In the last post, you read how the business of medicine has changed. The implication for you is that you can’t keep repeating the same actions time and again and expect to see the results you may have received just a few years ago. But even many of the Doctors who come to this realization still think that the solution is to “see more patients.” In this chapter, we will briefly cover the flaws of this strategy and explain the ways in which Doctors can apply the concept of Leverage to address all of their financial and legal challenges.
“See More Patients”—A Tragic Flaw
Confronted with any legal, tax, or financial setback, many Doctors follow the business strategy of “seeing more patients.” If the practice suffers because of a successful lawsuit, a sudden unforeseen expense, or an unproductive associate, Doctors try to “make up for it” by seeing more patients in hopes of billing more. The same tactic is followed by many Doctors who are behind in their retirement planning, who feel like they are paying too much in taxes, or who are getting divorced. Any financial setback seems to yield the same resulting behavior. Many physicians approach their entire career with the business strategy of working as long and as hard as possible for as long as they can physically endure it. Does this remind you of any of your peers? Do you see someone like this when you look into the mirror?
Certainly, there are many flaws to such a business strategy. Let’s examine a few of these flaws so you can understand why other strategies are better:
1. This strategy has diminishing financial returns
Even if you work harder and see more patients, each patient you see will potentially net you fewer dollars. As your marginal expenses for each additional hour of work may be the same and your taxes may increase if you hit new marginal tax levels, your “take home” may actually become less per-dollar as you work harder. Even if this is not the case, the next two limits certainly apply.
2. This strategy has financial limits
Even if you worked as hard as you possibly could and you could make more on each additional dollar earned, you only have 24 hours per day. Regardless of your specialty or sleep requirements, you cannot work 18 or 20 hours per day over an extended period of time. Thus, you are capped in the total income that you can generate by “just seeing more patients.” we will have many upcoming posts develop this concept further or you can visit the free book here.
3. This strategy will take a great personal toll on you
Extreme stress, physical ailments, divorce, decreased life expectancy—these are all common symptoms for Doctors who choose “seeing more patients” as their business mantra. Are these extreme personal costs worth it? We think not—especially given #4 below.
4. There is a “better way”
If working as hard as you could was the only alternative available to allow you to meet your financial goals, that would be one thing. However, the truth is that there is a much better concept upon which you can build your practice and personal finances. This concept will be explained below.
The Concept of Leverage
Let’s consider the following all-too-common scenario. You work a very long day and generate $10,000 of billings. The insurance companies pay your practice $3,000 for your hard work. Your practice overhead is about 50%, so $1,500 of that income is gross profit. However, the $1,500 isn’t yours. Of the $1,500 you actually receive, the Federal, state, and local tax authorities will take 40% to 45%, leaving you with only $800 to $900. In other words, less than 10% of the work you do in a given day actually results in money you keep. This means that you have to do $3,000,000 worth of work in order to generate less than $300,000 of money for you to enjoy. Unless you want to continue to work ten times as hard as necessary, you have to learn to work smarter. This is the key to this entire book. We call it Leverage.
If you refer to the Merriam-Webster Dictionary and look up the word “Leverage,” you will be presented with three definitions:
1. the action of a lever or the mechanical advantage gained by it
2. POWER, EFFECTIVENESS
3. the use of credit to enhance one’s speculative capacity
We will offer very simplified interpretations of the three definitions of Leverage stated above. The first definition states that Leverage increases the amount of force exerted. To exemplify this concept, think of Leverage as the act of wedging a stick between two heavy rocks that you could not move with just your hands. In order to efficiently move the rocks, you need to push down on the stick that you wedged between the rocks. In doing so, the rock can be moved. Leverage—the wedging of a stick—allows you to move a rock you would otherwise not be able to move.
The second definition of Leverage simply states that the act of Leverage allows people to be more efficient, effective, and powerful. This can be interpreted to mean that Leverage allows people to get more done in less time. It can also be interpreted to mean that Leverage allows people to get a job done with less effort. In either case, Leverage enables people to be more effective.
The third definition of Leverage applies to credit and loans. In this definition, Leverage allows people to buy things they don’t have the money to buy in an effort for them to increase their financial capacity. To illustrate this definition, think of a home loan—the $500,000 home that is purchased by a family with only $100,000 of their own money to use as a down payment. Leverage is the ability to enjoy the use of or participate in the upside potential of an investment you otherwise could not afford.
Quite simply, Leverage is a method by which you can do more with less. Less effort. Less money. Less time. If you are looking for a shortcut to financial success, Leverage is the closest thing to it.
The Importance Of Leverage
Successful physicians know that Leverage is an important tool to increase their wealth. Without Leverage, people would have to do everything themselves, including running their own business, earning money, handling financial affairs, paying for everything with only their own money, micromanaging everything at work and at home, and still finding time to eat and sleep.
If you feel like this is an accurate description of your life, then you are not using Leverage. Leverage makes your life easier. Leverage frees you to do the things that are most important, most profitable, or most enjoyable to you. Leverage is what allows you to achieve greater levels of financial success. No matter what your financial goals, mastering the art of Leverage and incorporating it into your planning will help you reach these goals faster. As we mentioned earlier, Leverage is how physicians can increase the power and effectiveness of their financial planning. You can do the same.
A little Leverage is good. A lot of Leverage is better. Who wouldn’t want to get more done with less effort or get more done with less money? Those who understand Leverage have tried to maximize its potential and use for thousands of years.
Work Smarter, Not Harder
It may seem like the amount of Leverage one can attain is endless, but there are restrictions on how much Leverage you can achieve. This restriction can be referred to as Capacity. Consider the following:
· You can only exert so much force
· You only have 24 hours in a day
· You only have so much money
· You can only borrow so much money
· You can only manage so many people
The principal goal of Leverage is to maximize efficiency. Efficiency is achieved when Leverage is increased to a point when you have maximized your capacity without going over. When you exceed capacity, problems occur. This causes you to have to address the method of Leverage all over again and possibly repeat certain steps. It is obviously an inefficient process when you have to duplicate any effort. This is why you should be careful not to exceed your capacity and create other, often bigger problems. Examples of problems caused by increasing Leverage beyond your capacity include seeing so many patients that you are: 1.) making billing and coding errors (Medicare fraud); 2.) working too fast and making mistakes (medical malpractice cases); 3.) hiring the wrong employees (employee lawsuits); and others.
You could theoretically increase capacity by working harder, but that is only acceptable if that is the most valuable and profitable use of your time and energy. Leverage is about working smarter, not harder. For this reason, increasing effort is not a viable method of increasing Leverage. The rest of this section will explain ways to increase Leverage and capacity so you can get even more out of your reduced effort. Getting better results from less effort isn’t just the subtitle of the book; it is the only way to achieve greater levels of wealth.
Leverage makes life easier. Leverage allows you to get more done with less effort or with less money. Once successful investors achieve a measure of Leverage, they use their extra time and money to find better methods of Leverage. This is a never-ending quest to become more efficient and effective in everything they do, so that they can build and maintain their wealth and protect their assets.
The next four chapters will specifically discuss how Leverage applies to financial transactions, effort, employees, and advisors. Lesson #3—Accept Referrals to Specialists—is perhaps the most valuable way to increase the capacity of your Leverage. As such, For California Doctors is filled with practical strategies that can only be enjoyed if you have a team of advisors to help you achieve greater Leverage.