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

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

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

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.

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

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

Physician Finances

How Do You Make A Personal Annual Budget?

Can I afford to buy a new car this year? How much can I afford to put into my 401(k) each month? In order to answer these questions, every person or family needs to have an annual budget so that they can estimate what their basic living expenses will be, how much they can save for retirement, and how much they have for discretionary spending. Every company and every hospital does this when creating its annual budget for the next fiscal year. But we are often less diligent about making our personal budgets than we are making our hospital or corporate budgets. In theory, making a budget for yourself sounds easy – just estimate how much income you anticipate and how much expenses you anticipate. But budgeting is deceptively difficult and you can be misled depending on what sources you use for income and expense calculations. Here is an accurate way to create your annual budget.

Where to start: total income


The first step is to estimate your income for the upcoming year. If all of your income comes from your wages from your employer, then this is simple – just look at last year’s income and add in the amount of any raises or bonuses you expect next year. However, most people also have additional income from dividends, capital gains, and interest from investments. Or maybe a side gig from consulting, speaking honoraria, or rental income. These extra sources of income are often variable from year to year and it can be difficult to predict what the amount of these other income sources will be next year. So, you will need to gather data from multiple sources:

Do Use:

  • Final annual payslip. This will have your total gross pay which is the amount that you earned from salary and bonuses last year before any tax deductibles are subtracted out. Gross pay is what you want to use when preparing your budget. Your final payslip will also show the amount you paid for employer-sponsored health insurance, 401k/403b/457 contributions, pension contributions, etc.
  • 1099 forms. These will contain additional income from consulting (or other outside employment), dividends, interest, and capital gains.
  • Records from other income. This can include cash payments you receive for gig work, income from rental property, etc. These will often be reported on Schedule C of your federal income tax returns so the Schedule C form from last year can serve as a useful source for this information.

Don’t Use:

  • W-2 forms. The income reported on various lines on your  W-2 forms will be adjusted for tax deductions, such as employer-sponsored health insurance premiums, 401k/403b/457 pre-tax contributions, etc.
  • IRS 1040 forms. The various entries on the 1040 form come from your W-2 forms and will have similar adjustments with the result that your income on the 1040 form will be less than the final gross pay that appears on your final annual payslip.

By adding up all of the income from all of these various sources, you can determine what your total gross income was last year.

Where to start: total expenses

Most of us do not do a very good job of tracking where all of our money goes each year. Some expenses are taken out pre-tax by our employer and we never even see that money. We pay for stuff with checks, credit cards, and cash. Families may have multiple checking accounts and several different credit cards.

I recommend staring with your checking account. The reason for that is that most people use their checking account as the central hub of their personal finances. We usually deposit our monthly paychecks as well as other income from consulting etc. into our checking accounts. We also draw from those checking accounts for paying expenses directly (by writing checks), taking cash from ATMs, and paying off our monthly credit card balances. Your monthly credit card statement will list your total deposits and total withdrawals as well as the details for each specific transaction.

  • Add up all of your monthly checking total withdrawals. Do this for each checking account that you and your spouse have.
  • Subtract out any expenses that you pay but that you later get reimbursed for. For example, work-related travel if you pay for your hotel and airfare but then get reimbursed for those expenses by your employer after the travel. You will need to go through all of your individual checking account withdrawals and credit card charges to find these expenses.
  • Subtract out withdrawals from your checking account that were for transfers to your other checking accounts. This can happen if you have checking accounts at two different banks or if you move money to a spouse’s checking account.
  • Transfers to children’s checking accounts are different and I recommend not subtracting out these withdrawals and instead including them as part of your basic living expenses in order to keep the budgeting process as simple as possible.
  • Account for transfers to savings accounts and money market accounts. You should always keep a pre-determined amount of money in these accounts as your emergency fund. But many people also use these accounts for short-term savings, with the intention of spending money in these accounts in the next few months. In this situation, you need to determine if you pay expenses directly from those savings and money market accounts or whether you “park” money there temporarily and then transfer it back to your checking account to pay expenses. To avoid double counting, do not include transfers from checking to savings accounts or checking to money market accounts in your total expense withdrawal calculations. But do include any expenses you pay directly from savings or money market accounts in your total annual expense withdrawals.

By adding up all of these withdrawals, you will have the total amount that you spend each year from your take-home pay. It takes a moderate amount of time to go through all of your monthly checking account statements but they are generally available through your on-line banking account website so the process goes fairly quickly.

Categorize your expenses


This can get very complicated so I recommend just using very general, broad categories to make the process as simple as possible:

  1. Income taxes
  2. Retirement savings
  3. Non-retirement investments
  4. Education expenses
  5. Insurance
  6. Discretionary spending
  7. Basic living expenses


You will need to go to various sources to assemble all of the data you need to stratify expenses into these various categories. For income taxes, the easiest way to determine your total taxes from your federal, state, and local income tax forms from the previous year. Be sure that you have included both your regular federal income tax plus your Social Security/Medicare tax.

For the retirement savings category, start with your end-of-the-year payslip. This will contain information about your 401k/403b/457 contributions and pension plan contributions. Do not include any employer contributions to those plans, only your own contributions. Next, look at your checking accounts and credit card statements to pick out transfers into other retirement accounts such as an annual IRA contribution, SEP contribution, or backdoor Roth contribution.

For the non-retirement investment category, pick out any withdrawals from checking, savings, money market, or credit card accounts that went into purchasing stocks, bonds, mutual funds, certificates of deposit, etc. Alternatively, if all of your non-retirement investments go through an investment company (such as Vanguard, T. Rowe Price, or Fidelity), you can look up your annual investment purchases on your annual statement from the investment company.

For educational expenses, include money that you transferred into 529 college savings accounts and money paid directly from your checking accounts to schools for tuition, etc. If you use other accounts to save for your children’s college education (such as uniform gifts to minors accounts), then include these as well.

For insurance expenses, start with your end-of-the-year payslip for premiums you pay for employer-sponsored health, vision, dental, disability, and life insurance premiums. These will generally appear as pre-tax or tax-deductible expenses on your payslip. Once again, do not include any insurance that your employer pays for, only include your own contributions to insurance premiums. Add in payments from your checking, savings, or credit card accounts for other insurance premiums such as homeowner’s, car, life, and umbrella insurance.

Discretionary spending is more complex and depends on what you define as being discretionary vs. basic living expenses. It is better to over-simplify your definition of “discretionary” to avoid the expense accounting process from getting to onerous. I recommend only including “big ticket items”, like vacations and new car purchases, since those are fairly easy to track. Add in other high-cost but non-essential items such as new TVs, computers, appliance upgrades, season sports tickets, and elective home renovations. Many credit card companies and banks will have “money manager” apps on your on-line credit card and checking accounts that will automatically group credit card charges or checks into categories like travel, entertainment, etc. and you can alternatively use these apps to calculate discretionary spending.

Basic living expenses are everything that is left over. It can be argued that things like movie theater tickets, new clothes, and wine purchases are better characterized as discretionary expenses but for most of us, it would take hours and hours to group each of these small expenses as being either basic living or discretionary expenses. It is easier to put them in the basic living expense category but then realize that in a financial emergency, you could cut back somewhat on the amount that you have historically spent on basic living expenses. Because everyone should have an emergency fund of at least 3 (and preferably 6) months of basic living expenses, this number is useful to help guide you about the minimum amount of money that you should keep at all times in your combined checking, savings, and money market accounts. A lot of different types of expenses will be lumped into basic living expenses including housing, food, utilities, property tax, transportation, license fees, annual dues, and loan payments.

Putting the budget together

Once you have all of the financial information and have categorized your previous year’s expenses, you can plan for next year. Start with your projected income. For most people, this will be similar to their previous year’s income plus the amount of any raises that are expected in the coming year. If your income is similar to the previous year’s, then your taxes will also be similar, unless you are moving to a different city or state. The current federal income tax rates are set to increase after 2025 (unless there is congressional legislation to continue the current rates) so your budgeting for 2025 and beyond will need to take into account any changes in tax rates. For most people, insurance premiums will also be same or just slightly higher, unless they anticipate a change in marital status or change in spousal coverage by health insurance. Health insurance premiums are the biggest insurance expense and by January, you should know what your premiums will be for the upcoming year. For basic living expenses and discretionary spending, you should account for the effect of inflation. No one can predict with certainty what the inflation rate will be 12 months from now so a reasonable estimate can be made by using the rolling 12-month inflation rate from the previous month. So, for example, the 12-month inflation rate in December 2022 was 6.5%. Therefore, increase your expected 2023 basic living and discretionary spending amounts by 6.5%. Next, factor in any large expenses that you know will occur in the next 12 months, such as a wedding, a new car, or a down payment for a new house. Add these one-time expenses into next year’s discretionary expenses. Use last year’s values for retirement savings and for educational expenses as a starting point for next year’s budget.

At this point, you will have accounted for your anticipated income as well as most of your planned expenses for the upcoming year. If the difference between income and expenses is a positive number, great news! – you can afford to put additional money into investments, retirement savings, educational expenses, or discretionary spending. On the other hand, if this is a negative number, you will need to look hard at your discretionary spending or investment spending to see if there are expenses in those categories that you can cut out. Although you could also reduce contributions to retirement savings or educational savings, I would caution against this unless you are desperate since those expenses are really paying for your future annual income in the case of retirement savings, or for future unavoidable expenses in the case of education saving.

January is the best time to do your annual budget. By January, you should have your year-end payslip from the previous year and will have at least started preparing your income tax returns. Beginning in January 2023, there is a $2,000 increase in the annual contribution limits to 401k/403b/457 plans so January is a good time to increase the amount of your monthly contributions to those plans. Although you could wait until December to do one massive contribution to your 401k/403b/457 or to your child’s 529 account, it is better to spread those contributions out to take advantage of “dollar-cost averaging” and also to let those contributions start to grow in your retirement account or 529 account investments over the course of the upcoming year.

Everyone needs a budget

Many people with relatively high incomes (such as physicians), often neglect doing an annual budget, believing that their income is high enough that they won’t run out of money by the end of the year. In reality, everyone needs to create an annual budget and people with high-incomes can spend more than they earn as easily as those with lower incomes. It is particularly important to go through the budget process if you anticipate a major change in your life in the upcoming year – a new job, marriage, new child, etc. Creating a budget is somewhat a skill – the first year you do it, the budget process takes a moderate amount of effort. But each year, it gets progressively easier to create your annual budget as you get more experience with the process.

Once you have that budget, stick to it and use it as a roadmap for your monthly expenditures. This is the best way to be sure that you are able to pay off all of your credit cards every month, make all of your monthly loan payments, stick to your retirement contributions, and ensure your children’s college future. Your annual budget today is your insurance that you will be able to afford to retire when you want to retire.

We cannot predict the future national or global economy but we can control our own future personal economy. Controlling it starts with your annual budget.

January 29, 2023

Hospital Finances Inpatient Practice Physician Finances

How Do You Define A Hospitalist FTE?

A reader recently emailed me to ask: “How do you define a hospitalist FTE?” It turns out that it is a great question with a very nuanced answer. Twenty years ago, an FTE was whatever a physician wanted it to be. Physician earnings were directly tied to physician billing and so a physician would work as much as they wanted in order to generate the income that they wanted. But over the past 2 decades, revenue from physician professional services has not changed appreciably – in 2002, Medicare reimbursed physicians at $36.20 per RVU; in 2022, an RVU was worth $34.61.

To put that in perspective, $1.00 in 2002 is worth $1.66 in 2022 whereas an RVU is now worth $1.59 less than it was in 2002! In order to keep physician incomes constant, hospitals have had to increasingly subsidize physicians. As a result, most physicians are now hospital-employed, rather than independent practitioners. This is especially true for hospitalists who rarely, if ever, are able to support their full salary on billings alone. In the past, the physicians defined what working full-time constitutes but today, it is the hospitals that define what working full-time means for a hospitalist.

Hospitals typically subsidize hospitalist groups based on the number of FTEs (full-time equivalents) that are required in order to cover the hospital’s inpatients. But defining exactly what an FTE is can be complicated and often a source of disagreement between the hospital and the hospitalist group. There are a number of equally valid ways of defining “full-time” and no one definition works best in every hospital. There are several steps to determine the best model in your hospital.

Step 1: Determine the number of patients per hospitalist per day

The number of patients each hospitalist should see per day will vary considerably from hospital to hospital and from nursing unit to nursing unit. There are 19 factors to consider when determining this number as outlined in a previous post:

      • Case mix index
      • Residents versus no residents
      • Admitting service versus consultative service
      • Presence or absence of advance practice providers
      • ICU versus general ward patients
      • Day shift versus night shift
      • Observation status versus regular inpatient status
      • Ease of documentation
      • Shared electronic medical record with primary care physicians
      • Non-clinical duties
      • Shift duration (hours)
      • Hospitalist experience
      • Patient geographical location within the hospital
      • Average length of stay
      • Inpatient census variability
      • RVU productivity
      • Quality of case management
      • Local hospitalist employment market
      • Patient demographics

There has to be flexibility, however, and rigid adherence to a given number of patients is a recipe for dissatisfaction on both the part of the hospital and the part of the hospitalist. If the hospital inpatient census falls, then the hospital will be unhappy that each on-duty hospitalist is not seeing enough patients. On the other hand, if the inpatient census surges, then the hospitalists will be unhappy since they have to see more patients than they agreed on in their contracts. Many hospitals will have a “risk-call” hospitalist each day who is on standby to come in to work if needed when the inpatient census is higher than normal.

Step 2: Determine how the hospitalists will be scheduled

Early in the hospitalist era, scheduling was simple: a shift was 12 hours long and there were two shifts – a day shift and a night shift. Hospitalist schedules have gotten a lot more complex in recent years as outlined in a previous post. Now, hospitalists often have 8-hour short day shifts and evening swing shifts to cover ER admissions in the early evenings. As a result, scheduling hospitalists has become much more complex. Here are some of the scheduling models:

The 12-hour shift model. This was the original hospitalist scheduling model and typically will have two 12-hour shifts per day, a day shift and a night shift. The day shift is typically 6:00 AM to 6:00 PM or 7:00 AM to 7:00 PM. The night shift starts when the day shift is over. Day shifts and night shifts are treated equally but since night shifts are considered less desirable by most hospitalists, there needs to be a “shift differential” to provide extra payment for covering night shifts. Many hospitals will also provide additional pay for hospitalists who work on holidays. Because most patient care (work rounds, interdisciplinary rounds, daily charting, discharges, family meetings, etc.) occurs during the day shift, hospitals will typically have 1 night shift hospitalist for every 3 -4 day shift hospitalists. High acuity patient care areas, such as the intensive care unit, may require 1 night shift hospitalist for every 1 day shift hospitalist.

The long-shift, short-shift model. In this model, one or more hospitalists works the entire 12-hour day shift but other hospitalists leave earlier in the day, after their work is done. The short-shift hospitalists check out to one of the long-shift hospitalists when leaving. The long-shift hospitalist is then responsible for any admissions that come in later in the day. Some hospitalist groups will have the short-shift hospitalists continue to take phone calls from nurses, the lab, and consultants after they leave the hospital; other hospitalist groups will have the long-shift hospitalists cover calls. Some hospitals will have a specific check-out time for the short-shift hospitalists, for example, 3:00 PM. Other hospitals will have the short-shift hospitalists check out whenever their work is completed, whether that be 1:00 PM or 5:00 PM. An advantage of this model is that it avoids having a lot of hospitalists sitting around doing nothing in the late afternoon, after all of their work is done. In addition, this model is very attractive to hospitalists with children, since they can be home when the kids get out of school.

The swing-shift model. In most hospitals, the peak in admissions from the emergency department occurs between 3:00 PM and midnight. After midnight, the admissions slow down, the inpatients go to sleep, and the hospitalist workload drops. To optimize patient care coverage, some hospitals will create a “swing-shift” to cover the surge in admissions during the evening. Every hospital’s pattern of ER admission is different so swing-shifts could be from 3:00 to midnight, 5:00 to 10:00, etc.

The comprehensive services model. In many hospitals, the hospitalists do more than just serve as the attending physician for inpatients. For example, they may perform medical pre-operative consultation in an outpatient pre-admission testing clinic. They may provide medical consultation for surgical inpatients. They may have a designated “triage attending” to serve as a liaison between the hospitalist services and the emergency department or the outside referring hospitals. Or they may provide on-site supervision of infusion centers. In these situations (except for triage attending), the duration of a shift is determined by whenever the work is done, rather than by a specific time of day or number of hours. In general, these other services require fewer than 12 hours per day. These types of services are often attractive to hospitalists with young children since they are generally able to get home earlier than they would with a traditional 12-hour inpatient hospitalist shift.

Step 3: Determine how a 100% FTE will be defined

Once the hospital has determined how many inpatients a rounding hospitalist should cover and how the hospitalists are to be scheduled, the next step is to determine what will constitute a 100% FTE hospitalist. There are several ways of defining an FTE.

The shifts per month model. This works best when all of the hospitalists work 12-hour shifts. A full-time hospitalist is typically defined as 15 or 16 shifts per month (180 – 192 shifts per year). It generally takes about a half hour to check out at the end of every shift with the result that a 12-hour shift is really a 12.5-hour shift. This works out to about 43 – 46 hours per week on average. Some hospitals will grant additional time off for vacations and CME with the result that full-time may be fewer shifts per year, for example, 170 shifts.

The hours per month model. This model works when there there are different hospitalist shifts of varying durations. In this model, a hospitalist may be scheduled for shifts of a variety of durations up to some pre-agreed upon number of total hours per month. This results in a great deal of scheduling complexity and often requires considerable effort by the scheduler to ensure equity among the hospitalists. Many jobs define an FTE as 40 hours per week, however, most physicians work more than that. Although physician time surveys vary, most find that physicians average closer to 50 hours per week. If we extrapolate from the 15 – 16 twelve hour shifts per month model that results in 43 – 46 hours per week, then this would equate to 2,236 – 2,392 hours per year. Rigid adherence to a specific number of hours per year is difficult. Unlike other hospital employees, hospitalists do not punch in and out on a time clock. There are always some days when a hospitalist needs to stay in the hospital past the end of their shift to finish charting, complete the H&P on a late admission, or provide care for a critically ill patient. In addition, some hospitalists may check-out early to one of their peers once they complete their daily work.

The number of billed wRVUs model. If you look in the annual MGMA physician salary survey, you can find the mean, median, 25th percentile, 75th percentile, and 90th percentile of work RVUs  produced by physicians in every specialty. Using wRVUs as a general guide of FTE productivity can be useful for many specialties but as discussed in a previous post, it is inadvisable to pay individual hospitalists by the wRVU. Nor is it advisable to use wRVU targets to define an FTE. If wRUVs are used to benchmark hospitalist productivity, the RVU targets need to be for the entire hospitalist group and not for individual hospitalists. There is too much variation in RVU production intrinsic to different types of hospitalist shifts – fewer RVUs with night shifts, more with ICU shifts, and none for triage attending shifts. In other words, rather than requiring each of your 10 hospitalists to produce 4,300 wRVUs per year, instead require the entire group of hospitalists to produce 43,000 wRVUs per year.

The traditional workweek model. Most outpatient physicians define full-time as traditional office hours, working Monday through Friday, 8:00 – 5:00. With physician offices often closed on weekends, evenings, and holidays, this works fairly well for outpatient medicine. This model is harder to apply to hospitalists because illnesses requiring inpatient care are just as likely to occur on weekends and holidays as they are on weekdays. Therefore, hospitalists need to cover every day of the year. Nevertheless, some hospitals will have a core group of hospitalists who cover Monday through Friday day shifts. Part-time hospitalists or moonlighters cover weekends. And nights are either covered by home call, by inpatient advance practice providers, or by nocturnists. This model can sometimes work in smaller hospitals that care for lower acuity patients but is impractical in larger hospitals. The weekday hospitalists typically take care of their daily rounds and any admissions. They then leave the hospital in the afternoon, after their work is done. A typical full-time hospitalist in this model might work 46 weeks with 4 weeks of vacation, a week of CME, and a week for holidays. This equates to 230 working days per year.

The academic hospitalist model. In many teaching hospitals, the attending physicians on medical inpatient services are hospitalists who oversee care provided by internal medicine, family medicine, or pediatric residents. In this situation, the residents typically cover a given inpatient service for 4-week blocks. The attending hospitalist typically covers the teaching service daily for 2 weeks, although at some hospitals, the hospitalist covers the service for shorter (1 week) or longer (4 week) blocks. Because residents are in the hospital to perform H&Ps and care for any acute medical problems, the hospitalist can often leave the hospital after rounding with the resident and completing charting. This results in the hospitalist typically being in the hospital for 5 – 8 hours per day. The attending hospitalists generally provide back-up coverage to the residents at night by home call, either individually for their particular inpatient service or on a group rotational night call basis. Unlike the traditional workweek model, the academic hospitalist model generally requires both weekday and weekend coverage in order to ensure continuity of patient care and continuity of resident education. Thus, full time is considered less than 46 weeks and may be anywhere from 6 months (182 days per year) to 8 months (243 days per year) of service time.

Step 4: Determine how a part-time FTE will be defined

Once there is agreement between the hospital and the hospitalists on what will constitute a full-time FTE, it then becomes easier to assign a percent effort to part-time physicians and to determine how those part-time hospitalists will be paid.

For compensation of hospitalists who work less than 100% FTE, the easy answer is to make their base pay the same percent as their FTE. However, that can pose more cost to the employer since there are certain employer-paid expenses that are fixed, regardless of whether a hospitalist is 100% or 70% FTE. For example, the employer’s portion of health insurance premiums and life insurance premiums is the same for part-time employees as it is for full-time employees. Similarly, the employer’s cost of recruitment and credentialing is the same whether the hospitalist is 100% or 70%. In other words, it costs the employer more to have 2 hospitalists who each work 50% FTE than to have 1 hospitalist who works 100% FTE. Most hospitals are willing to cover those higher costs in order to keep high-performing hospitalists who wants to work part-time, particularly if there is a reasonable chance that the hospitalist will eventually return to 100% FTE in the future. For example, an experienced hospitalist who is a parent who wants to cut back to 70% for a few years until his/her child is older.

One size does not fit all

From the above discussion, it is clear that no one single model is best for all hospitals. Each hospital (and each hospitalist group) must examine its own unique inpatient service coverage needs in order to select the definition of “full-time” that fits best. From the hospital standpoint, it is important to be flexible and work with the hospitalists to be sure that they are happy with the model. From the hospitalist standpoint, it is important to ensure that a model that optimizes their work-life balance does not interfere with optimal patient care.

Because hospital censuses ebb and flow from year to year and because new hospitalists are hired from year to year, it is important that every hospital re-examines how full-time is defined periodically to ensure that the agreed upon model best fits the dynamic nature of inpatient medicine.

December 10, 2022

Physician Finances Physician Retirement Planning

End Of The Year 11-Point Financial Health Checklist

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

Eleven point financial checklist

1. Do a “backdoor” Roth IRA.

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

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

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

2. Do a Roth IRA conversion.

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

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

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

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

3. Contribute to a 529 plan.

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

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

4. Maximize your deferred income retirement contributions.

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

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

5. Consider tax loss harvesting.

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

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

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

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

6. Optimize schedule A deductions.

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

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

7. Contribute to an SEP.

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

8. Review your beneficiaries. 

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

9. Rebalance your portfolio.

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

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

10. Increase disability and life insurance policy amounts.

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

11. Update next year’s budget.

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

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

Your annual financial checkup should be in December

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

November 30, 2022

Medical Economics Physician Finances

Inflation Is Like A Disease – Here Is The Cure

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

What causes inflation?

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

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

  1. Alterations in demand for goods and services:

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

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

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

How do we cure inflation?

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

Treating alterations in demand for goods and services:

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

Treating alterations in supply of goods and services:

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

Treating alterations in inflation expectation:

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

It really is like a disease

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

October 19, 2022