Frustrated by the radical changes takingplace in medicine brought about by litigation,managed care, and the cost ofmalpractice insurance? Do you find yourselfworking more hours just to maintainthe level of income you were accustomedto earning in past years? If the answer isyes, you may be wondering if there's anythingyou can do to utilize the assets withinyour practice to make up this differenceand/or supplement your retirement incomein later years.
Unless you own your facility or have asubstantial investment in medical andoffice equipment, in preparing your practice'sfinancial statement, you'll likely findthat your accounts receivable, the lifebloodof your practice, is the largest lineitem on the balance sheet.
Depending on your medical specialtyand whether you're a sole practitioner or apartner in a group practice, you may haveas much as $1 million or so tied up inaccounts receivable. It often takes monthsfor you to be paid for your professionalservices. The reason for this is that financialintermediaries such as Medicare,Medicaid, and insurance companies taketheir time to process claims. Don't thinkthey're breaking their backs attempting topay you on a timely basis. Why shouldthey? To them, your accounts receivable isan interest-free working capital loan.Consequently, this becomes a dormant,non-interest-bearing asset on the booksof your medical practice.
Also, these monies may be attacked in alawsuit. This leaves an exposure for potentialcreditors. So you have 2 big dilemmas:Not only are you losing the time value ofthat money for 60, 90, or 120 days, but youcould also lose the entire sum to a creditor.Furthermore, if there are several physiciansin your practice and the accountsreceivable are pooled, when 1 colleague issued, the entire accounts receivable of thepartnership could be in jeopardy. In otherwords, you or your partners may beexposed for something you or they hadnothing to do with.
However, if you follow these steps andutilize financial leverage and arbitrage,you can establish a supplemental retirementprogram for yourself utilizingaccounts receivable, while protecting yourmonies from potential creditors:
•Have your practice establish adeferred-compensation arrangement foryou under which it will obtain a workingcapital loan from a lending institution (ie,bank) to advance 100% of the "good"(ie,collectible) accounts receivable;
•Pledge the accounts receivable to thebank on an open-end, revolving basis asthe primary collateral to secure the bankloan. The bank will charge a competitiveinterest rate on the loan that should be ator slightly over the prime lending rate;
•Use proceeds from the bank loan tofund your deferred-compensation plan.Pledge back to the bank the investment inwhich the monies are placed as a secondarycollateral for the loan. Because ofthis double collateralization, the bank willmake the loan on favorable terms against100% of the good accounts receivable;
•In the event the loan would be calledfor any reason, structure the bank loan sothat the bank is required to look only tothe satisfaction of its debt from the collectionof the accounts receivable over anagreed period of time; and
•Upon retirement and/or dispositionof the practice, collect the accounts receivable,retire the bank loan, and releaseback to the physician in whose name theinvestments are held the investment(which has been accumulating over theyears) that was collaterally assigned tothe bank originally.
In order for the economics of this transactionto work, the cost of the bank loanmust be less than the rate of return on theinvestment. In financial circles, this conceptis referred to as arbitrage (ie, in thiscase, borrowing at a net rate lower thanyour reinvestment rate).
In the event that the reinvestment rateis only equivalent to the bank lending rateand there is no economic benefit to doingthis transaction, you still have protectedyour receivables from creditors, since thebank is in first position should outsidecreditors attempt to go after your medicalpractice's receivables.
Thomas R. Kosky and his partner, Harris L. Kerker, are principals of the Asset Planning
Group, Inc, in Miami, Fla. The company specializes in investment,
retirement, and estate planning. Mr. Kosky also teaches corporate
finance in the Saturday Executive and Health
Care Executive MBA Programs at the University of Miami in Coral Gables, Fla.
They welcome questions or comments at 800-953-5508, or visit www.assetplanning.net.