The financial mistakes new physicians make

Your compensation package is only part of your wealth plan. How you manage that income is crucial.

By Brian Luster and Steven Abernathy | Fall 2012 | Financial Fitness

 

In the past, it was simple: Get through the rigors of a medical school education, training, interning, residencies. Become a physician. Earn a great living. Right? Not so these days. Being a physician just isn’t as “easy” as it used to be.

The Physician Family Office recently completed an extensive study that confirmed what we all know to be true: Reimbursement is falling while the costs of operating a practice are rising.

And the latest Medical Malpractice Insurance Survey conducted by Medical Liability Mutual of New York shows dramatic increases in malpractice insurance rates across the board: they rose 54 percent for OB/GYNs, 54 percent for internal medicine, and an astounding 70 percent for general surgeons. Meanwhile, the National Practitioner Data Bank shows litigation rising significantly over the past two decades. The cost of resolving this litigation has risen 66 percent, with the average cost of resolving malpractice suits approximating $330,000.

Physicians must now see more patients and perform more procedures just to maintain their current income level.

“A lot can happen, and no one attains mastery of business management and wealth management skills–including portfolio management, legal asset protection and estate planning in medical school.” says Physician Family Office Advisory Board Member Steven Almany, M.D., an interventional cardiologist and partner of the Michigan Heart Group.

So with all of these challenges, and the added possible burdens of debt, how can a new physician avoid common financial pitfalls? It turns out that for many physicians, it’s the choices made outside of the practice of medicine that are responsible for their failure to realize their full wealth potential.

Today the average M.D. with a specialty or subspecialty makes approximately $350,000. If they can save just 25 percent of their annual income, by the time they are 60, there should be over $7 million saved for retirement. Sounds easy enough, but this is an outcome that few are able to realize.

Here are what we found to be the six most common wealth preservation mistakes made universally by medical doctors–and how to successfully avoid them.

1. Successful physicians are failing to integrate their advisors.
Typically, a physician surrounds himself with financial advisors, brokers, an accountant, an estate planning attorney, an insurance agent, a tax planning attorney and many others. If each one isn’t communicating with the other before dispensing advice, chances are their advice will either negate the effects of the others, or they will give you counsel that will actually destroy wealth.

Solution: In order to be effective, your advisors must be integrated, in communication and working toward common and clearly defined objectives.

2. Less than 1 percent of all financial advisors are acting as a fiduciary.
This alarming fact comes directly from the National Association of Personal Financial Advisors.

In most instances, advisors are your adversaries, legally obligated to hold their employer’s financial interests ahead of their client’s. Perhaps this is why there were more than 3,200 investor complaints and nearly
5,000 new arbitration cases against brokerage firms in 2011, according to CEG Worldwide LLC. That means that there are 23 new complaints and arbitration cases reported every day. If that’s not disturbing enough, often buried in the fine print of legal jargon on standard non-fiduciary agreements, people are advised: “Our interests may not always be the same as yours.”

So unless a doctor has reviewed literally all of the lines with an attorney or other fiduciary who will act in his best interest, it is highly likely that he will be wasting money.

Solution: Have your advisors sign a Fiduciary Oath that assures, in writing, their actions will be aligned with yours and they will prioritize your wealth interests and goals ahead of their own.

3. Seeking counsel from salesmen.
Even if you found one of the 2,500 U.S. advisors upheld to the fiduciary standard, what are the chances that their advice is of any value? It’s actually quite low. The problem is that most of the advisors out there are not experts; they are salesmen or relationship managers.

Solution: Seek out professionals who have been managing funds (in addition to individual client accounts) with audited track records for at least a decade, with proven results. These advisors should have a client base similar to you so your needs are best served.

4. Taking on too much portfolio risk.
The concept of “keeping up” with the stock market is a Wall Street myth. The stock market has averaged 7 percent per year for the past 140 years, and the median investor expected to earn between 10 and 33 percent during the past decade. Yet the median stock fund investor only earned 1.9 percent, according to Securities Industry and Financial Markets Association (SIFMA) Annual SIA Investor
Survey: Attitudes Toward the Securities Industry.

Solution: Investors should take on only as much risk as they need to meet their goals. Unfortunately for your advisor, this means fewer commissions and fewer fees.

5. Lack of education among your heirs about preserving wealth.
In two generations, 60 percent of wealth is destroyed; 90 percent of all family wealth is destroyed in three generations, according to The Family Business Institute. William Vanderbilt left his heirs the equivalent of
$4.8 billion (in current dollars), yet not one ranks among America’s most affluent today.

Solution: Begin educating your children about money management, wealth, taxes and financial responsibility early. As soon as your child has a grasp of basic arithmetic and can follow an adult conversation, it’s time to start. Take time to explain the role of your advisors, their strategies, and the lessons of capital budgeting, saving and investing. Your heirs will receive the best lessons in responsibility and preserving an inheritance directly from you.

6. Not creating and living by a written budget and comprehensive financial plan.
Articulate your family’s goals and objectives, project cash flows out into the future, and manage spending and your investments accordingly. Monitor progress against goals, and as circumstances change, adapt your behaviors accordingly–even if this means sacrificing in the short term or postponing retirement.

Solution: Have a clear, written budget. Review it and update it as needed.
This is a step that many highly educated people avoid because they do not like the idea of “budgeting.” Planning creates clarity; do not skip this vital practice. Just as with little or no planning, bad advice, or working with non-fiduciary entities, physicians can easily erode their wealth. With the right planning, young physicians can grow their practices, increase their wealth and enjoy their lives more fully.

 

 

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The Slow and Steady Path to Wealth

Before taking an expensive trip or splurging on a car, make sure your financial future is clear

By Steve Abernathy and Brian Luster | Fall 2011 | Financial Fitness

 

One of my employees recently told me a story about how her now-deceased parents got married in the 1950s and lived in a one-bedroom rental in the suburbs as newlyweds while her father worked full time in a modest-paying management training program and went to NYU part time for his MBA at night. His tuition was paid for by the GI Bill, as he had served in the Army during the Korean War. The three nights per week he went to school, his young wife offered to work overtime at her job as a bank secretary. They met at Grand Central Terminal late those nights, tired and hungry.

The newlywed couple referred to their late-night commuter train rides home as the “gravy train,” and so did many of their friends and acquaintances. They called it this because they knew that they were laying the foundation for a future that would not only include eating potatoes for dinner, but meat and gravy as well. They were happy with the journey of struggling to build a life together and not just the final destination, like so many people are.

We realize we all live in a world of instant gratification. However, our first word of financial advice to you is to delay this impulse now so that you can sleep better later on in life.

 

The path to financial security

Too many young doctors (as well as other professionals) are enduring a sleepless marathon of rigorous education, hands-on training, low-paying residencies and other jobs. In turn, they have a tendency to reward themselves with expensive evenings out or vacations they really can’t afford.

Eventually, they find out the hard way that credit card debt can escalate very quickly. And often, it is too late at that point.

We have served many in the medical community over the last 20 years, so we know how grueling a doctor’s training and career can be. But we think that some small part of you must have chosen this career so that, later in life, you could sleep better at night, knowing that what you endured would result in financial security for you and your family.

Providing eventual financial security for your family means that you will need the willpower to say no to the trappings of a “doctor’s lifestyle” (fancy cars, dinners out, expensive homes, etc.) early on in your career when you are still paying off your student loans and are only making a modest salary or starting a practice.

In addition, “riding the gravy train” may mean that you and your spouse or significant other try to avoid being in medical/graduate school, or having a low-paying residency or entry-level job, at the same time.

We know that sometimes this is impossible, but if you can develop a long-term perspective in terms of financial planning, perhaps one of you is willing to delay further schooling or a low-paying “apprenticeship” until the other partner is able to start working a decent-paying, full-time job.

This will help you minimize the burden of the student loans you will have to pay off. If one of you is always working, there is less of a need to borrow money for living expenses in addition to tuition. Fewer student loans translate into less interest paid over time and therefore more wealth accumulation in the long term.

Planning ahead and making these additional sacrifices means you and your partner will be that much closer to having the discretionary income you desire as well as true financial security.

 

Rethink home owner ship

While we are discussing loans, we are not just referring to student loans. For instance, who said you have to purchase your first home by 30 or 35 years of age? If anything, we now believe that home ownership, as an icon of the American Dream, should be reconsidered.

Today’s unprecedented economy means it is much more difficult to bet on real estate as an asset. The real estate “bubble” has burst across much of the country—in part because properties had become artificially overinflated as well as the fact that young doctors, as well as many other people, were able to obtain mortgages for little money down.

For many young doctors and other professionals, the smart choice now may be to rent for a longer period of time before purchasing a home. When you are tempted to do otherwise, just think about my employee’s newlywed parents who grew up in the Depression and were willing to live in a one-bedroom rental for a decade—with a dog, two children and a third on the way—before purchasing their first home.

 

Consult the experts

Another challenge doctors have is that they are often reluctant to ask for help. Perhaps trying to prepare your own taxes, fix a plumbing problem or write your own will may not be truly in your own best interest. Instead, seek out the experts. It is also important to consult the appropriate people when it is finally time to buy a home or when it is time to start up your own medical practice. Doing so may not only spare you angst, but also save you money in the long term.

 

Keep focused on the future

A long-term vision regarding taxes, finances, legal advice, etc. is also important because addressing the “big picture” is more likely to optimize your wealth over time.

Not all service providers are able to provide the same quality of service to a particular person or family over the course of a lifetime with so many variables potentially changing.

Young physicians may only hire an attorney if they need something right away (like a will) and don’t think through the attorney’s qualifications and whether or not he or she is a good fit for the long term. Other common scenarios include young physicians only buying a financial product or service when a salesperson calls and coerces them into doing so. The end result of this, over time, could be a hackneyed collection of investments lacking any kind of long-term vision or strategy. This approach does not result in true wealth optimization.

Another common mistake that many young doctors make is to think that they are immortal. Instead of spending money taking your spouse and children on expensive vacations, you need to make sure that you have adequate life and long-term disability insurance.

The consequences to your family, should you prematurely die or become disabled and are ill-prepared, would be devastating, both financially and psychologically. Ensure that your spouse does not lose sleep thinking “what if?” and does not needlessly suffer financially if the unexpected does happen.

Riding on the “gravy train” means having a longer-term vision that includes discipline, teamwork, planning for the future, asking the right expert for help at the right time, and having the courage to address the “what ifs” before they actually happen. Doing so will keep you on a steady course and help you avoid many of these common financial problems.

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Steven Abernathy is the founder, principal and chairman of The Abernathy Group II. Brian Luster is a principal and co-portfolio manager of the Abernathy Group II. The Abernathy Group II (abbygroup.com) is a Registered Investment Advisor (RIA) and is one of the oldest investment firms in the nation devoted to the medical profession. The Abernathy Group II runs a Growth Fund and a Physician Family Office.

 

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Protect the value of your future earnings

Protect your most valuable asset—the earning power that your training has provided you—with insurance.

By Michael Lewellen, CFP | Financial Fitness | Spring 2011

 

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.” The application of the concept of a foundation is different for each physician. However, as with patients, we often see very common symptoms and can make some generalizations about what is involved in creating a financial foundation for many young doctors.

Foundation building for young physicians depends on where they are in their personal lives (single, married, kids, etc.). Also, it can and needs to begin before the physician even leaves training because, like most things, establishing the right habits are 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…”

At the outset of their medical career, physicians in training are told “first, do no harm.” As advisors to young physicians at the outset of their financial careers, we give similar advice: “First, build your foundation.” That foundation includes protecting your future income and earning potential with disability and life insurance. more »

 

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Recession-proof your investments after healthcare reform

With proper diversification and alternative investments (think gold, oil and foreign currencies), a physician's portfolio can weather any storm.

By Jason M. O'Dell, CWM and Kim Renners, CPA, MBA | Financial Fitness | Summer 2010

 

UNDOUBTEDLY, MANY AMERICANS HAVE BEEN suffering through one of the worst economic crises in recent memory.

Though many economists claim that the recession is over, the most recent legislative changes (and those to come) are sure to impact most doctors in the form of  reduced reimbursements, increased employee benefit costs, and increased taxes on income and investments.

But although the economy may get better for most Americans while getting worse for most doctors, you can fight back by investing wisely. Doctors who take the time to understand today’s risks—and who are willing to address those risks—do not have to be afraid of investing.

Know the hurdles

In today’s market, there are no “free lunches” like there were with the dot-com and real estate markets of the mid-1990’s and early 2000’s.

You and your advisory team need to be prepared to navigate your way through the new tax minefields that have been laid for wealthy investors. Some tax increases have already been adopted, others will be phased in over time, and still more will be discussed this year and in years to come.

After all, healthcare reform is going to cost money, and the current administration has made no apologies for its plan to tax higher earners to pay for it.

Other hurdles include the United States’ dependence on foreign oil, debt service obligations from behemoth deficits, and a weak dollar—all fundamental threats to our nation’s fiscal health.

Savvy investors recognize that the marketplace will not change any time soon. They must focus their investment strategies on dealing with these challenges and mitigating the risks associated with these threats.

Diversify properly

Most investors understand that portfolio diversification is a key consideration to reducing some of the risk of loss in a portfolio. In historically volatile markets, mitigation of loss is not a luxury—it is a necessity.

Most investors who thought they were adequately diversified have looked at their statements at some point over the last two years and noticed very significant dips in their account values. That’s because they made the mistake of diversifying within the stock market. What these investors suffer from is called market risk. When economic factors cause a precipitous drop in the entire stock market, practically all stock investors suffer at some level.

What many experienced investors don’t understand is that diversification needs to go far beyond the diversification of securities like publicly traded stocks and bonds or bank deposits.

Proper diversification, especially in a highly volatile market like the one we are experiencing today, must also be across investment classes. A balance of domestic and foreignsecurities, real estate, small businesses, commodities, and other alternative investments, for instance, would prove less risky than holding the majority of your investments in real estate and securities.

Consider alternative investments

For doctors who can’t build or participate in surgery centers or other profitable healthcare investments that they can help make more successful, another popular investment strategy is to take advantage of different investment programs that are not publicly traded (i.e., not on the New York Stock Exchange or other exchange).

The term “alternative investment” covers a broad range of investment strategies that fall outside the realm of traditional asset classes:
• Gold and other precious metals
• Commodities, including but not limited to oil, natural gas,
wheat, corn and copper
• Foreign currencies
• Non-traded Real Estate Investment Trusts (REITs)
• Leasing funds
• Oil and gas drilling programs

 

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Improve Your Revenue Cycle

Increase profits by managing the billing and revenue cycle of your practice.

By Deborah Walker Keegan, PHD and Elizabeth W. Woodcock, MBA, CPA | Financial Fitness | Spring 2010

 

THE CLINICAL PRACTICE AND BUSINESS OF MEDICINE intersect in the revenue cycle of a medical practice. In the revenue cycle, the patient’s diagnosis and the services you provide to the patient are translated into codes that permit you to be paid. It is this payment that allows your medical practice to keep its doors open to treat patients today, tomorrow, and in the future.

Changes occurring in today’s healthcare environment present a challenge to optimal revenue performance. With the increasing prevalence of high deductible health plans, patients are more financially responsible for their health care. In turn, this means that a greater portion of a medical practice’s revenue is derived from its patients. The change in financial responsibility— from the insurance company to the patient—means that your medical practice will have to adjust its revenue cycle to capture patient payments earlier in the billing process.

If you are seeking a new practice opportunity, ask questions regarding the practice’s revenue cycle and its financial health. If you are continuing in your current position, routinely evaluate the performance of your practice’s revenue cycle. In any situation, it is important to determine if the revenue cycle is functioning at its optimal level. Throughout this article, we’ll describe actions to help you take your revenue cycle to the next level of performance. more »

 

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Giving it Back to Uncle Sam

Make up for declining reimbursements with financial efficiency and tax savings.

By Carole c. Foos, CPA and David B. Mandell, JD, MBA | Financial Fitness | Winter 2010

 

The proposed medicare cuts in reimbursements for most physicians go from frustrating to downright scary. Many of our clients were annoyed by the cuts in the past few years, and the proposed reductions are just more of the same. Layer on top of this the proposed healthcare overhaul which at the time of press is still unclear (yet all rhetoric out of Washington seems to expect physicians to sacrifice yet again), and it starts to feel like the federal government is determined to make it difficult for you to prosper. more »

 

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Five Tips to Help Your Practice Flourish

Keeping your practice healthy in rocky economic times requires more than simple money management.

By Judy Capko | Financial Fitness | January/February 2009

 

Growing a healthy patient base that flourishes year after year is second nature to some physicians. They just have the touch. Just as the saying goes, when the going gets tough, economically, it becomes harder to keep the practice growing.

Patients often leave a practice because of their insurance plan or now—with patients paying more of the cost for their medical care with high deductibles—they may be going to the doctor less, contributing to a sinking bottom line for some physicians.

A healthy practice depends on a steady stream of patients, but it also requires physicians to be more efficient with their resources: improving productivity and making wise investments in the practice. Lets look at some of the things you can do to keep your practice in tip-top shape. more »

 

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Financial Trouble Ahead?

A diligent review regimen and swift response will deflect financial problems before they begin.

By Judy Capko | Financial Fitness | Uncategorized

 

In the best of all worlds, whether in a solo or a group practice, physicians have their fingers on the pulse of the practice finances, immediately identify when things are going awry, and get to the fix. Unfortunately, my experience tells me this often is not the reality. Too often, I’ve been called into a practice that is in a financial crisis—a crisis that could have been avoided if actions had been taken sooner.

Physicians have the best of intentions when it comes to minding the store, but pressing clinical demands occupy their time and business matters get only a quick glance. In fact, when it comes to practice finances, many physicians are not even sure what danger signs to look for, let alone what corrective actions to take. As a result, physicians are sometimes blind-sided with a sudden deterioration in the practice’s performance. Following are some tips and procedures for monitoring practice finances and spotting red flags that indicate the practice is headed for trouble.

Set aside two hours a month for the physicians and the administrator to meet, review the practice’s management reports, understand the financial position, and make informed decisions based on the numbers. This encourages prudent decision-making and gives the manager the authority to act, based on your approval. This type of meeting serves as a report card of management’s performance and increases accountability. You should be looking at the following three types of information.

Productivity and accounts receivable

Each month the manager should prepare and update graphs that reveal the numbers for charges, receipts, adjustments, and aged accounts receivable for each of the previous 12 months. The data can be pulled directly from your practice management system’s month-end reports. If you notice a sudden jump or decline from one month to the next, there may be trouble on the horizon. For example, a sudden increase in adjustments may be an indication that accounts are not being followed up or perhaps someone is being indiscreet in what they write off. If one physician’s charges have taken a dip and the physician has worked a typical schedule (not taken time off), there may be a problem with charge reporting or a backlog with data entry.

If the accounts receivable are shifting into 90+ day aging, it may indicate a lag time in submitting insurance claims, a lax attitude with collecting from patients, or perhaps one of the high volume third-party payers has become delinquent. Typically, a well-managed billing and collections department will exhibit less than 20 percent in receivables aged over 90 days and a total accounts receivable equal to less than two month’s charges. There is some variation depending on the specialty.

The procedure revenue report reveals the quantity of each service provided by CPT code. Sort these by physician for a more detailed analysis. Tracking the number of evaluation and management codes lets the practice know if the patient base is stable, growing, or declining. Each month, compare both new patient and established patient visits. For specialists, also monitor the number of top ten procedures performed.

Staffing costs

Since staffing is the highest expense on a practice’s monthly income statement, these costs should be carefully monitored. Staff costs vary considerably, running between 15 and 20 percent for surgical specialties, and in the low to mid 20-percent range for primary care and pediatrics. Break down this expense by department and you will have a clearer picture of the staffing required to make your practice hum. It is prudent to monitor the number of full-time-equivalent employees on the payroll each month as well. Look for the variables. When the numbers are rising, it’s time to look for solutions. Monitor overtime costs as well. If they are on the rise, the administrator should be required to explain it and get it back on track. Overtime means you are paying 50 percent more for labor at the end of a workday when people are the least productive—not a wise financial decision. On the other hand, overtime on a temporary basis might be understandable. For example, staff may be required to work longer hours if a new physician has just been added or the practice is going through training for a computer conversion. Converting to an EMR system often causes a spike in overtime during the transition.

If everything in the practice is running its normal course, overtime hours should be stable and very limited. A sudden increase in overtime can indicate inefficiencies and lower productivity or it could be due to high absenteeism or excessive turnover, indicating a bigger problem.

Profit and loss

The profit and loss statement provides an overview of the money that came in and went out of the practice during the month. If the practice is stable, so are the numbers. Significant variations are an indication of problems in practice management and cash flow.

If you are experiencing financial difficulties, there may not be enough income to cover expenses, causing a delay in paying your bills. This results in an uneven distribution of expenses from month to month, which is reflected on the income statement. If this is happening, it’s time to dig deeper—look at both the money owed to you and the money you owe. Make sure collections are not falling behind and deposits are timely. Check to see if bills are being held and the practice is paying late charges. If so, it’s a management issue. It is the manager’s responsibility to bring cash-flow problems to the physicians’ attention immediately so corrective actions can be taken before a crisis emerges.

The dollar amount necessary to operate the practice is important, but for monitoring purposes, I propose you also focus on the percentage, which should remain fairly constant even when there are variations in monthly revenue. By looking at the historical picture with a running 12-month average, shifts in overhead costs will be easy to spot. Most practices spend between 40 and 60 percent of their income to cover operating expenses, with family practice having the highest percentage.

 

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