PROTECTING YOUR P.A. RECEIVABLES FROM MALPRACTICE JUDGMENTS Physician Asset Advisor, May 2004 According to recent estimates, there are now almost 5,000 bare doctors in Florida. The majority of insured doctors have lowered their coverage to $250,000 / $750,000. While most doctors have taken steps to protect their personal assets from potential malpractice claims, we have found many have not yet protected their practice equity, primarily their accounts receivable. Why is the P.A. at risk? It’s a virtual certainty that when a physician is sued, their PA will also be named. The PA is normally liable for the malpractice of any of its’ employees. Several insurance companies have stopped writing separate policies for PA coverage, and instead, are requiring doctors to increase their individual coverage. Let’s take an example of a 5-partner group practice, with total receivables and equipment of $1 million, or about $200,000/partner. Note that all the PA assets are at risk. If one of the doctors were to receive a $1 million judgment, and their personal assets were protected, the PA would be responsible for the whole amount. Consequently, the other 4 doctors not named in the suit could lose their entire equity in the PA. How do you protect the P.A.? The best method involves borrowing money from a bank using the receivables as collateral for a loan. The bank then becomes a secured creditor. If there is a judgment against the PA, a secured creditor (a bank) always gets paid prior to an unsecured creditor (a malpractice claimant). In the prior example, the group would borrow $1 million. Therefore, the PA’s net assets after the loan is in place would be zero, removing the practice as an easily attachable asset. Protecting your P.A. reduces the attractiveness of this asset to a plaintiff’s attorney. Once the money has been borrowed, it must be distributed from the PA to the physicians to become part of their personal asset protection program. There are 2 ways to accomplish this: 1) The PA distributes the loan proceeds ($200,000/doctor) as wages. Wages are considered a protected asset class in Florida. These funds can then be invested in protected investment asset vehicles. This method, although simple to implement, has the disadvantage of being taxable as ordinary income at 35%. Also, a bank will generally not lend more than 60%-70% based solely on receivables value, so a portion of the PA assets would still be exposed. 2) The PA uses the loan proceeds to fund a deferred compensation investment plan, most often in no-load mutual funds held within a tax deferred variable annuity. Each physician owns his or her own annuity; therefore, it is protected at a personal level as well as at a PA level. By using deferred compensation assets as secondary collateral, the banks are usually willing to lend the full 100% value of receivables. Due to complex tax implications, this method requires a competent tax attorney to draft the proper documents. If invested properly, the deferred compensation plan should earn similar or higher returns than the cost of interest to the bank. In 2003, a well-managed plan earned between 20%-30%, while the interest cost was only about 5%. Pitfalls: We have heard doctors discuss that a PA is protected by having a line of credit in place and borrowing on it after a lawsuit is in progress. Distributing funds of this magnitude during a malpractice case would almost certainly be considered a fraudulent conveyance, and not hold up under scrutiny. Conclusion As the malpractice crisis worsens, protecting the PA should be on every physician’s to-do list. Singer Xenos is an established wealth management firm specializing in physicians with $500,000-plus in investments. We manage over $400 million in assets such as retirement plans, annuities and personal accounts, with an emphasis on wealth building and protection from malpractice claims. Both Worth Magazine and Medical Economics named Singer Xenos one of the Top Financial Advisors nationally for physicians. Singer Xenos does not provide legal advice. Please consult with your own legal counsel.