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Monthly Archives: September 2015

Physician Wealth Management

Financial Management in Healthcare

Provided By Matt Harlow, CFA, Chief Investment Officer at Larson Financial Group

Though investment options are virtually unlimited, we have chosen to address the four primary investments we see physicians successfully use:

  1. The market
  2. Practice ownership
  3. Real Estate
  4. Exotic/private opportunities

The Market

Most physicians use “the market” as their primary vehicle for wealth accumulation. When we say “the market,” we are referring to publicly available investments that tend to trade easily. For example, you may have heard of small caps before. This refers to investing in small companies. Large caps are large companies. The market is not limited to only investing directly in companies. Instead, money from one investor can be grouped together with money from another investor to gain access to more investment choices with less cost. This is known as a mutual fund. Many market components can be used to diversify investments. Simply put, diversification means spreading your assets to multiple investments so that risk is reduced without necessarily reducing growth potential. This works because many types of investments are not highly correlated with one another so that when one is going down in value, others may be going up in value.

When using the market, a physician should focus on asset allocation, low expenses, and tax efficiency, rather than on trying to pick the hot stock or mutual fund of the day. The following table shows many of the various segments of the market available for investment, as well as, historical returns of each of these different types of investments. (29)

Physician Mortgage Loans

Physician Practice Ownership

Many doctors and dentists receive their income through ownership in a practice. From an investment standpoint, many of our clients earn better returns by investing in their practice than they likely could with other investment choices.

For this reason, many practice owners primarily use the market as a means of diversifying and protecting the wealth they have already created in their business. They often invest more conservatively in the market than our non-business owner clients because they are not relying on the market to create wealth. Their business handles this function. Instead, the market simply serves as a means to protect the wealth that their business has already created.

Real Estate

Real estate became a hot investment during the stock market downturn in 2001 and 2002. From 2001 through 2006, many people entered the real estate investment world, only to see their property values decimated between 2007 and 2008. This is not to suggest that real estate is always a bad investment, rather, that successful investors in the real estate market are usually those that treat it as a full-time career. They invest for a living in residential, commercial, and/or developmental real estate, and they earn a good living doing so. The point is that you probably need to choose which one you want to be–a real estate tycoon or a physician–because it would be rare to see someone who is great at both.

Rental property is not often the easy lottery ticket to wealth that infomercials promote it to be. Owning one or two rental properties can quickly turn into a losing proposition. Consider the example of a client who made a profit of only $150 per month after paying for his mortgages on two properties. All it would take is one month without a tenant, or a large repair, for the entire annual profit to be eroded.

We question the logic of investors who get into real estate as a hobby or for the chance to make a quick buck. Why take on the headaches and the risk of leverage in the real estate industry? This return could often be matched with far more conservative investments that do not involve the use of debt. Instead, we advise physicians to avoid direct real estate investments outside of the scope of their normal business unless they want to take on another full-time job. Instead they should consider the market as their primary wealth driver.

The good news is that investors can still gain great exposure to real estate without taking on the risk of debt–or additional work. This can be accomplished through the market by acquiring investments called Real Estate Investment Trusts (REITs). REITs function like mutual funds where investors pool their resources. Commercial property, mortgages, and other real estate investments can be purchased in bulk with a share of the profitability (or losses) returned to the investor, with no additional work or debt required. REITs are considered to be the most efficient way to achieve broad diversification in the real estate industry. (35)

Many physicians believe that this is a great alternative to active involvement in real estate projects outside the scope of their medical practice. We agree philosophically. Unless the individual real estate deal comes as part of the package with your practice ownership, it is probably best to leave it alone.

Exotic/Private Opportunities

Several other distracting opportunities exist for physicians outside of the normal stock market–primarily because most medical specialists qualify as “accredited investors.” An accredited investor is one that has a net worth in excess of $1 million (excluding a primary residence) or has income in excess of $200,000 to $300,000 per year. The income component alone qualifies most physicians as accredited investors. (30)

Why does this matter? Because accredited investors have access to investment options that are prohibited from being sold to the general public because they are considered to be too risky.

Many physicians are excited by the concept that they have access to investment opportunities that others do not. The relevant question again is: Does it matter? The short answer is that your status as an accredited investor means very little, but your status as a properly credentialed physician could mean much more. To clarify, it will help to understand the various exotic opportunities out there.

Hedge Funds

Unlike mutual funds, hedge funds are able to bet against the market (called “shorting” the market), and they are also allowed to borrow against your money to seek larger returns.

Does it work? Consistent studies suggest not. There is no evidence to support that hedge funds perform any better than should be expected from random chance or luck. This is largely in part due to the high fees charged by hedge fund managers, typically ranging from 4.26% to 6.52% per year. (36)

Private Equity

Private equity deals fare no better, and the risks are much greater. Venture capital, leveraged buyouts, and mezzanine financing deals require substantial risk on the part of the investor. You give up liquidity, diversification, and transparency for the chance of a big payoff. What do you stand to gain from this? Studies show the payoff is not worth the risk. The returns gained through private equity dealings are no better than those provided by investing in small cap (company) publicly traded stocks. (36) In other words, historically speaking, you would have gained the same returns with more liquidity, diversification, and transparency.

David Swenson, famous for his outstanding track record managing Yale’s endowment fund, had these remarks for individuals considering private equity deals:

Understanding the difficulty of identifying superior hedge fund, venture capital, and leveraged buyout investments, leads to the conclusion that hurdles for casual investors stand insurmountably high. (37)

Exotic investments are not worth the risks they pose. Unfortunately, being an accredited investor is not as advantageous as it sounds. Normal exotic investments do not add as much value as hoped, but your credentials as a physician (not your income), might sometimes grant you access to excellent investment opportunities not afforded to the general public. An increasing trend for physicians is to hold ownership interests in surgery centers, ancillary services, and hospital syndications.

Ancillary Services

We find it much more logical for physicians to attempt to outperform the market when they can directly affect the outcome. Ancillary services can generate additional income for you– ultimately meaning that you do not have to rely as much on seeing more patients to maintain a similar income stream.

Many ancillary services may be available, depending on your specialty. The idea behind investing in ancillaries is that because you are referring out the business, you might as well get paid for the additional work to be done. When physicians ask what ancillary services they should consider offering, we ask them what business they are referring out the door the most. That is probably your best place to begin strategizing.

Hospital syndications are also increasing in popularity with healthcare reform underway. Ownership of a hospital gives you access to some of the profits. The requirement that you be a physician who has credentials at the hospital keeps the public from gaining access to the investment opportunity. Hospitals sometimes treat physician ownership as a means of doing profit sharing, whereby you get to participate in the profits of the place you already do the work. When a physician considers ownership of ancillary services, we ask him or her to address three issues up front:

  1. Does the opportunity have a good business model that makes sense, and does the financial data support it?
  2. What is the exit strategy for the future in the best-case and worst-case scenarios?
  3. Is the return worth the risk?

To clarify the first issue, it is helpful to examine the financial ratios of the service in question in order to get a feel for how those compare to what would generally be expected for a similar business.

The financial ratios are the diagnostic tool that helps you measure whether or not an opportunity makes good business sense. You need to know what the difference between a good ratio and bad ratio is—or hire someone who does.

The exit strategy is something you want to consider anytime you enter into a business relationship.

  • How do you plan to sell your shares of the hospital syndication?
  • Will the buyer of your medical practice logically also want to acquire the ancillary business you have established?
  • What could happen to the value of your ownership if Stark laws are increased, and you can no longer own any portion of an ancillary service?

The best business opportunities are those that offer little risk in terms of how the exit strategy will impact you personally. Finally, if the above questions have reasonable answers, the last step is to determine whether the potential reward is worth the risk. A general rule is that it is not worth the loss of liquidity on any of these services, unless you expected to earn 15% or more on the investment returns.

A surgery center that returns only 8% in profit each year would not be worth the risk, unless you had reason to believe that your group’s involvement would increase surgeries enough to increase the profit margin to the 15% minimum requirement.

In summary, exotic investments available to the general public are rarely a good opportunity, but direct access to additional revenue on work you are already generating can often be very profitable. This might be the best exotic investment it makes sense to pursue. Diversification remains paramount, so we would not want to see more than 15% to 25% of someone’s investments tied up in these types of investments. Instead, the open market offers the best long-term opportunities to be properly rewarded for the risks that you take.

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(29) All returns are in U.S. dollars. Data was taken from a reliable source, but we cannot directly attest to its accuracy. The portfolios referenced above are for illustrative purposes only, and are not available for direct investment purposes. Performance above does not make adjustments for expenses associated with the management of an actual portfolio. 80 year data not provided in the chart indicates an asset class that was not tracked during that time frame. (45) (30) $200,000 from a single individual or one earner in the family, or $300,000 if combining both spouses’ incomes. (35) Swedroe, Larry E. and Kizer, Jared. The Only Guide to Alternative Investments You’ll Ever Need. New York, NY: Bloomberg Press, 2008. (36) Swedroe, Larry E. The Quest for Alpha. Hoboken, NJ : John Wiley & Sons, Inc., 2011. (37) Swensen, David. Unconventional Success. New York, NY: Free Press, 2005. (45) Dimensional Fund Advisors. Matrix Book. Austin, TX : Dimensional Fund Advisors, 2011.

Medical Malpractice Insurance Cost

We continue to stress that not knowing the right questions to ask when making financial and legal decisions can lead to unintended consequences. This is especially true in the area of malpractice insurance. Not understanding the various options and intricacies of malpractice insurance can cost you time and money–and cause major problems with your medical credentials.

This is how it often works: One doctor asks another, “Which company do you use?” and he purchases that plan without any further investigation into the important issues surrounding the type of coverage provided. This is great for the insurance company, but not always great for the doctor or dentist. The following sections provide the essential knowledge base for choosing medical and dental malpractice insurance.

Competition Benefits the Physician

When everyone uses the same company, this greatly reduces competition–allowing the company to set rates to their advantage. In fact, in some states, there is very little malpractice insurance competition, so pricing varies greatly from state to state. Understanding competing options by researching them, either on your own or through your financial advisor, can have a significant impact on your medical malpractice insurance cost.

Different Types of Coverage

Doctors and dentists need to understand the difference between “claims-made” and “occurrence-based” coverage. The best way to explain the difference is through a timeline.

Dental Malpractice Insurance

In the timeline above, note that the physician was working with a different practice in 2010, before switching practices at the beginning of 2011. The occurrence happened in September of 2010 while the physician was still at Practice A, but the claim was not made/filed until April of 2011, when the physician had moved to Practice B.

If the physician had occurrence-based coverage while at Practice A, he would still be covered for the event that happened in September 2010, even though he was no longer with that practice. However, if instead the physician only maintained  claims-made coverage while at Practice A, he would not be covered for the September 2010 incident. Instead, he would need tail coverage to pick up where his claims-made policy left off in January of 2011. Understanding this difference, and the type of coverage that you hold, is especially important anytime you consider joining a new practice.

Risk/Retention Groups and Captive Insurance Companies

In response to the non-stop increase in malpractice insurance premiums over the past decade, many physicians are now creating risk/retention groups and captive insurance companies in order to better control costs. Through these structures, the member physician “owns” a portion of the entity. Provided that claims are minimal, the profits of the entity are distributed back to the doctors.

Premiums for risk/retention groups or captive insurance companies are usually substantially lower due to the doctor members’ ownership. This also gives the potential for a tax break to the physicians, provided that the risk/retention group or captive insurance company is well structured.

Practices with more than ten doctors often pay between $200,000 and $250,000 in annual malpractice premiums for the group. Right now OB/GYN doctors are hit especially hard, often paying $50,000-$100,000 in premium each year per physician. In the above example, if ten OB/GYN physicians came together to form a risk/retention group or captive insurance company, they could likely reduce their premiums by half or more. (12)

Questions to Ask

These are questions you ought to know the answers for regarding your medical and dental malpractice insurance:

  • How much coverage do you have, and are the limits commensurate with your state laws?
  • When was the last time you shopped for competitive rates?
  • Do you know what your coverage actually is–and what its limits are?
  • Does your coverage have a “hammer clause”–a statement inside the policy that details the insurance company’s right to settle a claim? In other words, if you get sued, do you have the right to determine if the case is settled, or does the insurance company maintain this right?

Physicians fail to realize until it is too late that many insurance companies prefer to settle claims out of court instead of fighting them. The problem is that a settled claim shows up on your professional record. It is important to make sure that it is your choice whether the case gets settled–and not the insurance company’s, especially if you have no fault in the case.

Have Questions?

(12) Risk retention groups and captive insurance companies have several risks associated with them. Consult with qualified legal and insurance professionals prior to implementing either of these strategies.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal advice or services. Please consult the appropriate professional regarding your legal needs.

Disability Insurance for Doctors

We recently learned a client had been diagnosed with aggressive prostate cancer that has since spread into his bones and other organs. Immediately life was put in perspective for his family. When we met for an update at their home, this client’s primary concern was about his personal disability insurance. He wanted to make sure his family would be okay if he was unable to work for an extended period of time. The doctor has been the sole breadwinner for his family for a number of years, but they are not yet at a point where they are financially independent without insurance.

We quickly reminded the family that they had well-structured disability insurance in place (three policies working together), and that they would be just fine financially no matter the direction this cancer took. This client had set out a clear mandate years earlier when he told us, “My objective is to take care of my family whether I live too long, die too early, or get disabled along the journey.” His courageous outlook, in spite of this traumatic experience, is inspiring–but it also emphasizes the need for every doctor to make sure his or her disability insurance is well thought out.

When it comes to designing a doctor disability insurance program, three important issues work together in determining your best outcome:

  1. How much net income you desire.
  2. The strength of the insurance coverage available.
  3. How to best coordinate individual insurance benefits with group benefits.

Income Protection Desired–After Taxes

Determining the correct amount of net monthly income you desire is the most important factor when evaluating your disability insurance needs. We highlight net because disability benefits are either paid out income-taxable or income tax-free, depending respectively on whether 1) you or your practice took a tax deduction for the premiums paid or 2) if the premiums were not deducted.

Most physicians receive some basic coverage from the practice, group, university, or hospital with whom they are affiliated. This is often equivalent to a percentage of pay (for example 60%) up to a maximum cap–anywhere from $2,500 to $25,000+ per month, depending on the employer.

Physicians should complement their group disability coverage with individually owned disability insurance coverage. The question becomes, “How much additional coverage is appropriate?” The answer is found in the following formula:

Disability Insurance for Physicians

Physician Disability Insurance

The proper amount of coverage is important–but equally important is the strength of the coverage. To simplify this issue, we divide policies into three tiers of available coverage.

Tier 1 “Any Occupation” Coverage

Tier 1 coverage is the weakest form of disability insurance. A Tier 1 plan states that if you can work in any profession, you are no longer disabled. Even though you can no longer work as a physician, if you can answer the telephone, you are no longer disabled because you could work as a receptionist at your office. Many group disability insurance policies provided by a university or hospital start as Tier 2 or Tier 3 coverage, and quickly turn into Tier 1 coverage after two years of disability. As faulty as this coverage is, it is much more prevalent than many physicians and practice managers realize.

Tier 2 “Specialty Specific–Not Working” Coverage

Tier 2 coverage is anecdotally the most common for physicians, but we usually cringe when we encounter specialty physicians who own it. Tier 2 coverage pays a benefit if you cannot work in your specialty, provided that you are also not working in any other capacity. In other words, if you cannot perform surgery, but you can still conduct office visits–and want to continue doing so to maintain your partnership status in the practice– you would no longer be considered disabled. The same would be true if you wanted to teach or move into hospital administration.

Tier 3 “Specialty Specific” Coverage

Tier 3 coverage is what the specialized physician should own whenever possible. Tier 3 coverage has a simple definition that says you are disabled if you cannot perform your specialty. Period! If you cannot perform the duties of your specialty, you are disabled, and should receive full benefits. It does not matter if you work elsewhere, teach, conduct office visits, or move into administration. If you can no longer perform your specialty, you are disabled. The good news is that a properly structured Tier 3 plan frequently has the same cost, or often less, than a Tier 2 plan. (23)

The above details lead to the conclusion that it is very important to make sure you understand which Tier your individual and group disability insurance policy falls into in order to ensure that you have not accidentally acquired Tier 2 coverage.

One of the biggest problems we encounter is that some insurance agents actually masquerade their Tier 2 coverage as Tier 3 coverage. We have an email on file that was forwarded to us from a physician. His insurance agent, from a popular mutual insurance company, was boldly misleading his client about this issue. He was “assuring” the client that his disability coverage was better than anything else on the market, when it was clearly Tier 2 coverage instead of the stronger Tier 3 coverage.

The worst part was that the agent apparently did not even understand the contract for the coverage he was selling, because he misused several terms and described things inaccurately to his client. We put the physician in direct contact with the underwriters from the insurance companies so that he could ask his specific questions. After doing so, the physician immediately opted for the stronger Tier 3 coverage instead of the weaker Tier 2 coverage. It also happened to be less expensive.

Properly Combining Coverage

One final issue, important to many higher-income specialists, is how to properly combine multiple disability insurance policies. For higher income specialties, three policies are often at play that must work hand-in-hand to be structured as efficiently as possible:

  1. Your “base” individually owned policy
  2. Your “secondary” individually owned policy
  3. Your group policy from your practice/employer

The finer details of how to properly combine these three policies are beyond the scope of this article. However, at a basic level, it is important to know that whenever possible, it is essential to put your individual policies (base and secondary) in place before you join your group or take on your group coverage because group coverage counts against you when determining the amount of coverage for which you are eligible. Conversely, individual coverage does not usually count against you when determining the amount of group coverage available.

The good news from a cost standpoint is that disability insurance is a temporary solution. Once your assets are sufficient and can provide for your family on their own merit, disability insurance is among the first a physician can afford to reduce or cancel. Think of it this way, when you are young, your debts are high, and your assets are low, so your need for coverage is likely to be the greatest. As you reduce debt and acquire assets, your need for coverage should continue to decrease.

Have Questions?

(23) Martin, CFP®, Thomas S. Life’s Toughest Battles. St. Louis, MO: Larson Financial Group, LLC, 2008.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.

Investing for Physicians

Distribution of US Market Returns

While no one can reliably predict the future, the past may offer perspective on recent market events and the long-term benefits of equity investing. The below chart shows the historical distribution of US market returns since 1926. The performance years are stacked in order of return range.

The graphic highlights that performance over the past two years has been extreme by historical standards, and that, over time, the market’s positive return years have outnumbered the negative return years, with positive performance more concentrated in the higher ranges of returns.

History shows that the stock market has rewarded investors who can bear the risk of stocks and stay committed through various periods of performance.

Have Questions?

CRSP data provided by the Center for Research in Security Prices, University of Chicago. The CRSP 1-10 Index measures the performance of the total US stock market, which it defines as the aggregate capitalization of all securities listed on the NYSE, AMEX, and NASDAQ exchanges. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

A Doctor’s Estate Plan

Add a Letter Covering These 13 Wishes

Having an estate plan is necessary for doctors, but there is a great deal of information the legal documents may not include. Here’s what to cover in a supplemental letter that specifies preferences, discloses critical logistic info, and will save your family significant stress during a difficult time.

A Doctor's Will & Testament

You might be surprised how many doctors die each year without an estate plan. There are numerous reasons for this major oversight, including those who cannot or will not think about death, those who believe talking about and creating an estate plan may cause problems with their partner or family members, and those who don’t want to spend the time with a lawyer.

Having a proper estate plan goes a long way to prevent family arguments. The guesswork is eliminated and the family is clear on your intentions. Furthermore, properly drafted estate planning documents may actually save money, time, and court costs.

Just as an estate plan brings a feeling of peace and comfort, so does an accompanying letter listing items sometimes not included in the estate plan. Here are several suggestions you may consider including in your or your loved one’s accompanying letter:

1. People to be notified at the time of death. Certain people and institutions need to be notified at time of death, including your lawyer, trustee, executor, and accountant, along with federal pension authorities. Relatives and special friends will want to know as soon as possible, so providing the names, addresses, and telephone numbers will make it easier for the person assuming this responsibility.

At the time of my father Jack’s death, my mother and family did not know who Jack’s closest colleagues at work were. As a result, a former coworker called after the funeral saying he would have appreciated attending. This oversight, which could have been prevented with a listing of people to be notified, caused much anguish for both the family and the friend who was left out.

2. Listing advanced funeral arrangements. Be sure you communicate his or her funeral arrangements and last wishes (e.g., body burial, type of casket, cremation, and music requests).

3. Location of personal papers. List the exact location of personal documents, including birth and marriage certificates, diplomas, military papers, and so on.

4. List of bank accounts and bank locations. List all bank accounts by name of institution, branch address, and type of account. Also give the location of canceled checks and bank statements with the number and location of the safety deposit box and key.

5. Listing of credit cards. List by issuer and card number.

6. Location of deed and mortgage papers. Indicate where the documents are located, the date for renewal, and the holding institution.

7. Listing of insurance policies. List life, auto, home, veterans, medical, and other insurance policies together with the responsible agent’s name and location of these documents.

8. Listing of vehicles, including registration and other papers. Provide the location of all keys and operating instructions.

9. Income and property taxes paid and owing. Provide the location of income tax returns for the past three years, record of property tax amounts, and due dates.

10. Investments, including mutual funds, stocks, and bonds. List all stocks, bonds, certificates of deposit, and other investments. Indicate the location of the investments and the name and address of the financial advisors. If owning any gold or silver coins or bars, provide the location and details.

11. Listing and location of valuables. List all jewelry and other valuables, including the names of those to whom the articles are to be given.

12. Record all loans and other accounts payable.

13. Special survivor benefits. List all possible sources of benefits not named in the estate planning documents —government pension, veteran’s pension, employee pension, fraternal associations, and so forth.

14. Website logins and passwords. List of computer and website login, pin, and password information, including for general computer login, email account(s), file hosting services, and online banking, retirement, and investment services.

Once you’ve completed a current estate plan and accompanying list of assets, document location, and burial wishes, you can feel more at ease knowing your final plans will be fulfilled. Let one or two other family members know where the estate planning documents and accompanying letter are stored and the name and address of your lawyer. Better yet, give a copy of the accompanying letter to one or more of the following: your spouse, a trusted friend, and/ or a family member. These trusted companions can begin the process of notifying family and friends and fulfilling the wishes named in the estate plan.

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