Is it time for a financial self-exam?

Use your last year of residency or fellowship to develop a game plan for your financial future.

By James McNaughton, CFP | Financial Fitness | PracticeLink Tips | Spring 2016

 

Contract negotiations. Family considerations. Personal finances. Your anticipation of the end of residency can easily be stymied by the overwhelming stress of finding a job and all that it entails.

Understanding the basic financial planning concepts for physicians will arm you with the knowledge you need to conduct an efficient interview with a financial professional and hopefully minimize any mistakes or unnecessary products or fees. In this Financial Fitness article, we’ll touch on some general concepts of retirement planning, life insurance, disability insurance and recommended estate documents.

Retirement planning

There are three phases of an individual’s financial life cycle: asset accumulation, conservation or protection, and distribution.

For most professionals, asset accumulation begins in their early- to mid-20s and tends to last 25 to 30 years. Physicians start their asset accumulation phase much later than the average person—in some cases as late as their mid-30s. To overcome the late start, it is important to understand the value of compounding interest over time. Allow yourself to reap the rewards of your hard work, but understand that time is your best asset.

Most people will require 60 to 80 percent of their preretirement income to maintain a similar lifestyle in retirement. Work with an adviser who will assist you in calculating your future nest egg, and remain proactive with your plan. At a minimum, request annual or semi-annual meetings to review performance. It is much easier to alter your plan early in your career than a few years before retirement.

Life insurance

One of the most common questions I encounter from young physicians is, “How much life insurance do I need?” Unfortunately, there is no simple answer to that question. The amount of coverage needed depends on factors such as income or cash flow needs; expenses and debts; and spousal or dependents’ needs.

One of the most popular approaches used to determine an amount is the capital retention approach.

This method provides a death benefit amount that, along with other assets, is sufficient in providing a level of investment income that covers the projected needs of the family without invading the death benefit principal. If other income-producing assets are available, this would reduce the required death benefit.

“Term” is usually the most appropriate type of life insurance for young physicians, as it allows you to purchase the most death benefit while minimizing your premium. For example, if you purchased a $2.5 million term policy and your spouse could safely withdraw 4 percent ($100,000) without invading principal, would this amount of income be adequate to maintain a comfortable lifestyle? The ability to communicate between spouses regarding a gloomy topic is important.

Disability insurance

Disability insurance is a way for you to insure one of your most valuable assets: your income. After years of medical education and training, you now have the ability to maximize your income.

Disability insurance will pay if you meet the insurance company’s definition of disabled. This is very important for a young physician who has not had the time to save for retirement.

As you interview for jobs, your prospective employer may or may not offer disability insurance. Most employer-offered policies are “plain vanilla” policies that may not contain language needed for your specialty.

For example, if you’re interviewing as an orthopedic surgeon and your employer does not offer an own-occupation disability policy, it may be in your best interest to purchase one. This will allow you to receive benefits if you are no longer able to perform the duties of an orthopedic surgeon but still earn income while working in another occupation or medical specialty. Generally, disability insurance should replace 60 to 70 percent of your gross income.

Estate documents

One of the most overlooked aspects of financial planning is the creating or updating of simple estate documents, all of which can be drafted by an attorney. Three documents to consider are:

Wills. This is a legal document that provides the will maker (the “testator”) the opportunity to control the distribution of property. This document is extremely important for young families as it can name a guardian for minor children.

Living will or advance directive. This document can be drafted when in full capacity, giving personal directions to a physician regarding health care in the event of being severely disabled or suffering from a terminal illness.

Durable power of attorney for health care. This is a written document executed by one person (the principal) authorizing someone else to make medical decisions on the principal’s behalf. This power takes effect when the principal cannot give informed consent to a medical decision and not just in the event that the principal has a terminal illness.

Before you leave residency, examine your existing situation to establish a starting point. Educate yourself on the products and services you’ll need, and find an adviser who can help guide you through these decisions.

James McNaughton, CFP, is a partner at Siouxland Investment Group, LLP and financial adviser for Premier Physician Agency, LLC, a national consulting firm specializing in physician job search and contracts.

(Disclosure: James McNaughton is a registered representative and registered investment adviser representative of SWS Financial Services, Inc., a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Views and opinions expressed herein are solely the author’s, and SWS Financial Services, a member of FINRA and SIPC and a wholly owned subsidiary of Hilltop Holdings, Inc. (NYSE: HTH), with headquarters at 1201 Elm St., Ste 3500, Dallas, TX 75270 (214-859-1800). Premier Physician Agency, LLC is not affiliated with SWS Financial Services, Inc.)

 

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Do you qualify for student loan forgiveness?

Determine your eligibility to participate in Public Service Loan Forgiveness programs.

By Joy Sorensen Navarre | Financial Fitness | Winter 2016

 

Student loan debt is like an iceberg that has the potential to sink physicians financially unless they figure out how to manage it. Public Service Loan Forgiveness (PSLF) is a radar-like management tool for physician borrowers.

PSLF is a free federal program that started in 2007 and allows certain federal student loans to be forgiven after 10 years of on-time monthly payments, often at a reduced monthly payment amount, for physicians employed by nonprofit or public health systems.

In order to gain a better understanding of the program and how it works, here are the most common questions we receive from new physicians when they are deciding if PSLF is a fit for them.

How can I find out if my hospital qualifies?

The first thing to do is to identify who is paying you—are you an employee of the hospital or another entity? Some physicians are employees of the hospital. In many cases, physicians are employed by a physician group or a university. Your most recent IRS Form W-2 will identify your employer.

Second, determine the nonprofit status of your employer. Hospitals and physician groups may be nonprofit or for-profit. In some cases the status is unclear. Last year, a prestigious and profitable hospital told us their physician group was a for-profit entity. When we asked for confirmation, we learned their legal tax status was actually nonprofit. In order to figure out tax status, ask for the federal Employer Identification Number (EIN). By obtaining this information you can determine if the group is nonprofit and qualifies you for PSLF—or privately owned or for-profit, which would make you ineligible.

Will Congress change the program in the future? Or, if Congress changes it, what happens to me?

Because PSLF can be changed through an act of Congress, we find that physicians have questions about the future of the program. There are a few reasons why we recommend physician borrowers consider PSLF as a viable option now for loan forgiveness.

First, experts believe that the high cost of medical education and the growing physician shortage create compelling public policy reasons to continue the program into the future. In addition, the original purposes of the law still exist. PSLF was created by The College Cost Reduction and Access Act of 2007 to protect borrowers from excessive student loan repayment burdens and to encourage employment in the public and nonprofit sectors. The Act cut subsidies to private student loan lenders estimated to cost U.S. taxpayers $87 billion. Those savings are redirected to programs to help borrowers.

Second, precedents exist for extending benefits to current participants in the event of future changes. According to university financial aid officers, when changes are made to federal student loan programs, existing participants have been grandfathered in.

Finally, a borrower ultimately remains responsible for the repayment of student loans, so we recommend that our clients work with a financial advisor to establish and make regular contributions to a contingency fund to serve in the case of adverse changes.

I heard there is a $57,000 cap on amount forgiven. Is that true?

No. There is no cap on forgiveness with PSLF. This figure was proposed in President Obama’s 2015 budget proposal as a possible cap, but Congress took no action.

I made payments during residency. Do they count toward the 120 required for forgiveness?

The earlier physicians start repayment, the more benefit they will attain. However, many residents and fellows don’t have the time to fully understand the options. Recently a physician finishing her training told us, “We are dying for good information on student loan forgiveness. You made it easy.”

If the payments were made after October 1, 2007, on Federal Direct Loans where the location that the residency occurred is a qualifying public service organization and payments were made under a qualifying repayment plan, then they qualify.

Should I consolidate my loans?

This depends on the loans you have. If some or all of your loans are not eligible for PSLF and you wish to participate in the program, you will have to consolidate into a Direct Consolidation Loan. Only loans received under the Direct Loan Program are eligible for PSLF. If you have loans from programs that are not eligible, such as the FFEL Program or Perkins Loan Program, you can consolidate them into a Direct Consolidation Loan in order to qualify for PSLF.

It’s our goal to raise awareness about Public Service Loan Forgiveness. When early-career physicians understand their student loan forgiveness options, they feel equipped to make informed decisions and avoid financial icebergs.

Joy Sorensen Navarre is the president and founder of Navigate LLC, which has helped hundreds of early-career physicians understand their student loan repayment options, evaluate the results and make solid decisions. She can be reached at (612) 209-2382.

 

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Key items of an employer’s benefits package

Understanding the basics of your benefits can help you prepare for interviews and contract negotiations.

By James McNaughton, Financial Advisor | Fall 2015 | Financial Fitness

 

The financial planning principles that make up an employer’s benefits package simply are not a part of the education or training that you have received.

However, these items will be a vital part of your contract and may be discussed in-person by your potential employer. It’s important that you arrive to your interviews or negotiations with a basic understanding of the following terms so you can fully evaluate opportunities from a financial perspective.

Retirement savings plans

When it comes to retirement planning, a young physician’s best ally is time.

As you come out of residency, you may have a 30- to 40-year timeline before retirement, so take advantage of any employer-offered plan and supplement that plan according to your needs or goals.

The most common retirement plans among employers are 401(k)s and 403(b)s. For 2015, an employee can make a maximum contribution of $18,000. Those over age 50 can make an additional catch-up contribution of $6,000.

Find out when you are eligible to participate. If you need to fulfill one year of employment before becoming eligible, you may consider doing some type of retirement planning on your own that first year. Some employers may match your contributions into these plans while others may make no contribution at all.

These are details for which you need answers. If your prospective employer does contribute, ask if a vesting schedule and terms exist for you to see.

Most importantly, be proactive in your retirement planning and take advantage of any employer benefits.

Disability insurance

Young physicians should give disability insurance extra scrutiny. Not only does it protect the investment and sacrifices you’ve already made, but it also protects your future income potential.

Many employers will offer some variation of short- and long-term disability. Will your employer pay the premiums? Find out when your coverage starts and what elimination period you must fulfill. Ask what triggers a benefit and the amount paid for a monthly benefit. To what age is the benefit payable? Do they also include “own occupation” language? Many employers offer group policies that may not include this language. Investigate to see if these policies would fulfill your “risk” need. Alone, these policies may not be sufficient, and a supplemental policy may be necessary. Calculate your needs and do what is best for you and your family.

Life insurance

In most cases, term insurance is the best recommendation for young physicians. It is inexpensive and can be purchased for a specific term (such as a 30-year term policy). This makes term insurance ideal for covering debt such as mortgages or business loans. Your employer may offer life insurance that is one or two times your salary, or instead offer a flat amount. More than likely, this may not be adequate coverage for you and your family. Before purchasing supplemental life insurance through your employer, shop rates with other companies for the most cost-efficient policy. Also ensure that beneficiaries can be named for any employer-paid life insurance policy.

If you remain unsure about the packages or policies offered by an employer and whether they meet your needs at this stage of your career, or wonder if you should consider the procurement of additional coverage, seek the opinion of a licensed financial advisor with experience in working with other physicians.

James McNaughton is a partner at Siouxland Investment Group, LLP and Financial Advisor for Premier Physician Agency, LLC, a national consulting firm specializing in physician job search and contracts.

(Disclosure: James McNaughton is a registered representative and registered investment adviser representative of SWS Financial Services, Inc., a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Views and opinions expressed herein are soley the author’s, and SWS Financial Services, a member of FINRA and SIPC and a wholly owned subsidiary of Hilltop Holdings, Inc. (NYSE: HTH), with headquarters at 1201 Elm St., Ste 3500, Dallas, TX 75270 (214-859-1800). Premier Physician Agency, LLC is not affiliated with SWS Financial Services, Inc.)

 

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First, build your foundation

Your future income is your greatest asset. Here’s how to protect it.

By David Mandell, JD, MBA and H. Michael Lewellen, CFP | Financial Fitness | Summer 2015

 

As advisors to young physicians across the country, we are often asked, “What is the most important thing I should be doing financially in the first years of practice?”

Our answer is simple: You need to build a solid foundation. But the application of this concept is different for each physician.

Foundation building for young physicians depends on where they are in their personal lives (single, married, kids, etc.). Also, ideally it begins before you even leave training because, like most things, establishing the right habits is a key to building a financial foundation.

Most young physicians will see a significant increase in their incomes when they begin their practice. Up to this point, they have typically been living paycheck to paycheck, and a jump in income by five-fold or more can be a bit euphoric. With a “spend now and plan later” attitude, many young physicians will indulge a bit and make large purchases. Often taken too far, they find themselves once again living paycheck to paycheck. The attitude then becomes, “Once I make partner in a few years, I’ll address my financial plan.”

Though some splurging is in order, we try to get our young clients to focus on getting into the right habits and shielding what they have already built.

Young physicians’ greatest asset

The most important factor in the building of a foundation is to protect what you have already built. For many young physicians with little savings and large student loans, the question is often, “What have I built? I am in severe debt!” The answer is that they have actually built a significant asset that needs protecting: the value of their future income.

Given the significant investment made to become a practicing physician, it should not be surprising that the value of your future income is also significant.

For example, let’s say an orthopedic surgeon is offered a starting salary of $300,000, including benefits. Assuming this physician plans on practicing for 30 years (and 3.5% inflation), the present value of this annual income is more than $5.5 million—even if that physician never makes more than $300,000 per year, including inflation.

Most people would think an asset this valuable is worth protecting.

What is needed to protect this asset? That depends on who they are protecting it for, if it’s for just themselves or for others dependent on them. For either scenario, physicians need to protect their ability to earn this income in the future. That is why disability income insurance is so critical, and is tool number one for young physicians to implement.

Disability insurance

Disability income insurance conceptually is straightforward: If you become disabled, it will pay you. For young physicians (and on into your 50s), this protection is critical because you have not accumulated the savings to support yourself and your family in case you can’t work as a physician.

When looking at purchasing individual disability income insurance, physicians need to determine what their true need is, not how much they can get. If monthly expenses are $3,000 a month, but an insurance salesman says you can get $5,000 a month, you are over-insuring yourself. Though having more coverage than what’s needed is not always wrong, controlling expenses in order to build the proper foundation is more important.

Physicians will also want to make sure they’re purchasing adequate coverage. The definition of disability should be occupation-specific; thus a physician cannot be forced to go back to work in another field. Residual or partial disability rider is another important part of the contract, which in case the physician suffers a partial disability, they can still work part-time in their occupation. Typically there has to be an income loss of 20 percent or greater. Also, in the event of a long-term disability, having a cost-of-living rider as an inflationary protector is important.

Young physicians should also beware of what is available through an employer. The issue with group insurance is that it covers the masses. This can lead to coverage that is not occupation specific, has short benefit periods, does not have a partial or inflation protection rider, and can be canceled at any time. While that is not the case with all hospitals, generally group insurance is not adequate for a young physician.

Often, there are discounts in place that are connected to hospitals that allow young physicians to purchase individual disability income insurance at a lower rate or with unisex rates. The unisex rate option is the most ideal and has the greatest positive impact on female physicians.

Life insurance

Young physicians with financial dependents—typically children or spouses, but sometimes other family members—need to focus on protecting their future income value not only against disability, but also against death. This is why life insurance is tool number two that we typically recommend.

Much like disability income insurance, you need to first determine what your need is from a death benefit perspective to make sure you are being cost efficient. The way to determine your need is to decide what expenses would need to be covered. For example: mortgage, education funding for children, car loans and other debts and income support for spouse.

Young physicians in a position of purchasing life insurance should probably consider term insurance as their best option.

Term insurance is inexpensive and provides a death benefit for a period of time (10, 20, 30 years). This does not mean term insurance is the only or best type of insurance; it is generally best for a young physician who has a specific need. Permanent life insurance can be a very tax efficient saving vehicle that provides tax-free growth and tax-free distributions, if structured properly, and can provide great asset protection depending on the state of residence. For these reasons, permanent (cash value) insurance is often selected even by young physicians as a wealth accumulation and protection vehicle.

At the outset of their medical career, physicians in training are told “first, do no harm.” As advisors to young physicians nationwide who are at the outset of their financial careers, we give similar advice: “First, build your foundation.”

David B. Mandell, JD, MBA, is a former attorney and author of 10 books for physicians, including For Doctors Only: A Guide to Working Less & Building More, as well a number of state books. He is a principal of the financial consulting firm OJM Group where H. Michael Lewellen, CFP serves as director of financial planning. They can be reached at (877) 656-4362.

 

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When to talk money?

Knowing how and when to bring up compensation discussions can affect the quality of life you enjoy as a new employee.

By Patrice Streicher | Financial Fitness | Winter 2015

 

The money section of the Wall Street Journal this September referenced a study by Northwestern Mutual Life Insurance in which it concluded that Americans would rather talk about sex than money.

Many of us have come to learn that it is impolite to discuss money, which may account for the reason that so many of us are uncomfortable with the topic—much less tackling salary negotiations.

Over the last two decades, I have served as a liaison between CEOs and physician candidates during the various stages of the recruitment process, including contract negotiations. Empowerment in salary negotiations comes from knowledge, strategic planning, timing and an understanding of the rules of engagement.

Money terms

Knowing the differences between salary, productivity and financial packages is important. They are not synonyms. Salary, along with the productivity piece, is income reported on your W2; a financial package includes your salary, productivity, signing bonus, CME allocation, benefits (i.e. insurances, retirement plans, etc.), relocation stipend and any other items assigned a dollar value. In layman’s terms, a financial package is akin to an employee’s hidden paycheck. Be advised that when it comes to financial packages, there are governing bodies that impose boundaries and mandates on salaries, benefits and incentives legally acceptable in a job offer to a physician candidate.

Knowledge is power

One the best pieces of advice is to become knowledgeable about salaries using data collated by reliable sources such as MGMA and other organizations offering compensation benchmarks by region, state, practice structure and setting. Also seek real-time salary benchmarks from colleagues who have recently accepted new positions. They can speak about their experiences in negotiating deals along with offers they received during their practice search. When the topic of salary is initiated by the prospective employer, it is advisable and reasonable for you to ask about the salary range of recently employed physicians working in the practice. Additionally, you may want to seek any documentation that substantiates your anticipated compensation, which is often derived from a medical staff plan conducted by the hospital.

Building a foundation

The first steps toward a successful salary discussion relies on the initial interactions between parties and their perceptions of each other.

Your ability to make a personal and professional connection with practice decision-makers is paramount. You must also have the ability to succinctly communicate your skill set in a way that aligns with the practice’s needs, yet in a way that doesn’t appear boastful. The end game for you is to build a foundation of respect, cohesiveness and mutual interest in taking next steps.

Salary discussions should be initiated by the practice, not you. For the prospective employer, recruiting new associates to a practice is expensive and one that requires a deliberate, cautious approach. The decision-maker must have confidence that you match the personality and culture of the practice before they will even utter a syllable about money to you.

Timing is everything

Despite etiquette debriefings with physician candidates about the appropriate timing to discuss salary, I have on occasion had physician candidates who have gone rogue during an initial conversation with a practice leader.

A common mistake made by these impatient candidates is positioning a premature salary discussion as a courtesy when their true agenda is transparently evident: “Before we begin, as I do not want to waste your time or mine, how much are you offering?” In post-interview conversations with medical directors and CEOs on the receiving end of this dialogue, I’ve learned that many not only eliminate these candidates from consideration, but also make comments such as, “They were too money motivated; we have decided to pass on this candidate, as they are not a match for our practice.” One physician leader asserted in a conversation with me, “…since when is it commonplace to offer a dollar amount before you know what you are buying?” When it comes to talking about compensation, patience, knowledge and timing are everything.

The idiom “all in good time” should be the mantra for physicians seeking new positions. Rest assured everyone in the process understands you are not a volunteer and expect a fair wage to share your talents. That said, your rushing or pressuring the salary conversation before the appropriate time is not only ill mannered but myopic. Successful negotiations require emotional intelligence combined with confidence supported by factual data and market information.

Conduct yourself in a calm, controlled and professional manner in all interactions with the practice. As is true in all negotiations, be prepared to walk away if discussions experience an impasse. Options are not only empowering, but also liberating. Have a minimum of two and no more than three positions as finalists. That’s not to suggest playing contracts against each other but rather giving yourself the option to negotiate in good faith effort with a safety net.

This brings me to another observation: When it comes to negotiating, people invest their egos into the interaction. Seems as though everyone wants a story to tell friends about how they outsmarted the opponent, which resulted in their being a master negotiator. This may work when buying a car, but when it comes to employment agreements, administrators and their board of directors, for the most part, have structured an approved financial package.

This is not to say that an offer should be taken at face value and that dollars cannot be moved from item one to item two in structuring your best deal. But there are legal and financial boundaries that confine all parties within a negotiation.

Rules of engagement

The conversation about salary and benefits is usually broached during your site interview by the practice. The initiator should be the practice representative who almost always is the practice’s decision-maker and is serving as the administrator or lead physician.

As a rule of thumb, confine compensation negotiations to your recruiter and the individual in the practice who possesses the authority to say “yes.”

As a recommendation, talk with your recruiter about your financial criteria before speaking with the practice. The recruiter should have insights about the group’s standard agreements, salary ranges, A/R, anticipated revenue and other vital information.

Patrice Streicher is an associate director at VISTA Physician Search & Consulting.

 

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Insurance: tails and types

It’s up to you to protect yourself and your estate when things go wrong.

By Marcia Hoyn Noyes | Fall 2014 | Financial Fitness

 

You’ve trained long and hard to practice medicine. You now strive to provide the best care for your patients. However, accidents happen. And when they do, you must be prepared for the legal entanglements that can arise, sometimes even after your death.

Medical malpractice defense attorney Elizabeth L.B. Greene, now a partner at Mirick O’Connell in Massachusetts, worked on a medical malpractice case filed against an estate almost 20 years ago. The physician, who had practiced for more than 50 years, had entered retirement prior to his death. After his passing, a patient filed a medical malpractice claim against his estate. Even though the doctor had no prior notice of the claim, the patient’s attorney filed within the applicable statute of limitations.

Unfortunately, the doctor did not have tail insurance.

Greene says if tail insurance had been in place at the time of his death, then the legal costs and the verdict against the physician would not have been borne by his estate nor impacted the administration of the estate.

“In addition, the lack of tail insurance required the physician’s family members to be more involved in the case than they would have been if a claims representative had been involved,” explains Greene.

Had the insurance been in place, the family would have still found the case to be a burden on top of their own personal loss. However, Greene says that the lack of tail insurance “had a more significant impact on [the family’s] time and emotions.”

With many family and friends as physicians, Greene says she understands the challenges and pain that a medical malpractice claim can cause. “It often attacks physicians to the core of their being.”

Hospice and palliative medicine physician Steve Grabowski, M.D., of Golden, Colorado, attended a medical conference with a session on malpractice issues a few years ago. “The session presenter asked everyone in the audience who had been sued sometime in the past to please stand; almost everyone in the room stood up.” Grabowski says he saw tears in the eyes of most of the doctors when they suddenly realized they were not alone. “It’s this dirty little secret that doctors carry with them, because the first thing doctors are told by attorneys after a suit is filed is to not talk about it to anyone,” he says. “While good legal advice, talking to friends and colleagues can be personally helpful in working through a difficult situation.”

Malpractice insurance, also known as professional liability coverage, encompasses much more than medical errors or omissions. It also covers breach of duty, misstatements, negligence and wrongful acts. Whether a claim is valid or not, without insurance you’d still spend a great deal defending yourself.

So how much do you actually need? Greene says that in her experience, the answer differs based on several factors: geographic location, practice setting and area of medical specialty. Kathy Brown, COPIC Insurance’s vice president of corporate marketing and communications, says hospitals also have requirements regarding the limits of liability a physician must carry in order to be granted hospital privileges.

“In addition, most state regulations include financial responsibility and/or minimum requirements for limits of liability. In highly litigious states, physicians often carry higher limits than those required,” she says.

Types of malpractice coverage

Two types of professional liability coverage are available to most doctors: occurrence and claims-made policies.

Occurrence: You are covered for any incident that occurs while your policy is in force, despite when that claim may arise. Let’s say a patient comes forward with a claim that you were negligent in your medical diagnosis nine years ago while you were insured. Even though you may have moved on to another practice, stopped practicing, retired or died, you or your estate is still covered. Occurrence is the most expensive of the two types of malpractice insurance available, and many carriers are no longer carrying this type of coverage.

Claims-made: You are protected for any claim that is made during the term of the policy that is related to care that was provided while insured. Once the policy expires, you have no coverage, even if the claim happened while you were covered. One advantage of this type of policy is that it is discounted in the early years of a practice and then over time rises to better reflect the actual value—typically around the fifth year.

If you have claims-made insurance and want to ensure that you will be covered after the policy expires, you must purchase “tail” coverage.

Tail coverage: Protects you against claims that arise while the policy was in force but after the policy has expired. This coverage might be appropriate for any number of circumstances, including:

  • Disability
  • Quitting medical practice
  • Death
  • Retirement

Grabowski explains that prior to retirement, physicians may want to cut back their practice and just work part time. “At that point, a physician may be able to continue his or her coverage, but at a decreased premium,” he says. “I think going without tail coverage once you retire is foolish and quite risky.”

Nose coverage (also referred to as prior acts coverage): A supplemental insurance available for when you transition to another employer or want to change your insurance carrier. Much like “tail” coverage when you are winding down from your business, “nose” insurance protects you for unknown and unreported claims that occurred before the effective date of your new insurance.

Comprehensive liability insurance will protect you, your practice and family even after your life ends, so understanding the various types of insurance available will give you peace of mind in knowing that you are covered adequately.

Marcia Noyes is a frequent contributor to PracticeLink Magazine.

 

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What’s your exit strategy?

Before you join your next practice, give thought to how you’ll leave it.

By Steven Abernathy and Brian Luster | Financial Fitness | Spring 2014

 

When you’re considering an offer of employment, going over your exit strategy before you sign on the dotted line might be the last thing on your mind. However, paying attention to some of the more common issues can save you time and spare you undue stress.

These days, there is no question that changes throughout a physician’s career—moving from private practice to hospital or corporate employment, for example, can be stressful. What do you need to do to plan a smooth conversion or exit strategy before closing your office door one last time? How are loose ends resolved upon your departure? Is there a succession plan in place? If loyal patients wish to see you at the new practice, are you contracted to honor a pre-existing residual payment plan with your old employer?

Countless issues may rear their heads, including non-competes, buyouts, client communication and succession planning. Successful transitions begin with a sensible,  realistic outlook about your career path and careful planning from your early working life through retirement.

Of course, after you’ve signed on and helped build a thriving practice, you may not be the one leaving. A partner’s departure will greatly affect your professional situation—and also your financial one.

Imagine this example: One of your junior medical partners, enticed by a lucrative offer from a nearby university hospital, decides to jump ship. There’s nothing too controversial about this…until the defector begins not only to poach clients, but also to divulge certain trade secrets and procedures that you developed.

What could you learn from that example?

Lesson 1: When you or your medical partners are transitioning, properly drafted non-compete agreements are essential.

In the imagined example, if you had prepared such an agreement, you would have had leverage to fight against the departing physician’s actions. Though non-compete agreements are generally disfavored on public policy grounds, if they are necessary to protect business interests and limited in duration and geographic proximity, they can help preclude this type of issue.

Lesson 2: Put agreements in writing as soon as employment is confirmed.

Much like a prenuptial agreement, a well-drafted non-compete can serve as a blueprint delineating what type of post-employment behavior is or is not permitted.

If you are an employer, we recommend you also add the essential verbiage to your employee handbook.

If you still have years of work ahead of you, be advised to clarify the specifics around what “assets” are yours (patients, patient files, procedures/techniques, proprietary information) and what are not. Though your patients are free to visit any doctor they wish, an employer with foresight may write any number of “non-compete” type restrictions into your contract. For example: “For any patient who sees you at your new practice, you owe the old practice two times the cost of the office visit.”

This may not be top of mind for many new physicians; attractive salaries, employee benefits and an institution at-the-ready to handle insurance claims, EMR conversions and other pesky administrative and system tasks have led many physicians to sign on the dotted line. Be sure to know what you are to receive—and what you may be giving up.

Lesson 3: If you are planning to move to another practice, or you are retiring, let your patients know well ahead of time.

What constitutes ample notice varies around the country, but a good place to start would be your state’s licensing board or medical societies. Different notice requirements may be required for specific specialties, as well. According to The New England Journal of Medicine, internal medicine physicians are advised to provide at least three months of notice; psychiatrists are counseled to provide six.

The obvious import of providing notice is to both thank the patients and to ensure they understand they have the option of remaining with the practice. Patients will undoubtedly appreciate this courtesy.

Timely notification is not simply a manner of courtesy, but also of protection. Imagine that you’re about to retire. Eager to begin traveling the country with your wife, you neglect to arrange permission to access your patients’ records after retirement and, at least in one patient’s case, to release medical records. Three months later, your cross-country journey is rudely interrupted by a malpractice suit. Your failure to release the patient’s records was a major cornerstone of the suit; worse yet, your main line of defense is tied up in the patient’s medical records—records that you now have trouble accessing.

Lesson 4: Make sure you are not disqualified on careless technicalities.

Before leaving a practice, be aware of the type of malpractice insurance you’ll need. The amount of doctors who don’t know the difference between “claims made” and “occurrence” coverage is baffling. Such ignorance can be costly.

If our fictitious traveling retired physician, for example, had “claims made” coverage and neglected to purchase “tail insurance” for claims filed after the termination of his policy, he would be unprotected. This may have been the case if he mistakenly believed he had “occurrence” coverage, where his carrier would be responsible for claims that arose while he was being covered (which presumably would have been when he was practicing). Few things are more disconcerting than being sued after crossing the finish line.

Make sure you have the proper professionals handling the transaction to propose the right questions and get the answers you need to move forward worry-free. This is complicated work and the risks involved can be foreboding.

Steven Abernathy (sabernathy@abbygroup.com) is founder, principal and chairman of The Abernathy Group II where Brian Luster (bluster@abbygroup.com) is a principal. They can be reached at (888) 422-2947. The Abernathy Group II Family Office sells no products and receives no commissions. It is independent, employee-owned and governed by its Advisory Board comprised entirely of thought-leading physicians and professionals.

 

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Can you recession-proof your career?

Seven resolutions that can help you build and protect your wealth no matter what the future has in store.

By Steven Abernathy and Brian Luster | Financial Fitness | Winter 2014

 

You’ve finished medical school, gone through the rigors of a tough residency, landed a plum job in your specialty. Now what?
Aside from working long hours, the demands of your office or hospital group, malpractice insurance, the EMR, Obamacare, business or school debt—and whatever future surprises will be thrown at the medical profession—your career is a stable one. But is it recession-proof?

Though joining the medical profession as a physician has long been considered a responsible and effective way to make a contribution to the greater good while earning a comfortable living, physicians today must plan ahead. Impulsive, risky financial choices are not an option.

Unfortunately, many physicians who will eventually become or are already members of the mass affluent all too often are investing like members of the middle class. This means not only mistaking salespeople for experts and failing to integrate advisors, but also not having a savvy eye to the future.

Though no one holds a crystal ball, there are known certainties ahead:

• Physicians are working more and retiring later. Do you have a set time to retire, or will you delay retirement and continue working? Remember, if you own your medical practice, like any business, many factors affect its value. A retiring physician cannot transfer managed care contracts, so this may depress the sale price, giving potential purchasers little incentive to buy. And because hospitals are choosing to pay through performance incentives rather than an upfront premium, this too lessens a practice’s salability.

• Despite a high monthly income, doctors seldom create and preserve generational wealth.  Medical doctors, as well as other professionals, fail to employ fiduciary stewards and instead rely on those bound by “suitability.” Only a fiduciary represents an investor’s interests 100 percent of the time and adheres to a coordinated plan designed exclusively for their family enterprise. An M.D. with a specialty or subspecialty averages $350,000 annually. If, over time, just 25 percent of that is saved, given the power of compounding, there should be, by age 60, $7 million available for retirement income. However, this is rarely the case! When wealth is properly looked after, its growth is prioritized over a “hot” fad. Professional investors, such as Warren Buffett, are praised for their temperance and patience. Not every horse is a winner—nor is every stock.  Professional investors are not incented to sell or promote products; their work constitutes making fiduciary decisions for clients.

More than $1.5 trillion in taxable money is invested at family offices, yet they’re still not something that successful physicians, businesspeople, and entrepreneurs learn about as a matter of course. According to Penta, published by Barron’s, the greatest wealth enterprise most people have never heard of continues to grow and thrive. Multi-family offices continue to spring up across the country and around the world. Yet their profile remains astonishingly low.

It’s not only about earning wealth; it’s about preserving wealth. And knowing the mechanisms to do this are what demarcate a successful family enterprise from the others.  Though there are no ways to determine exactly what will be ahead for medical doctors in the 21st century, it is possible to implement a thoughtful, strategic plan focusing on the goals of every doctor and his or her family.

We recommend committing to the following 7 fundamental rules:
1. Purchase products and services from established providers of wealth management services and advice rather than working with commissioned salespeople.

2. Employ up-to-date, accurate reporting that tracks progress and progression over time and offers a clear picture of the here and now.

3. Focus on sound decision-making, oversight and preparation for a strategic and clear succession plan.

4. Understand each individual’s role in managing both the family’s affairs and the roles of support staff.

5. Clarify and connect how all activities required to manage the affluence are connected, and identify effective providers to effectively achieve each action.

6. Decide to employ strategic, purposeful management of all assets and wealth.

7. Adhere to and honor a cohesive plan.

Former SEC Chief Arthur Levitt wrote: “65 million American households will probably fail to realize one or more of their major life goals because they have not developed a basic financial plan.” Avoid being one of those households. Make a plan with a professional money manager, adhere to it, and review it periodically.

Though the basic financial blueprint for every family will be different, honoring the ideas above will create awareness and lay the foundation for making intelligent decisions around your family’s wealth plan.

Steven Abernathy (sabernathy@abbygroup.com) is founder, principal and chairman of The Abernathy Group II where

Brian Luster (bluster@abbygroup.com) is a principal. They can be reached at (888) 422-2947.
The Abernathy Group II Family Office sells no products, and receives no commissions. It is independent, employee-owned, and governed by its Advisory Board comprised entirely of thought-leading physicians and professionals.

 

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Fatal financial planning flaws

Are you making one (or both) of these mistakes physicians make?

By By David B. Mandell, JD, MBA and Jason M. O’Dell, MS, CWM | Fall 2013 | Financial Fitness

 

 

As authors of 11 books for physicians, including For Doctors Only: A Guide to Working Less & Building More, we have consulted with thousands of doctors of all specialties during the last decade.

From this experience, we have become intimately familiar with the mistakes physicians make when working with their CPAs, attorneys and other financial advisors. Whether it is in the area of tax, asset protection, retirement planning or other areas, the result is almost always the same. We leave the meetings or conference calls asking ourselves, “How could this doctor get such poor, uncreative, or just plain wrong advice?” It would be laughable if it weren’t so troubling.

It is not surprising that physicians do not get the value they should out of their professional advisors. While the typical specialty physician has nearly 25,000 hours of training in his or her profession, there is a grand total of zero hours of training in business or financial issues related to the business of being a doctor.

After learning how to use specialists in other areas of medicine, doctors receive no training in how to choose or evaluate the advisors whose advice and experience will be the backbone of the their financial plans for their entire careers.

Doctors lack the spare time and training to do their own planning and have virtually no training on how to find and evaluate the right specialists to assist them, so it is no wonder that most are ill-served by their professional advisors. In our experience, fewer than 5 percent of physicians are properly advised by a professional team.

In this article, we will point out the common flaws we see in physician-advisor relationships.

 

FLAW #1: Staying with an advisor you’ve outgrown
The first mistake the overwhelming majority of physicians make in the financial, legal or tax aspect of their careers is how they initially choose their professional advisor. Whether it is their CPA, investment professional or attorney, many physicians make a poor choice because their method of choosing an advisor is flawed.

When you consider the typical pattern, this is not surprising. Most doctors choose their advisors when they are in residency or fellowship, as this is the time when most doctors begin to make money or start a family. The doctors may need some life or disability insurance, a will, and someone to prepare and file tax returns. Working long hours without financial training or the means by which to evaluate an advisor, doctors typically do what other busy people do and take the path of least resistance (and minimum time commitment). They use the advisor the older residents use, find someone the local medical society recommends, or hire a friend or family member.

Though this unscientific approach is obviously flawed, it serves its purpose when there are bigger challenges at hand (like 20-hour workdays and finding a job). Your life is so hectic, you just need to “get it done fast.” The advisor you choose at this point simply has to be decent and cheap—and that is good enough. Like a triage nurse in an emergency room, a top-trained specialist is unnecessary when all you need are a few basic stitches.

What is alarming to us is not this initial choice of advisor, but rather the fact that most physicians actually stay with these same advisors who handled their triage planning in residency for the rest of their careers. The typical justification for this is, in our opinion, rarely anything concrete or acceptable. Doctors give us explanations like, “we have been together so long, I’d hate to change now,” or “if it ain’t broke, don’t fix it.” This begs the question: How do you know “it ain’t broke” if you don’t get a second opinion?

Most alarming to us (and something we see every day) is when a physician stays with an advisor when the doctor has clearly outgrown the expertise of the advisor. Consider the following real-life example:

 

Case Study: Oscar the Orthopedic Surgeon
Oscar, an orthopedic surgeon living in Nevada, contacted us after reading one of our books. Though his income was over $1 million per year and he was part of an extremely successful practice, he used the same New York-based lawyer he retained to create his wills 10 years before, when he was a resident.

Not only was this attorney not licensed in Nevada, but he continued to advise Oscar in areas that were clearly beyond his expertise. While he was certainly a nice gentleman, and perhaps was competent for doing basic planning for someone with minimal tax or estate planning concerns, he had no concept of advanced techniques that a physician making over $1 million per year should be considering. He had no knowledge of fringe benefit plans, asset protection planning or other fairly routine planning that we routinely implement for high-income physicians. While this gentleman may have been an acceptable choice for Oscar when he was a resident, it was a total disservice to the surgeon at this point to continue to use this attorney as his primary advisor.

 

Doctors advise patients to get a second opinion before opting for surgery or chemotherapy, but they don’t get their own second opinion before agreeing to pay hundreds of thousands of dollars each year in taxes. Oscar’s desire to not hurt his attorney’s feelings had potentially cost him more than $1 million so far.

The idea that you can outgrow an advisor may seem obvious to you in the medical arena—you would no longer send your child to a pediatrician when the child becomes an adult. Yet for some inexplicable reason, this surgeon continued to use his attorney as his lead advisor, despite our numerous recommendations that someone else (not necessarily us) may be more appropriate.

•    How did you choose the professional advisors you work with today?
•    How many other professionals did you interview prior to choosing one?
•    Have you periodically interviewed others as your needs have changed?

 

Flaw #2: Failing to understand sub-specialties in tax, law and finance
If you needed a stent put into your aortic valve, you would not go to a general practitioner. Moreover, you would not consult with any specialists outside of cardiology. In fact, you wouldn’t even settle with seeing the standard cardiologist. You would only seek the help of an interventional cardiologist to handle this procedure. The point is that medicine is a highly specialized discipline. If you have a specific issue, you will seek out a physician properly trained and experienced with that particular issue.

Utilizing a specialist to assist you with your heath concerns seems obvious. However, our experience has shown that, in the areas of law, taxation and finance, doctors completely fail to apply this same concept. To illustrate this, let’s consider the area of taxation.

The ever-changing United States tax law is the most complex set of rules ever created by one society. The lengthy and confusing Internal Revenue Code is only the beginning. IRS revenue rulings, private letter rulings, tax memoranda, announcements, and circulars—as well as tax court and federal court cases—only serve to make the field that much more difficult to understand. The quantity of information is so vast that many law libraries devote an entire floor to tax materials. No single person can possibly be an expert in all areas of tax law.

Nevertheless, each physician typically relies on one CPA to serve as their “tax advisor” in all areas of tax. The taxation issues that require guidance typically include retirement planning, income structuring (salary vs. bonus), payroll tax, corporate structure (whether to be an “S” or “C” corporation), compensation (whether to implement a deferred compensation plan), estate tax planning, taxation on sales of real estate, individual tax returns, corporate tax returns, and buying or selling a practice. While these issues all fall within the scope of “tax,” each exists as a discrete sub-specialty with its own unique knowledge base. As if the generic “tax advisor” weren’t yet over-extended, we have seen many physicians ask their tax advisor to provide guidance in areas far outside of tax altogether, such as asset protection or investing.

One method to overcome this problem is to bring in a firm that will bring new “value-added” subspecialty knowledge.

However, the key success factor here is to make sure that your local CPA and the outside firm can work together for your benefit. If additional expertise can be brought to bear for your planning, and your current CPA understands that this outside firm is not trying to take you as an accounting client, you can benefit significantly.

Physicians need to take their own advice.  You encourage your patients to seek second opinions and rely on specialists to address their complex medical needs. Your financial needs are similarly complex, and getting a second opinion and utilizing specialized advisors is critical to your long-term financial well-being.

 

David B. Mandell, JD, MBA, is an attorney and author of five national books for doctors, including FOR DOCTORS Only: A Guide to Working Less & Building More, as well a number of state books. He is a principal of the financial consulting firm OJM Group (ojmgroup.com) along with Jason M. O’Dell, MS, CWM, who is also a principal and author. They can be reached at (877) 656-4362 or mandell@ojmgroup.com.

 

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What does it take to grow rich?

Three strategies to build the lifestyle you deserve.

By Brian Luster and Steven Abernathy | Financial Fitness | Spring 2013

 

Did you work your way through medical school, pay off debt, make tremendous sacrifices to end up in a successful medical practice, and believe that wealth would just “happen” once you started earning the salary you envisioned?

It seems like common sense: save more, have more. But the way most people handle their finances is broken.
Take note: If you don’t plan to accumulate wealth, you may not. With the monumental changes ahead in the practice of medicine, lack of planning can saddle doctors and their families with unseen burdens.

There is a good reason why families like the Rockefellers have built and maintained wealth over several generations while, according to The Family Business Institute, 60 percent of affluent families have historically lost their wealth in the second generation, and 90 percent have lost their wealth by the third.

Today, you can protect and grow your wealth the way the Rockefellers did and today’s billionaires do. How? Make savvy wealth management choices—and know what’s out there.

There are three distinct strategies every high net worth individual and family must adopt to ensure their business and financial lives are being handled effectively.

Strategy 1:
Focus on protecting your assets from litigation and other claims, and actively work on succession planning.
Asset protection is a vital piece of the wealth creation puzzle. Remember: If you have money, there is always someone who wants to take it from you! Through proper planning and the use of trusts, limited partnerships and various corporate structures, you can often protect the vast majority of your hard-earned assets from creditors, litigators, malpractice claims, the government (taxes, Medicaid, etc…) and even former spouses or business partners.

The better you learn to protect your assets, the more assets you’ll have to ensure that you can live the lifestyle you want today and also have generational wealth to pass on to your children and grandchildren.

As crazy as it may sound, more than one in three people with a net worth of $10 million or more do not currently have a will or a trust and have not named a trustee or administrator for their estate. According to Beating the Midas Curse from Rodney Zeeb and Perry L. Cochell, 37 percent of the people who have the most to lose have done little or nothing to protect their wealth for future generations.

Cornelius Vanderbilt was the world’s richest man of his generation with a fortune of over $100 million (equal to $4.8 billion today). Wanting to keep his fortune intact, he left $95 million to just one of his sons, William, who, when he died, divided what had become a vast fortune at the time, $200 million, among all of his children.

The next two generations spent lavishly, very quickly squandering the entire fortune, destroying what Cornelius and William had built. It’s a prime example of the old adage “Shirt sleeves to shirt sleeves in three generations.”

Strategy 2:
Hire a team of independent financial experts whose goals are aligned with your own.
Before there was any real regulation, people like the Rockefellers took steps to ensure that, when they invested their money, they did it with expert research and guidance.

Instead of just trusting the advice of a broker, banker or commissioned salesperson, they hired independent financial advisors to work directly for the family. These advisors studied and weighed the merits and risks of each investment opportunity to understand how it would fit into the bigger picture before making any decision. This is similar to how a Family Office Model operates today.

Today’s multi-family office model lowers the costs of hiring an expert team, all of whom serve as fiduciaries—meaning they are legally obligated to act in your best interests. Why is this so important?
Less than 3,000 of the 1 million-plus registered securities representatives and insurance agents in the United States are fiduciaries. We recommend our clients only engage people who have audited track records and proven experience working with high net worth individuals and families.

Strategy 3:
Achieve optimal financial outcomes through teamwork.
Expert advice must be well coordinated, and all aspects of every decision must be taken into consideration to ensure your investments work together for your benefit. If a professional does not oversee and integrate your team, chances are your business and personal investments are not optimized. Every piece of the puzzle needs to be evaluated and understood. When you make a decision, know how it will affect the other parts of your financial life.

Coordination not only saves hours, but also in many cases is far less expensive than a brokerage relationship. When the effects of each possibility are thoroughly evaluated and your representative brings results to you, this is the Family Office at work. There are specialized Family Offices with a focus on various professional arenas.

The legal and financial decisions and plans you make today should include a component that will maximize the amount of wealth to be passed along to the next generation. Enjoying your lifestyle starts with the right mindset; dedicate yourself fully to your medical practice and delegate wealth management matters.

Steven Abernathy (sabernathy@abbygroup.com) and Brian Luster (bluster@abbygroup.com) are from The Abernathy Group II Family Office (abernathygroupfamilyoffice.com), which sells no products and receives no commissions. It is independent, employee-owned, and governed by an Advisory Board comprised of thought-leading physicians and professionals.

The information contained in this article is provided solely for convenience purposes only and all users thereof should be guided accordingly. The Abernathy Group II does not hold itself out as a legal or tax adviser. If you wish to receive a legal opinion or tax advice on the matter(s) in this report please contact our offices and we will refer you to an appropriate legal practitioner.

 

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