I am concluding this miniseries on the economics of medicine by examining the cost of doing business as a solo practitioner. Earlier, we saw that living a decent lifestyle requires an annual salary of $170,000. Now let’s see what happens if you’re a solo practitioner and you want to generate that kind of income.
The first thing you’ll have to do when setting up your offices to hire an attorney to help in incorporating your business. You should never practiced under your name alone. Instead of being Half M.D., I should set up a company called Half M.D., PA, to distance myself from any liabilities.
You can get your business to pay the cost of malpractice insurance, health insurance, life insurance, and disability insurance—four things that all physicians will need. The cost of malpractice insurance is highly variable based upon specialty and location. In California, you might pay as little as $10,000. Or you can practice in the absurdly expensive region of Southern Florida where malpractice insurance for ob/gyns runs over $100,000. For my calculations, I decided to use $40,000 for malpractice.
Next, you’ll need to hire an office staff. You will need a nurse or medical assistant, a secretary, and someone who can take care of billing. The total annual cost for salary and benefits for these three employees can run as high as $150,000 depending on the level of talent and experience. You’ll also need to rent a building with enough examination rooms, a private office, and a break room. You can easily spend $5,000 a month on such a setup. You will then have to cover other overhead such as equipment. You can be as bare bones as having just syringes and patient gowns, or you can purchase an ekg machine ($2,000), an ultrasound machine ($100,000), or any number of other office-based equipment depending on your level of practice. I used the calculations below as a bare minimum. You should play around with the numbers for your own situation.
You will see that before taxes, you’ll need to earn over $700,000 a year. As you can imagine, being the only person in the office to pull in that kind of money is going to be very difficult. You may occasionally hear your family practice doctor say that he has not taken a vacation in over six years. He is not being facetious. Every day that you don’t work—whether it be due to an illness or vacation—is a day that you don’t get paid. I will be very generous with my calculations in saying that you are working 250 days a year in this example. If you can get an average of $100 off of each patient thanks to laboratory fees and “bill aboves,” you will have to see thirty patients a day to come out ahead. That gives you 16 minutes dedicated to each patient. I say “dedicated” because you really aren’t going to spend that much time with anyone. Half of your day will be dedicated to paperwork, calling back pharmacists, calling back consultants, writing letters for patients, and other miscellaneous tasks which do not generate money. In reality, you will more likely spend 8 minutes with each patient.
That’s 8 minutes to solve the patient’s new problem, work on health maintenance such as pap smears and cholesterol screening, council about smoking and drinking, consolidate medications, and fulfill any other tasks that the patient needs done. If you’re a pre-med reading this, you may have noticed when you’re shadowing a primary care physician, he runs into the room, looks at the patient’s chart, and quickly blurts out, “I see that you’re here for a headache. Have you had any nausea, vomiting, dizziness, lightheadedness, ringing in the ears, facial pain, difficulty swallowing or talking, tingling of the hands or feet, heart palpitations, urinary incontinence, or erectile dysfunction?”
The patient at this point is staring off into space and manages to say, “Uh, no.”
The physician will then reply, “Good, take this ibuprofen.” And as he is walking out of the room, he glances that the chart and says, “I see that you’re due for a colonoscopy soon. We’ll get that worked out the next time you’re here.”
You now know why primary care is a dying field. Who wants to see 30 patients in a day, only to be the lowest paid doctor?
P.S.: I should add that these calculations were done with the hopes that every patient ends in a full payment. Many insurance companies will not pay you on time, in full, or at all. There is a very real chance that you might have to work extra days to make up for lost income from deadbeat billings.
We’re continuing this miniseries on the economics of medicine by addressing the kind of salary you should be aiming for. While we would all like to believe that we went into medicine for the purpose of helping others, we must not delude ourselves into thinking that “helping others” is cheap. Let’s take a look at the salary that is necessary to maintain a comfortable lifestyle. I’m going to run the numbers given the scenarios that (1) you are single, or at least have a spouse that works, and (2) that you’re married and serve as the sole provider. Let’s say that you purchase a house for $300,000—a reasonable amount in an urban area—and you also purchase a $30,000 car. Assuming a 6% interest rate on each of these items and a 2.5% annual addition for property taxes, PMI, and maintenance, the monthly cost for the house will be $2,423.65, while the car will run $579.98 .
Adding up other components of lifestyle such as food, cable, Internet access, phone bills, and entertainment, we then get the table below for a necessary salary for a single person. I also tacked on the monthly cost of repaying student loans and investing money toward retirement.
Here is the table for a person who is married and serves as the sole provider for the family:
Realize that these numbers are based upon the lifestyle that you choose. They do not reflect an extravagant lifestyle by any means. If you want to belong to a country club or send your children to private school, the numbers will quickly rise from there.
You can claim that you’re willing to live on a salary of $40,000 a year. That you never got into medicine for the money. That you only want to help people and will be happy living from paycheck to paycheck. You’re certainly welcome to live whatever lifestyle you choose, but bear in mind that you still need to make $70,000 a year beyond your lifestyle cost so that you can repay your student loans and save for retirement.
These numbers do not include health insurance, malpractice insurance, disability insurance, or life insurance. If your employer does not pay for these benefits, or you’re a solo practitioner or contractor, you should add the expected costs of these insurances to your total salary. All of a sudden, the necessary pre-tax salary can be well above $200,000, even if you are trying to live on $40,000 a year.
 Calculations taken from mortgage calculator.org.
I’m continuing this miniseries on the economics of medicine by focusing on the important goal every worker anxiously awaits: retirement. Let’s start off by determining what type of lifestyle we want to live when retired. I would like to believe that I would own my home outright. Whether it be in a major urban area or a retiree’s dream home in Florida, we can expect a $300,000 house. Is not unreasonable to assume that I would have to spend 5% of the value of a home each year for property taxes, insurance, and maintenance. Therefore, I should expect to spend about $1250 a month on housing.
If I want to drive a decent car when I’m retired—say, a $30,000 vehicle—I can expect to make payments of just under $600 a month. I can also add monthly payments for food, clothing, medical expenses, Internet access, and a phone bill. Because I’ve worked so hard as a doctor and want to enjoy my retirement, I will expect to spend quite a bit of money dining out and traveling for vacations.
The table below summarizes the monthly expenses I can expect in retirement:
For my particular lifestyle, I will need to earn $52,000 a year from my investments. Given that I should expect to draw no more than 4% annually from my savings, I should retire with $1.3 million in available funds for withdrawal. Since this number is after taxes, and given that I will be in a high tax bracket, I should realistically expect to retire with $2.2 million in savings.
To get to this number, let’s look at how the market has performed historically. Over the past 30 years, the S&P 500 has had an annual rate of return of just over 10%, not accounting for inflation. While there have certainly been extreme ups and downs over the past few years, the market is pretty consistent over the long term. Let’s continue to use 10% as our annual rate of return for retirement investments.
To reach $2.2 million, I would have to invest $12,000 a year for 30 years. Granted, I know very few physicians who can work for a total of 30 years outside of primary care. Many of the physicians I know try to retire after 20 years. Using this number as a timeline, I would need to invest $35,000 a year for 20 years to reach $2.2 million.
Now for the bad news. To become an attending physician, you are going to have to invest 12 years of your life and rack up $200,000 in debt just so you can begin earning a salary that most people in the United States will be ignorantly envious of. Previously, I’ve mentioned that you would have to earn more than $35,000 a year beyond your everyday living expenses so that you could pay off your student loans in 10 years. Now you are going to have to tack on another $35,000 so that you can begin saving for retirement. That’s $70,000 beyond the cost of housing, car payments, food, clothing, health insurance, life insurance, disability insurance, malpractice insurance, and car insurance.
Now for the even worse news. I want you to go to the webpage for your city’s police department. In my area, police officers need only to have earned a high school diploma and reached the age of 18. The starting salary for an officer in my area is $45,000 a year. Just think, you’ll be a resident and working twice as many hours just to make the same amount. Police officers also look forward to gaining other benefits including health Insurance and a pension. Likewise, retired military, teachers, and firefighters can enjoy many years of retirement at the government’s expense by working only a few years relative to the amount of time they will receive entitlement packages.
But let’s take this one step further. Let’s say that a police officer decides to invest $10,000 a year until he becomes old enough to draw Social Security. Assuming the 10% rate of return, he will generate $7.9 million over a 45 year period. If he decides that his pension and Social Security are enough to live on and defers withdrawing any of as investments for an additional 20 years, his total savings will increase to $53 million. And remember, you’re the doctor making the big bucks.
I worked with one veteran in the VA hospital who was retired military, retired police, and had netted himself two pensions and Social Security. He was pulling in $160,000 a year in retirement benefits. Since he was hospitalized with dementia, all of that money went to his family. Not surprisingly, his children were adamant that he be a full code so that they could continue receiving checks. The federal government was the one left with paying the health bills.
I’m kicking off a short series on the economics of medicine this week by expounding upon one of the most important—and depressing—aspects of practicing medicine. I first want to address the elephant in the room. Most medical students will receive their education via student loans. Annual tuition prices for medical school can range from less than $10,000 to well above $40,000. Typically, private schools generally cost around $30,000 a year to attend. Next, add on cost of living expenses. In a major urban area, you might well spend over $1000 a month on rent. Once you tack on food, gasoline, car insurance, clothing, and other expenses, your total bill for medical school might run over $50,000 a year—or $200,000 for the whole degree.
Let’s say that you have $200,000 in debt and that the interest rate for your loan is 5%. You can see from the table below that depending on a how long you take to pay off your loan, the total cost of your education will be close to double what you originally expected.
Even if you were to devote a large portion of your salary to paying off your debt, taking the 10 year route will cost more than $25,000 a year. That’s $25,000 more that you have to earn each year after taxes. Since you’ll likely be in one of the higher economic brackets, you will need to make between $35,000-$40,000 beyond your everyday living expenses just to pay off your loans. Instantly you can see why many people pursue subspecialties where the pay is higher. Why become a primary care physician who will spend 20 years paying off debt, when you could become a radiologist and knock it out in five?