If you think the business of medicine is tough today, "You ain't seen nothing yet." There is an approaching confluence of events that could have a significant financial impact on physicians. Here's how to protect yourself from these new financial threats.
If you think medicine is a difficult business today, “You ain’t seen nothing yet.” You are about to face your largest financial challenge ever. There is an approaching confluence of events that could have a significant financial impact on most physicians -- unless you do something to protect yourself.
Medicare reimbursement cutbacks, which has begun for many specialties, will reduce the income of many doctors. Even if you don’t treat Medicare patients, you are not immune to this cut. If your private insurance contracts offer you some percentage (say 120%) of Medicare, a cut in Medicare reimbursements will lower your private insurance reimbursements. In addition, the healthcare overhaul may bring a host of financial challenges none of us can accurately predict at present.
Further, while the December 2010 compromise stalled any federal tax increases for two years, they are all still scheduled to kick in by 2013. These increases includes raising the top income tax brackets, capital gains tax rates, lowering deductions and more -- all of which will hit most physicians squarely in the bottom line.
In addition, most states are facing financial difficulties that may result in a variety of direct and indirect tax increases. Some doctors live in high state income-tax environments, while others live in states that are already threatening tax rate hikes -- especially in the higher tax brackets. Even states that are supposed to be “no income tax” states have a host of hidden taxes. Many counties have delayed adjustments in property-tax assessments to reflect the downward turn in the real-estate market. As an example, one of our partners has had his house assessed at 50% more than what he purchased the house for three years ago -- and was denied an appeal to revalue the home for tax purposes.
In addition to declining reimbursements and escalating taxes, the final “triple threat to success” concerns physicians in medical groups. Larger groups often fail to react quickly and plan against financial challenges. The vast majority of group practices with more than three or four physicians suffer from what we will call “lowest common denominator” (LCD) planning. This occurs when the practice will only implement the asset protection, tax-reduction, qualified or non-qualified planning techniques that everyone can agree on. It’s not surprising that this takes a lot of time, as doctors are notoriously independent, intelligent and extremely busy. There are often too many opinions and distractions for a group of doctors to unanimously agree on anything other than the simplest (and least beneficial) strategies.
We have spoken to thousands of doctors who are frustrated with their practice’s LCD planning. The very physicians who want to implement more advanced and beneficial planning ideas are usually the same ones who are doing most of the work and generating most of the revenue for the practice. They are often “caught in the middle” in their practices. Their younger partners are generally busy paying off student loans or paying for their first home -- they can’t afford to fund retirement tools that may reduce taxes because they need every dollar they earn. Older doctors have an “If it ain’t broke, don’t fix it” mentality. The problem is that the new medical economic environment is “broke.” The old ways cannot continue to be standard operating procedure.
For physicians who would like their group practices to consider more proactive planning, we’ll introduce a few concepts that can be implemented to help you avoid LCD planning and address these significant financial threats. These techniques work for solo practitioners as well right up to very large groups.
Use a “Hybrid” Benefit Plan. If you are in a LCD situation, consider using a hybrid benefit plan in addition to a traditional qualified plan (401(k), profit-sharing plan, money purchase plan or defined benefit plan. The main attraction of a hybrid benefit plan created under new pension rules is that each physician can choose the amount he or she wants to contribute in the plan formula. The contribution can be as low as $150 up to $100,000 per year.
A hybrid plan can be implemented for large or small practices. Other benefits of this type of plan include:
• Utilization of the plan in addition to a qualified plan such as a defined pension, profit-sharing plan/401(k) or SEP IRA;
• Contributions can qualify for current tax deductions;
• The plan acts as an ideal “tax hedge” technique against future income and capital gains tax increases;
• Balances can grow in an asset-protected environment;
• Employee participation requires a minimal funding outlay; and
• There are no minimum age requirements for withdrawing income, and no early withdrawal penalties.
Employ a More Flexible Corporate Structure. The hybrid plan is the only significant plan a practice with a “one entity structure” (P.C., P.A., etc.) can utilize. This one entity structure promotes LCD planning gridlock. A common way to solve this problem is to alter the practice’s legal structure so that it allows individual physicians their own planning flexibility, without disrupting their day-to-day operations or requiring new insurance contracts or Medicare provider numbers.
In the typical medical group structure, there is one legal entity -- a corporation, LLC, or professional association (PA). Physicians are either owners of the entity (informally referring to themselves as “partners”) or non-owner employees. In all such cases, the physicians have no ability to separate themselves from the central legal entity. If the central entity does not adopt a planning strategy, no individual doctor has any flexibility to adopt beneficial corporate planning strategies for his or her benefit.
If this is the case in your practice, you might consider a superior structure. Doctors can own their share of the practice through their own professional corporations (PCs) or PAs. In this way, the group is paid by the insurers, pays its bills and overhead, and then pays the physicians’ PCs -- best through 1099 independent contractor income. For the physicians who want to implement planning strategies beyond LCD, they may do so through their own individual PCs without any impact to partners’ planning or operations. The strategies will be implemented at each doctor’s PC level, leaving the central entity and its operations unchanged. We have seen this strategy used successfully in some of the largest medical practices in the United States.
Bring In an Expert. As we’ve said before, the most-common hurdle to implementing advanced planning is planning gridlock. Unfortunately, most find no solution to this dilemma as their planning gridlock is what stops them from creating a structure that allows them to avoid gridlock -- a Catch-22. Because of practice politics, the doctors who are able to navigate past the gridlock generally have the help of outside experts (with whom none of the partners or other legal or tax advisors have any negative history).
Experts in the fields of tax, benefits planning and corporate law have the credibility and expertise that increase the probability that you will be able to convince your partners to “see the light” in a way that fellow physicians cannot. These advisors can often explain the suggested structure from attorney-to-attorney or CPA-to-CPA, so that the local advisors are on board, agreeable and involved in the planning.
The changes are coming. Financial success in the practice of medicine is going to be harder than ever. Even if you are grappling with financial gridlock in group practice, you can explore advanced planning options to address these challenges.
Jason O’Dell is author of "Investing Secrets for Physicians" and founder of O’Dell Jarvis Mandell, where Carole Foos is employed as a CPA and tax consultant. For a free copy (plus $5 shipping and handling) of “For Doctors Only: A Guide to Working Less and Building More,” please call (877) 656-4362 or email firstname.lastname@example.org.
This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment, legal or tax advice. There is no guarantee that the views and opinions expressed in this article will come to pass or be appropriate for your particular circumstances. U.S tax and state corporate law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax, employee benefit and legal advice before implementing any strategy discussed herein. For additional information about the OJM Group, including fees and services, send for our disclosure statement as set forth on Form ADV using the contact information herein.