Insurance Considerations Exploring the Myriad ’What-if’ Scenarios Involving Your Practice
What does your medical practice need for insurance? This is a question that many practices do not address often enough. Over time, the practice will evolve, physicians will age, and the needs of the physician and the practice will change — yet the insurance portfolio is not re-evaluated.
This article will identify the various types of insurance that are available and to help identify certain features that make each type unique. Ultimately, it will help provide you with the tools necessary to work with your insurance broker in order to design the portfolio that is right for your needs and the needs of your practice. This will also include a review of why you are in the market for insurance and some final items to consider when designing your portfolio.
Before meeting with your insurance broker, it is important to identify why you are in the market for insurance. For some, it is ensuring that their families are protected in the event of an unfortunate occurrence. For others, it is ensuring the continuity of their practice and that their business partners are protected. And still others look to insurance policies as a way to fund their own buyout and future transitions.
No matter the reason, there are a few items that need to be considered. First and foremost, how much is needed? If the policy is for your family, you should consider the cost of your lost income, as well as any anticipated debt payments that may be due. When reviewing insurance policies for your practice, it is important to consider the lost productivity of the physician, the cost to share the remaining overhead, and whether or not any lump-sum payments will be triggered in the form of a buyout.
Next, has there been a recent change in the makeup of the practice that is causing this portfolio review, such as a partner considering retirement or a new physician coming on board? Finally, are there certain tax strategies that you are looking to take advantage of, such as the tax-free receipt of disability benefits?
Life-insurance policies can be broken down into two types — term or permanent. Term policies are generally set for periods of one to 30 years, with premiums that remain steady or gradually increase over time. These are most often purchased by younger physicians who have many years until retirement and are starting out with growing families.
Those policies deemed to be permanent are commonly known as cash-value or whole-life policies. While these policies are generally more expensive, some of the money goes into a cash-value account, which earns dividends and can be used by the policyholder. As the account grows, these dividends can be used to either increase the cash value or offset the annual premiums. These policies are commonly taken out by a practice to cover an aging owner who may be scheduled for a buyout in the future. This way, the practice is covered in the event of the owner’s death or can be cashed out to offset the cost of the buyout.
Similar to life-insurance policies, disability insurance generally comes in more than one type: income, overhead, or buy-out. Disability-income policies are designed to cover loss of income in the event that a qualifying event occurs. For policies of this nature, it is critical to discuss the potential tax implications with your accountant. By paying the premiums on this type of policy with after-tax dollars, any benefits that are paid out may be received tax-free.
Disability-overhead policies should be considered in order to offset the lost productivity from a disabled physician. This type of policy will reimburse the practice for certain qualifying expenses, such as rent, salaries, and other insurance premiums, among others. Smaller practices can benefit greatly from these policies, as it can be harder for them to assume the related overhead costs of the disabled physician that will otherwise be split across the remaining physicians. Disability-buyout policies are designed to cover the payments that may be due to a physician to purchase their interest in the practice in the event that the disability triggers a buyout from the practice.
In today’s medical practice, various types of risk lie around every corner. Accordingly, having solid liability coverage, of all types, is imperative. Of these policies, malpractice insurance is the most important, as it is designed to cover the physician regarding claims of medical error.
As the cost of malpractice insurance continues to grow, various factors should be considered to ensure that you have chosen the correct policy. The first should be to review the relative risk and average claims for the area of medicine that you are practicing. Next, all state laws and regulations need to be understood. Third, will your policy be claims- or occurrence-based? If a ’claims made’ policy was selected, has the cost of ’tail’ coverage been considered?
Finally, yet equally important, the decision should not be entirely cost-based. Before selecting your carrier, review their history and ensure that they are going to give you the best level of service possible. Should a claim arise, you would want to ensure that your carrier is going to fight for your interests and not just settle everything that comes across their desk.
Similar to malpractice coverage, but for all of your non-medical suits and claims, is general-liability coverage. This is specific to items such as property damage or bodily injury caused to others. Reading the newspaper, it is clear that people in our society are willing to sue for just about anything. Therefore, it is absolutely necessary to be covered for these potential ’slip-and-fall’ type accidents.
Becoming as important is cyber-liability coverage. With the transition of many practices to electronic health records and use of the related systems, along with the associated costs of accidental data breaches or loss of personal health information, these policies are becoming more and more necessary. It is important to note that most malpractice or general-liability policies will not cover these types of claims, which could result in significant out-of-pocket costs if not properly insured.
Finally, it should be noted that, even though the policy types above are more common, there are other policies available that should be considered. These include, but are not limited to, commercial packages for those who own their own building, workers’ compensation, directors’ and officers’ coverage, and umbrella policies.
Understanding why you are in the market for an insurance policy, and knowing what type you would like to purchase, is a good start. However, there are a few final considerations to point out that will help to ensure that you are maximizing the benefit of the portfolio.
The first is to make sure that you compare policies and ensure that your comparisons are similar in nature. To do this, you need to read the fine print. If a rate is too good to be true, it very well may be. Second, make sure that you take advantage of ways to reduce your premiums. This is sometimes true with malpractice insurance, whereby brokers may offer premium discounts if all of the insured partake in annual educational training courses.
Third, reiterating what was stated previously, it is important to continue to review your own insurance needs, as well as the needs of the practice, which will change over time. Finally, talk to your trusted advisors. Your CPA, attorney, and insurance agent can all help to offer advice when making these types of decisions and may be able to provide a point of view that was not initially considered.
Remember, insurance is supposed to be for those ’what-if’ scenarios. While the likelihood of certain scenarios may be unlikely, if they did occur, would you be prepared?
James Krupienski, CPA, is manager of the Health Care and Pension Audit divisions at Meyers Brothers Kalicka, P.C.; (413) 536-8510.
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