If one doctor in a practice is killed in an accident, the practice immediately begins to lose revenue. "But you can't ratchet down your overhead. That overhead and the lead time needed to find a replacement mean someone's going to be paying out of pocket," said Jim Stroud with Warren, Averett, Kimbrough & Marino. And that someone will be the other partners. But if done correctly, life insurance purchased by the practice naming itself as the beneficiary can lift that financial risk.
Overhead drives most practices to purchase insurance coverage. "Overhead can't be cut off immediately," said Jerry Callahan, director of the Healthcare Services Group at L. Paul Kassouf & Co. Supplies, utilities and salaries are usually paid in arrears. Rent may have to be paid for many months, even if the practice shuts down immediately. "With insurance, you take the overhead burden off the physicians who remain," Callahan said.
For a one-physician practice, the life insurance policy can cover the overhead and the staff left behind who are now stripped of their income. "We had a physician buy life insurance for his staff. Not a big policy, but enough that the office staff could have 90 days to find another job," said Mary Elliot of Warren, Averett, Kimbrough & Marino.
Having a large doctor group can be a form of insurance in itself, but not always. If the surviving doctors perform every dollar of work that had been done by the deceased, then practice revenues and overhead remain the same. "The physicians work harder, but they get to share the deceased doctor's income. But that rarely happens," Stroud said. Survivors usually say they're as busy as they can be without negatively impacting patient care or their families, and they choose to let the deceased doctor's work fade away. "In that case, all the doctors take a pay cut commensurate with the overhead that was paid by the deceased doctor," Stroud said. Life insurance offers a boost of funds while the practice seeks to replace the deceased or lowers some of the overhead over time.
Even a large practice may have less protection they think they have, if their doctors practice on multiple campuses. A physicians group of ten serving on three campuses ends up with only three physicians available for rotation. Lose one, and the call rotation shifts from one in three to one in two.
"With specialists, the body of their work is difficult to transfer to other physicians," Stroud said. Specialists also tend to have expensive overhead of technical staff and equipment and are themselves difficult to replace in this waning physician market, making them prime candidates for practice life insurance.
If a practice chooses to replace a deceased doctor, it will need funds to see it through the lengthy recruitment process. New doctors only graduate once a year, and more physicians are retiring than graduating, which creates a highly competitive recruiting market. "Recruitment services charge handsomely and new doctors are not the least bit timid in asking for signing bonuses, moving expenses, big salaries and payment for their education debts," Stroud said.
"The best case for finding a new doctor is a six-month process," Callahan said. "Even if you find someone already in practice, there's the recruitment wining and dining, a 90-day out clause, and the moving time."
The time to find a new graduate runs at least a year. "Alabama practices likely won't be able get a recruit from next year's class right now and will have to look for a 2010 grad," Stroud said.
Property or equipment investment can make life insurance a must. "Life insurance is sometimes required by financial institutions that lend funds to the practice," said Gerry Kassouf, CPA, of L. Paul Kassouf & Co. "It is also prudent to acquire life insurance to fund a stock purchase arrangement where funds are not readily available."
Stroud noted that premiums are not tax-deductible. So, for example, if the premiums are $10,000, the practice will really spend $14,000 on that policy. Kassouf added, "Without proper planning, it is possible to generate unwanted tax consequences. Life insurance should be owned by and payable to individuals or entities that coordinate with the company's legal documents."
Term coverage gets the vote over whole life. If you renew annually, it goes up every year based on your age. "But I like to lock in the premium for a 10-year term," Callahan said. "You pay higher in the earlier years and a little less later on, but you can budget for the cost for the next 10 years."
Whether to buy practice life insurance "boils down to how much risk you want to take as a practice associated with that doctor no longer being there," Callahan said. "For the premium, it's a small investment in the event one of your shareholders dies."
