Doctors have been subject to wrenching economic changes. Over the last 15 years, they have faced cutbacks in insurance and Medicare reimbursements by as much as 25% for consultations and office visits, says Mark Perlson, whose CPA practice Perlson, Touhy & Company in Massapequa, N.Y., focuses on physicians.

Across-the-board fee cuts are common for many outpatient and in-hospital surgical procedures. Perlson says an eye doctor who 15 years ago was paid $3,000 for cataract surgery is now paid just $900 for the procedure. Obstetricians paid $6,000 for delivering a baby 15 years ago now get paid only about $3,000.

Meanwhile, over the same period, the cost for nurses, administrative staff, malpractice insurance, recordkeeping systems, physician supplies and all other things medical have risen steadily. Malpractice insurance for obstetricians in New York has skyrocketed to $200,000 a year, and an orthopedist in New York often pays $130,000 a year for malpractice insurance. If that weren't enough, the cost of collecting reimbursements from insurers has increased substantially because carriers routinely deny payments if they don't have extensive paperwork from the doctors.

The passage of President Barack Obama's health-care reform legislation makes the prognosis for the nation's physicians even grimmer. The mood in Congress is certainly not in favor of increasing expenditures. And now doctors are facing a 21% cut in Medicare reimbursements in October, says Perlson. Of course, cuts are scheduled every year, only to be rescinded at the last minute. But the Obama legislation, now signed into law, may really bring them to pass.

All of these problems make practicing medicine less attractive, at least as a business. And these problems are crucial to financial planners: Doctors are prime financial advice candidates, yet they have become unable to hire financial help because they cannot meet their minimums, say several independent advisors.

Banding Together
Trying to stare down these challenges, some doctors have banded together into large groups or cooperatives-known as "megagroups." Such collectives allow doctors to squeeze an additional 15% to 25% in reimbursements from insurance companies, says Perlson. The movement isn't new, but it has accelerated in some parts of the country, and will likely change the way financial professionals approach and advise doctors.

"Doctors who leave the autonomy of private practice and join these megagroups make more money," Perlson says. "They're not doing great, but because of the ability of these organizations to get higher reimbursements, the doctors do not get squeezed as much. Megagroups stop the bleeding."

Wendy Stimpfl, a health-care attorney at Rivkin Radler in Uniondale, N.Y., says these organizations also allow doctors to join together under one tax ID number, which gives them not only collective bargaining power but collective purchasing power for supplies, malpractice insurance and other expenses.

"Just having a bunch of doctors is not enough to get the ear of the insurers," she says. "Megagroups are able to offer insurers real savings in the long run by combining their technology systems, staffs, billing systems and administrative costs."

Allied Pediatrics of New York, a collective of 75 pediatricians in 18 offices on Long Island, started an after-hours center so their patients could avoid more expensive visits to emergency rooms. Those savings have become attractive even to the insurers, and could snag the group higher reimbursements.

"The megagroup can bring real value to insurers," says Ron Mullahey, a senior vice president for NAPA Management Services Corporation, a group of 500 anesthesiologists.

The movement started out west and is well established in California. Paul Temby, a wealth manager who focuses on doctors in San Diego as part of his firm Dowling & Yahnke, says three or four megagroups dominate medical economics in the city. And the trend is just now sweeping the East Coast, says Stimpfl. "Out west, they're a bit ahead of us and they've been forming these groups for some time, and now it is making its way east," she says. "Certainly, it's happening in New York."

However, the business proposition isn't compelling everywhere. Since fewer doctors serve less-populated areas, it's less attractive to launch groups in those places for economies of scale. Ben Utley of Physician Family Advisors in Eugene, Ore., which derives 75% of its revenue from doctors, says private megagroups aren't as common in smaller cities like his. And Temby says doctors working alone in rural areas can still make a lot more money than those in the cities.

But even if private megagroups are not all that common in Eugene, Utley says hospital megagroups are scooping up some practices. A hospital can afford to pay doctors more than they would make on their own in small practices. The physicians may give up control of their business and become employees, says Utley, but when they join a megagroup, "it's a win-win situation."

Those groups unaffiliated with hospitals come in two varieties: One type of megagroup is run like a cooperative, and each doctor is entitled to an equal vote in governance. The other type is run by a controlling shareholder who may or may not give the doctors equity stakes. ProHEALTH Care Associates LLP in Lake Success, N.Y., for example, is controlled by physician David Cooper, and according to two sources, the group is no longer offering equity stakes to doctors joining its ranks. Some smaller groups, meanwhile, will give a young doctor a contract saying he can buy an ownership stake after three or five years and will offer the doctor a loan to purchase his stake at that time.

ProHEALTH is a multidisciplinary group with doctors of different specialties. Other megagroups are specialty-specific and might gather together obstetricians and doctors from other specialties.

The advantage of multidisciplinary groups is the referrals that can be made among doctors. Federal law and some state statutes normally prohibit certain kinds of fee-splitting and referral fee arrangements among physicians. So when a doctor in a family practice refers you to an orthopedic practice, Perlson explains, no referral fee can be passed along. In a multidisciplinary megagroup, on the other hand, revenue between different disciplines can be split because the different practitioners are under the same tax identification number.

As physicians are enticed to sell themselves to these organizations, advisors may want to consider offering them an analysis of the benefits a megagroup can offer. An advisor can post content on her Web site or develop marketing materials, for instance, that say she can help doctors evaluate the compensation or benefit packages offered by these groups.

When a doctor sells his practice to a group, for instance, he faces the choice of whether to roll his 401(k) assets into the group's plan or into an IRA. Dick Bellmer of Deerfield Financial Advisors in Indianapolis says rolling the assets into an IRA will give the doctor much more freedom and choice to manage those retirement assets.

But the advisors will have to actively communicate that kind of advice to doctors thinking of joining the group practice. Being proactive in that way demonstrates to doctors that you know what's going on in the medical field.

Ultimately, some physicians might not want to join a group, and their final decision won't rest on the money. Because even if they were to see their reimbursements increase, it might not be worth it to them if it meant giving up their autonomy. Bellmer says one of his clients, a doctor with a lucrative practice who was a few years from retirement, turned down an offer from a hospital megagroup. "He didn't want to be suddenly treated like an employee," says Bellmer. "Some of the established doctors who have sold their practices to hospitals find they're being asked to do things they have not had to do for many years, like being on call during all hours of the day and night."

Also, doctors who join megagroups may lose tax deductions on cars and entertainment since they're no longer business owners. They'll also have to change their plans if they thought they were going to get a big payout from the sale of their practice at the end of their career.

"Advisors are going to have to revise many doctors' financial plans to treat them like employees instead of business owners," says Perlson.

While no one can read the tea leaves, there could also be consolidation among the megagroups in the decade ahead: Private equity investors and public companies are likely to invest in megagroup management companies and further consolidate their operations. Currently, Mullahey says, 80% of Americans are covered by three insurance companies. It's not hard to imagine that, in a decade, Americans will choose from just five or ten medical care providers.

How To Help Physicians Heal Themselves
Opportunities for entrepreneurial and business-minded doctors remain plentiful in this time of change; disruption breeds big winners and losers-some lucky, some smart. Take gastroenterologists, for example, who perform colonoscopies but often earn much less than anesthesiologists working on the same procedure. This has prompted some gastroenterologists to hire anesthesiologists to work as employees on salary so that they can collect the anesthesiologist's higher fee.

With medical economics in flux, a financial advisor catering to doctors must help them with the business end of their practices. This niche has a lot of idiosyncrasies. Doctors might be good at surgery, but bad with money, ill-equipped to run a hospital or a budget. They also deal with life and death issues, which means often they feel like they know things they don't, and that requires you to push back if they won't listen.

To help them succeed amid the changing medical economics, you might need to encourage them to be flexible with their goals or business models. Or you might need to be flexible with your own.

If a doctor you are advising has seen his income slump, explore ways to boost billings. For instance, a general practitioner who is a cardiologic specialist might be able to conduct echocardiograms-sonograms of the heart-in his office by adding ultrasound equipment. Or stress tests. Such procedures can boost income, and patients appreciate the convenience of not having to see a cardiologist annually.

Despite the parlous economic conditions for physicians, many of them-especially specialists in plastic surgery, radiology, anesthesiology and other medical niches-are complacent about their financial affairs. No one knows for sure that these specialists will continue to be immune to the fate of their colleagues whose incomes have declined sharply. Many doctors in their 60s who have lived extravagantly for many years are now facing lean retirement plans because they have not been disciplined about saving in times of plenty. Do not allow them to spend on fancy cars, big homes, etc. unless they are saving adequately to meet their retirement goals.

Utley says the planned cut in Medicare will disproportionately hurt specialists. "You've got to remember that elderly people are the ones who are sick and they're on Medicare," he says. "The specialists sought by older people are disproportionately affected by the Medicare cuts."

Advisors who have specialized in small, qualified plans with three or five doctors and ten or 15 employees must be aware of the risk that the firm will be swallowed up by a megagroup. If a hospital or group buys 15 practices with five doctors in each, all of those retirement plans will be replaced by a big one. That means 14 firms lose small plans and one firm gains a huge one. This means consolidation will be a high stakes game for advisory firms serving small medical practices and their retirement plans.

Given the reimbursement cuts by Medicare, Medicaid and private insurers, the situation will be especially unhappy for physicians over 50. Ask doctors that you work with or want to work with if they are interested in exploring ways to get out of the profession now, and then help them figure out alternatives. Doctors can leverage their valuable medical knowledge in many ways. They can open weight-loss clinics, for example, or provide Botox treatment. Or they can consult with companies in the technology, insurance or pharmaceutical industries.

And lastly, working with doctors means you might have to change the way you yourself do business.

If you require a $1 million investment minimum, doctors under age 50 often won't qualify. You could simply turn them away. But if you're trying to build a long-term business of working with doctors, you might also come up with a service level meeting the needs of doctors who don't yet meet your minimum asset requirements. One answer could be a service focused on helping doctors maintain a budget while you also offer model portfolios over the Web or a turnkey asset-management provider's advice. Reserve your higher level of service, such as comprehensive financial plans and quarterly meetings, for those doctors that meet your minimums.

Editor-at-large Andrew Gluck, a veteran financial writer, owns Advisor Products Inc., a marketing technology company serving 1,800 advisory firms.