Category: Physician Finances

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

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

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

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

How to choose a 529 plan

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

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

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

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

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

What about grandparents?

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

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

What I did

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

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

The time to act is now

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

December 28, 2021

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

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

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

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

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

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

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

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

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

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

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

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

March 15, 2021

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

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

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

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

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

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

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

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

December 23, 2020

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

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

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

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

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

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

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

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

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

March 21, 2020

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

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

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

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

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

Pros

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

Cons

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

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

December 1, 2019

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

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

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

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

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

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

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

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

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

November 24, 2019

The computer engineering geniuses at Apple have done it again. They’ve created yet another device that I’m probably going to have to buy. The new Apple Watch (series 4) has the ability for anyone to monitor their EKG (sort of). But what are we as physicians going to do with this data? Most electronic medical records permit patients to upload images to their patient portals for their physicians to have access to. Inevitably, some patients will overuse this system – some physicians are already drowning in dozens of Apple Watch rhythm strips being submitted by a single patient. But even for the patient who sends in a single suspicious rhythm strip, if the physician is going to make a clinical decision based on the strip, what are the implications? So, this presents several questions for physicians.

What is it?

The Apple Watch 4 can monitor the heart rhythm in two ways. First, it can measure the regularity of the heart beat by essentially taking the patient’s pulse; this can be reported as regular or irregular. Second, it can measure a single lead EKG reading and it is this latter feature that is really innovative. All EKGs are done by positioning 2 electrodes on different parts of the body and then measuring the electrical signal between those electrodes. A full EKG uses 12 electrodes and produces 12 different wave forms, or leads. The first three of these leads are the limb leads I – III. Lead I measures the signal between the left arm and right arm. Lead II is between the left leg and right arm. Lead III is between the left leg and left arm. The problem with a watch is that an electrode sensor on the back of the watch only has contact with one arm but by placing a second electrode sensor on the knob of the watch, a person can touch that second electrode with a finger from the other arm, thus generating a lead I EKG tracing by having an electrode in contact with both the left and the right arms simultaneously.

What can it tell you?

Since the Apple Watch can only generate a single lead EKG, there are limitations about the amount of information it can provide. For example, you cannot diagnose a myocardial infarction from only one lead (you need all 12). The main information that the lead I tracing will give you is whether the patient is in sinus rhythm or atrial fibrillation. Apple claims that the Apple Watch is 98.3% sensitive and 99.6% specific for classifying atrial fibrillation. However, 12.2% of rhythms could not be classified by the Apple Watch EKG app. Although Apple only mentions atrial fibrillation on its marketing materials for the Apple Watch 4, any physician who looks at telemetry monitor strips in the hospital knows that there are other important rhythm abnormalities that can be identified from a single lead EKG tracing.

What should you do if the patient uploads a rhythm strip?

Although we all get trained in EKG interpretation in medical school, most physicians are not credentialed to read 12-lead EKGs. In most hospitals, physicians must apply for hospital privileges to interpret EKGs and generally, this will be limited to cardiologists; in smaller hospitals, it may be a general internist who has EKG interpretation privileges. Reading an Apple Watch rhythm strip is considerably less complicated than reading a full 12-lead EKG but nevertheless, physicians should know their own limits as to whether they can confidently identify atrial fibrillation (or some other abnormal rhythm) by a rhythm strip. So, for example, if you are a podiatrist or dermatologist and do not normally look at heart rhythm strips, you may want to tell the patient who uploads an Apple Watch rhythm strip to your electronic medical record that EKG interpretation is not part of your normal practice and that they should check with one of their other physicians. However, most primary care physicians are trained in the recognition of atrial fibrillation.

Can you bill for review of the rhythm strip?

The short answer is in 2018, no but in 2019… maybe. Lets take a look at the CPT code possibilities for Apple Watch rhythm interpretation.

1. CPT code 93010 (Medicare reimbursement about $8.50). This is the CPT code for interpretation of a 12-lead EKG if someone else (usually the hospital) owns the EKG machine. It requires an order from a physician and a written interpretation. Since an Apple Watch rhythm strip is only 1 lead and since it is done by the patient’s initiation and not by the physician’s order, CPT 93010 cannot be used.
2. CPT code 93042 (Medicare reimbursement about $7.00). This is the CPT code for rhythm strip interpretation of 1-3 leads of EKG tracings. Like the previous CPT code, this requires an order from a physician and a written interpretation. Although it is conceivable that 93042 could be used to bill for Apple Watch rhythm strip interpretation, I would be hesitant to bill it since the patient is submitting the strip without a physician order.
3. CPT code G2010 (Medicare reimbursement about $6.50). This is the new CPT code for “Remote Evaluation of Pre-Recorded Patient Information” that was created as part of the 2019 Medicare physician fee schedule. This was designed for video or images such as photos of a rash, etc. that a patient creates and then sends to the physician for review. There are several restrictions when billing this CPT code, however. The physician doing the review of the pre-recorded information cannot have seen the patient for a regular evaluation & management encounter within the previous 7 days or within 24 after reviewing the images. Also, the physician has to interpret the image and communicate the findings to the patient within 24 business hours. We will not know for sure if Medicare carriers will accept CPT code G2010 for Apple Watch rhythm interpretation until the new fee schedule goes into effect after January 1, 2019 and we start submitting bills for it; however, it would seem like this CPT code would be the best fit.

Who should get one?

Since the main thing the Apple Watch EKG app does is tell whether there is atrial fibrillation, it will primarily be useful for patients at risk of atrial fibrillation or with a history of previous atrial fibrillation. Better identification of patients with intermittent atrial fibrillation really could save lives since about 15% of all strokes are the result of untreated atrial fibrillation. My suspicion is that a lot of other people with occasional PACs or PVC (premature atrial/ventricular contractions) will also be uploading rhythm strips to understand why they have occasional subjective “skipped heartbeats”. Although not designed for PAC or PVC identification, this could be a side benefit of the app. Similarly, ventricular arrhythmias such as non-sustained ventricular tachycardia may be identifiable. Bradycardic rhythms such as sinus bradycardia and various forms of heart block (1st degree, 2nd degree, and 3rd degree) may be identifiable. Even if these rhythms cannot be diagnosed with complete certainty, the tracings from the Apple Watch EKG app may be suspicious enough for the physician to direct the patient to seek medical attention where a full 12-lead EKG or a 24-Holter monitor can be performed.

I’ve never had atrial fibrillation or any kind of heart problem. So, am I going to get an Apple Watch 4 with an EKG app… well, yeah, probably.

December 20, 2018