When it comes to asset protection for doctors and other medical professionals, there are unique concerns that need to be addressed. Toby Mathis, Esq. explores practice-related concerns in the first part of this 3-part series.
Doctors and other medical professionals have unique concerns regarding asset protection, taxes, and risk mitigation. Tax and asset protection for doctors and medical professionals is a niche specialty, and misinformation on this subject abounds.
Ultimately, there are three main areas doctors and other medical professionals need to address when considering protecting their assets and mitigating the inherent risk associated with practicing medicine. These three areas are: your practice, investments, and life.
Part 1 of this three-part series will focus on the first area: your practice. Parts 2 and 3 will cover your investments and life, respectively.
“An Ounce of Prevention Is Worth a Pound of Cure”
Many of us, especially those in the medical field, are familiar with Ben Franklin’s famous quote, “An ounce of prevention is worth a pound of cure.” In the medical field, this is often used to espouse preventative medicine and the importance of preventing a (health) problem before it arises.
Originally, Ben Franklin said these words in reference to fire outbreaks in Philadelphia. Obviously, this aphorism applies to fire prevention, but it’s also highly relevant to the fields of medicine, law, taxation, and asset protection.
Fire is a useful image when thinking about risk, asset protection, and liability for doctors and medical professionals. To prevent a fire, you have multiple lines of defense. The first line of defense is a fire extinguisher. The fire extinguisher’s purpose is to put out any immediate (smaller) fires. If the fire extinguisher is not enough, the second line of defense is a sprinkler system. If a fire extinguisher and sprinkler system together aren’t enough, the third line of defense is a firewall. The purpose of a firewall is to compartmentalize the fire and starve it of oxygen, which it needs to grow. By isolating the fire to one area, firewalls ensure a fire doesn’t take the entire structure down.
So, this is where Ben Franklin’s famous phrase comes into play. The key to asset protection for doctors is to approach your plan with the same mindset as fire prevention. To do this, doctors need to know what’s “flammable” in their practice.
Asset Protection for Medical Practices
One of the first questions a doctor should ask themselves is “Where can a fire break out in my practice?” Remember: by “fire” we mean “threat.” The most obvious answer is patients; however, there are many other “flammable” concerns for doctors that aren’t as obvious.
To continue the fire metaphor, a doctor or medical professional’s first line of defense is insurance. This is your fire extinguisher. The second line of defense is an umbrella insurance policy, which would be your sprinklers in the fire metaphor. Finally, your third line of defense against threats to your practice is to create a “firewall” for your business. By this, I mean your medical practice should be held in a legal entity to ensure it’s isolated from your other assets.
Lines of Defense
E&O insurance is your first line of defense (your fire extinguisher). This is not cheap since there are so many claims, both legitimate and illegitimate. The idea behind this first line of defense is to avoid paying frivolous claims and excessive amounts. If you do encounter a frivolous claim, most often, E&O insurance will “put out the fire” and you can move on with your professional life. Consider it a cost of doing business.
If a claim exceeds the limits of E&O insurance, that’s when you’ll want to call in your second line of defense: an umbrella insurance policy. More than likely, if the claim exceeds the limits of E&O, it’s possible the claim is legitimate. In the fields of medicine and law, it’s called a “practice” for a reason — we’re always practicing. Mistakes happen.
That being said, if you do make a mistake, it doesn’t have to be a career-ending mistake. This is where an umbrella policy makes all the difference.
In some cases, if firewalls are not in place, claims can become excessive. In these cases, claims that should have been settled within the E&O policy limitations instead keep growing. These should-be small claims grow because they keep feeding — on your assets. The more fuel a fire finds, the more it will burn. In this metaphor, the fuel is your assets: your house, investment accounts, rental properties, stocks, bonds, and other assets. Thus, we need to isolate that risk with a firewall by operating through an entity. Then, if the risk exceeds even the firewall of your professional entity, we put firewalls around your personal assets, too.
Often-Overlooked Risks for Doctors
Besides the obvious, there are other liability sources not often considered in a medical practice or business. These things would be easily contained within the “firewall” of a legal entity, which would be either a professional corporation or professional LLC. The legal restrictions on entity structuring for medical practices vary by state. If you’re curious about your state’s rules, you can always schedule a no-obligation consultation with us to discuss your structuring options. Call 800-706-4741 to schedule, or schedule online.
This is an area that is often overlooked, but employment practices are a leading source of new litigation. This includes things such as sexual harassment, discrimination, wrongful termination, and wrongful hiring, among others.
With this, you want to make sure you have that type of coverage in your insurance policy. I recommend having regular insurance, E&O insurance, EPLI, and an umbrella policy to cover any gaps. Keep in mind that umbrella policies are usually extremely inexpensive: less than $1,000 a year can buy millions in coverage.
These additional policies are your sprinkler system. You need the sprinkler system when a claim is larger than your primary insurance limitations. In my experience, these larger cases are not frivolous. Frivolous claims are often settled within insurance limits because they’re usually driven by lazy people looking for a cash grab.
Damage to Practice Assets
This is another often-overlooked concern to which medical professionals and doctors should give specific attention. Your practice’s assets can include the physical structure, medical equipment, furniture, computers, and other tangible property of the practice. It could also include intellectual property, including client lists and other proprietary information.
The threats in this area involve external theft, natural disasters, internal employee theft, and even cyber attacks and other forms of data breaches. What would happen if you had an employee who posted your entire client list to social media? If it sounds far-fetched, think again. I’ve seen it all.
Ultimately, asset protection for doctors is more about asset isolation, risk mitigation, and prevention of claims. To this end, doctors should have multiple lines of defense, including primary insurance, secondary insurance and/or an umbrella policy, and a “firewall” around the business to mitigate damage to the practice. In this case, your “firewall” is the legal entity holding your practice.
These three things can make or break the success of a medical practice. As a doctor, if you have these three basic things in place, you’re far more likely to be successful and prepared for these threats.
In the second part of this 3-part series, I’ll cover how doctors can protect their investments from risk.
If you have any questions about how to structure your medical practice, reach out to schedule a complimentary consultation with Anderson Advisors. We can discuss your options in a no-pressure Strategy Session and figure out the best legal entity to hold your medical practice in your state. Call 800-706-4741 or click here to schedule.