The Investment Scientist

Physicians: Are You Ready for More Budget Cuts?

Posted on: September 9, 2011

This year, total federal spending in projected to be $3.6 trillion. The top three budgetary categories are:

  1. Medicare/Medicaid —  $826 billion
  2. Social Security —  $717 billion
  3. Defense/Wars —  $703 billion

Medicare and Medicaid costs alone account for 23% of total federal spending.

If the magnitude of these projections does not alarm you, let’s look at it from a revenue perspective. This year, the revenue is projected to be $2.2 trillion. Medicare and Medicaid costs of $826 billion, account for a whopping 37% of total tax revenue! You may logically ask — what about the $1.4 trillion budget shortfall? Not to worry — we can borrow it fromChinaas we’ve been doing for years.

Standard & Poor’s does not have much credibility in my book, but it does make a cogent point. They assert that not in a fiscally sustainable path and that it is essential that we cut $4 trillion from the deficit over the next 10 years. Simply stated, that translates into about $400 billion annual revenue raising and/or budget cutting – an amount that will barely begin to close the country’s budgetary shortfall.

And yet the debt deal reached between the Congress and the President agrees only to a cut of $917 billion over the next ten years, with another $1.4 trillion additional reduction to be determined by a twelve person bipartisan Congressional panel.

The good news for physicians and for that matter, anyone in the field of medicine is that the initial $917 billion cut leaves Medicare and Medicaid unscathed. But clearly, this is only a Pyrrhic victory, since there is no way we can extract ourselves from this mess without cutting Medicare/Medicaid, given that it’s the largest budget item and that the other two competing items — Social Security and Defense — are holy cows to Democrats and Republicans respectively.

Worse yet, as a White House spokesperson has made clear regarding the debt deal, “Any cuts to Medicare would be capped and limited to the provider side.” In other words, physicians will be the sacrificial lamb again.

The entire care system is caught between a budgetary rock and an obligatory hard place. On the demand side, American people are living longer but are sicker – judging by the increasing percentage of people who are obese and suffering from chronic diseases. And, in 2014, 15% of the population who are currently uninsured will be added into the health care system, thanks to Obama’s reform. On the budget side, our nation is quickly running out of money to pay health care providers.

If this budget battle over the federal debt ceiling doesn’t look like a perfect storm for physicians, I don’t know what does.

While it is nearly impossible to change the course of the storm, there are three things that physicians can do to limit the damage:

1. Join a medical society and support its lobbying efforts. Democracy is all about give and take. Physicians should not have to shoulder all the burdens of budget cuts. Compared to AARP, lawyers and insurance companies, physicians as a whole are relatively passive politically. This must change! If your medical society has more active membership, it will have more leverage with the politicians.

2. Make your practice more efficient. Many small and medium medical practices are run like “mom and pop” shops. Though a medical practice is a business, physicians are by and large not businessmen. This too must change!  If you do not have the requisite business acumen, then I strongly advise you to retain a competent practice consultant to help you streamline operations, cut costs and seize opportunities.

3. Put your personal finance in good order. A great percentage of physicians have not done any investment planning, asset protection planning, tax planning, or estate and business succession planning. It’s no wonder that Thomas Stanley, best-selling author of The Millionaire Next Door asserts that physicians have the lowest propensity to accumulate substantial wealth among all high income earners. A competent fiduciary wealth advisor can help you rectify this short-coming.

While the future of medicine is highly challenging, for those physicians who are well prepared, it will continue to be professionally and financially rewarding.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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