The sun was shining through my office window. The birds were chirping outside and the smell of spring time was in the air. Living in central Texas you tend to really cherish days in the mid-70s with a light breeze, as you know the 100 plus degree temps of summer are quickly approaching. However, this was no ordinary Monday morning. It was March 22; the Monday following the passing of the recent health care reform bill. Many questions came hurling into my office that day ranging from “Should I sell my practice?” to “Should I downsize my house?”; but in general, most of my clients wanted to know how this would affect their financial picture in the long-term.
Overview and Highlights
There are a number of ways this bill will affect not only how physicians will be practicing medicine in the future, but obviously their overall financial planning moving forward. Let’s take a quick look at some of them:
Cost to Fund the Reform – The costs of the bill, an estimated $940 billion over the next 10 years, will be paid for in a number of ways. The first will be reducing Medicare spending. As many physicians know firsthand, this could pose a large concern for one’s practice depending on geographic location and payer mix. Secondly, there will be a new tax of 3.8 percent on investment income for those that make over $200,000 individually or $250,000 as a couple. This will put greater emphasis on tax efficient investing in one’s non-qualified savings. There will also be a 10 percent tax on indoor tanning and a 40 percent excise tax on “Cadillac” insurance plans which some physicians at large practices and teaching hospitals currently enjoy the benefits.
Insurance Changes – As everyone knows putting the interests of your patients ahead of your own is the right thing to do. Anyone in a role of service should do the same. No one likes to hear about someone being denied insurance coverage because of previous health concerns. However, in the big picture, years ahead of us, I think one of the largest changes as a result of this bill passing is that the legislation bans insurers from limiting lifetime coverage’s and also bans the ability not to insure someone because of a pre-existing condition. In my opinion, I am not sure that insurance companies will be able to compete long term in offering coverage for individuals. Relating it to other types of insurance, what if auto insurance carriers were forced to give coverage to everyone regardless of their driving history? What if disability insurers were forced, by law, to pay out claims for people that applied for the coverage after they had already been disabled?
Realities of the Situation
My clients and family will tell you that I am normally a very upbeat and positive person. In fact it pains me deeply to discuss negative issues with people I care about. It is, however, the reality of my career as a financial advisor at times. While I don’t think that the sky is falling and I haven’t encouraged anyone to exit medicine and take up basket weaving, there are some financial realities that physicians will have to face moving forward.
In my book, “The Demographic Epidemic – The Financial Realities Facing the Future of Medicine” due out later this year, I discuss many of the key elements that will change the financial pictures of my clients and their colleagues in the years ahead. A couple of these include:
Government Deficits Coupled with Tax Hikes
No matter which “side of the aisle” your political allegiances lay the fact of the matter is that both parties have spent large amounts of money and government has expanded over the past 20 plus years. With the outstanding large deficits owed by our government one of, or a combination of, three things has to happen in order for them to remedy the debt problem:
- The government has to spend less — As we have seen, that doesn’t appear to be happening anytime soon.
- Print money at a quicker rate — This obviously could lead to rapid inflation.
- Increase taxes — The tax rate hikes normally hit the high income earners, which includes most physician families.
If I were a betting man I would guess that the second and third options would occur before the first. So this means if physicians are making less because of reimbursements declining and getting taxed more, there will obviously be less dispensable income in future years leading to less spending dollars in the budget or less savings dollars for the future.
Social Security, The Baby Boomers and an Ever Aging Population
Simply put, the largest age demographic of Americans in our history is about to head into retirement, begin collecting Social Security checks and be on Medicare. While I think Social Security will eventually include another “band-aid” similar to the one that was created in the 1980s, these facts do pose a problem for many physicians. Letting Social Security go by the waste side would be political suicide for Congress. My best guess is that in order “fix” the Social Security system again one of two things will happen; either raise Social Security taxes or eliminate the inflation adjustments on the payments. Since so many people will be on Social Security in the future, the majority probably wins and tax rates are increased, again, meaning less in take home pay.
Shortage of Physicians
It is no secret that the number of physicians in the U.S. has been decreasing per capita in many geographic locations. While many physicians flocked to my home state of Texas to practice in the early part of last decade following a very practice-friendly tort reform bill passing, many areas of the country are short in numerous specialties. Many figures have shown that over the past 10 to 15 years many teaching hospitals have underestimated the need for new specialists coming in to their programs. This throws somewhat of a wrench in normal supply and demand economics. While normally short supply of a specialized field is a good thing for those that are entering that field, with physicians pay being pushed down further and further this isn’t a great incentive for new, young and bright minds to enter into medicine.
Predictions and the “Crystal Ball”
While it is true that many physicians have seen their income decrease over the course of their career in medicine (if any young physician takes some time to speak with their older partners who might have practiced in the 70s or early 80s before managed care really came to fruition, they will tell you about the disparity between then and now) one has to ask themselves how much further can pay decrease until the stress, length of education and risk of lawsuits are not worth the pain anymore.
I know that many of my clients and their colleagues practice because they truly love medicine and their patients and feel called to help people. While I completely relate to that, one cannot ignore the ever changing financial realities of practicing medicine.
The changing financial realities are really what most physicians are concerned about in the big picture. In my professional opinion I feel most physicians, especially those in sub-specialties, will see a gradual increase in their taxes by about 10 to 15 percent in the next 10 years and will see about a 20 to 30 percent decrease in pay over the same time frame.
The above estimations obviously make my job as a financial advisor a little more difficult. It is hard to find a retirement software package that actually allows one to input decreasing income in future years. While the future can seem cloudy, now is the time to make sure you are planning ahead. In general, even as pay decreases and taxes increase, physicians will still make more than most of the population of America. However, as a physician, now is probably one of the best times to review your financial plan. Here are some brief suggestions:
- Review Cash Flow – Both your personal budgeting and spending, but obviously that of your practice as well. If you have more than 10 years left of practice, it is probably wise to plan on scaling back on some expenses in the future. You don’t need to sell off everything and live in a one bedroom apartment, but limiting some purchases could be a good thing.
- Eliminate Debt – Do everything in your power to reduce down what you owe others. Many of my clients are aggressively paying down their mortgages and partnership buy-ins. While they obviously will not have as big of interest deductions in the future, they will be out from under large loans, giving them more flexibility with cash flow in future years.
- Save Aggressively – Most physicians take full advantage of their pre-tax retirement plans through their practices. When looking to save additional dollars it will be even more important moving forward to be cognizant of investment income generated by your portfolio. With the tax changes on the horizon partly due to the new health care legislation, your interest, dividends and capital gains income on your investments might reach higher than 30 percent; possibly as high as a 100 percent increase from the current rates, depending on your tax bracket.
- Meet with Your Advisor to Discuss the Future – Now is a great time to address your future retirement needs and financial planning issues with your financial advisor. Ideally you should be working with someone that specializes in you and understands the physician’s ever changing financial world.
Kasey Gahler, CFP, is owner and financial advisor at Gahler Financial (www.gahlerfinancial.com). He can be reached at firstname.lastname@example.org. This is for informational purposes only and should not be construed as individualized investment advice. Please contact your Financial Advisor to discuss. Registered Representative Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC Investment Advisor Representative Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor Cambridge and Gahler Financial are not affiliated.