Life After Residency

Leaving residency or fellowship is the time physicians have to decide whether to remain employed by a hospital or go into private practice. For the doctor, the convenience of being employed must be weighed against the independence of private practice. There are also plenty of doctors choosing later in life to either leave private practice or go back to it — it all depends on personal preferences.

Below we’ll discuss the pros and cons to both hospital employment and private practice.

Hospital

Employment by a hospital is a path many doctors are choosing. By the end of 2013 practice ownership is expected to drop to 36% from 57% back in 2000, according to a report from the American Medical Association and MGMA-ACMPE, suggesting a trend towards hospital employment. Residents and fellows are deciding that after the long, hard years of medical school and training that they would like to have more of a work-life balance.

Hospitals provide outstanding benefits along with continuing medical education. A hospital also provides doctors with cutting edge technology, which means physicians have access to equipment such as X-rays and MRI without the cost of ownership. The main reason doctors consider hospital employment is they perceive high business expenses associated with owning a practice. Some simply are not interested in becoming business people and prefer the more corporate environment that employment in a hospital system provides.

However, being an employee rather than a business owner generally provides more exposure to taxation. The physician’s total income is reported on a W-2 and taxed as ordinary income. Any expenses incurred with connection to employment are only deductible to the extent that they exceed 2% of the adjusted gross income. Furthermore, expense deductions may be limited when income levels exceed certain thresholds based upon filing status.

Many doctors have incurred large student loan debt as a result of medical school. In some cases, this debt may be forgiven when employed by a non-profit organization, such as a hospital. This may be more easily attained after residency and fellowship with only a few more years of service. If you have a federal Stafford loan, you may be able to get all or part of your loan forgiven through certain types of volunteer work, public service, military service or medical practice.

However, if you do have all or part of your student loans forgiven, be aware that the IRS may consider the forgiven debt as income and you may have to pay tax on that amount. Also, if you choose to participate in any loan forgiveness program, make sure to obtain written verification before you begin work of what amount will be forgiven and under what conditions.

Private practice

Joining an existing practice is another option. Whether you are employed by a practice or wish to buy into a practice, private medical offices offer another lifestyle and financial option.

One of the biggest advantages is the autonomy physicians have over their business. The decisions they make can be based upon patient care and practice policy rather than hospital policy. Compensation can be influenced by seeing more patients, where working for a hospital provides a salary. Income can also be supplemented by providing ancillary services.

If employed by a large practice, you have partners/employees who share in the management of the business and management of the patient care. When deciding if this is the option, one must consider the employment contract first. Many employment contracts require you to sign a covenant not to compete which may limit your ability to leave the practice.

Will you be required to bring in a set amount of patients? Will you be allowed to buy into the practice and, if so, on what terms? Will your ability to become an equity partner in the practice be accomplished through “sweat” equity or through an actual capital contribution?

Being in a medical practice outside of a hospital has an entrepreneurial element. Most practitioners are not exposed to the business side of practice management; however, you may have non-medical skills that you can contribute such as web site design, practice analytics or real estate knowledge.

There are tax benefits to ownership over direct employment. The amount that can be put away for retirement to grow tax free is significantly larger under a defined contribution plan than an employer sponsored 401(k) — $51,000 vs. $17,500. This amount is shielded from current income taxes and grows tax free until withdrawn.

Additionally practices often provide employee car and travel expense, along with other perks, not found in a hospital. Compensation bonuses are common based on practice performance. In some cases, this “bonus” may be treated as a distribution and not as wages, providing potentially large tax savings.

Current trend

Today, fewer doctors wish to open their own practice. Those who do are usually in a rural setting, which may also qualify for debt forgiveness. Those who wish to set a practice in a more populated area are looking towards concierge medicine whereby patients pay a set fee annually for the doctor’s service. Doctors often do not take insurance relying on the patient to submit the claim.

Understand your business

Given the vast amount medical training, doctors have little time for practice management, business and personal finance education. It is therefore important for doctors to seek out the means to get this knowledge through outside professionals, courses or business readings. They should put together a financial team of professionals, which may include an attorney, CPA, banker and insurance agent.

For someone just beginning their practice, depending on their lifestyle, either hospital employment or joining large group practices can be beneficial. However, most agree that the days of solo practitioners are limited.

Lisa Silber, CPA, is a manager at Friedman LLP, an accounting, tax and business consulting firm that has been servicing the needs of public and private companies since 1924. Lisa can be reached at: [email protected].

Friedman LLP is also a proud member of the National CPA Health Care Advisors Association. HCAA is a nationwide network of CPA firms devoted to serving the healthcare industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at [email protected].