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Are you prepared for inflation?


How physicians can protect our financial security.

If many economic experts are correct, the United States economy is in serious trouble. The combination of rising inflation and historically high debt levels threatens the marketplace's stability, particularly in the healthcare sector. No one benefits from inflation. It generates a vicious cycle of rising interest rates, unemployment, and investor uncertainty. Healthcare is particularly vulnerable to inflation because of the complex laws that limit our ability to raise fees. At the same time, the door on alternative methods for physicians to maintain income may be closing. 

Physicians have prospered over the past thirty years relative to the general population.

The past thirty years have been a period of low inflation, and physicians have fared reasonably well. Health care expenditures have increased 20% over the past 20 years due to an aging population, new technologic advances, and the introduction of the Affordable Care Act. Combined with a limited supply of physicians, this growth has helped physicians and hospitals maintain some control over their income despite cost-cutting measures.

Low inflation moderated cuts by the federal government and, in some cases, allowed for increased fees to specific providers. Keeping Medicare rates close to a level slightly above inflation has prevented the mass exodus of physicians out of Medicare, as is the case with Medicaid, which currently only covers 60% of providers' costs. Medicare fees pay about 90% of actual costs to hospitals and physicians, but physicians have made up for this by their contracts with private insurers, who typically pay more.

Historically, medicine has always been considered a service-oriented advocation, not a way to become wealthy. The introduction of Medicare in 1965 and the generous private health insurance plans negotiated by powerful unions increased income to hospitals and physicians dramatically. Before Medicare, physician incomes were about twice that of an average worker. Now they are more than five times that of an average worker; this increased income allowed physicians to invest and prosper with many becoming wealthy. 

Low inflation over the past thirty years has helped physicians in several ways.

  • Low inflation prevents the erosion of the value of long-term investments.
  • Low inflation and low interest rates allowed physicians to invest in technology, increasing productivity and providing new ways to earn income.
  • Low inflation grew the economy, allowing small businesses to continue paying for private health care. A favorable supply and demand for physician services also bolstered the ability to maintain high incomes.

American physicians are the highest paid in the world, with an average salary of $270,000 in 2020, according to the Medical Economics Annual Physician Report. In the same report, the authors note that most physicians have maintained or increased income using new technology, working harder, newer practice models and taking advantage of increased payment for quality measures.

Shifts in practice patterns have also benefitted physicians. A shortage of physicians has encouraged hospital systems and insurance companies to lure physicians with high salaries and bonuses in return for becoming employees. According to Forbes, the percentage of physicans in private practice declined from 41 percent in 1983 to 17 percent in 2014. The trend continues, attracting new physicians burdened with high debt. These physicians typically generate less income than they earn, something hospitals have been willing to subsidize in return for more referrals into their systems and specialists. For example, hospitalists typically earn $150,000 less than their productivity, and the trend is spreading to other specialties. 

The medical bubble is about to burst.

Rising inflation, a massive federal deficit, and the inevitable rise in interest rates can change the fortunes of physicians who do not recognize and prepare for future economic changes. The time to change in before, not after inflation gets out of control.

A recent op-ed piece in the New York Times claimed that inflation rates have little bearing on the economy's health in general. The authors are burying their collective heads in the sand to deny our past mistakes and endanger our future, unlike the ostrich, which buries its head in the sand to protect the future by checking on its buried eggs. Rising inflation will have dire consequences for all social programs, but especially for healthcare. A quick look at how the federal government allocates our tax dollars should show how dangerous inflation and rising interest rates can be to physicians.

The majority of federal spending is now to service the debt and for social security and Medicare. Revenue has been flat.

As a student, I overheard an undergraduate asking a faculty member at Princeton University how much it costs to live in Princeton, N.J. The professor wisely answered, "You will undoubtedly spend more than you earn, so if you have a good relationship with a bank and you will be fine." He was describing a simplified version of Keynesian economics, named after the economist John Maynard Keynes who opined in the 1930s that government and the central banks could maintain the GNP in times of recession by borrowing money to stimulate the economy, which would repay the debt created. He advocated lower taxes and suggested that deficits were not a problem if the economy grew.

Except for a brief period in the 1980s when we had a surplus, we have managed our growth in GNP through borrowing money selling bonds. Roosevelt embraced the policy by creating the new deal, spending his way out of the depression. The same approach raised money to finance the war machine during World War 2 and how we dealt with the COVID-19 pandemic. The result is that we now face a historically high debt to GNP ratio. During the Regan, Bush, and Trump administrations, tax cuts exacerbated the problem by inadequately stimulating GNP enough to reduce the deficit as promised by Keynesian economists. A contributing factor has been that we have been continuously at war somewhere in the world for the past twenty-five years.

COVID-19 may be the straw that breaks the camel's back, increasing the national debt to thirty-nine trillion dollars. The per capita debt is $69,000 for every man, woman, and child in the U.S. Paying that off would alleviate one problem but would fail to account for future promised obligations, as well as newly created social welfare programs. 

Countries like Spain and Greece, which cannot increase the money supply, must deal with their debt by implementing austerity measures, drastically cutting social services. The U.S. has avoided this because our dollar remains valuable, and we have never defaulted on debt repayment. Yet.

Physicians are at particular risk as inflation increases.

  • The Affordable Health Care Act significantly increased the number of patients covered by government insurance plans. More than 50% of patients are covered by Medicare, Medicaid, or private pay, and the number of patients with private insurance is decreasing. As the number of covered lives in private plans declines, private companies exert more control over physicians by limiting networks and forcing lower fees.
  • Inflation will force small businesses to close or to limit or eliminate private insurance. More patients will be driven into government programs or become private pay.
  • High inflation allocates more money to service the debt and less to support social programs and promote growth.
  • More people are collecting social security than are paying in. The U.S. population increased marginally last year, but the birth rate in the U.S. fell. The population grew slightly, mainly from the immigration of low-skilled workers who contribute little to social programs. Our immigration policies need to change to attract more talented, skilled workers and enforce illegal immigration regulations.
  • The primary buyer of our debt is China. As political tensions increase, they could stop buying our bonds.
  • The population is aging, increasing healthcare spending for hospitals, drugs, and rehabilitation leaves less for physician fees.
  • The price of oil is linked to the dollar. Increasing money supply by printing dollars has not significantly devalued the value of our currency, but as oil demand decreases, the dollar will be less valuable, making our bonds less attractive.

For new physicians, the situation will be worse. The cost of medical education and undergraduate education has soared over the past 30 years. It costs sixty thousand dollars a year to attend a four-year college like NYU or Cornell and seventy thousand a year to attend a private medical school. Even the Caribbean medical schools charge sixty thousand a year.

These trends make medical education affordable only for the wealthy and limit diversity. They may ultimately make Medicine an undesirable career choice. At the same time, as medical school enrollment is increasing, Medicare has been reluctant to spend the money to increase residency positions.

How physicians can protect our financial security

  • Option one: Work faster and longer. Most of us already are maxed out, and younger physicians generally don't wish to continue this tradition. Maybe it is time to work smarter, not harder. Embrace innovation which will make your work more efficient.
  • Option two: Do with less. Reduce expenses. Downsize your house—Trade in the BMW for a Ford. Refinance your mortgage if you have one. Convert all your variable loans to fixed rates. Physicians make a lot of money but do poorly at keeping it. Don't worry about keeping up with the Jones; they assume you are wealthy anyway.
  • Employees will demand higher wages but don't skimp on valuable workers. One poorly trained front desk person can ruin a practice. Look for other things to cut. Reduce inventory, let CVS give vaccines (They are generally money losers), shop around for things you need. Amazon business may be cheaper than your regular supplier.
  • Pay your office bills with no-fee credit cards that earn points and pay them off each month.
  • Pay more attention to billing and collecting. Studies show that many physicians don't charge for many reimbursable services covered by the ACA. A patient discussion about a living will is reimbursable. Smoking cessation advice and a yearly wellness exam is covered at 100%. Collect all the copays and coinsurance. Learn the art of coding and regularly check receivables because your stake in this is much more significant than your billers.
  • Shop around for all your insurance. Buy a high deductible health insurance policy with an HSA for your staff. Under the ACA, many preventative services are covered at 100%. They will complain about the high deductible, but you can offer to pay their medical bills up to the deductible. Studies show only 10% of workers use their insurance. The money you save on the premiums will more than pay the bills your workers submit to you, and an HSA gives you another savings vehicle.
  • Consider hiring a low-level provider like a good N.P.
  • It's time to seriously consider a concierge model which can protect you from the whims of insurance companies. Physicians in those models are highly satisfied, often earn more, and claim to have better outcomes. Patients overwhelmingly love the care they get and will pay for it. Most insurance companies, including Medicare, don't prohibit or limit these arrangements if done correctly.
  • Invest in real estate, commodities like gold and silver, and renewable energy. Gold is currently undervalued but historically performs well in inflation. The technology and communications market will remain strong. Stay with the equities market concentrating on low cap stocks that are less affected by inflation and plan to hold them for at least ten years. Over the long run, the S&P has performed better than other investments, although there will be periods of downturn. Pharma will likely remain profitable for the near future, but I don't think we can expect to see 15% returns in the future.
  • Keep cash on hand to invest in stocks that show promise of beating the rate of inflation. Be prepared to move quickly.
  • Consider TIPs, which are federal bonds that fluctuate with the interest rate. As a rule of thumb, your stock to bond ratio should be 60/40.

Physicians will never be poor, but the favorable financial bubble will burst due to bad fiscal policy, changing public opinion, and unfavorable laws limiting our practice options. Regardless, the services of honest, informed, and affable physicians will always be needed. Our place in society and self-esteem will be defined not by dollars but by our good deeds. Perhaps that's how it always should have been.

These are the opinions of Simon Douglas Murray, M.D., and not those of this publication or its owners. I am not a financial advisor, just a small-town country doctor.

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