Doctors Going Bankrupt. It Can Happen to You

"Prosperity is not without many fears and disasters; and adversity is not without comforts and hopes." —Francis Bacon

37%–Percentage of increased bankruptcy filings for the month of June 2007 over the previous year. (American Bankruptcy Institute, 2007)

On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect. One of the major goals of the legislation, according to US Senator Jeff Sessions (R, Alabama), was to disallow people from filing bankruptcy simply for the sake of taking advantage of a financial opportunity provided by the government.

"People who can afford to pay all or a part of their debts over a limited period of time should not get off scot-free," Sessions explained.

One year later, the number of bankruptcy filings for the first three quarters of 2006 fell by nearly one million from the previous year. For the time being, at least, the new law was making an impact.

But for the month of June 2007, consumer bankruptcy filings increased nearly 37% over the previous year, according to the American Bankruptcy Institute. And for the first quarter of 2007, filings were up 66% over the same period in 2006.

While the 2007 numbers are down from the all-time high figures of 2005, they're still a sad reminder that bankruptcy—for a wide range of reasons—is widespread in the United States. It can happen to anyone, at any time. Even to doctors.

Just how vulnerable are physicians? Consider these case histories.

Starting Over at 50

In the process of opening a medical clinic in town, Kevin Jensen, MD, a family physician practicing in Carson City, Nevada, and his wife, Lois, borrowed all they could borrow and mortgaged everything they could mortgage in order to come up with the equipment necessary to open the clinic. They spent the next several years working between 60 and 90 hours a week to get the clinic off the ground.

Then, just when it started to look like their life's effort and sacrifice would pay off, Dr. Jensen decided to purchase an airplane. He learned how to fly and obtained his pilot’s license.

One September morning in 2001, Dr. Jensen and his wife climbed into their airplane and took off from the Carson City Airport. Just after takeoff, the plane's engine cut out. Dr. Jensen tried to turn the plane around and bring it in for a landing at the airport but, without power, he was unable to make it back. The low-flying plane clipped a tree and fell into the backyard of a home near the airport.

Miraculously, no one was killed. Dr. Jensen shattered a leg and his wife had minor bumps and bruises. But the plane had fallen on the owner of the home and inflicted serious back injuries. Litigation followed. The homeowner sued Dr. Jensen, his wife, the airplane mechanic, and the mechanic's shop. Everyone began pointing fingers at someone else.

"It was a horrible tragedy," recalls Derek Rowley, a friend of Dr. Jensen's and cofounder of Nevada Corporate Headquarters, a premier business formation and small business consulting firm. "For the next several years, it took everything Dr. Jensen had to defend the lawsuits. He lost his practice and all of his savings."

Dr. Jensen ended up selling his practice to a company that hired him on as a staff physician—but with a contract containing a no-compete clause stating he couldn't practice in competition anywhere within 50 miles of the clinic. A few months later, when Dr. Jensen was let go, he found himself unemployed and unable to practice medicine in his hometown.

Dr. Jensen had to relocate, and began serving as an emergency room physician at a rural Nevada hospital in Mesquite. Shortly thereafter, he called Rowley and asked if they could have lunch. "I've lost everything once, and I’m in the process of trying to get my feet under me again," Dr. Jensen told his friend. "I want to rebuild my life and I don't want to make the same mistakes. What do I need to do to protect myself?"

Rowley explained how Dr. Jensen needed to organize and structure his business, and how he needed to be careful about the way he held assets so that they weren't exposed.

Dr. Jensen has since begun rebuilding his life, only this time he's doing it with some planning and foresight. He has several business entities that he uses not only for his practice, but as building blocks toward his retirement.

"I'm very pleased to say that he's going to recover from this, but he's 50 years old and he's starting from scratch," Rowley says. "But at this point, I think he's counting his blessings."

In the Line of Duty

Maurice Ramirez, DO, BCEM, CNS, CMRO, is a highly regarded physician in south Florida. He is also the founding chairperson of the American Board of Disaster Medicine, and a senior physician-federal medical officer for the Department of Homeland Security. When trouble calls, he responds.

"My equipment is in the back of my car," Dr. Ramirez explains. "I can leave on 2 hours' notice from anywhere inside the continental United States. If I travel on vacation, I carry 200 lb of gear with me."

Dr. Ramirez and physicians like him deploy any time there is a nationally declared disaster, an event of national significance, or in anticipation of a potential terrorist attack, as an advance field medical team. Part of his team was at the New Orleans Superdome following Hurricane Katrina.

"We are effectively the M.A.S.H. units within the continental United States," says Dr. Ramirez, who, during the 2004 and 2005 hurricane seasons, spent 12 weeks away from his practice. Dr. Ramirez has seen what lack of financial preparation can do to a physician's practice.

"A member of my disaster response team had to resign his commission, and this is a guy who held the third highest rank you can get," Dr. Ramirez explains. "He's an anesthesiologist, and all of the hospitals where his group had contracts had terminated the contracts because he wasn't around. He had become, in their words, unreliable, because over a 14-month period of time, he had been gone 12 weeks."

Dr. Ramirez explains that financial and business preparation is critical to physicians who volunteer their time as he does. But he adds a third, and maybe even more important element—relationship preparation, or what he likes to call physician self-disclosure.

"I know a physician assistant who was not just Army Reserve but he was Army Ranger Reserve, and every one of his patients knew that he was a Ranger, and knew that as we were ramping into the potential for a second Gulf War, every one of his people knew that at some point he would probably get a deployment call up," Dr. Ramirez explains. "He was in-country for a solid year before he went back to that practice. And when he came back, his patients didn't migrate, every one of them insisted on going back to Dr. Rob. Because he told them in advance that he was going. And the patients actually brought him cake and cookies. I swear, the guy actually gained 5 lbs before he left. And I think that’s the relationship issue."

Dr. Ramirez advocates financial resilience, or good money management. He says that there are many physicians who end up losing their practices because of being called up for National Guard deployments. And the only thing they've done wrong is that they've failed to provide for their own financial security.

"If you know that you're going to go from a business income of $750,000 a year to captain's pay, which if I remember correctly is somewhere around $78,000 a year, taxable, it's going to be less than 12% of what your business usually brings in," Dr. Ramirez says. "And yet your expenses are not going to go down that much. You need to have a year's worth of capital in place if you know you could be gone for a year. And you must have projects for everyone in the office. That way, on days when you don't have cross-coverage in the office, your people have something to do. They can follow up on past due accounts or catch up on the conversion to electronic records."

Dr. Ramirez saw this very principle in practice when his own doctor recently took a 1-month vacation.

"He came back to an office that was clean, everything was done, everything was filed, and they had their best month of collection the month that he got back, because they had been able to chase accounts that nobody had the time to hunt down," Dr. Ramirez says. "It's about financial preparation, relationship preparation, and business preparation."

Turning Things Around

Don Saelinger, MD, and two other physicians founded Patient's First Physician Group (PFPG) in the 1970s, and built it into the practice to be associated with in the Cincinnati-northern Kentucky market.

In 1993, with managed care beginning to roll into the local market, PFPG was looking for capital in order to grow its business. After considerable investigation into practice management companies, Dr. Saelinger and his partners sold their practice to Health Partners, a privately held company, for stock and cash, but they maintained their own infrastructure.

Then, in 1995, Health Partners was sold to a publicly traded company called FPA, which, in 1999, filed Chapter 11.

"That made our management company bankrupt, and essentially, our practice bankrupt," Dr. Saelinger says, adding that he and his colleagues could see the handwriting on the wall. "The leadership of FPA began pushing us for our cash, which they had not done before. They tried to get us to move our infrastructure to their national infrastructure, which we steadfastly refused to do. And I guess the advice to physician groups that want to survive to the end of the day is don’t give up your infrastructure."

The next 2 years took "a couple of years off my life," Dr. Saelinger recalls, but in the end, he and his colleagues banded together to repurchase their management company from bankruptcy court and have continued straight uphill ever since—adding new doctors, new sites, a new surgery center, and a variety of other capabilities.

One key element to the practice's success, Dr. Saelinger says, is "aligning the physician incentives so that when push comes to shove, there's not a lot of pulling apart in your organization. You don't have disruption in the ranks. And as we moved forward in our new model after the bankruptcy, physician ownership of the organization was vital in building the group."

PFPG was recently acquired by St. Elizabeth Medical Center in Covington, Kentucky, the leading hospital in the area, a move that Dr. Saelinger says positions the practice for success no matter what health care reimbursement model comes down the pike. And he credits his solid physician organization with making it all possible.

"Doctors are usually not very readily convinced that they should pull money out of their pockets for their organization," Dr. Saelinger explains. "That's a difficult sell, generally. But we were able to do that, and that's what saved the day."