, and neurosurgery. It is entirely appropriate that the neurosurgeon who has to take trauma call every 4th night for his/her entire life makes a high income. In addition, the cost of medical malpractice insurance premiums varies significantly. The average general internist pays $16,000 per year in malpractice premiums but the average neurosurgeon pays $92,000 per year for malpractice coverage. Once again, it is entirely appropriate that the neurosurgeon has a high income in order to cover the high overhead malpractice insurance expense inherent in that specialty.

What is the solution to these compensation disparities?

In a free labor market, a worker’s income is determined by the supply of workers and the demand for that worker’s services. So, on the surface, it would appear that there is a shortage of heart surgeons and neurosurgeons whereas there is a overabundance of general pediatricians and pediatric endocrinologists. However, American medicine is not a simple free market economy. Hospitals make the most money from procedures and surgeries: the financial margin on a surgery is much greater than the margin on a medical admission. That margin is highest for inpatient surgeries such as cardiovascular surgeries and neurosurgeries. Because of this, hospitals are incentivized to subsidize specialists who perform these high-margin procedures. Furthermore, many of these surgical subspecialists have much more rigorous on-call schedules – a neurosurgeon or interventional cardiologist is much more likely to be called into the hospital in the middle of the night to manage a patient with head trauma or with a myocardial infarction than an endocrinologist or rheumatologist whose practice is largely outpatient and limited to Mondays through Fridays during the daytime. Therefore, in order to provide 24-hour trauma or cardiac care, hospitals must pay these subspecialists substantial on-call pay.

A central problem with physician reimbursement is that it has not kept up with inflation and has, in fact, fallen over the past decades. In 1998, Medicare reimbursement per RVU was $36.69 and 25 years later, in 2023, the reimbursement per RVU had fallen to $33.89. By contrast, if the RVU reimbursement had merely kept up with inflation, then the $36.69 rate in 1998 should be $70.45 today! Physicians have made up for the reduced payments per RVU somewhat by spending less time with each patient in order to see more patients per day but that alone has been insufficient to maintain a constant income. The solution has frequently been for physicians to become employed by hospitals with the hospitals subsidizing their income. This has resulted in physician income becoming untethered from physician work productivity. The effect has been that physician income is increasingly determined by the value of the physician’s specialty to the hospital’s finances more than the physician’s actual patient care work effort.

It has been proposed that the solution would be to pay low-compensation subspecialists more. This would work in a pure free market economy but would not work in our current system of physician reimbursement. Physician services are categorized by CPT codes and then reimbursed by the number of RVUs associated with each of those CPT codes. Non-procedural specialties all use the same CPT codes for the evaluation and management services that they provide. Thus, the endocrinologist or geriatrician bills the exact same CPT codes as the general internist and gets reimbursed the exact same amount per RVU as the general internist. Because of this, the “cognitive” subspecialties of pediatrics and internal medicine (i.e., those without associated procedures) have no chance of generating more RVUs than the general pediatrician or internist. Indeed, the amount of time and effort to see a 10-year old with uncontrolled type 1 diabetes in the pediatric endocrinology office is considerably more than that required to see an otherwise healthy 10-year old with an ear infection in the general pediatrics office, even though the payment is the same for both patients. As a result, for many of these subspecialties, the reward for more years of training is a lower income. Because these pediatric and internal medicine subspecialties do not generate significant margins for hospitals, there is little incentive for hospitals to subsidize them.

It is notable that pediatric subspecialties dominate the low compensation specialties. One of the driving reasons for this is Medicare/Medicaid. Nearly every American over age 65 qualifies for Medicare so older adults are by and large all insured. Children are not eligible for Medicare but are instead covered by CHIP and Medicaid programs (or have no insurance at all!). In most states, Medicaid pays considerably less than Medicare (in Ohio, Medicaid payments for primary care services are only 57% of the Medicare amounts). Consequently, pediatricians of all subspecialties have an inherently worse payer mix than physicians who care for adults. Similarly, pediatric hospitals also have a worse payer mix than hospitals caring for adults.

So, how do we fix this? There are several tactics that can be considered:

  • Increase residency positions in some specialties. This will work only for those highly compensated specialties where there is truly an insufficient supply of physicians for current demands.
  • Re-align RVUs assigned to different procedures and services. The current RVU assignments have been affected by intense lobbying from subspecialty physician organizations and in many cases, the most RVUs have been given to the loudest lobbyists.
  • Increase physician reimbursement for Medicaid and CHIP patients. In an ideal world, a physician would get paid the same for a patient with Medicare, Medicaid, or CHIP. This would help correct the low compensation for pediatric specialties.
  • Increase the RVU conversion factor. The current conversion factor of $33.89 per RVU is too low for the vast majority of physicians to earn a living from professional billings alone with the result that most physicians require hospital subsidization. This has eroded free market effects on physician compensation.
  • Normalize the relation between years of training and income. It is entirely appropriate that the interventional cardiologist who trains for 7 years has a higher income than the general internist who trains for 3 years. But it makes absolutely no sense that the endocrinologist who trains for 5 years makes less than the internist who trains for 3 years.
  • Strategic expansion of advance practice provider utilization. We have to face the reality that income disparities in some specialties will eventually result in fewer physicians entering those specialties. Hospitals should start training nurse practitioners, physician assistants, and pharmacists to perform some of the work done by these specialists. For example, advance practice providers can often effectively replace most of the daily inpatient diabetes management currently done by endocrinologists.
  • Embrace AI. The heart surgeon will not do a coronary artery bypass surgery faster using artificial intelligence but AI may allow the general internist to more efficiently evaluate a patient with chest pain. Similarly, AI may speed up the time required for an infectious disease specialist to come up with a diagnosis based on a patient’s presenting history and lab findings. It can help the endocrinologist select the most effective diabetes treatment based on a patient’s co-morbidities. It can shorten note and order-writing time for patients performing E&M (evaluation and management) services. Artificial intelligence has the greatest potential to improve productivity of physicians in cognitive specialities, which are also the specialties that are the most under-compensated.

The forces that affect physician incomes are complex. But if we do not begin to take corrective action soon, we will find ourselves without endocrinologists, geriatricians, and pediatric endocrinologists in the near future. Because of the structure of American healthcare, we cannot rely on free market forces alone to solve this problem.

April 9, 2023

Categories
Physician Finances

Not All Money Markets Are Insured By The FDIC

The U.S. stock market and U.S. bond market are both down 18% since December 2021. Neither are showing any signs of recovery. On the other hand, money market accounts are doing quite well with rising annual yields. This has caused many people to invest new money into money market accounts. An advantage of these accounts is that they are covered by FDIC insurance, giving investors a sense that their money is secure. But investors need to research their money markets carefully because not all of them are actually insured by the FDIC.

What is a money market account?

A central tenet of any financial plan is to have an emergency fund that can cover at least 3 and preferably 6 months of household expenses. This emergency fund should be held in “cash”. From an investment standpoint, cash means an account that is secure, non-volatile, and immediately available. The three types of accounts that are considered as cash accounts are (1) checking, (2) savings, and (3) money markets. These are often called “transactional accounts“. Although some financial experts also consider certificates of deposit to be cash accounts, they are better considered to be low-risk investments because the money deposited in them cannot be accessed for a set number of months. Because of this, money in certificates of deposit cannot be used in an emergency. The Federal Reserve reported that as of 2019, the median amount of money Americans held in transactional accounts was $5,300 however the mean amount was much higher, $41,600. This discrepancy is due to a small number of Americans holding a very large amount of money in transactional accounts, resulting in the average being skewed.

Most financial experts recommend maintaining 1-2 months’ worth of expenses in a checking account and 2-4 months’ of expenses in savings or money market accounts. Money market accounts and savings accounts are very similar but there are several important differences. Money market accounts often come with check-writing and debit card options, unlike savings accounts. Money market accounts generally pay higher interest rates than savings accounts to depositors. However, money market accounts usually require a much larger initial deposit than savings accounts with the interest rate varying depending on the amount deposited and held in the money market account.

Checking accounts generally earn little to no interest; indeed, many banks charge a monthly fee to checking account owners. Savings accounts do earn interest but it is minuscule – currently, savings accounts at large national banks typically only earn 0.01% annual interest. For the past several years, money market accounts also had very low interest rates that were about the same as savings accounts but in the past 6 months, these interest rates have risen to 3 – 4% annualized.

When a person deposits money in a money market account, the bank then uses that money to invest, typically in short-term bonds and treasury bills. The bank makes its money off of the interest on those investments by making the interest it pays the depositor slightly lower than the interest rate on the bank’s investments. As an example, at last week’s auction by the U.S. Department of the Treasury, the annualized interest on treasury bills ranged from 4.22% on 4-week bills to 4.70% on 26-week bills. Last week, my bank was offering money market accounts with a 3.50% annualized yield. So, if the bank uses money market deposits to buy treasury bills, it can make a net profit of about 1%. Banks can also use money deposited into money market accounts to make bank loans, such as mortgages, car loans, and business loans. The interest the bank charges on these loans is even higher than treasury bill interest rates. Banks assume that there is a predictable amount of money being deposited and withdrawn by money market account owners and assumes that everyone does not decide to withdraw all of the money market funds all at once.

What does being FDIC-insured mean?

An advantage of transactional bank accounts is that they are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC is a United States government corporation created in 1933 in response to runs on banks that contributed to the Great Depression. Banks that are members of the FDIC pay the FDIC annual fees that are similar to insurance premiums. The FDIC then uses the proceeds of these fees to build up its reserves in order to insure the checking accounts, savings accounts, money market accounts, and certificates of deposit at member banks. Importantly, the FDIC is self-funded, meaning that it is not supported by public funds and does not depend on congressional appropriations.

Each individual’s total of all transactional accounts at a single bank is insured up to $250,000. That means that if you have a checking account, savings account, and money market account at an FDIC member bank, if the sum of all three accounts is less than 250,000, you are insured. Any amount over $250,000 deposited in an account is not insured and can be lost if the bank goes under. The FDIC’s reserves are currently $1.28 billion. In the event of massive bank failures, the FDIC also has a line of credit of an additional $100 billion from the U.S. Treasury Department. Because of this, FDIC-insured transactional accounts are considered the safest of all types of investments.

Money market funds are not FDIC-insured

Money market accounts are issued by banks. Money market funds are issued by investment companies. Although these two types of money markets are similar, there are important differences, the most important being that money market funds are mutual funds and are not insured by the FDIC. However, that does not necessarily mean that FDIC-uninsured money market funds are less safe than FDIC-insured money market accounts. As is often the case, the details are in the fine print.

When you deposit money in a bank’s money market account, the bank leverages that money to make loans and investments. The bank does not just keep that money in a vault somewhere. This creates a problem if there is a run on the bank by depositors because the bank does not have enough cash on hand to pay off all of the depositors at once. If this happens, the bank can become insolvent and go under, such as happened with Silicon Valley Bank recently. Unlike banks, investment companies do not make loans so all of the deposits in a money market fund are used for investments, typically in short-term U.S. government bonds and treasury bills. As an example, the Vanguard Cash Reserves Federal Money Market Fund has 99.5% of its funds held in cash or U.S. government securities (U.S. government bonds, treasury bills, and U.S. government securities repurchase agreements). The yield that a money market funds pays to its investors is directly related to the interest that the fund is getting from the government securities it buys. This week, Vanguard’s money market fund has an annualized yield of 4.55%. This is higher than the annualized yield of bank money market accounts but slightly lower than the current interest on 26-week treasury bills. Other money market funds offered by investment companies may be invested in municipal bonds, making the yield tax-exempt to depositors. High-risk money market funds may invest in corporate bonds or foreign currency certificates of deposit.

Money market funds also differ from money market accounts by check-writing and debit card privileges. These are not typically offered by investment companies to money market fund depositors. It also takes longer to withdraw money from a money market fund than a money market account. Generally, it takes 2-3 days (and up to 7 days) for money to transfer from a money market fund in an investment company into a checking account at your bank. However, most money market accounts held by your bank can transfer funds immediately into a checking account held in that bank.

When you invest money in an investment company’s money market fund, you are purchasing shares of that fund. The fund managers generally keep the price per share at $1.00. When the fund makes money, it pays you in dividends (not interest). So, when you make income off of the money invested in the money market fund, the price per share does not change but you end up with dividends. Usually, those dividends get reinvested in the money market fund resulting in you owning more shares of that money market fund. During the 2008 financial crises, the price per share of most money market funds dropped to $0.97, so investors lost 3% on their money market fund investments.

When depositing money in a bank’s money market, it is important to read the details carefully to be sure that the bank is offering an FDIC-insured money market account. As an example, Chase Bank does not offer a money market account through its regular banking services but it does offer a money market fund through its affiliated investment company, JP Morgan Asset Management. The current annualized yield on this money market fund is 4.47% but it is not FDIC-insured.

Caveat emptor

Nowhere does the phrase “Let the buyer beware” apply more importantly than investing. In this time of financial uncertainty with bank failures and the impending U.S. debt ceiling, it is essential that all investors be sure of the details of their investments. Money markets are currently highly attractive because they are generally safe and currently paying annualized yields that are better than can be had with stocks or bonds. Here are some of the considerations to take into account when considering a money market:

  1. Is your bank a member of the FDIC? If it is, then money market accounts offered by the bank are likely FDIC-insured. There are a few banks in the United States that are not insured by the FDIC so be sure that yours is an FDIC member bank. Credit unions are not insured by the FDIC but are insured by the equivalent National Credit Union Administration (NCUA).
  2. Is the money market offered by your bank insured by the FDIC? If your bank is an FDIC member and offers a money market account directly, then the money market is insured. But you do need to be careful because many banks will link their websites to their sister investment companies, often called “asset management” or “wealth management” companies with a similar name as the bank’s. These money market funds are generally not FDIC-insured.
  3. How much money are you putting in a money market? In general, you should avoid putting more than $250,000 in any single money market account. A common scenario is buying a new house. Let’s say you sell your current house for $500,000 and you are buying a new house for $500,000 but the closing date for purchase of your new house is two months after the closing date for sale of your old house. So you need to park $500,000 somewhere safe until you close on your new house. It is better to split the money into two $250,000 money markets – either into one owned by you and one owned by your spouse at a single bank or into two money market accounts in two different banks.
  4. Money market account versus money market fund. The deposits in an FDIC-insured money market account will be slightly safer than deposits in a non-insured money market fund. However the money market fund will probably pay a higher annualized yield than the money market account. You will need to weigh the risk versus reward associated with an account versus a fund.
  5. What is the money market fund invested in? If you do decide to deposit money into a money market fund, be sure that you read the details of how the fund manager uses those deposits. A money market fund that is totally invested in U.S. government securities is safer than a money market fund invested in municipal bonds. A money market fund that is invested in corporate bonds or foreign currency certificates of deposit is considerably riskier.
  6. How fast will you need to move the money? You can wire money from your bank’s money market account immediately but it can take up to a week to transfer money from your investment company’s money market fund into your checking account.
  7. Do you want to write checks on your money market? Although every bank and investment company has different rules, most banks will allow you to write a check or use a debit card to access cash in your money market account. Most investment companies do not offer check-writing or debit cards to withdraw cash from money market funds.
  8. Know your tax implications. Money market accounts will pay you interest, which is taxed at your regular income tax rate. Money market funds will pay you dividends, instead of interest. Dividends come in two types: ordinary dividends and qualified dividends. Qualified dividends are taxed at the dividend tax rate of either 0%, 15%, or 20%, depending on your taxable income. For most people, the dividend tax rate is lower than their regular income tax rate. Ordinary dividends, on the other hand, are taxed at your regular income tax rate, just like interest is taxed. Most money market funds will pay out ordinary dividends and not qualified dividends. Money market funds invested in municipal bonds are generally tax-exempt.
  9. When to consider treasury bills instead of a money market. Every week, the U.S. Treasury Department auctions federal securities. Treasury bonds mature in 20-30 years, treasury notes mature in 2-10 years, and treasury bills mature in less than 1 year. For some people, purchasing a treasury bill directly from the Treasury Department can be a good alternative to a money market. Treasury bills are similar to a certificate of deposit in that the money cannot be accessed until the bill matures. The advantage of a treasury bill is that it generally pays a higher rate of return than money market accounts at a bank. Just be aware that if the federal government reaches the debt ceiling without congressional action, you may not be able to get paid once a treasury bill reaches its mature date. Currently, treasury bills with mature dates of 4, 8, 13, 17, and 26-weeks are available for purchase. The most recent annualized rates range from 4.22% for 4-week bills to 4.70% for 26-week bills.

The good news is that both money market accounts and money market funds are generally safe and currently offering better annualized yields than other common investments. Just be sure you know what you are putting your money into before you hand over your cash.

Categories
Hospital Finances Physician Finances

Non-Compete Clauses For Doctors

Recently, the Federal Trade Commission has proposed a rule that would ban all non-compete clauses in employment contracts. These clauses have been common for physicians, so what would the impact be?

A non-compete clause is a type of restrictive covenant that prevents an employee from working for one of their employer’s competitors. Non-compete clauses typically specify a duration of time that the former employee cannot work for a competitor (typically 1 year) and the geographic range that the former employee is prohibited from working in. A related clause is the “non-solicitation clause” which prohibits employees from taking customers (patients) with them if they leave their job. Non-solicitation clauses can also be written to prohibit a former employee from recruiting other current employees to come work for them.

Summary Points:

  • Many physicians are bound by contractural non-compete clauses
  • The FTC has recently proposed elimination of all non-compete clauses
  • For many specialties, non-solicitation clauses are more appropriate than non-compete clauses
  • For other specialties, non-compete clauses provide important financial protection for hospitals
  • Academic hospitals may be more impacted than non-academic hospitals by non-compete clause elimination

Although results of different surveys of physicians vary, the best estimate is that approximately 40% of U.S. physicians are bound by a non-compete clause. A frequently raised question is: “but is it enforceable?”. The answer is… maybe. In the United States, each state has its own laws regarding non-compete clauses with several states (such as Oklahoma, North Dakota, and California) banning them altogether. The enforceability of non-compete clauses is also state-specific and usually based on legal precedents from previous judicial decisions in that particular state. In general, physicians do not want to have non-compete clauses in their contracts but employers (hospitals or group practices) do want to have non-compete clauses.

I have been on both sides of the physician non-compete clause controversy – as a physician who had to sign my own employment contract and as an employer who had to help write physician contracts. As a practicing physician, I had two components of my clinical practice: as an inpatient critical care physician working in our hospital intensive care unit and as an outpatient pulmonologist who was one of the very few in Central Ohio specializing in interstitial lung disease. These two components of my practice had very different implications for non-compete clauses. As an employer, I had roles as the treasurer of our clinical department, an elected board member of our health system’s physician practice group, and the medical director of one of the hospitals in our health system. Each of these employer-related roles gave me a different vantage point on physician non-compete clauses. After dealing with the pros and cons of these clauses for more than 30 years, here are some of my thoughts.

When are physician non-compete clauses NOT appropriate?

Fundamentally, non-compete clauses are used to prevent harm to the employer. For some physicians, leaving one hospital to go work for another hospital in the same city poses little to no risk of harm to their employer. This is primarily true for specialties that do not depend on physician referrals, particularly if there is no significant physician shortage in that particular speciality. For these specialties, non-compete clauses should either be non-existent or should be less restrictive. Typically, these physicians are hospital-based and the patients that they care for are not referred specifically to them by some other physician. Instead, they get patients who choose to come to that particular hospital but do not choose to see that specific doctor. Many of these physicians do shift work. Examples include:

  • Hospitalists
  • Critical care physicians
  • Emergency medicine physicians
  • Radiologists
  • Pathologists
  • Anesthesiologists

If one of these physicians leaves to go work for the hospital’s competitor, they do not take patients with them. The hospital may have financial harm from having to recruit another physician in the same specialty to take their place but the hospital is unlikely to lose patients who would chose to go to a different hospital simply because that physician now practices there. The hospital can also be financially harmed if its most experienced and most productive physicians leave since that hospital will likely have to replace those physicians with younger, less experienced and less productive physicians. However, this would be equally the case whether the senior physician leaves to work in a hospital across the street or leaves to work in a hospital in a different part of the country, outside of the hospital’s geographic area of patient referrals.

Much of the criticism of physician non-compete clauses have come from primary care physicians and it is not really clear whether primary care physicians ever need a non-compete clause. There have been emotional stories of family physicians who wanted to leave their hospital-owned practice to work in public health clinics caring for uninsured patients but were contractually prohibited by the hospital. However, the reality is that most primary care physicians leave for another practice because of better working conditions or better pay. As long as a primary care physician does not take their patient panel with them, there is little effect on a hospital because it is relatively easy for that hospital to hire a new primary care physician to assume care for that patient panel. In this case, a non-solicitation clause that prohibits the primary care physician from actively taking their patient panel with them would be more appropriate. These non-solicitation agreements generally do not prohibit a patient from voluntarily seeking out that primary care physician at their new practice location but do prohibit the physician from actively trying to persuade (solicit) that patient to follow the physician to their new practice.

When ARE physician non-compete clauses appropriate?

Two situations when non-compete clauses do make sense for physicians are when the hospital has invested money in a physician’s training or invested money in a physician’s practice ramp-up period. In both of these situations, the hospital can experience direct financial harm if a physician leaves to go work for a competitor.

One example of employers investing money in physician training is military medicine. Medical students agree to work for the military for a specified number of years and in exchange, the military agrees to pay for all or some of the medical student’s educational expenses. Another example is when a hospital pays for a physician to get advanced training in order to fill a clinical or administrative need at that hospital. For example, a hospital that sends one of its physicians to get training in quality assurance to prepare the physician for a hospital quality directorship. Or when the hospital decides to buy a surgical robot and sends one of its surgeons to get trained to use the robot. In these situations, the hospital has a direct financial investment in that physician’s training and the hospital should expect to receive a return on that investment.

In many specialties, physician contracts will include a practice ramp-up, whereby the hospital will subsidize that physician’s income for a specific number of years while that physician builds their practice and develops a referral base. The duration of time for this ramp-up depends on the specific specialty. For example, it may only take a new gastroenterologist 1 year to build up a sustainably-sized patient panel. On the other hand, it may take 5 years for a plastic surgeon specializing in aesthetic surgery to build a sustainable referral base. A typical ramp-up contract would be for a relatively large subsidy for the first year of practice and then smaller amounts for subsequent years. For hospital-employed, salaried physicians, the ramp up is often expressed as annual RVU targets. For example, a hospital-employed gastroenterologist might be contractually expected to generate 6,000 wRVUs the first year and then 8,000 wRVUs in subsequent years. During that first year, the gastroenterologist’s salary is guaranteed and not dependent on RVU production. For non-hospital-employed physicians, the ramp up is often in direct monetary payments. For example, the hospital might pay the plastic surgeon $200,000 year 1, $150,000 year 2, $100,000 year 3, and $50,000 year 4. In either case, the hospital has a direct financial investment in developing the physician’s practice and once again, the hospital should expect a reasonable return on that investment.

If physicians take patients with them to a new hospital, the original hospital will lose money. Those patient now go to a different hospital for their lab tests, their x-rays, and their surgeries. This “down-stream revenue” can be substantial – not only as a loss of income to the hospital but also as a loss of patient care income to the pathologists, radiologists, surgeons, and specialists who practice at that hospital and are dependent on that patient population remaining at their hospital. This can occur with primary care physicians who have a large patient panel. But it can also occur with outpatient specialists who maintain large populations of patients who regularly see them in the office. As with primary care physicians, a non-solicitation clause may be more appropriate for these specialists than a non-competition clause.

Specialists can also create financial harm to a hospital by leaving and taking their referrals with them. Specialists cultivate referral bases over years of practice. So, for example, if a joint replacement surgeon who has established a referral network of rheumatologists and primary care physicians leaves to go work for another hospitals, those rheumatologists and primary care physicians will now be sending their patients needing joint replacement surgeries to a different hospital. As an alternative to non-compete clauses, non-solicitation clauses can be written to prohibit specialists from actively seeking referrals from their previous referral base. When a physician in our practice group resigned, announcement letters to that physician’s patients had to be written by or approved by the practice administrators so that the physician could not advertise to patients about their new practice location.

So, what is the solution?

Physician non-compete clauses should not be a “one size fits all” proposition. Most physicians do not need a non-compete clause as there are more effective ways to ensure their loyalty. For those physicians who do need non-compete clauses, the details of those clauses should be tailored to the degree of financial loss faced by the hospital (or employing group practice) should they leave.

For specialties that do not warrant non-complete clauses, paying end-of-the year bonuses is a good way to ensure that the physicians remain with the hospital for at least one year. It costs money to recruit and hire physicians when considering the cost of job advertising, interviewing, travel, moving expenses, signing bonuses, and on-boarding. But an unhappy physician is not going to be a productive physician and moreover, that unhappy physician can poison the culture of the hospital’s medical staff – in the long run, a poisoned culture can be very expensive. Ensuring that physicians remain employed for at least one year of employment in order to get their bonus gives the hospital enough time to recruit another physician to replace the one who is leaving. If the physician leaves before 1 year is up, the hospital can use the money it would have paid that physician in bonus pay for new physician recruitment, instead.

For specialties that do warrant non-compete clauses, sometimes other restrictive covenants can be equally effective or even more effective. For example, a non-solicitation clause in a primary care physician’s contract can prohibit that physician from taking their panel of patients with them to a new employer. This can mean prohibiting the physician from taking patient medical records with them and contacting patients to offer to see them at the physician’s new office. Non-solicitation clauses can also be used to prohibit the physician from recruiting other physicians or hospital employees to come work at their new place of employment.

When hospitals agree to provide a financial ramp-up as a physician builds their practice, it is reasonable for that hospital to insert a non-compete clause. Before our health system put non-compete clauses in our physician employment contracts, we would regularly have surgeons and specialists who would receive ramp-up subsidies totaling as much as $400,000 over several years. All too often, as soon as the surgeon or specialist completed their ramp-up period, they would be recruited by another hospital in town that would pay them a $50,000 signing bonus. This was a bargain for the other hospital since it only had to pay a small signing bonus and did not have to pay the more expensive ramp-up, thus saving that hospital a net $350,000. However, hospital want to have to keep an unhappy surgeon or specialist on the medical staff. So, a solution is to have a buyout for the non-competition clause to offset the hospital’s initial investment in that surgeon or specialist. This buyout should be equal to the amount that the hospital has subsidized that physician with a diminishing amount after the ramp-up period commiserate with the hospital’s subsequent return on investment from the physician’s contribution to the hospital’s patient care revenue. For example, let’s take a surgeon specializing in surgery of the right little toe who needs 3 years to build his toe surgery referral base and get his OR team efficient with toe surgeries. His buyout might look like this:

Ramp-up periods are used not just to build referrals but also to build expertise. In my experience, it takes about 7 years for a newly trained surgery resident or fellow to reach maximum surgical efficiency as an attending physician. In those 7 years, the surgeon is building their operative team and learning how to hone his or her skill: Which patients to operate on and which to not operate on. How to reduce the operative time it initially takes to perform a particular surgical procedure. How to anticipate and avoid surgical complications. For non-surgical specialists, the time to reach maximum productivity may be a bit shorter. But regardless, in the first several years after completion of formal training, the physician is still learning and the hospital generally is covering part of the cost of that on-the-job training. Even if the heart surgeon is paid based on wRVU productivity and thus gets paid less in their first few years after fellowship, the hospital loses money from paying the OR nurses and anesthesiologist to do 2 open heart surgeries in a day rather than 3 open heart surgeries in the same amount of time while the surgeon is learning how to be efficient.

Hospitals should be willing to waive buyouts and non-competes under certain circumstances. For example, a few years ago, we had a non-productive but somewhat famous specialist at our hospital who we were losing money on and we considered terminating him. A hospital 5 miles away was simultaneously recruiting him, believing that they were making a hiring coup by poaching a famous doctor from us, not realizing that he was a financial disaster. We waived his non-compete and did not ask for a buyout because we were happy to have him gone (and now dragging down the competition’s finances). Similarly, academic physicians who have worked at a university medical center for several years and then get passed up for academic promotion should have any non-competes waived.

Non-compete geographic limits

Most physician non-compete clauses contain geographic restrictions that correspond with the hospital’s patient population geography. For example, a community hospital might have a 10-mile restriction if most of its patients live within that 10-mile radius. On the other hand, a tertiary referral hospital might have a 50-mile radius non-compete restriction if it depends on referrals from a lot of community hospitals within that 50-mile radius.

Geographic limits should also be based on the specialty. For example, a primary care physician probably will not draw patients from further than 10 miles from their current practice whereas a specialist might draw patients from 100 miles away. This can be particularly true for a physician specializing in a very unique condition such as a kidney transplant surgeon or an interstitial lung disease pulmonologist (such as myself), who may be the only physician practicing in that specialty in a several county area.

What is considered a reasonable geographic distance in non-compete clauses is often contentious and the cause of many employment-related lawsuits. A non-compete clause for the kidney transplant surgeon specifying metropolitan Columbus might be reasonable but specifying all of Ohio is probably unreasonable.

Hospitals will not voluntarily eliminate physician non-compete clauses

No hospital wants to be the only hospital in town to eliminate non-compete clauses. Otherwise, there would be unidirectional movement of physicians from that hospital to all of the other hospitals in town that do have non-compete clauses. So, for those hospitals that would be willing to drop their non-compete clauses from physician employment contracts, if the FTC makes non-compete clauses illegal, then they could finally eliminate non-competes without worrying about being at a competitive disadvantage to their hospital competitors. In other words, the FTC ruling would essentially level the playing field.

Academic hospitals and non-academic hospitals will be affected differently. Historically, many physicians have left jobs in academic medicine to go into private practice at non-academic hospitals. But the reverse is very rare: physicians generally do not give up their private practice to go into academic medicine. There are always exceptions – our health system acquired a local private practice electrophysiology cardiology group and a local vascular surgery group, for example. But by and large, physician movement between academics and private practice is a one-way street. If physician non-compete clauses are outlawed, then academic hospitals will be at risk of losing more physicians to local non-academic hospitals but the reverse is unlikely to occur. On the other hand, physician movement between different non-academic hospitals is very common. Individual physicians leave one group practice to join another group practice. Hospitals contract with one hospitalist group one year and a different group the next year. Elimination of non-compete clauses will likely affect physician movement between different non-academic hospitals fairly similarly. As a consequence, no academic hospital ever wants to give up its physician non-compete clauses but non-academic hospitals will be willing to give up non-competes as long as all of the other non-academic hospitals in town have to also give up theirs.

Because of this one-way movement of physicians from academic to non-academic hospitals, these two types of hospitals will have ramp-up costs affected differently by global elimination of non-compete clauses. Academic hospitals who lose physicians to non-academic hospitals immediately after their ramp-up costs are paid will stand to lose those ramp up costs. However, if a non-academic hospital pays ramp-up costs for a physician who is then poached by another non-academic hospital, then the original hospital can poach a different doctor from the second hospital so that the ramp-up costs end up balancing out. Because of this, academic hospitals will likely lose more money in ramp-up expenses than non-academic hospitals if non-compete clauses are outlawed.

The economic risk of eliminating all physician non-compete clauses

No one has a crystal ball to predict all of the effects of a blanket elimination of non-compete clauses and history shows us that with every government policy decision comes unintended consequences. Here are some of the possible effects of eliminating physician non-compete clauses:

Increased healthcare costs. One of the concerns of the FTC’s proposed complete elimination of non-compete clauses is that it will be inflationary at a time when our economy is reeling from the highest inflation rates in 40 years. After all, a primary goal of banning non-compete clauses is to increase worker wages by increasing employer competition for those workers. Employers would then transfer the increased expenses of employee wages to consumers by increasing the price of goods and services. However, American medicine is a weird economy, and consumer prices are not as tightly bound to employer expenses. In the U.S., 45% of healthcare expenditures are paid by federal, state, or local governments with the largest component being Medicare and Medicaid. The price Medicare pays doctors and hospitals for any given medical service or procedure is determined every year by Congress and hospitals get paid the same amount no matter what their costs are to provide that service or procedure. If hospital costs go up because they have to pay doctors more, Medicare does not pay that hospital more money. Instead, hospitals increase the amount that they charge commercial insurance companies and self-pay patients. The danger of eliminating physician non-compete clauses is therefore an increase in commercial health insurance premiums to working Americans and an increase in the cost of healthcare to those who pay for healthcare out of pocket.

Lower pay for new physicians. The second risk of physician non-compete clauses is that it could reduce income for newly trained physicians, particularly surgeons and specialists. Hospitals would no longer be incentivized to pay for ramp-up periods for new surgeons or specialists and thus there could be a wider income separation between physicians straight out of residency and fellowship compared to those who have been out in practice for several years. Although it can be argued that this is the physician’s own cost of going from inexperienced/inefficient to experienced/efficient, those same physicians who are newly trained are those who are making student loan payments and thus have less disposable income to begin with. In academic medicine, these income gradations already exist with Assistant Professors earning less than Associate Professors who in turn make less than full Professors. If non-compete clauses go away, these seniority-based salaries may become more prevalent in non-academic medicine.

Higher pay for sub-specialists. Losing a hospitalist or an ER physician to a local competitor does not affect a hospital’s financial margin much but losing a reconstructive plastic surgeon or a joint replacement orthopedic surgeon can have a huge financial impact. Hospitals will be incentivized to pay more to those physicians who bring in the most money for the hospital. Because surgical procedures usually have the greatest financial margin for hospitals, subspecialty surgeons could see an increase in their salaries.

Better coffee in the physician lounge. If non-compete clauses are eliminated then physicians will be not only drawn to work for those hospitals that provide the highest salaries but also those hospitals that have the best physician amenities. This could mean providing free parking, bigger offices, free food, and more vacation time. It is often said that trying to run a hospital full of a bunch of doctors is like trying to run a business full of a bunch of CEOs. Without non-competes, those doctors will increasingly expect to be treated like CEOs.

More hospital mergers. One way to prevent a local competing hospital from hiring your physicians is to buy that competing hospital. If you have a monopoly on the local healthcare market, then you don’t have to worry about losing your physician employees since they would have to sell their house, uproot their kids, and move to a different community to get a job with a different hospital. For larger hospitals and hospital systems, the amount that they pay to physicians is a relatively small part of the annual budget. But for smaller hospitals that are just scraping by financially, the additional costs required to retain their doctors could be enough to force them to merge with larger health systems or even close.

Non-compete clauses should not impede reasonable competition

In a free market economy, employees will go to work for the employer who offers them the best job for the best salary. The strength of a free market economy is that this competition for the best employees is the invisible hand that encourages employers to provide optimal working conditions and pay more for the best workers. Excessive use of non-compete clauses creates employment monopolies and in the long-run, monopolies end up hurting the average consumer and hurting the overall economy.

Free market employment encourages innovation and efficiency. It is why the United States has been the envy of the world for the past 150 years when it comes to revolutionary inventions, technologic breakthroughs, and economic success. Injudicious use of non-compete employment clauses risk turning “workplace of choice” initiatives into “workplace of force” realities which can stifle innovation and efficiency.

But employers should reasonably expect to recover their financial investments. No one would expect a factory to spend $250,000 to buy a new machine and then be required to give that machine away 3 years later to a competitor for free. And we should not expect one hospital to spend $250,000 to train a physician only to have that physician go work for a competitor once completing their training. So, there has to be a compromise. Non-compete clauses should not be applied to all physicians but neither should they be eliminated completely.

Non-compete clauses (with options to buyout those clauses) should be reserved for those situations when hospitals invest a significant amount of money in a physician’s career development. For other physicians, non-solicitation clauses can protect the hospitals without negatively impacting a free-market competition for physician employment. Eliminating all physician non-compete clauses is unwise… but so is the indiscriminate use of non-compete clauses across the board to all physicians in all specialties. I hope that the FTC finds a way of protecting the right of physicians to chose their workplace while protecting the right of hospitals to recover their financial investments in physician career development. The answer to the physician non-compete controversy is not that they should always be used nor should they never be used but rather that they should sometimes be used.

February 15, 2023

Categories
Hospital Finances Physician Finances

Public Service Loan Forgiveness (PSLF): What Doctors And Hospitals Need To Know

The Public Service Loan Forgiveness (PSLF) is a federal program that forgives student loans for people who work for government or non-profit organizations. There are several eligibility requirements but many physicians qualify and can have hundreds of thousands of dollars of educational debt eliminated. How can a physician maximize the amount of money forgiven? Should PSLF eligibility be a factor in job selection? Should hospitals and other healthcare organizations promote PSLF eligibility as an employment incentive? As usual, the answers are all in the details.

Summary Points:

  • Many physicians employed by not-for-profit hospitals and government hospitals are eligible for Federal Direct Loan forgiveness
  • This can result in a physician saving hundreds of thousands of dollars
  • Repayment decisions made by physicians in training can significantly affect the amount of loan forgiveness in the future
  • Physicians need to understand the implications of PSLF when choosing jobs after training
  • Hospitals can leverage the PSLF program for physician recruitment and retention

 

What is the PSLF program?

Public Service Loan Forgiveness is a program sponsored by the U.S. Department of Education. It was created by the College Cost Reduction and Access Act of 2007. This is a different program than the one-time student loan forgiveness program proposed by President Biden that would forgive up to $20,000 to anyone with student loan debt. In order to be eligible for the PSLF, an applicant must be employed by a qualifying employer for 10 years. Therefore, the first applicants became eligible in 2017, ten years after the law was passed. There were problems initially and 99% of the first 28,000 applicants were denied. Congress attempted to fix these problems with new legislation in 2018 but confusion and misinformation about eligibility requirements persisted. In, 2019, President Trump’s proposed budget included elimination of the PSLF program; however, the democrat-majority House of Representatives did not cut the program. By April 2020, only 2,215 borrowers had student loans forgiven under the PSLF, a denial rate of 98.5% since program inception. To address many of the problems with the PSLF, the federal government granted a temporary waiver for PSLF applications between October 6, 2021 and October 31, 2022. This waiver allowed application approval for people who were previously denied PSLF because of issues such as past late payments on loan installments. There are new, permanent changes to the PSLF program that will go into effect in July 2023 that will further address some of these issues. The current eligibility requirements are:

  1. Have a William D. Ford Federal Direct Loan. Other federal student loans are not eligible but may be able to be consolidated into a Direct Loan to become eligible.
  2. Be employed by a qualifying employer. These include federal, state, local, or tribal governments and not-for-profit organizations. This also includes the U.S. military and the Peace Corps.
  3. Work full-time for that employer.
  4. Repay loans under a qualifying income-based loan repayment plan. To qualify:
    1. Each payment must be for the full amount owed for that payment period
    2. Payments must be made no later than 15 days after the payment due date
    3. Payments must all have been made while employed by a qualifying employer
  5. Previously make 120 loan installment payments (i.e., 10 years of repayments). All of these must have all been made after 2007 (inception date of the PSLF).
  6. Have used a qualifying income-driven loan repayment plan. The type of repayment plan is critical and many common repayment plans are not eligible for PSLF including the Standard Repayment Plan for Direct Consolidation Loans, the Graduated Repayment Plan, the Extended Repayment Plan, and the Alternative Repayment Plan. Repayment plans that are eligible for PSLF include:
    1. Pay As You Earn Repayment Plan (PAYE Plan)
    2. Revised Pay As You Earn Repayment Plan (REPAYE Plan)
    3. Income-Based Repayment Plan (IBR Plan)
    4. Income-Contingent Repayment Plan (ICR Plan)
  7. Submit a PSLF certification and application form every year to the Department of Education. This form requires entries by the borrower and also requires a signature from an authorized official of the employer who has the authority to certify the borrower’s employment. It is important that the borrower knows who to go to in the organization to get this signature:

Once the PSLF is approved, the federal government then forgives whatever amount remains on the Federal Direct Loan. Therefore, an important strategy is to make the lowest allowable amount in monthly payments so that there is the greatest amount left on the loan after 120 payments. The forgiven amount is not subject to federal income tax.

Many physicians are eligible

One of the results of the COVID pandemic was an acceleration of the trend for physicians to be employed by hospitals rather than private physician practices. A study reported in 2022 by the Physician Advocacy Group found that 75% of U.S. physicians are employed by a hospital or other corporate entity (such as a health insurer). Currently, 341,200 physicians (52% of U.S. physicians) are employed by a hospital.

The American Hospital Association reports that there are 6,093 hospitals in the United States. Of these, 1,228 are for-profit hospitals, 2,960 non-governmental not-for-profit hospitals, 951 state/local governmental hospitals, and 207 federal governmental hospitals. In addition, there are 635 non-federal psychiatric hospitals and 112 other hospitals (such as prison hospitals); many of these are also either not-for-profit or operated by a state or federal government. In other words, more than 70% of American hospitals are qualifying employers for PSLF purposes.

Medical school is expensive. Currently, 73% of medical school graduates have educational debt at the time of graduation. The average debt is $250,990 ($202,450 for medical school and $48,540 for undergraduate school). Many physicians funded their education at least in part through Federal Direct Loans. These loans are for $5,500 – $12,500 per year for undergraduates and up to $20,500 per year for graduate or professional students. The total maximum is $138,500. They are particularly attractive because they have lower interest rates than private educational loans and do not have as strict credit history requirements as private educational loans. Most students use a strategy of maximizing their Federal Direct Loan amounts before taking out more expensive and more restrictive private loans, for example, from a bank or credit union. There are other federal student loans that allow the student to borrow larger amounts of money. For example, a grad plus loan from the U.S. Department of Education can be for the entire amount of the cost of professional school. Other federal student loans (such as FFEL Program loans or Perkins Loan Program loans) are not themselves eligible for PSLF but can be consolidated into a Federal Direct Loan, thus increasing the amount of money that can be eventually forgiven using PSLF.

There are other loan forgiveness programs that physicians may be eligible for such as the National Health Service Corps Loan Repayment Program (underserved communities), the National Health Service Corps Students to Service Loan Repayment Program (primary care physicians in physician shortage areas), the National Health Service Corps Substance Use Disorder Workforce Loan Repayment Program (substance use disorder treatment facilities), the National Health Service Corps Rural Community Loan Repayment Program (substance use disorder treatment facilities in rural areas), the Indian Health Service Loan Repayment Program (Native American communities), the Armed Forces Loan Repayment Program (military physicians), and State Student Loan Forgiveness Programs (states with physician shortages). The PSLF program has the broadest inclusion criteria and is available to more physicians than the other loan forgiveness programs since the PSLF does not require moving to an underserved area, working in substance use disorder treatment, or joining the military.

I’m a medical student. How does the PSLF affect me?

The PSLF is designed to forgive student debt. Medical education is expensive and most of the educational debt generated by physicians is from medical school (rather than undergraduate college). It is important to be strategic when incurring educational debt. Here are some specific tactics that medical students can use:

  • Maximize PSLF-eligible loans. This means starting with the William D. Ford Federal Direct Loans. Only use other student loans after you have taken as much as permitted from the Federal Direct Loans. Try to avoid private loans if at all possible.
  • Consolidate other federal student loans into a Federal Direct Loan as soon as possible. Many loans can be consolidated into a Federal Direct Loan and this can greatly increase the amount of money that will eventually be eligible for PSLF. However, consolidation resets your PSLF eligible payments to zero so if you have already made payments on your Federal Direct Loan and then consolidate, you will lose credit for all of those payments you have previously made. Ideally, you should consolidate all loans immediately after graduation from medical school, before you make your first loan repayment installment in residency.
  • Keep your total debt as low as possible. Private medical schools are more expensive than public medical schools and do not necessarily result in a better education. Do a careful analysis of the total cost of each medical school when selecting which schools you apply to. Keep your living expenses low by living with roommates, cooking your own meals, and making purchases judiciously.
  • Don’t forget scholarships. Unlike loans, scholarships do not need to be repaid. A $50,000 scholarship beats a $50,000 loan every day. Check with your medical school’s office of financial aid and apply for any scholarships that you are eligible for.
  • Know whether your residency employment will be eligible for PSLF qualification. Most residencies are at not-for-profit hospitals but if your residency is at a for-profit hospital and your employer during residency is that hospital, then your loan payments made during residency will not count toward the 120 necessary to be eligible for PSLF. Moreover, you lose the advantage of making your lower monthly loan payments when your income is lower during residency and as a result, when you do eventually apply for PSLF, you will not be able to have as much money forgiven. When applying to residencies, ask if the organization that you get your paycheck from either is a government employer or is a tax-exempt employer under Section 501(c)(3) of the Internal Revenue Code.

I’m a resident. How does the PSLF affect me?

As soon as you start residency, you are employed and thus must start making payments on your student loans. However, with income-driven repayment plans, the amount you pay each month depends on your annual income. Here are some tactics to pay the least over your 10-year repayment period in order to have the greatest amount forgiven under PSLF:

  • Start making loan payments early. Do not opt for using grace periods or deferment to delay starting payments. The amount of monthly payments depends on how high your income is. Your strategy should be to make as many payments as possible when your income is low during residency and make as few as possible when your income is higher as an attending. By using this tactic, you will have a larger amount still owed on your loan when you become eligible for PSLF and therefore will have a larger amount that can be forgiven.
  • Don’t pay Federal Direct Loans off early. It feels really, really good to be debt-free and it can be tempting to try to make extra, early payments on student loans during residency and as a new attending physician. However, if you work for an employer that qualifies you for PSLF, then every early loan payment that you make is less money that can be forgiven once you are 10 years out of medical school. With PSLF, it is far better to be debt-smart than to be debt-free.
  • Keep your annual income low. As a resident, it can be tempting to do a few moonlighting shifts each month to buy a new car or to go on a Caribbean vacation. But the money earned from those moonlighting shifts increases your annual taxable income and therefore increases your monthly payments on an income-driven repayment plan. This will result in a lower amount of loan forgiveness after you have made 120 monthly payments and are eligible for PSLF. On the other hand, contributing to a 403b, 457, or traditional IRA can reduce your annual taxable income, resulting in a lower monthly repayment amount which then increases the total amount of your loan that can be forgiven by PSLF. Each physician weighs the benefits of extra disposable income against the cost of higher loan payments differently.
  • If your spouse makes a lot of money, consider filing separately for federal income taxes. This keeps your own taxable income low and thus keeps the amount of your monthly payments as a resident low. The result is that a larger amount of your loan can be forgiven by PSLF. By filing separately rather than jointly, you may pay slightly more in income taxes as a resident but the amount of money eventually forgiven could be much greater.

I’m a physician. Should I base a career choice on the PSLF?

The PSLF program is attractive to doctors since it has the potential to wipe out hundreds of thousands of dollars of educational debt. But for a physician completing residency or fellowship, basing a job choice on whether or not that job will result in PSLF eligibility can be hazardous. There are several reasons why a new physician should not base a career decision mainly on PSLF eligibility.

  • It might go away. A PSLF applicant must first work for a qualifying employer for 10 years. Ten years is an eternity when it comes to federal funding. It is 3 different presidential terms and 5 different congressional terms. Inevitably, there will be swings in which political party controls the presidency and the U.S. House of Representatives. The PSLF has been on the chopping block before and it may be again before new physicians entering the workforce this year become eligible.
  • Don’t sell your dreams. Maybe you have always aspired to take over a solo practice in your home town. Maybe your ideal job is to work for a for-profit healthcare company such as HCA. Maybe you would like to work part-time for a few years when your children are young. In these situations, you won’t be eligible for the PSLF. But if PSLF eligibility means taking a job that you won’t be passionate about or compromises your desired work-life balance, then the cost of PSLF may be too high.
  • You might change your mind. I am a unicorn – a doctor who stayed at the same health system as a medical student, resident, fellow, and attending physician for 41 years. Few physicians stay with the same employer for their entire career. Historically, between 40% and 70% of physicians change jobs in their first 5 years of practice. During the first 2 years of the COVID pandemic alone, 43% of physicians changed jobs. Maybe your spouse has to relocate to a different city. Maybe you don’t get along with your colleagues. Maybe your hospital closes. If you change jobs in the first 10 years of practice and your new employer is not a qualified employer for PSLF purposes, then you won’t be eligible for PSLF. On the other hand, once your loans are forgiven by PSLF, you are free to go work for whoever you want, wherever you want.
  • You might be financially better off without PSLF. Government jobs usually pay less than private practice jobs for physicians. Not-for-profit hospitals often pay physicians less than for–profit hospitals. With PSLF, you will still need to make required repayments every month for 10 years and the amount that you will be forgiven is only the amount remaining on your Federal Direct Loans at the end of those 10 years. In the long run, you may come out ahead financially by taking a job that does not qualify for PSLF but pays a few thousand dollars a year more than a job that qualifies for PSLF. This is particularly true if the amount of money you take out for Federal Direct Loans is relatively modest, for example, less than $50,000. On the other hand, if you estimate that your student loan balance after your first 120 monthly payments will be $500,000, then taking a private practice job in order to earn an extra $20,000 per year compared to an academic job does not make financial sense.
  • You aren’t compulsive with paying off bills. To be eligible for PSLF, you have to make your repayments in full, every month. If you miss monthly payments or run out of money at the end of the month and can’t make a full payment, then you lose eligibility.
  • You’re prone to getting caught up in moral dilemmas. When the federal government forgives educational loans, it means that the American taxpayers are paying for your education. For some people, this is perceived as a handout and physicians earn enough that they may feel they don’t deserve a handout. Elected officials from 11 states declined to participate in Medicaid expansion because they were ideologically opposed to taking federal tax money to care for the poor in their state. If you are a person who won’t be able to sleep at night if the federal government helps pay for your medical school debt, then the PSLF may not be for you.
  • Shorter rather than longer residency. The 120 payment clock starts ticking once you graduate from medical school. As a resident and fellow, you earn less than an attending physician but with an income-driven repayment plan (such as PAYE or REPAYE), you also have smaller monthly loan payments while still in training. If you enter a specialty that requires 3 years of residency, then you will have 7 years of high monthly payments as an attending physician before you are eligible for PSLF. However, if you enter a specialty that requires 7 years of residency and fellowship, then you will only have 3 years of high monthly payments as an attending physician before PSLF eligibility. Physicians with the longest residencies/fellowships have the most to gain financially from PSLF.

The bottom line is that hoping to qualify for PSLF should never be the main factor in career decision making. However, when it comes down to two equally attractive jobs, qualifying for PSLF can be a tie-breaker.

I employ physicians. How can I leverage PSLF?

If you are the medical director of a not-for-profit hospital, use your hospital’s PSLF qualification as a physician recruitment incentive. Here are some tactics you can use to your advantage:

  • Tell physician recruits that the hospital meets PSLF employer qualification. Many residents and fellows do not fully understand the differences between for-profit and not-for-profit hospitals and often accept jobs without even knowing which type their new hospital is. There is also a difference between working for a not-for-profit hospital and working at a not-for-profit hospital. A physician employed by a private practice medical group that works at a not-for-profit hospital will not qualify for PSLF.
  • Advertise that the hospital signs the employment certification each year. This is a required element of the PSLF application. By telling physician recruits up front that you are aware of the need for these annual certifications and are willing to sign them in a timely fashion, you indicate to the recruits that you are knowledgeable about the PSLF process and will be there to assist them without creating any barriers. Medical directors and hospital administrators have hundreds of forms that need to be signed every month and they often get behind in completing them in a timely fashion – make sure that physician recruits know that you place a priority on the PSLF certification signatures.
  • Have a designated physician loan navigator. Hospitals often agonize over whether or not to pay a physician a one-time $20,000 signing bonus. But PSLF can amount to as much as a $650,000 savings to a physician with no cost to the hospital. Therefore, ensuring that physicians meet eligibility and apply correctly can translate to millions of dollars of financial benefit to the medical staff. Designating a staff member from the hospital’s finance department or medical staff office to devote a percentage of their FTE to helping physicians manage their loans can be a terrific hospital investment. Responsibilities could include helping physicians consolidate federal loans into Direct Loans, helping fill out PSLF applications, ensuring employer certification signatures get done, helping physicians develop strategies to ensure full and timely monthly payments, etc.
  • Provide regular PSLF updates. There is no class on financial health in medical school. Most newly trained physicians do not fully understand investing, taxes, retirement planning, or personal budgeting. Because the first borrowers only became eligible for PSLF in 2017, many physicians are not even aware that the program exists, particularly if they graduated from medical school before 2017. By incorporating news about developments in the PSLF program into your medical staff meetings, you send a signal to the physicians that the hospital cares about them. Doctors talk to each other and when your medical staff tell their friends that the hospital cares about physician financial health, it helps you to attract top physicians. PSLF then becomes a line item for the medical director’s annual “Workplace of Choice” goals.

Never turn down free money

If you are a physician with Federal Direct Loans and have been employed by a government or not-for-profit healthcare organization for the past 10 years, then you may be eligible for free money with no strings attached. You have won the lottery without having to buy a lottery ticket. This kind of thing rarely happens in life so don’t let the opportunity pass by. If you are a medical director or administrator at a not-for-profit hospital then many of your doctors are eligible for free money. If you help them get it, it will foster their loyalty for years to come.

February 12, 2023