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What hospital statistics don’t reveal about doctor salaries

Posted on June 2, 2019January 30, 2021 by SmartMoneyMD

I came across a heated newsgroup thread related to a recent survey comparison of medical specialty salaries and the revenue that each specialty generates for hospitals. Overall there is a general correlation between higher hospital revenue and higher salaries, but there are some outliers. According to the data, ophthalmologists generated one of the least amount of revenue for hospital yet reported income that was in the middle of the pack. You can read the official survey data on Merritt-Hawkins.

Naturally, there was some animosity from those specialties who felt short-changed by the system. Why would a certain field be compensated more for contributing less to the system? The devil in the detail, of course.
This topic presents a good learning opportunity for all doctors.

A study is only as good as the data given
We’ve all taken part in clinical or laboratory research at some point in our lives. Some of us conduct research in our jobs. We all know that variables need to be controlled, and shoddy survey research is only as good as the respondents’ responses.

In this survey, both hospital and office-based specialties are lumped together. Certain medical fields like dermatology, ophthalmology, and psychiatry are office-based fields. For the most part they function independently of hospitals, and generate revenue from professional charges as well as ancillary services. They do not typically bring in much revenue to hospitals.

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Why? These specialties are unique:

These specialties typically do not consult other specialties, so the referral chain ends with them.
These specialties typically do not order high volumes of ancillary testing such as lab work or imaging.
Procedures that these specialties perform can typically be conducted outside of the hospital. Anything done outside of the hospital translates to zero revenue to the hospital.
They’re also not likely to be employed by the hospital either.

If you look back at the survey, a field like ophthalmology isn’t going to bring much revenue into the hospital. An ophthalmologist isn’t likely to be employed by a hospital either. So the reported salary of an ophthalmologist isn’t likely to have any correlation with hospital revenue at all.

In contrast, neurosurgeons employed by a hospital are going to be more common. Most of their surgeries are performed in the hospital, and their work brings in significant technical revenue to the hospital. A hospital could contract with independent neurosurgeons for their services, but from a business standpoint employing the neurosurgeon would give the hospital much more control.

Key points in the business of medicine
It’s never a good idea to make career decisions based on money especially in medicine. What might be a hot field with great compensation may no longer be the case your entire career. The key points I impress upon my students to assess are the following:

You need to choose a field that you enjoy.
Once you’ve narrowed down your potential options, get a sense of what you can do with your expertise. Inpatient, outpatient care? Lifestyle?
Understand how one’s skills within a profession translates into income. You don’t have to understand everything, but getting a head start will allow you enough time [read: years] to synthesize the right questions to ask in the future.

If your career specialty is already set, it’s not too late to reassess what you understand or not about your field. If you are an internist, you probably already have a good sense of job options available like outpatient care or hospital medicine. Study how revenue stream occurs. Figure out where the middlemen are, and ask yourself if you are okay with how the system you are in works. Realize that not every one of your peers will share the same values that you do. Make sure that whatever you decide to do helps to preserve your profession. I’ve seen plenty of doctors “sell out” their profession to make a quick buck. Don’t be that gal. We’ve worked too hard to throw away everything.

The bottom line? Don’t get mad if someone else seems to work less and earn more! If that is important to you, figure out what you can do to make it right! You’ve got an entire career to do it.

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Financial conundrums of dual income doctor households

Posted on May 27, 2019January 30, 2021 by SmartMoneyMD

Two incomes are better than one, right? As we all know, the answer isn’t clear cut. If we have to actively “work” to generate income (shout out to @PassiveIncomeMD), we have to balance exchanging time for money. Nothing comes for free. When you throw in a tax system to convolute matters, certain households are actually punished for going into the workforce. There is a delicate balance between each income-earning member and what each profession entails. Some households are hit harder financially than others due to the income situations of each spouse, but hey, we don’t choose our partners based on their incomes right? ?

This conundrum isn’t limited to doctor households or families with a high-income earner. One of my neighbors is a financial analyst with a stay-at-home wife and two kids. The wife opted resign from her previous job as a teacher because her entire income would have gone towards child care. That’s just how life plays out sometimes.

The tax man punishes disproportionate incomes

The U.S. tax system almost always “punishes” the spouse with a lower income. Two main reasons:

The tax system is progressive, just like how the jackpot in those slot machines keep on growing. The higher your income, the more likely you will get pushed toward a higher marginal tax bracket. Suppose a dual income household has a physician earning $350,000 a year and an IT customer support specialist earning $60,000 a year. The physician income alone puts the family in the 32% marginal tax bracket. If the IT professional were single, he’d only be in the 22% bracket. If he were the sole breadwinner in the family, they’d be in the 12% marginal bracket. Instead, the family will be in the 35% marginal bracket. This means that a good portion of his income will be taxed at 32% (until the family income reaches the 35% threshold) and the rest at 35%! Perhaps that is the penalty one pays for being in a high-income household. For some households, giving up 35 cents for every dollar you earn on a $60,000 might not be worth it.
Social Security and Medicare taxes get taken out “twice” in a dual working household. This is a system that you pay into while working and will receive some repayment in retirement. But one could argue that it’s still potentially less money in your pocket. A family with spouses earning $350,000 and $60,000 a year will potentially take home less than another family with a single earner with a $410,000 income.

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This boy stays at home to entertain the family. Not a bad main gig!

Whether the lower income producing spouse remains in the workforce ultimately depends on what is most important to the family. Interestingly, most of my colleagues in this situation made their decisions based on finances. Essentially all of the lower income spouses ended up leaving the workforce to care for their children until the kids became old enough to enter school. Some of the spouses re-entered the workforce. One wife of a couple I know actually worked side gigs with Instacart and Rover while the kids were in school!

Spouses with similar incomes fare better

Our tax system tends to be more forgiving when each member of a dual income household has similar incomes. Each member still needs to pay into Social Security and Medicare separately, but they would have been required to do so even if they were unmarried. These households are undoubtedly more equipped to reach their financial goals more quickly, but are also susceptible to overextending their earnings because they have higher earnings.
Most of my experience with dual income households is with dual doctor households. Since medicine is a relatively time-demanding profession, I find that most dual doctor households are obligated to outsource many tasks. Instances include:

Utilization of grocery delivery services or grocery pick-up services.
Utilization of Uber Eats, Seamless, or other restaurant delivery services.
Utilization of dry cleaning services with pick-up services.
Nanny or Montessori schooling for young children. Some nannies command salaries in the $70k range, more than what most medical residents earn! I once knew a doctor household who kept their nanny until the kids were well into high school!
Utilization of lawn and home cleaning services.

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There is no end to what you can outsource. While the income levels of dual doctor households may be higher, their taxes are higher, and the expenditures tend to be higher as well. Are these families actually better off financially than single doctor households? I would suspect that the split is actually more even than we would expect. There are a handful of dual doctor families I’ve seen that completely outspend their earnings. Shocking? Not anymore.

How to be a winner

There isn’t a single best answer to handle the finance implications of dual income households. The bottom line is that some of us are going to get the short end of the U.S. tax system. We might not have a choice in the matter. What we do have control over is how much we save and invest.

The hate associated with being a Californian doctor

Posted on May 10, 2019January 30, 2021 by SmartMoneyMD

Geographical arbitrage is a huge component to being able to build wealth in a timely manner. For doctors, the formula for rapid wealth accumulation calls for geographical arbitrage even more strongly as our salaries do not have wide ranges across the country. A doctor in Texas will probably command a similar salary in Arizona (maybe slightly less). A doctor in the midwest might earn more, spend less, and work less than her equivalent in California. By this token, who would want ever want to live in the Sunshine state?

There was a recent post on the White Coat Investor website enumerating all of the financial disadvantages of being a doctor in California. Sadly for those in California, those reasons are backed by fact—on average, you’re going to probably going to work pretty hard as a physician in California, spend $1 million on a starter home, and commute a few hours a week. By the way, gas is around $4 a gallon.

The fuel to the fire

Those of us living in California are probably aware of many other factors that make living in the area financially tough. Some of them that come to mind include:

Private practice physicians can’t establish as an LLC. This basically means that you have to pay a little more and deal with more logistics to get a corporation established.
Payor mix is skewed. There are practices that thrive on taking care of MediCal patients. Actually, in-office visits pay horribly but if you patient needs surgery you can actually get decent reimbursement.
High concentration of doctors. California has over 50,000 physicians. Many of these doctors are clumped in the larger cities so competition is tough. Many plastic surgeons in California operate on Fridays and Saturdays in order to capture the appropriate demographic. Think longer hours.
Potentially malignant physician employers. Those doctors who have potential to join private practices will face employers who will burn and churn you. Full-time jobs at part-time salaries. You name it, and it exists.
Inter-office commuting. One of my friends covers 4 offices for his practice and operates at 3 different hospitals. By the way, he can’t expense it, because he is a W2 employee.

The “special” gas, by the way, has an octane rating of 89.

California is not all bad

There are almost 40 million people living in California. It’s got to be not all bad. Many of the reasons that people use to justify living this fair state are emotionally charged, but there is still good reason that they are valid. Let’s take a look at some of them:

Ethnic diversity. There is more benefit than face value of having diversity. Part of this argument sounds snobby, but this is how some doctors justify working 6 days a week trying to pay off a $1.4 million home that they don’t really even like. This is more than moving to Detroit to take a highly competitive Hospitalist job because it has a sizable Middle Eastern population and good Halal options. Most doctors I know have eaten tasty dim sum rolled around a cart, but probably have no idea that the real stuff can only be found in more diverse cities like Los Angeles, New York, or San Francisco. Does this matter to everyone? For some people it clearly matters a lot.
Proximity to family. We all know that this is important, but sometimes it’s non-negotiable.
Values and attitude. We all know that type of laid-back attitude, culture, and general vibe in California. Sometimes all that you need to know that the world is going to be okay is that jogging path down by the pier, the Iranian supermarket where you can get 6 tangerines for $1, or the sunny weather when you go hiking. Likewise, those die-hard New Yorkers wouldn’t trade their lifestyle for anything else.

Getting hit financially

The average physician in California will likely take longer to build up her bank account. Some two physician households in California will only generate an earning power comparable to a single physician family in the Midwest. The biggest question is whether that is going to be okay with you. If you want to be financially independent by age 40 it might be tough. Most doctors, however, will still be able to manage a respectable living with judicious financial choices–if doctor’s can’t afford to live in California, then who can? Let’s stop the hate on the Californian doctor!

Californians and New Yorkers, I want some love! Why do you choose to live in the cities that you are in?

Plateauing net worth and lifestyle inflation

Posted on May 6, 2019January 30, 2021 by SmartMoneyMD

Wealth accumulation can follow many trajectories, depending on discipline and external factors like stock market health or economic fluctuations. With a proper financial plan, doctors can stick to a game plan that should allow them to reach financial milestones rather predictably. The adage that wealth begets wealth certainly does hold true most of the time, but it doesn’t necessarily guarantee financial victory. One of the issues with wealth accumulation is that goals, needs, and desires rarely remain constant over time. Life happens, and sometimes that can derail even the most sound financial plans. Let’s take a look at the financial trajectory of a typical financially-conscientious physician:

The doctor in training and early career doctor
Many early career physicians are knee-deep in debt. Some of us venture even further into the red by purchasing a home or buying a big-ticket item on credit while on a resident’s salary. Fortunately any early career financial missteps can be righted with a lengthy enough career length. I find that this generation of physicians overall tends to be more aware of finances, possibly because of the negative changes in medicine. Doctors at this age will often start picking up financial books or talking to financial planners. Some of them will be directed to @WCI’s website and find out that it’s cool to be attuned to your bank accounts.
This is also the point where many doctors are able to dig out of a negative net worth when the financial strategies start working. I remember that the time my net worth became zero—I felt as happy as I did when I got accepted into medical school and residency!
When our financial strategies start working, we hope that it could continue indefinitely, but throughout our careers there are many factors that can disrupt the game plan.

Early mid career doctors

How long does the gravy train last? Will your net worth growth actually accelerate as you reduce debt? It should—your first $100,000 in net worth should be most difficult to achieve, while your second or third $100,000 ought to be easier. As more of your net worth becomes invested, it should grow by itself.
In practice, many mid career doctors end up plateauing their savings rate simply due to life changes or letting the reins loose a little too soon. This is where we are at most risk of a plateauing net worth.

Increasing costs for children — As we had mentioned on a previous article, we don’t always make rational decisions. Sometimes we may be more wiling to splurge on a high price tag for our family members but not necessarily for ourselves. Send your kids to private school, and the math equation changes.
Finding that “forever” home — Many doctors at this point will find a reason to get a bigger and more expensive house. Perhaps the second dog needs a larger yard or the kids need more room for themselves. The second mortgage will dig into your income twice as hard when the first home doesn’t sell.
Taking more lavish vacations — While there is nothing wrong with taking time off from work, many doctors end up overcompensating for having stressful careers through luxurious vacations. Throw in a few five-figure vacations a year, and you realize that it will chew up a chunk of a doctor’s salary.
Making poor financial choices intended to grow one’s net worth — This is where smart people can outsmart themselves. Commercial real estate, fast-food restaurants, family businesses…you name it, there are probably people who have dumped a chunk of change into ancillary investments. Some of these investments are going to flop. Each failed investment will extend your working career a little longer. Just make sure that you don’t make too many of them…

Frankly, any of these situations can happen to us. Many of these choices are made conscientiously, but they can have lasting effects on our net worth trajectory.

Is plateauing your net worth a bad thing?

Late career doctors

There really isn’t much other than catastrophic events or major economic recessions that could derail a well-executed financial plan for late career doctors. Conversely, there are instances at this age where doctors are presented with unexpected health issues or worse yet, death. I have seen a handful of doctors who were unable to enjoy the fruits of their labor due to health issues. You can take your money to the grave, but it might not do you too much good.

The conclusion to all of this? Plateauing can happen even with judicious financial planning simply due to changing needs and desires. What’s important for doctors to realize is that many of us are okay working a “full career” despite a early retirement being a hot trend. Just make sure that the lifestyle changes that you make don’t make you overextend into your golden years.

Private schools and costs, revisited

Posted on April 24, 2019January 30, 2021 by SmartMoneyMD

College admission letters officially came out a few weeks ago, and there were many happy parents as well as some disappointed ones. One of my colleagues’ daughters received her acceptance letter to Harvard. He had kept me in the loop during the application process and her daughter had already been accepted into Stanford and Berkeley, both with full tuition scholarships. I congratulated him and we had no further discussion about it.

Implicitly we both knew that she was going to Harvard even though there were two full scholarship offers at great schools. I guess you know where I stand in terms of private vs public education…
There is no end to the debates about private and public schools. The contention has always been that private schools confer no guaranteed return on investment despite having a higher price tag than publicly funded schools. We’ve all seen private grade schools that are great, and probably an equal number that are lousy. I recall that in childhood many of the doctors’ kids all enrolled in a private school only to find that the public city schools offered better advanced classes. I attended public schools that were considered some of the worst in the entire country up until college, and managed to develop a relatively good career. It all depends on where you live and options are around.
The money bloggers are relatively vocal in their opposition of private education, from secondary school all the way into college. The doctor money bloggers in general seem to favor the public school route, but their rationale also involves saving oneself from unnecessary expenses. There is nothing wrong with that viewpoint, especially when these very same money bloggers have hard evidence from their own experiences that they carved out a financially successful lifestyle without the huge price tags. I would venture to assume that the physician bloggers who developed successful professional careers without shelling out the big bucks would also argue that private education confers zero advantages. There is a saying in medical school “P = MD”—if you can make it through, an “M.D” is an “M.D” whether you got it in the Caribbean or Dublin.

The evolution of medical school tuition costs
We’ve seen quite a few changes in the medical school world over the past year and a half. We’ve seen that New York University’s medical school is waiving tuition for all of its students. Likewise, Columbia University has also has a program that covers all need-based aid. Most recently, Washington University in St. Louis also announced that it will cover the cost of tuition for its entering medical school class.
That’s three private universities using their endowment to eliminate tuition cost out of the picture.
For those of you who aren’t familiar, these three medical schools are highly competitive. I remember that there was a time that WashU gave its first year students a t-shirt with the student’s MCAT score on it. Many aspiring doctors would strongly consider finding a means to fund their tuition at these schools if they were accepted.

Free private education for all?
How would your opinion of private education change if it were all free? This is an interesting thought exercise, as many private schools survive solely on the premise that they offer a higher quality of education. Most non-parochial primary and secondary schools have certain testing requirements for entrance, whereas non-magnet public schools simply require you to live within a certain vicinity.

Residency and fellowship
Doctors have to train beyond medical school in order to enter the profession. It’s pretty clear cut that a top tier residency will likely offer a stronger peer group and potentially a higher quality of training. Many of these training programs are tied public universities (at least one in most states), but a large number are also tied to private universities with affiliated hospitals. Most medical students aren’t really going to care whether they train at a private or public hospital.

Private education isn’t exactly like setting your Benjamins on fire…

One reason for this? Residents are paid during their training, so you might as well go to the best program you can get accepted into as long as it works with the rest of the family.
Interestingly, many dentists I know who enter residency (dentists are not required to train after dental school) still opt for the private route, with the hope that they will get “better” training. Their rationale? Dentists have to pay for their residency.

Professional school, colleges, and primary school
If money weren’t a factor then choice of all other schooling will likely distill down to two factors: (1) quality of education and (2) convenience. Gee, that sounds like the same criteria that most people look at to try to justify the cost of private education. Many of my colleagues consider that paying for a child’s four-year education will only sent them back four years of retirement. We all know that this translates to more than that due to investment growth, but I still see perfectly rational people make choices that perhaps are a little bit irrational. That is the beauty of human nature!

By the way, tuition alone at Harvard for the upcoming school year runs upward of $46,000. Early retirement anyone?

Ten doctor financial mistakes you don’t want to make

Posted on April 14, 2019January 30, 2021 by SmartMoneyMD

It’s okay to make mistakes in life. That’s the only way to learn. Hopefully the major mistakes get made earlier in life so that we have less to lose and more time to “make up” for faltering. But hey, life wouldn’t be interesting if challenges aren’t presented to us. Let’s look at ten of the common doctor financial blunders that have either happened to me or my coworkers:

Borrowing too much from your future self. The potential of having a stable career in medicine makes spending a breeze. I still remember the day I applied for a credit card as a resident and my approved credit line was actually greater than several months of my salary! I think that there are provisions these days to prevent excessively leveraging your credit, but as doctors we are still given relatively broad leveraging freedom.
Growing too quickly into your income. This has happened to me on multiple occasions. We work hard in our jobs. Sometimes we get a lucky break and get a bonus or raise. It’s very tempting to use that additional income as a reward for our headaches at work. I certainly did that once by purchasing a car in cash. Was it better than financing the car at 2.9% for five year? It’s still not clear to me, but if you make too many of these spontaneous purchases, your wallet will eventually feel it.
Buying a timeshare. Those marketing and salespeople are fast to close the deal. They offer free breakfasts or free show tickets for a 2-3hr timeshare session. What’s ten or twenty thousand dollars amortized over the course of your lifetime, especially if you consider how much you could potentially spend on vacation? There are annual HOA dues to most timeshares which dig into the budget as well.
Buying a vacation home. This is probably worse than buying a timeshare. Perhaps you decide that you like Hawaii very much, but you don’t live or work there. What’s wrong with buying a vacation home in Hawaii so that your family can stay there any time of the year? There’s nothing wrong with owning a second home, but there are costs to owning relatively expensive secondary homes. There’s only value in these investments if you sell them at an inflation-adjusted profit in the future. You be the judge if that is likely to happen.
Job hopping. You don’t like your hospital or boss. You hunt around and find that there are other better options, but the problem is that it’s halfway across the country. Pack up the family and move. The problem is there is opportunity cost to moving. If you switch jobs, then you will have downtime where you will not be earning income.
Living as if you can work forever. If you spend exactly as much as you earn, then your net worth will never grow. I have had colleagues who do a great job spending down every paycheck. Be aware that at some point in your career you might not be able to sustain the same work hours that you did when you were younger.
Lending money to family/friends. This is a touchy subject as different cultures treat borrowing money differently. In some parts of the world, it is expected that more successful family members support those who were less fortunate. Unfortunately, you may never expect to receive any repayment for family loans. I once knew one nephrologist who ended up having to moonlight in order to help pay for his brother’s mortgage. Tough situation.
Thinking that all doctor incomes afford the same lifestyle. Face it. There is a difference between a neurosurgeon’s and internist’s salary. There is no way that the lower income profession can live the same lifestyle as the higher one.
Thinking that you are different. Don’t delude yourself into living a life that your existing wealth cannot afford. Just because one of your coworkers spent her way into bankruptcy doesn’t mean that you are immune. You aren’t. If everyone else you know lost big on a syndicated apartment investment, don’t think that you’ll be different.
Expecting a windfall. This is a bizarre concept to me—some coworkers somehow justify a lifestyle with the expectation that a windfall will bolster their existing incomes. It could be an expected raise, an inheritance, a winning lotto ticket, or a huge payout from an investment. Anything could happen, but wait until the windfall comes before you make life decisions based on a particular outcome.

What other financial mistakes have you or your coworkers stumbled on?

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The many paths to financial freedom

Posted on April 5, 2019January 30, 2021 by SmartMoneyMD

The challenge in achieving financial freedom is that there is no single route to reach your goal. This means that there is no single cookbook to building wealth, only a countless number of recipes that others have written accounting what has worked for them. The frustration that many of us have in reading about others’ success is that there is never any guarantee that you or anyone else could replicate the outcome. But that is life; we just have to learn from others and make the best possible decision for ourselves.

Doctors are fortunate in that their occupation tends to be relatively stable despite the growing factors that erode physician satisfaction or autonomy. To this end, most doctors can just work hard at their day (or night) jobs for income and focus on controlling expenses. Controlling the doctor financial freedom pathway is actually pretty simple in theory. Let’s see how we can stratify the trajectory to financial freedom below:

Allergic to debt
The majority of students, residents, and early career doctors I encounter fall into this category. They are debt averse, maybe because they have read so many accounts of others who have been in their shoes go through living a bare-bones existence. Discounted Pop-Tarts, 12 for $1 ramen packs, leftover grand rounds meals—you name it, these guys have done it. Some of them avoid getting traditional loans for their education by borrowing from their parents at a set interest rate. Some of them carve out their homes and apartments into rentals. It’s quite creative and impressive some people go about cutting costs and avoiding debt.
The reward? Being debt-free confers a good deal of psychological affirmation. It also gives you absolute control of where you income goes (none of it goes towards repayment of debt). As your income rises in your career, you can put more of it towards your final net worth. Is this method the fastest way to get to financial freedom? Some people would think so.

Career workhorse
You went into medicine because you like stability. No gambling, no risk taking…just good ‘ole fashioned intelligence and hard work. If you can grind through the high volume of patients and put up with ever-increasing administrators, you can get a good income. Save as much of it as possible, and you’ve got yourself a good nest egg.

The career workhorse is not debt averse; she borrowed for her medical school education and for her home and vehicles. There is nothing wrong with leveraging capital in order to live a lifestyle that you worked hard to earn. The way to financial freedom through this trajectory is simply to automate a fixed amount of savings from your paycheck. Set your savings rate to 20% of your paycheck, go for a standard career in medicine, and you will reach financial freedom. Period.

Income and side-hustle focused
There are also physicians who are keen on focusing on ancillary income. Real estate, book deals, courses, and whatever else that can generate income is fair game. There is a fascination with passive income these days, where the effort is put forth ahead of time to generate income with little upkeep indefinitely. Some of these are low yield; others, like real estate can be high risk and high reward. Many of my colleagues have been fortunate to bet big on ancillary investments outside of their profession and built up a revenue stream independent of their work.
The very fortunate side-income physicians have been able to supplement and subsequently supplant their primary working income as a doctor. How common is it to be able to achieve financial freedom through this route? You be the judge.
Conclusion

The majority of doctors are going to be career workhorses. There is nothing wrong with that—that’s how we advise students. You should choose a career that you actually want to focus your time on. If you happen to find another calling to supplement your income, so be it.