Overhead Expense Coverage and Disability Buy-out Insurance

Advice varies on disability insurance for medical practices. Most injuries require only a short-term absence of the physician — less than six months — and the premiums don't seem worth that short-term risk. Statistics point to the physician being back to work inside a year, said Jim Stroud of Warren, Averett, Kimbrough & Marino. "Accounts receivable on that doctor will help keep the practice going for the next one to two months, and the other physicians are usually willing to cover for the disabled for a short time." To alleviate short-term financial pressure, Gerry Kassouf, CPA, of L. Paul Kassouf & Co. recommends that practices maintain a savings reserve to cover necessary expenses during short-term disability situations. But for smaller practices of one to three physicians, Kassouf recommends business overhead insurance. This covers the disabled doctor's part of the overhead, which can be a hefty portion when only a few doctors contribute to those costs. Mary Elliott of Warren, Averett, Kimbrough & Marino adds that overhead insurance "won't cover any costs for finding and recruiting a replacement if that becomes necessary, and it is expensive, which is why you generally only see it in smaller practices." For situations when disability causes a doctor to leave permanently, disability buy-out insurance provides the funds to pay the disabled shareholder and/or cover the purchase of the disabled physician's ownership. Jerry Callahan, director of the Healthcare Services Group at L. Paul Kassouf & Co., says this might be a worthwhile investment if the practice has a large buy-out amount, has to buy out a large accounts-receivable balance, or has large sums as part of an agreement. "Some older practice agreements might state that if a physician's disabled, he gets a year's compensation or gets a fixed sum, like $100,000, and it's not tied to the economics of the practice. The practice would have to write that doctor a check with no way to pay for it without that doctor still there generating the revenue." Disability buy-out insurance can make sense then.