Gain insights on bankruptcy, private equity firms, and more.
By Christin Melton
Physicians concerned about an impending 10.1% reduction in physician fees from the Centers for Medicare and Medicaid Services (CMS) can breathe a little easier"--"for the next 6 months. After several weeks of wrangling among Congressional Republicans, Democrats, and the White House, Congress passed the Medicare, Medicaid, and SCHIP Extension Act of 2007, which President George W. Bush signed into law on December 23, 2007. The legislation authorizes a 0.5% increase in physician payments from the government-funded Medicare program. This minimal 0.5% increase expires June 30, 2008, at which time the statutory 10.1% cut goes back into effect, absent further legislative intervention.1
Since 1999, CMS has calculated physician fees using the Sustainable Growth Rate (SGR) system. The SGR system establishes annual spending targets for various items provided in connection with physician's services, such as office visits, laboratory tests, durable medical equipment, outpatient therapy, and physician-administered drugs. According to the US Government Accountability Office, "the SGR system is designed to apply financial brakes whenever spending for physician services exceeds predefined spending targets?by reducing physician fees or limiting their annual increase."2 The complex formula bases yearly increases in target spending on a combination of factors, which include inflationary adjustments for physician services, projected fluctuations in Medicare enrollment, changes to the Medicare plan, and the estimated 10-year average real gross domestic product (GDP) per-capita, which currently is slightly above 2%. The system evaluates Medicare spending cumulatively, beginning with 1996, which means that underspending one year would be offset by any overspending in subsequent years.3 If cumulative spending targets are exceeded, the SGR system requires corresponding reductions in physician fees to counter prior and future overspending.
Several physicians' advocacy groups have been urging Congress to replace the SGR system with one tied to physicians' actual costs rather than the GDP. The GDP fails to account for some of the root causes of rising fees: hikes to malpractice insurance rates, personnel additions to accommodate a growing number of patients, and the costs of implementing new technology. Instead of creating a long-term solution, Congress enacts stopgap legislation each year to forestall the mandatory physician fee reductions. These cuts are likely to get deeper as the number of individuals enrolled in Medicare continues to grow.
In a ruling last month, the Equal Employment Opportunity Commission established that companies which provide health care benefits for retired employees are not obligated to offer coverage for retirees aged 65 or older who are eligible for Medicare. A corresponding influx of enrollees in the Medicare system will increase the volume of services provided and, under the SGR formula, mandate even steeper reductions in physician reimbursements down the line. Sixty percent of physicians responding to a May 2007 survey of American Medical Association (AMA) members said that further cuts in Medicare reimbursements would force them to "limit the number of new Medicare patients they treat."4 This adds up to bad news for America's baby boomers, now approaching retirement age.
With 2008 being an election year, Congress likely will not allow CMS to scale back physician fees this year, but that does not mean doctors should rest easy. The AMA encourages physicians to get involved and contact their elected officials. Unless the SGR system is changed or modified, physicians who treat Medicare patients will be forced to continue floating their financial security on the political tides. SR
As a result of changes to the 2008 Medicare Physician Fee Schedule rates, CMS has extended the participation decision period for physicians to February 15, 2008. Participating status changes, however, will be effective as of January 1, 2008.
By Ed Rabinowitz
On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect. One of the major goals of the legislation, according to US Senator Jeff Sessions (R, Alabama), was to disallow people from filing bankruptcy simply for the sake of taking advantage of a financial opportunity provided by the government.
"People who can afford to pay all or a part of their debts over a limited period of time should not get off scot-free," Sessions explained.
One year later, the number of bankruptcy filings for the first three quarters of 2006 fell by nearly one million from the previous year. For the time being, at least, the new law was making an impact.
But for the month of June 2007, consumer bankruptcy filings increased nearly 37% over the previous year, according to the American Bankruptcy Institute. And for the first quarter of 2007, filings were up 66% over the same period in 2006.
While the 2007 numbers are down from the all-time high figures of 2005, they're still a sad reminder that bankruptcy—for a wide range of reasons—is widespread in the United States. It can happen to anyone, at any time. Even to doctors.
Just how vulnerable are physicians? Consider these case histories.
In the process of opening a medical clinic in town, Kevin Jensen, MD, a family physician practicing in Carson City, Nevada, and his wife, Lois, borrowed all they could borrow and mortgaged everything they could mortgage in order to come up with the equipment necessary to open the clinic. They spent the next several years working between 60 and 90 hours a week to get the clinic off the ground.
Then, just when it started to look like their life's effort and sacrifice would pay off, Dr. Jensen decided to purchase an airplane. He learned how to fly and obtained his pilot's license.
One September morning in 2001, Dr. Jensen and his wife climbed into their airplane and took off from the Carson City Airport. Just after takeoff, the plane's engine cut out. Dr. Jensen tried to turn the plane around and bring it in for a landing at the airport but, without power, he was unable to make it back. The low-flying plane clipped a tree and fell into the backyard of a home near the airport.
Miraculously, no one was killed. Dr. Jensen shattered a leg and his wife had minor bumps and bruises. But the plane had fallen on the owner of the home and inflicted serious back injuries. Litigation followed. The homeowner sued Dr. Jensen, his wife, the airplane mechanic, and the mechanic's shop. Everyone began pointing fingers at someone else.
"It was a horrible tragedy," recalls Derek Rowley, a friend of Dr. Jensen's and cofounder of Nevada Corporate Headquarters, a premier business formation and small business consulting firm. "For the next several years, it took everything Dr. Jensen had to defend the lawsuits. He lost his practice, and all of his savings and retirement."
Dr. Jensen ended up selling his practice to a company that hired him on as a staff physician—but with a contract containing a no-compete clause stating he couldn't practice in competition anywhere within 50 miles of the clinic. A few months later, when Dr. Jensen was let go, he found himself unemployed and unable to practice medicine in his hometown.
Dr. Jensen had to relocate, and began serving as an emergency department physician at a rural Nevada hospital in Mesquite. Shortly thereafter, he called Rowley and asked if they could have lunch. "I've lost everything once, and I'm in the process of trying to get my feet under me again," Dr. Jensen told his friend. "I want to rebuild my life, and I don't want to make the mistakes I made before. What do I need to do to protect myself?"
Rowley explained how Dr. Jensen needed to organize and structure his business, and how he needed to be careful about the way he held assets so that they weren't exposed.
Dr. Jensen has since begun rebuilding his life, only this time he's doing it with some planning and foresight. He has several business entities that he uses not only for his practice, but as building blocks toward his retirement.
"I'm very pleased to say that he's going to recover from this, but he's 50 years old and he's starting from scratch," Rowley says. "But at this point, I think he's counting his blessings."
Maurice Ramirez, DO, BCEM, CNS, CMRO, is a highly regarded physician in south Florida. He is also the founding chairperson of the American Board of Disaster Medicine, and a senior physician-federal medical officer for the Department of Homeland Security. When trouble calls, he responds.
"My equipment is in the back of my car," Dr. Ramirez explains. "I can leave on 2 hours' notice from anywhere inside the continental United States. If I travel on vacation, I carry 200 lb of gear with me."
Dr. Ramirez and physicians like him deploy any time there is a nationally declared disaster, an event of national significance, or in anticipation of a potential terrorist attack, as an advance field medical team. Part of his team was at the New Orleans Superdome following Hurricane Katrina.
"We are effectively the M.A.S.H. units within the continental United States," says Dr. Ramirez, who, during the 2004 and 2005 hurricane seasons, spent 12 weeks away from his practice. Dr. Ramirez has seen what lack of financial preparation can do to a physician's practice.
"A member of my disaster response team had to resign his commission, and this is a guy who held the third highest rank you can get," Dr. Ramirez explains. "He's an anesthesiologist, and all of the hospitals where his group had contracts had terminated the contracts because he wasn't around. He had become, in their words, unreliable, because over a 14-month period of time, he had been gone 12 weeks."
Dr. Ramirez explains that financial and business preparation is critical to physicians who volunteer their time as he does. But he adds a third, and maybe even more important element—relationship preparation, or what he likes to call physician self-disclosure.
"I know a physician assistant who was not just Army Reserve but he was Army Ranger Reserve, and every one of his patients knew that he was a Ranger, and knew that as we were ramping into the potential for a second Gulf War, every one of his people knew that at some point he would probably get a deployment call up," Dr. Ramirez explains. "He was in-country for a solid year before he went back to that practice. And when he came back, his patients didn't migrate, every one of them insisted on going back to Dr. Rob. Because he told them in advance that he was going. And the patients actually brought him cake and cookies. I swear, the guy actually gained 5 lb before he left. And I think that's the relationship issue."
Dr. Ramirez advocates financial resilience, or good money management. He says that there are many physicians who end up losing their practices because of being called up for National Guard deployments. And the only thing they've done wrong is that they've failed to provide for their own financial security.
"If you know that you're going to go from a business income of $750,000 a year to captain's pay, which if I remember correctly is somewhere around $78,000 a year, taxable, it's going to be less than 12% of what your business usually brings in," Dr. Ramirez says. "And yet your expenses are not going to go down that much. You need to have a year's worth of capital in place if you know you could be gone for a year. And you must have projects for everyone in the office. That way, on days when you don't have cross-coverage in the office, your people have something to do. They can follow up on past due accounts or catch up on the conversion to electronic records."
Dr. Ramirez saw this very principle in practice when his own doctor recently took a 1-month vacation. "He came back to an office that was clean, everything was done, everything was filed, and they had their best month of collection the month that he got back, because they had been able to chase accounts that nobody had the time to hunt down," Dr. Ramirez says. "It's about financial preparation, relationship preparation, and business preparation."
Don Saelinger, MD, and two other physicians founded Patient's First Physician Group (PFPG) in the 1970s, and over time built it into the practice to be associated with the Cincinnati-northern Kentucky market.
In 1993, with managed care beginning to roll into the local market, PFPG was looking for capital in order to grow its business. After considerable investigation into practice management companies, Dr. Saelinger and his partners sold their practice to Health Partners, a privately held company, for stock and cash, but they maintained their own infrastructure.
Then, in 1995, Health Partners was sold to a publicly traded company called FPA, which, in 1999, filed Chapter 11.
"That made our management company bankrupt, and essentially, our practice bankrupt," says Dr. Saelinger, adding that he and his colleagues could see the handwriting on the wall. "The leadership of FPA began pushing us for our cash, which they had not done before. They tried to get us to move our infrastructure to their national infrastructure, which we steadfastly refused to do. And I guess the advice to physician groups that want to survive to the end of the day is don't give up your infrastructure."
The next 2 years took "a couple of years off my life," Dr. Saelinger recalls, but in the end, he and his colleagues banded together to repurchase their management company from bankruptcy court and have continued straight uphill ever since—adding new doctors, new sites, a new surgery center, and a variety of other capabilities.
One of the key elements to the practice's success, says Dr. Saelinger, is "aligning the physician incentives so that when push comes to shove, there's not a lot of pulling apart in your organization. You don't have disruption in the ranks. And as we moved forward in our new model after the bankruptcy, physician ownership of the organization was a key element in building the group."
PFPG was recently acquired by St. Elizabeth Medical Center in Covington, Kentucky, the leading hospital in the area, a move that Dr. Saelinger says positions the practice for success no matter what health care reimbursement model comes down the pike. And he credits his solid physician organization with making it all possible.
"Doctors are usually not very readily convinced that they should pull money out of their pockets for their organization," Dr. Saelinger explains. "That's a difficult sell, generally. But we were able to do that, and that's what saved the day."
By Thomas R. Kosky, MBA
More and more when you read financial publications you come across the term private equity. But what exactly does this term mean?
By definition, private equity is a pretty broad term referring to any type of equity investment in an asset that is not freely tradable in the public marketplace on one of the stock exchanges. It also refers to the manner in which monies have been raised, ie, privately. Private equity firms were commonly misunderstood to invest only in assets that were not in the public market. However, this is not necessarily the case as larger private equity firms invest in companies listed on public exchanges and then take them private. Some of the categories of private equity investment include leveraged buyouts and venture capital. Private equity firms typically control the management of the companies in which they invest, and oftentimes bring in new management teams whose focus is to increase that company's value.
Most private equity firms are not listed on a stock exchange; therefore, to own such securities the firms must find a buyer. The "exit" or "selling out" strategy is often achieved by way of an initial public offering (IPO), which is floating a company's stock on the stock exchange or maybe even selling the company to another private equity firm.
Private equity firms raise capital by creating what are known as private equity funds that are pools of capital invested by the private equity firm. Although other structures exist, private equity funds are generally organized as either a limited partnership or limited liability company where the private equity firm acts as the general partner. The limited partnership is often called the fund, and the general partners are sometimes designated as the management company. The fund obtains capital commitments from what are known as qualified investors that include pension funds, financial institutions, and wealthy individuals. These investors become the passive limited partners in the fund partnership. All investment decisions are made by the general partner who also manages the fund's investments, which are commonly referred to as the investment portfolio.
For managing this private equity fund, the general partner(s) is/are typically compensated in the form of an annual management fee of 1% to 2% of committed capital and up to 20% of profits realized above a targeted rate of return. These partnership interests are not freely tradable like mutual funds.
How do these private equity firms generally realize a return on their investment? Usually it is done through an IPO, the sale or merger of the company they control, or a recapitalization. Unlisted securities may be sold directly to investors by the company commonly referred to as a private placement offering or to a private equity fund, which pools contributions from smaller investors to create a capital pool.
If you are intrigued with the thought of investing in a private equity fund, consider the following:
Most private equity funds are offered only to institutional investors and individuals of substantial net worth. This is often required by law as well, since private equity funds are generally less regulated than ordinary mutual funds. For example, in the United States, most funds call for potential investors to qualify as accredited investors, which requires at least a $1 million net worth, annual income of no less than $200,000 or $300,000 of joint income for 2 documented years, and an expectation that such income level will continue.
The bottom line is that a private equity fund investment is for those who can afford to have their capital locked up for long periods of time and who are able to risk losing significant amounts of money. This higher risk is offset by the potential rewards in the form of higher annual returns.
By Susan Haigney
In response to the current solid state of transportation stocks, Forbes asked top analyst Bear Stearns' Edward Wolfe to suggest a few companies investors should keep an eye on. Wolfe advises that rails should be bought at 13 to 14 times forward earnings and should be sold when they are above 16 times forward earnings.
While some analysts are suggesting Burlington Northern Santa Fe (BNI), Union Pacific (UNP), and CSX (CSX) due in part to Warren Buffett and Carl Icahn's interest in the companies, Wolfe recommends Canadian National Railway (CNI) and Norfolk Southern (NSC). Canadian National Railway has the industry's best operating margin at 40% vs 24% for US rails. Norfolk Southern is estimated to trade 14 times earnings over the next year. Wolfe also recommends Expeditors International (EXPD) because only 2% of its revenue comes from freight movements in the United States and the Hub Group (HUBG) for its solid annual earnings growth of 50% over the previous 3 years.
By Susan Haigney
If you don't have the time to dedicate to researching charitable organizations but you have the desire to give, the following Websites have made it easy to contribute to your favorite causes by combining shopping with giving:
2.35 million—Number of Toyota vehicles sold worldwide in the first 3 months of 2007. (Time, 2007)
2.26 million—Number of vehicles sold by GM in the first 3 months of 2007. (Time, 2007)
37%—Percentage of consumers who generally pay the full amount on their credit card bill(s) each month. (Experian-Gallup Personal Credit Index Survey, 2007)
13%—Percentage of consumers worried about not being able to make minimum payments on their credit cards. (Experian-Gallup Personal Credit Index Survey, 2007)