Group practice pitfalls: New financial threats demand more protection for your wealth

Key Points

If you think medicine is a difficult business today, 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 doctors, unless you do something to protect yourself.

Medicare reimbursement cutbacks will reduce the income of most doctors. Even if you don't treat Medicare patients, you're not immune to this cut. If your private insurance contracts offer you some percentage (say, 120 percent) of Medicare, a cut in Medicare reimbursements will lower your insurance reimbursements. In addition, the healthcare overhaul the president is promoting will further reduce physician income.

On top of both of these "gross" income-reducing events, there is a significant "net" income-reducing threat that shouldn't be ignored.

If you have a large mortgage, significant health expenses or other itemized deductions, this change could cost you $5,000 to $50,000 each year - and this is in addition to the income tax changes.

What's more, 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. Others live in states that are already threatening tax rate hikes - especially in the higher tax brackets.

In addition, even states that are supposed to be "no state income tax" states have hidden taxes. And many counties are delaying 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 percent more than his purchase price of less than three years ago - and he was denied an appeal to revalue the home for tax purposes.

In addition to declining reimbursements and escalating taxes, the final threat concerns doctors in medical groups.

LCD planning

In the vast majority of group practices with more than three or four physicians, doctors suffer from what we will call "lowest common denominator" or "LCD" planning. LCD planning occurs when the practice will only implement the asset protection, tax-reduction, qualified or non-qualified planning techniques that everyone can agree on. This is not surprising, as doctors are notoriously independent, intelligent and very 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 practices' 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 - their younger partners are usually busy paying off student loans or paying for a big new house, and they can't afford to fund retirement tools that may reduce taxes because they need every dollar they earn. The older doctors have the "If it ain't broke, don't fix it" mentality. The problem is that under the new medical economic environment, it is "broke." The old ways cannot continue to be standard operating procedure.

If you are a physician who would like your group to consider more proactive planning, this article is for you. It introduces a few concepts that can be implemented to help you avoid LCD planning and to address these significant financial threats. We have seen these techniques work for solo practitioners up to very large groups.