You’ve found the perfect practice, doing the cases you want to do, living where you want to live, what else do you need to know? Let’s get a few more answers, along with the tools for evaluating the practice.
How is Income Distributed
In General, Physicians can be paid in 3 different ways: 1) W-2 Employee, 2) 1099 – Independent Contractor or 3) K-1 Partnership.
Employee – Physicians can be employees of Physician owned corporations. (In California, it is illegal for Physicians to be employed by Hospitals. For this reason, you see captive medical groups (i.e. The Permanente Medical Group with Kaiser Health and the Gould Medical Group with Sutter) or Medical Foundations established by Hospitals.
Employers withhold taxes from Employees with each paycheck. This includes Social Security Tax, Medicare Tax, State Disability, Federal and State Income Tax Withholding. The Employer has the obligation to report the taxes to the government on a quarterly basis. At year end, Employees receive a W-2 form to report income.
Employers also set up benefits such as Pension Plans and Health Insurance Plans as well. More on this later.
Independent Contractors – An Independent Contractor provides services, and takes responsibility for providing services contracted for, filling out tax forms and paying taxes, and finding their own benefits. Many Physicians work under this arrangement, as it provides flexibility if they work in multiple locations for multiple groups. It also allows Physicians to customize their own pension and benefits in a way that may not be possible in an Employee relationship.
In 2018, Dynamex Operations West v. Superior Court, the California Supreme Court adopted a three-factor test to determine whether workers are employees or independent contractors under the state’s wage orders. This has introduced uncertainty for Physician Independent Contractors. Under the new California analysis, all three of the following factors must be met for a worker to be properly classified as an independent contractor:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- The worker performs tasks that are outside of the usual course of the hiring entity’s business.
- The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.
AB5 (2019) (Gonzales) codified the Dynamex decision in California law, but exempted physicians from the requirements. CRNAs will be treated as employees.
Independent Contractors receive a 1099 form to report their income.
Partnership – Physicians can work as Partners in a Partnership, and have an experience that is a hybrid of being an Employee and an Independent Contractor.
Partnerships can arrange for benefits such as Health Insurance and Pension Plans. However, each Partner is responsible for the reporting of Income and payment of taxes.
When Do I Become A Shareholder / Partner?
There usually is a probationary period where new hires can be easily terminated (At-Will Employment), followed by a longer period before Physicians are rewarded with a recognition of seniority, employment rights and / or increased income. There are a few questions to ask.
Does every Physician make Partner?
If Yes, How long is the usual period before partnership is offered?
Is there a cost to becoming partner?
If No, What percentage of Physicians make partner?
Why do Physicians fail to receive a partnership offer?
Can you speak to a Physician that did not receive a partnership offer?
These are important questions to ask. It will give you insight into how the practice views new hires. Are new physicians viewed as the future? Or are they puzzle pieces to be used for a few years and interchanged? Depending on your individual plans, it may be a mute question, but it is worth having an awareness of the issue.
Diving Into The Income. What Do I Need To Know? What Is Included?
When comparing practices, you want to be able to make valid comparisons. To do this, you will need to know what is included as a benefit, an expense, and assumptions used to determine the income. It is easy to become enamored with a large number, only to realize the workload needed to support it does not allow any free time.
Workload – This encompasses more than just how many hours you are in an OR
How many hours per week in the OR?
Are you personally doing cases? Medically Direction? Supervising? Emergency Intervention?
How many hours per week in meetings?
Are there leadership expectations?
Are there expectations of work from home?
How taxing is the workplace environment?
What are the call requirements?
Are you working post call?
How is call apportioned?
Workload can be a very tricky number. Some practices pay for only time performing cases. Others guarantee a minimum number of hours for a workday. You’ll want to know if call hours are included in the workload calculations. How is in-house call treated, vs. out-of-house call. A typical workload is between 50 and 60 hours per week, if in-house call is fully included. (This is an average, that also includes weekends.)
How is income calculated?
Individual production? Hours worked? Salary?
What causes income to increase or decrease? Can you get more income by working harder?
Does income change if the practice payer mix gets better or worse?
Can each Anesthesiologist see the practice finances?
Are there performance metrics that affect income?
Do these reduce income? Serve as a bonus?
How many weeks of vacation are provided at the quoted income?
What if you want more vacation?
How is vacation picked? Is it equitable? Is the process transparent?
Is it possible to have an unpaid sabbatical?
Is there a mechanism for an unpaid maternity / paternity leave?
Other Benefits To Consider
HMO (Health Maintenance Organization) vs. PPO (Preferred Provider Organization) – An HMO trades choice by having smaller networks that internally manage your care for lower co-payments and less out of pocket costs. The PPO usually allows for more choice of Physicians and Hospitals for treatment, but comes at a cost with a higher deductible and co-payment. A HSA (Health Savings Account) is commonly paired to a high-deductible plan, and allow for the use of pre-tax dollars to pay for medical deductibles.
Group Health Insurance policies are paid with pre-tax dollars. Physicians paying with personal funds are subject to a deductible on their taxes. (Although a personal corporation my help with this issue.) Group Health Insurance policies are known to have higher quality customer service.
Group practices commonly get better rates than individuals. Ask if the group you are joining shops for their policies together. The largest insurers in California are The Doctor’s Company ($200M in written premiums), Norcal Mutual Insurance Company ($150M) and Medical Protective by Berkshire Hathaway ($30M).
The failure rate for companies looking to participate in the medical malpractice insurance industry exceeds 76% – a daunting figure for physician insureds. Scores of physicians have been caught up in the catastrophic failures of various risk retention groups and interdeminty trusts (i.e. Physicians Interindemnity Trust), leaving physicians in a lurch as the insurance policies they paid thousands of dollars for now prove totally worthless.
Malpractice Insurance Alternatives
Claims Made – The most common policy currently sold. Covers for all malpractice claims made while the policy is in force. During the first 5 years of these policies, rates start low and increase to a mature rate, reflecting the building volume of patient cases and the time required for malpractice cases to be filed.
Many claims made policies have a provision for retiring doctors that have been insured for many years with the same company to allow retirement without “Tail Coverage.” Tail Coverage is a term that describes the liability coverage for future claims when someone retires, or moves to a job with another insurance company. (For instance, leaving Norcal Mutual to go to Kaiser, or The Doctor’s Company to go to Stanford University.) The cost of tail coverage can run over $20,000 in California, so it needs to be considered. The alternative to tail coverage is Nose Coverage. With Nose Coverage, the new insurance company agrees to take on the risk of prior acts. The cost of nose coverage is similar to tail coverage, but can be offset by the ramp up of the new policy. (If you are changing jobs, who pays for nose or tail coverage can be negotiated!)
Occurrence – Occurrence Coverage is a less commonly found policy that covers all claims based on the date that the policy was in place. There is no ramp up in rates, because the policy extends coverage beyond the end of a physician’s practice. There is no financial penalty moving from an occurrence policy to another insurance policy.
Discounted Disability Insurance can be a benefit when taking a new job. In general, you want to find a policy that covers you for practicing your own specialty. (Own profession is better than any profession.) You will need to decide the waiting period before the policy starts (30 days, 60 days, 90 day) and how long the benefits can potentially last.
One consideration is that you want to own the policy yourself, so if you change jobs, it travels with you. Similarly, you want to pay benefits with after-tax dollars. If premiums are paid with pre-tax dollars, the benefits are taxed as income, if paid. If premiums are paid with after-tax dollars, there is no tax on benefits.
Employee and Partnership models allow for Employer sponsored retirement plans. When doing the math to compare jobs, you will need to factor these in. First some general questions.
When do I become vested in the retirement plan? (Best answer – It’s your money, immediately.)
Is the plan portable when you leave?
Is there an employer match?
Can you choose who manages your money?
What limits are there on how much or how little you can contribute?
Are there both Roth and Traditional options?
Retirement Account Types
Traditional Employer Pension – Out of vogue. The employer sets aside funds to pay out a guaranteed pension. This resembles a Defined Benefit Plan, with the difference that the risk is entirely on the employer, and if the employee dies early, the monies all go to the employer.
Defined Contribution Pension Plans – These include Roth IRA, 401k and SEP-IRAs. They have in common that contributions are made with no guarantee of return. All returns grow tax free. Roth IRAs are seeded with after-tax dollars, and at maturity there is no tax on the distribution if it is after 59 1/2 years old. 401k and SEP-IRA plans are built with pre-tax dollars, and they are taxed upon distribution.
Which retirement plan you choose depends on what you think taxes will be when you retire. If you think taxes will go up, fund a Roth IRA and pay the tax now. If you think taxes are going down, fund a traditional IRA. If you don’t know, the experts say the best bang for the buck is for someone under 40 to fund a Roth, and for someone over 50 to stay with traditional.
Defined Benefit Pension Plan – A defined benefit plan works by putting money away with the plan to fund a specific benefit at a specific time. These were popular when the stock market soared, and companies could harvest the overfunding. They were unpopular when they needed to stuff more and more money away to make up for poor returns.
Doctors will sometimes use these to shield more money from taxes. You can reduce risk of needing make-up funding by keeping the rate of return expectation low, and the expected benefit modest. You need expert advice on this topic.
Terms To Know
I am embarrassed to tell you how many doctors get confused here, but you will want to know them so you can compare.
Gross Income = Raw share of collections. A true gross income will show all costs before any deductions. We will help you create a worksheet so that you can work back to a true gross income or down to a net income so that you can compare numbers.
There are items such as billing, malpractice or administrative costs that can be taken out before, or after, the monies are divided. You will need to know this to compare.
Gross Income on a 1099 (Independent Contractors) – Doctors that receive 1099 income will view this as their gross income, because they pay all expenses. They don’t realize that the billing costs have been absorbed by someone else, and other things may be as well.
Gross Income on a W-2 (Corporate Employees) – W-2 Income reflect monies that are available for taxation and distribution. Health Insurance, Pension, half of Social Security and Medicare, Pension, and a wide variety of benefits can be taken out before you reach the “Gross Income” on a W-2 form. (This is one of the benefits of W-2 employment. Taxes can be much simpler. On the other hand, options for personalization are fewer.)
Gross Income on a K1 (Partnership) – Partnership income is a hybrid of 1099 and W-2 incomes. The partnership can organize Health Insurance, Pension, Malpractice like a Corporation. However, the partner is responsible for paying both the Employer and Employee portions of Social Security and Medicare taxes.
Net Income = The amount of money in your check! As you can see, the net income for a Partnership is different than that of a Corporate Employee or an Independent Contractor.
As you narrow down your choice to a few practices, you may want to ask if there are any sweeteners to influence your decision.
Early Commitment Bonus – Some practices will offer an early commitment bonus to encourage residents to decide on their first job, as early as their PG2 year.
Moving Expenses – As we accumulate more possessions, the cost of transporting them escalates. Some practices or hospitals will offer this as a option.
Sign-On Bonus – Another option for attracting physicians is a signing bonus. This is usually paid when an anesthesiologist joins the group. It is common to expect that the bonus will become vested over a period of time. (In other words, it is a “loan” that is forgiven after a period of time, commonly 1 or 2 years.)
What happens if it doesn’t work out? It’s better to know this before you start. Breakups can be messy, especially if the process is muddy. You’ll want to ask before you sign how physicians leave the practice, whether it is voluntary or involuntary.
No-Cause Termination – With this scenario, you can be fired for no reason. It is not uncommon for employment agreements to have a period of no-cause termination to protect the employer from a hiring mistake that is immediately apparent. This period may vary between 90 and 365 days.
Prospective anesthesiologists will want to make sure that their employment transitions to a for-cause termination status after some reasonable period of time. This will protect them from unwarranted termination by fiat.
For-Cause Termination – Termination for-cause defines a specific group of offences that trigger termination. These are usually paired with a process for adjudicating punishment before physicians are fired. This provides significant protection to the physician, and to the employer as well, if all steps are followed.
Voluntary Departure – Not all separations of physicians and practices are contentious. Sometimes, things just don’t work out. Ask about the process in the event you decide to leave.
Reporting to the National Physician Data Bank – The National Physician Data Bank was created because it perceived that the increasing occurrence of medical malpractice litigation and the need to improve the quality of medical care had become nationwide problems that warranted greater efforts than could be undertaken by any individual state. Reporting of “any negative action or finding” by state licensing authorities, peer review organizations, or private accreditation entities to the National Physician Data Bank has been required since 1990. This includes final adverse actions taken by federal and state agencies and health plans against health care practitioners, providers, and suppliers. Final adverse actions included licensure and certification actions, health care-related criminal convictions and civil judgments, exclusions from federal or state health care programs, and other adjudicated actions or decisions.
The National Physician Data Bank does not track voluntary departure or resignation of privileges where there is no reportable issue.