Categories
Physician Finances Physician Retirement Planning

Planning For Retirement For Physicians Part 1: How Much Money Will You Need In Retirement?

I was asked to give a presentation on financial planning to fellows attending this fall’s annual meeting of the American College of Chest Physicians. In preparation for that presentation, I am preparing several posts about retirement planning for physicians. This is the first of these posts. As a disclaimer, I am not a financial planner but after more than 30 years of being a physician with 15 of those years spent as the treasurer of our Department of Internal Medicine, I have seen physicians make a lot of good choices and bad choices so I have a few thoughts on the subject.

The question everyone asks when planning retirement income is: “How much money will I need?”. The answer is… a lot. Before you can even begin to try to answer the question, you have to consider a number of variables including:

  1. How long will you live in retirement? Somehow, this one always gets me queasy whenever I have to consider it. Currently, the average life expectancy for an American who is 30 years old is age 77 for a man and age 81 for a woman. Since you are a physician, you can probably add a couple of years to that since you are likely a non-smoker and have reasonably healthy eating and exercise habits. So, if you are looking at retiring at age 65, then you’re going to need 15-20 years of income saved up. And if you’re planning on living to 100 like me, then you’re going to need to support yourself for 35 years.
  2. What is the inflation rate? The consumer price index goes up each year with an average inflation rate for the past 100 years of 3.1% per year. But remember, that is an average. The year I started medical school, the inflation rate was 13.5% and a couple of years of that rate will dramatically erode your retirement account. For the sake of simplicity, let’s assume the consumer price index goes up the same amount in the next 30 years when you get ready to retire as it has in the past 30 years when I was a resident. If that is the case, then an annual income of $250,000 this year will be equal in purchasing power to an annual income of $549,813 in 30 years.
  3. Will your fixed expenses change? Hopefully, you’ll have the house paid off, the kids out of the house and their college paid off. Once you retire, you won’t have to be setting aside a big chunk of your annual income for retirement savings since you’ll be drawing off of those savings. But things happen and it is possible that you’ll have different fixed expenses in 30 years. But for simplicity sake, subtract out your current mortgage payments, retirement contributions, and kid’s college savings contributions from your current income to determine what percentage of your current income is used for your activities of daily living in order to determine what you will need to maintain that level of daily living in retirement.
  4. What portion of your retirement income will be subject to income tax? As you will see in a later post, there are taxable and non-taxable retirement savings options for you but most of your retirement income is likely to be subject to income taxes, just like your current income is.

So, for the purposes of example, let’s assume you are a physician making $250,000 a year currently. And let’s further assume that you are spending $30,000 a year on your mortgage, you are putting $40,000 a year away for retirement, and you are saving $10,00 a year for your children’s college savings and all of those expenses are going to go away when you retire with your house paid off and your children graduated from college. That means that your effective current income is $170,000 per year. If the consumer price index goes up at the same pace as it has for the past 30 years, then in order to have the same lifestyle in 30 years as you do now, you’ll need to have $374,000 per year. The good news is that your annual income will likely be also going up each year for the next 30 years and presumably the amount that you are contributing into your retirement fund will also so it won’t be quite as much of a sudden shock to your finances.

There are a lot of formulas for estimating how much of your retirement account you should plan to take out each year. A commonly quoted number range is 3-5% of your total retirement portfolio.  Let’s go with 4% as your initial withdrawal rate and you estimate that you will live for 30 years in retirement. In order to have $374,000 per year, starting 30 years from now, you’ll need to have about $9,000,000 in your retirement account in order to fund yourself entirely out of your retirement savings.

If you are a physician and you and your spouse are making a lot more than $250,000 per year, then your retirement target may be closer to $15,000,000 or $20,000,000. These are really scary numbers but as I’m going to show you in the next several posts in this series, it is actually pretty do-able as long as you start saving early and you save smartly.

 

August 16, 2016

 

 

Categories
Medical Economics Physician Finances

What Is The Return On Investment For Residency?

Let me preface this post by saying that my advice to any medical student when choosing a specialty is to follow their passion and not the dollars. That having been said, money ultimately does make a difference. So what is the return on investment per year of residency?

Let’s start with medical student debt. No matter how altruistic a medical student is on day one of medical school, by the end of the fourth year, debt pressures can significantly influence career choices. The Association of American Colleges estimates that the average medical student debt is $172,751 for students graduating from public medical schools and $193,483 for graduates of private medical schools. With the median first year resident salary being about $52,000 with an increase of about $2,000 per year for subsequent residency years, physicians starting their careers following residency can face a huge debt burden. Many student loans will require relatively small monthly payments during residency but as soon as residency is completed, the monthly payments can skyrocket to as much as a mortgage payment.

Most physicians would assume that the longer the duration of residency, the higher the salary a physician makes after completion of residency and it turns out that this is generally correct. Pediatrics and family medicine with only 3 years of residency are usually the lowest paying specialties. Surgical specialties requiring 6 or 7 years of residency after medical school have the highest salaries for physicians. But those additional years of residency mean that the physician will either need to retire at an older age to make up for the lost earning years from the longer residency or they will have a shorter career duration for lifetime earnings.

A different way of looking at residency choices is the salary return on investment based on the number of years of residency. In other words, the best return on investment would be a specialty that has the highest salary per year of required residency training. Sure, there are a lot of potential criticisms of this method of analyzing the economics of post-graduate medical training but it is interesting, nevertheless.

The first challenge in this analysis is to pick a physician compensation report. There are reports put out by the MGMA, the AAMC, Medscape, Merritt Hawkins, and the AMGA, just to name a few. The data from each one is a little different. For example, the MGMA report mainly samples large physician group practices whereas the AAMC report is for academic physicians. Th AMGA is comprised of medical group practices and health systems. The Medscape report relies on self-reported individual physician surveys and may be subject to reporter bias. Reports based on first year salaries can be affected by relatively small numbers of physicians sampled. The bottom line is that there is no perfect compensation survey that fits all physicians. The Medscape Physician Compensation Report 2015 is based on surveys submitted by 19,657 physicians between December 2014 – March 2015 and is freely available on the internet. The American Medical Group Association (AMGA) is an organization for medical group practices and has 125,000 physician members. The AMGA Compensation Report 2015 is based on surveys received to member medical groups and health systems. The Merritt Hawkins Physician Compensation report is based on hospital and group practice offers to newly recruited physicians and primarily reflects entry-level salaries.

In the table in the PDF link below, the average compensation reported by Medscape is listed along with the number of years of residency for each specialty. I have counted years of fellowship as years of residency for simplicity. By dividing the average salary by the number of years of residency, you can come up with the average salary per year of residency training. If you think of think of residency as a career investment, then this number gives you an idea of the return on your residency time investment. Some of these numbers have to be viewed with caution, however. For example, unlike the MGMA and AAMC reports, Medscape lumps all cardiologists into a single category of cardiology so this may include not only general cardiologists but also interventional and electrophysiology cardiologists who have longer fellowships and make a higher salary. There is no separate category for outpatient general internal medicine and hospitalist medicine in the Medscape survey so presumably the category of “internal medicine” includes both even though they have very different salaries.

Medscape Physician Compensation Analysis

The AMGA physician compensation report gives fairly similar results as Medscape but does give results for some specialties not included in the Medscape survey:

AMGA Physician Compensation Analysis

The Merritt Hawkins report shows slightly different results, mainly what to expect in the first year after residency. It has a smaller “n-value” for each specialty so this may affect its accuracy compared to other reports:

Merritt Hawkins Physician Compensation Analysis

The MGMA report is for starting salaries in the first year post-residency in larger medical groups. Like the Merritt Hawkins survey, the results for any given specialty represent a small number of physicians and my not be as reflective of true numbers as other reports:

MGMA Physician Compensation Analysis

If you combine these three reports, the three highest return on investment specialties for all 4 surveys are emergency medicine, dermatology, and orthopedic surgery. Anesthesiology makes the highest return on investment list in 3 of the surveys and neurosurgery makes the list on 1 survey (however neurosurgery was only included as a specialty in two of the four surveys).

The lowest return on investment depends on the survey. For the Medscape, AMGA, and MGMA surveys that survey all practitioners, the two consistently lowest return on investment specialties are endocrinology and infectious disease. Pulmonary/critical care medicine and rheumatology make two of the surveys’ lowest return on investment list. Allergy and nephrology each made the bottom list in one of the surveys.

However, in the Merritt Hawkins survey, the four specialties giving the lowest return on investment are non-invasive cardiology, radiology, psychiatry, and hematology/oncology. Although this could just be a result of small numbers of physicians sampled in the Merritt Hawkins survey as opposed to the other surveys, it is also possible that these four specialities are becoming saturated with a supply of physicians beginning to exceed the supply.

No one would advise a medical student to choose a specialty purely based on this analysis. The good news is that all physicians make a high income relative to other professions and so the decision should be more about what you enjoy doing rather about a pure financial return on investment. There are also quality of life issues to consider, for example, an emergency medicine physician has to be willing to work a lot of evening and night shifts since that is when emergency rooms get busy.

In an ideal free market world, physician salary would be dictated by the supply and demand for any given specialty but the market for physicians is not a free market system since income is tied to reimbursement and the reimbursement for any given service or procedure is determined by Medicare and commercial insurance companies.

For myself, I started off my career as a pulmonary and critical care physician, one of the specialties with the lowest return on investment. Even if I had read this blog post 30 years ago, I still would have gone into pulmonary/critical care since that is where my passion lies.

August 1, 2016

Categories
Physician Finances

40 Questions To Ask During Physician Contract Negotiations

Entering a used practice can be like buying a used car. You just never know where it has been or how well it is really running, regardless of what it looks like on the outside. At our hospital, physicians have a lot of different employment models with some employed by the University, some in small group practices, some who are in solo practices, and some that are in large multi-specialty practices with hundreds of physicians. Our fellows asked me to give a talk next month on what to look for as they begin their job searches for their future medical practices. Here is a summary of my thoughts… 40 questions to ask during job negotiations:

  1. What is the salary? BEWARE OF THIS QUESTION!! Salary ≠ Salary. There can be hidden benefits and there can be hidden costs. This is a question often best left to the end of the job interview. There is often considerably more to job satisfaction than income than money alone. Don’t say “yes” to the first job offer but do your homework and check the MGMA salary report as a general guide of what salary to expect.
  2. Will you be hospital-employed or privately employed? In 2002, 75% of physician practices were owned by physicians. By 2011, more than 60% were owned by hospitals. The current trend is definitely toward hospital employment and even if you are looking at a private group, there is a chance that it is negotiating an employment agreement. Although there can be advantages to either model, current healthcare economic policies and reimbursement make it easier to succeed in a hospital-employed model in most cases.
  3. Who governs the practice? In small groups it is the partners. In large groups it is typically a CEO and board of trustees. In hospitals it is usually a CEO and board of trustees. At Universities it is usually the Dean and board of trustees. In government agencies, it is an administrator or political appointee. Be sure that the governance places a priority on your interests.
  4. Who do you really work for? Particularly with hospital or academic employment, the leadership structure can be complex and more resemble a matrix than a hierarchy. With large organizations and practices, be sure you know who you will report to and who will be making the decisions that will affect different aspects of your job.
  5. How does the group define clinical productivity? RVUs? Patient encounters? Shifts? Billings? Receipts? Each of these has advantages and disadvantages. How clinical productivity is measured for one specialty may not be best for a different specialty.
  6. How many patients should I see? This is not only specialty-specific but can vary tremendously from one patient population to another within the same specialty. Hospitalists generally see about 1.5-2 patient encounters per hour or 15-18 encounters per day. But not all encounters are equal, for example, a hospitalist co-managing reasonably healthy patients admitted for joint replacement surgery can see far more patients per shift than a hospitalist doing primary management of complex medical admissions admitted through the emergency department. Ambulatory physicians should expect about 20 minutes per patient. 82% of physicians work 8-12 hours per day for an average of 10 hours per day and an average of 59.6 hours per week. For internal medicine it works out to about 110 patient encounters per week.
  7. Do I need a productivity ramp-up period? If you are an emergency room physician, anesthesiologist, trauma surgeon, or critical care physician, then the answer is no because you will have a full slate of patients your first day in the hospital. If you are a surgical specialist, a consultant in a competitive market or a primary care physician then the answer is likely to be yes. Ramp-ups give the new physician a guaranteed salary if they are not able to make their own salary with their own billings and are usually phased out over a 1-3 year period. Also, most physicians do not reach optimal clinical efficiency until about 7 years after completing their formal training, which is why physicians age 50-60 are currently the most productive physicians in the United States.
  8. What is the group’s payer mix? You can plan on bringing in about $34/RVU for Medicare, $25/RVU for Medicaid (depending on your state), and $30-70/RVU for commercial insurance. Self-pay patients can vary but most of the time will provide negligible reimbursement.
  9. Will my payer mix affect my income? In Ohio, it can take up to 180 days to get commercial insurance company provider approval. Therefore, building a practice may mean more self-pay and Medicaid in the beginning. If you plan to rely on inpatient unassigned ER admissions to build your practice, bear in mind that these patients will generally have a lower payer mix. The affordable Care Act Medicaid expansion states have much better payer mixes than those states that opted out of Medicaid expansion. States that did NOT adopt Medicaid expansion include: Alabama, Florida, Georgia, Idaho, Kansas, Maine, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Wisconsin, and Wyoming.
  10. Who negotiates commercial insurance contracts? Small group practices will usually get the “standard” rates from insurance companies and this is typically 90-110% of Medicare on a per RVU basis. Large groups may have higher reimbursement from the same insurance companies, depending on their leverage. Huge groups or those with monopolies may get 150-180% of Medicare rates. If the hospital is sponsoring the contract negotiation with an insurance company, the focus may be more on hospital reimbursement rates than on physician reimbursement rates. Most patients don’t realize that when they get admitted to the hospital, the amount that 2 physicians get paid by an insurance company to provide a given service or do a procedure can vary depending on who those physicians are employed by.
  11. Are “easy” duties equally shared? There are some clinical activities that can generate a lot of income per physician work hour. Be sure that the more senior members of the practice are not hoarding all of these relatively easy activities such as EKG interpretation, PFT interpretation, bone density interpretation, reading cardiology non-invasive tests, EEG interpretation, EMG interpretation, and sleep study interpretation.
  12. Are there medical directorships? These can be a great way to balance your overall employment activity portfolio, much like having some bonds in your investment portfolio. These can take the form of hospital directorships, practice-owned lab/imaging directorships, governmental directorships, industry directorships, and university teaching salary lines.
  13. Is there a buy-in? This used to be pretty standard but is uncommon now and should be a red flag to you. There are some things that are appropriate for buy-in: property, equipment (depreciated), and accounts receivable. Think twice before buy-in for: referral base, patient charts, or practice equity.
  14. Can I moonlight? No two moonlighting activities are exactly the same and be sure you know what the rules are before you sign your employment contract. Expect on having some unexpected expenses in your first few years of practice so being able to make a little extra money can really help. These may take the form of extra hospital shifts, extra clinics, expert witness testimony, business consulting, honoraria for giving talks, or board memberships. In some groups, income from these activities belongs to the practice and in other groups, the income belongs to the individual physician.
  15. What intangibles will add to your job satisfaction? These can include teaching, research, publication, public health, community service, sports medicine, and medical volunteerism. Don’t underestimate the value of these things. In a recent survey of physicians, 17% said they were very dissatisfied and 25% said they were somewhat dissatisfied with their job. Only 41% of physicians said that they were very likely or somewhat likely to recommend a young person to go into medicine. I have lots of uncompensated intangibles in my job and that is one of the reasons that I’m so happy with my job.
  16. Are there plans to be an accountable care organization (ACO)? ACOs were started as a provision of the Accountable Care Act in 2012. They are created by physicians and hospitals combining to provide all of the healthcare for at least 5,000 Medicare beneficiaries for 3 years. The providers are jointly responsible for the care of the patients with a goal of reducing unnecessary tests, keeping costs down, meeting quality benchmarks, and focusing on prevention. Those ACOs that are successful get paid extra by Medicare. However, many ACOs have failed, resulting in lower income. ACOs’ existence is also vulnerable to who is in Congress and who is the President so there is no guarantee that they will still exist 3 years from now. The bottom line, beware of practices that are ignoring ACOs but also beware of practices that are counting on ACOs to survive.
  17. Does the practice use advanced practice providers? These can be nurse practitioners, physician assistants, CRNAs, clinical nurse specialists, or nurse midwives. The scope of practice of these providers varies from state to state so know the laws of the state you will be moving to. Also, there is a big difference between advance practice providers employed by a hospital versus employed by a physician practice. If they are employed by the hospital, then you the physician cannot use their documentation for your own notes in order to justify the level of service billed. It is possible, however, for the physician group to lease some of the advance practice provider’s time from the hospital enabling the physician to use the advance practice provider’s documentation as part of the physician’s note.
  18. Is there an electronic medical record? This is not as much of an issue now compared to a few years ago since now, most practices will have an EMR of some kind. However, you do need to ask a few questions. Does it meet federal EMR requirements? Does it interface with the hospital EMR? Does it interface with referral physicians? Does it interface with the billing department? Does it work for you or do you have to work for it (not all EMRs are equally user-friendly)?
  19. Are there restrictive covenants? Even though you think that your first job out of residency will be the one you will stay with for the rest of your life, it probably isn’t. Restrictive covenants can take many forms including: geographic non-compete, non-solicitation, hospital non-compete, and chart ownership. Restrictive covenants can be appropriate for some specialties but they must be reasonable. A 10 mile geographic non-compete clause may be OK for a thoracic surgeon specializing in robotic surgery. A 50 mile geographic non-compete is probably not OK for a hospitalist.
  20. What about call? Do all partners participate equally? Not all call is created equal, for example, is call taken at home or in the hospital? If it is home call, how frequently do you have to come into the hospital at night? How many hospitals do you cover when you are on call? Is there a surge plan in case you get overwhelmed with admissions or consults? Are there residents or hospitalists who are in the hospital covering the patients with you?
  21. What about shift work? If you will be working shifts (for example emergency medicine or hospitalist medicine), then who makes up the schedule? Does the new guy do all of the night shifts? Is there a shift pay differential for the undesirable shifts? Beware of productivity-based salary plans that have shift work because not all shifts are productivity-equal, for example, you probably won’t hit your RVU targets if you are primarily working the midnight to 8 AM shift in the emergency department.
  22. How will my success be defined? RVUs? Total income? Number of procedures? Quality metrics? Patient satisfaction? Readmission rates? Length of stay? Publications? Grants? None of these are necessarily bad measures of success but just know what the rules are and what is valued by the practice before you start.
  23. What is the history of the practice? Recent physician turnover can be a warning sign. A new venture may be riskier than an established group practice. Some turnover is OK – many/most physicians change jobs in their first 5 years of practice.
  24. What’s under the rug? Some of the things that they won’t put in the employment ad you read in a medical journal can include: Medicare fraud history; federal investigations such as HIPAA violations, tax fraud, Stark violations, or discrimination; employee civil suits; state Medical Board violations; and malpractice history. If there was recent attrition, why did the previous doctors leave? Always Google the practice and the senior members of the practice to be sure that there is no hidden dirt on the practice.
  25. Are there negotiable incentives? The salary may be non-negotiable, but there are a lot of other things that the hospital or practice may be willing to pay for. Sometimes, all it takes is just asking about student loan repayment, moving expenses, signing bonuses, board certification exam fees, DEA license fees, state medical license fees, practice advertising/promotion costs, and pager/cell phone/answering service.
  26. What are the benefits? Computer? Expense accounts (CME, travel, books & journals, equipment?), Sick time accrual? Vacation time accrual? Retirement? Maternity leave? Paternity leave? Tuition discounts? Health insurance? Life insurance? Disability insurance? Health club membership? Meals? These can really add up and can make a job more valuable even though the salary alone may be considerably lower.
  27. What is the practice overhead? There are some elements of overhead expense that all practices will have such as billing expense (“revenue cycle”), legal expenses, practice administration, rent, equipment, nurses, etc. Academic institutions will uniquely have additional expenses such as “Dean’s tax”, departmental tax, fellow salaries, research faculty support, and support of money-losing specialties. None of these are necessarily bad but you should know where every penny of your collected dollar is going.
  28. What is the collection rate? This is a point of confusion for most physicians. The gross collection rate is the amount that you get paid versus amount you billed and typically 40-60%. It is completely dependent on where the practice sets its fees and is largely irrelevant. The net collection rate is the amount you get paid versus the contractual rates. This should be as close to 100% as possible and should always be > 90%. The net collection rate is a reflection of billing efficiency and is highly relevant.
  29. What are the contract termination conditions? Most initial contracts are for 1-3 years. Frequent re-negotiation can be tedious but can protect you against changing medical economics. The contract should contain a termination clause. Typical “without cause” termination is 90 or 180 days and typical “with cause” termination is immediate.
  30. Where will you actually be practicing? Most practices will have multiple locations that they practice in and just because your initial interview was at the flagship hospital does not mean that you will be spending all or even any of your time there. Know if you will be working at an outpatient clinic, an inpatient hospital, an urgent care, doing telemedicine, an LTACH, an affiliated hospital, or a nursing home.
  31. Do you have a unique marketable skill? This can be negotiated into a higher salary than the standard base salary and can include expertise in interventional endoscopy, interventional bronchoscopy, cardiac MRI, endoscopic ultrasound, robotic surgery, laparoscopic surgery, or experience in a specific disease.
  32. Does it feel right? For most physicians, that sense of it “feeling right” was one of the main factors in deciding what residency to choose. That same sense is helpful for your first job after residency and can be affected by, the partners, the practice, the administrator, the hospital, and the community.
  33. What kind of malpractice do they have? “Claims made” means that the insurance coverage period covers the period of time the claim is filed. Claims made policies require purchase of a tail to cover any claims filed after the coverage period. “Occurrence” means that the insurance coverage period covers the period of time when the actual event occurred and it does not require purchase of a tail.
  34. Who pays malpractice? The contract will usually say who pays for the annual premiums but be sure that you know who will pay for a tail insurance policy if you leave the practice. The cost of the tail can vary depending on the cost of the regular premium, the physician’s specialty, and how long the physician worked at the practice before resigning. Tail coverage can be very expensive.
  35. What is the retirement plan? There are a bewildering number of retirement plan options including defined benefit pension plans, defined contribution pension plans, 401a plans, 401k plans, 403b plans, 457 plans, Social Security, IRAs, and SEPs. If you assume that you will work for 30 years and then live for 15 years after you retire and you are now making $150,000/year and you estimate you will need 80% of your annual income in retirement, then you are going to need about $5,000,000 by the time you retire. It is not as difficult to achieve as you might think but it is very important that you start early in your career. Be sure you know what your retirement savings options are and then take advantage of them early in your career to the best that you can afford.
  36. How difficult was the contract negotiation? Was it a struggle? Was it fair? Your first negotiation with the partners or the hospital will not be your last.
  37. Did they give it to you in writing? Some of the warning signs to be on the look-out for include a partner’s spouse who is involved in practice administration, an “acting” chairman (academic position), resistance to provide details in writing, no incentive bonus, a history of frequent physician turnover, and partners who are all old or all young.
  38. Is the contract assignable or non-assignable? In the event of a potential group acquisition, consolidation, or merger will you be obliged to work for the new group (assignable contract) or will you be free to leave (non-assignable contract).
  39. What happens if you leave? Can you cash in your unused vacation time and does it accrue from one year to the next? Can you cash in your unused CME time or unused sick time? Do you get to keep your accounts receivable or will they stay with the practice?
  40. Do I need to have an attorney review the contract? Maybe…The bigger the practice, the less negotiable the contract but it is usually worth a few hundred dollars for the peace of mind that an attorney will give you that you are not being taken advantage of.

 

July 21, 2016