Financial modeling may simplify compensation arrangements, help physicians gauge job risk
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Today’s inflationary environment has thrown a wrench into the wealth creation ability of many asset classes, further underscoring the need for good financial security from your career.
Unfortunately, many physicians do not have the time, tools or experience to accurately evaluate their first, or any new, employment opportunities and ultimately are disappointed by their financial circumstances being worse off than what they envisioned. Sadly, but commonly, this situation often leads to significant personal and family stress, professional insecurity and financial hardship.
How common is this scenario? According to various reports, between 50% and 75% of orthopedic surgeons will change jobs during their first 5 years working, for example. The bulk of switches occur after 2 years of practice.
Although various factors, such as family circumstances, location, and practice conditions, play a role in a young physician’s decision to change jobs, dissatisfaction with one’s financial situation has been shown to be one of the biggest contributors to job changes.
In this column, we review a method we initially wrote about in 2019 to demonstrate how millennial and non-millennial physicians can financially model their net worth in various job opportunities to help them make good employment and personal spending decisions. At its core, the technique employs a simple sensitivity analysis, similar to those used by professional analysts on Wall Street, to simulate various “what if” financial scenarios, including practice productivity. The purpose of financial modeling is to simplify convoluted compensation arrangements frequently seen in private practice and employment arrangements to identify large discrepancies in compensation and risk to the young physician early in the job search process.
Fresh out of training and loaded with debt, it is not uncommon for young physicians to gravitate toward the highest paying career opportunity only to change practices a few years later when financial stressors decrease or practice conditions and family situations change. It is important to remember that a job’s financial benefits are only one determinant of satisfaction. Always keep your personal big picture in mind during your career search process.
Understand the financial side
Although the financial aspects of a particular job are not the only criteria to consider, compensation is often cited as one of the top two reasons why physicians change employers. Many times, young physicians leave a practice because their income expectations were vastly different than what they were actually paid.
This situation is usually made worse by the incredibly complex compensation formulas, overhead costs and/or partnership costs that exist in various practice environments in today’s health care system, which often mislead a physician’s expectation of compensation.
What is financial modeling?
Financial modeling, in the finance world, is the process of creating a summary of a company's expenses and earnings in the form of a spreadsheet that can be used to calculate the impact of a future event or decision. Company executives frequently use these tools to guide decisions and estimate stock prices, relying on the present value of future cash flows that was covered in our 2019 article that discussed the importance of using insurance to protect a surgeon’s future income from the effect of disability and death.
Despite its seemingly complex uses, the financial modeling process is relatively straightforward and may be of value to young physicians — executives of their own career choices — in their job decision-making process.
Financially modeling future income
If you know, roughly, what you may be expected to make in each job opportunity, as well as various other costs, such as living expenses for your family, partnership buy-ins and taxes, a simple spreadsheet program may be a valuable tool in financially modeling your net worth in various job opportunities. In some situations, this practice may provide a rough estimate of what other partners are taking home as a guide for compensation, which is essential information to gather when personally doing an evaluation. Also, if you plan to invest your disposable income, it is helpful to estimate living expenses and desired rate of return to see what you may actually be able to save and compound over time.
To demonstrate the value of this technique, Figure 1 is a spreadsheet designed in Microsoft Excel that depicts a hypothetical private practice employment opportunity that offers a $350,000 starting salary and a $50,000 partnership buy-in cost during year 3. Like many private practice opportunities, income in partnership is dependent on production, however the practice, in this example, provided an estimate (Figure 1). Figure 2 shows a spreadsheet reflecting a second job opportunity with a $450,000 annual salary in a state with higher taxes (Figure 2).
Further analysis
If you wish to take the analysis a step further, you can graphically depict your net worth in various job opportunities side by side (Figure 3). Although it sounds like an overly analytical exercise for someone who probably has limited spare time, such efforts may help you better understand the trajectory of your earning potential in various job settings. In the example provided, one can see that although Job 2 had a $100,000 higher starting salary, after 3 to 4 years the Job 2 opportunity breaks even financially with Job 1 having a far higher trajectory for long-term earnings growth.
The value of this exercise is that it allows young surgeons to easily model a “worst case” and “best case” scenario for each employment offer to better understand the financial risk and reward in relation to other factors more pertinent to the practice of medicine.
Searching for a job as a millennial or non-millennial physician is among the most stressful — and exciting — times in one’s career. The decision about job selection is made worse by the current inflationary situation and its effect on margin compression, a drain on profitability in health care. Although the financial aspects of a job should never be the only factor in choosing a certain position, often young physicians do not fully understand their compensation expectations prior to signing a job contract, which may lead to discontent later on. Financial modeling is a simple tool that may help young physicians visualize complex compensation arrangements typically seen in employment contracts, identify large discrepancies in compensation and gauge physician risk for various employment offers early in the job search process.
References:
Mir HR, et al. J Orthop Trauma. 2011;doi:10.1097/BOT.0b013e318237bb2d.
Smith AA, et al. Hand (N Y). 2006;doi:10.1007/s11552-006-9000-8.
Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
For more information:
Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon practicing at Northwestern Medicine in Warrenville, Illinois. He can be reached at sanjeevbhatia1@gmail.com or @DrBhatiaOrtho.
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com. You should seek professional tax and legal advice before implementing any strategy discussed herein. He can be reached at mandell@ojmgroup.com or 877-656-4362.
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Mir HR, et al. J Orthop Trauma. 2011;doi:10.1097/BOT.0b013e318237bb2d.
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