Protect All of Your Medical Practice's Assets

Physician's Money Digest, January 2006, Volume 13, Issue 1

Many of you areprobably frustratedby the changesthat have takenplace in recentyears—changes brought about by increasinglitigation, managed care, and,in some cases, the prohibitive cost ofmalpractice insurance. You may evenwork additional hours just to maintainthe level of income you had been earningin previous years. Now more thanever, it is important to protect theincome generated by your practice.

Unless you own your facility orhave a substantial investment in medicaland office equipment, you willfind that your accounts receivable,the lifeblood of your practice, isprobably the largest single line itemon your financial statement. It is youraccounts receivable that is exposed topotential creditors in the event of alawsuit. If there are several physiciansin your practice and one of yourcolleagues is sued, the entire accountsreceivable of the partnership could bein jeopardy if the plaintiff is awardeda malpractice judgment.

Five-step Solution

There are a number of ways thatphysicians can protect their accountsreceivable from potential creditors inthe event of a lawsuit.

1) Obtain a working capital loanfrom a bank to advance 100% of thegood (collectible) accounts receivable.By good accounts receivable, I amreferring to those that are collectiblewithin a reasonable timeframe, generallynot more than 90 to 120 days.

2) Pledge the accounts receivable tothe bank on an open-end revolvingbasis as the primary collateral to securethe bank loan. The bank will charge acompetitive interest rate on the loanthat should be at or slightly over theprime lending rate.

3) Place the proceeds from the bankloan into an investment vehicle that ispledged back to the bank as secondarycollateral for the loan. It is because ofthis "double"collateralization that thebank should make the loan on favorableterms against 100% of the goodaccounts receivable.

4) Structure the loan so that the bankis required to look only to the satisfactionof its debt from the collection of theaccounts receivable over an agreedupon period of time in the event theloan would be called for any reason.

5) Upon retirement and/or dispositionof the practice, accounts receivableis collected, the bank loan is retired, andthe investment that has been collaterallyassigned to the bank in which themonies have been accumulating will bereleased back to the physician in whosename the investments are held.

Transaction Economics

Ideally, you would want the returnrate on the investment to be equivalentto or greater than the interest ratecharged on the bank loan. To theextent that the rate credited on theinvestment is less than the rate chargedon the loan, this transaction will costyou money out of pocket on an annualizedbasis—a small price to pay foryour peace of mind. Should creditorsattempt to go after your accountsreceivable, the assets in your medicalpractice cannot be taken from you.

The ideal candidate for establishinga deferred compensation arrangementis a physician who has several years ormore before retirement and is a partnerin a high-risk or multispecialty practicecomprised of several physicians, eachwith at least $100,000 at risk in collectiblereceivables.

Additionally, if you are currentlyembroiled in a lawsuit, implementingsuch a program may not be advisable,as it might be construed as fraudulentconveyance to a potential creditor.

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. Mr. Kosky and Mr. Kerker welcome questions or

comments at 800-953-5508 or e-mail Mr. Kosky directly at

Thomas R. Kosky