[Editor's Note: Today's guest post is written by The Physician Philosopher (TPP), an anesthesiologist who blogs to physicians about finances and wellness. We have no financial relationship. Note that this post is all about fellowships for physicians. The calculation of doing a residency for a dentist is completely different. Not only is there an opportunity cost, but dentists actually PAY TUITION during residency.]

I remember when I was trying to decide between doing a fellowship or not.  It can be an agonizing decision as you have finally started to see the light at the end of the tunnel.  It is difficult processing the idea that the tunnel may grow dark again before you begin to see the light.  There are many ways to think through this decision process, but today we are going to focus on the financial aspect of completing a medical fellowship:  Does a fellowship produce an adequate ROI?



What Is an Adequate Return on Investment for a Medical Fellowship?

Before we can determine if there is an adequate ROI, we must first define what exactly constitutes “adequate.”  My definition from here on out will be the following:  If you break even (or better) after performing a fellowship with the opportunity cost involved, I consider this an “adequate” ROI.  I hear you asking, Why do I feel this way?

It's simple.  Presumably, you chose to pursue a fellowship because you felt that particular subspecialty would accomplish one of a few things:

  1. Allow you to spend more time with family.
  2. Provide you more enjoyment than a generalist position.
  3. Allow you to be an “expert” in your particular niche (i.e. research or teaching).
  4. Access to a job you might not otherwise have received (i.e. often necessary in academia or filling a private practice need).
  5. Job Security from the future prevailing evils of a changing world in health care.

If your reasons for choosing fellowship fall into one of the categories above, then really all that needs to be accomplished to meet an adequate ROI is to break even on your Opportunity Cost.  Part of your decision involved secondary gain, which was successfully obtained in one of the items above.  Making more money wasn't necessarily your end goal with fellowship.

If you chose to do a fellowship because you felt it would be more profitable in the end, then “adequate” means you need to make up substantially more than your opportunity cost.  If choosing a fellowship for profit, an adequate ROI for profitability's sake = 2 x your Opportunity Cost.  You can still apply the following conversation and just double the opportunity cost as the goal number.


How do You Calculate the Opportunity Cost of Fellowship?

A Brief Caveat

Before we get into the following example to calculate opportunity cost, some comments must be made:

1) This example assumes a one-year fellowship.  You may have to double (or triple) the math for multiple year fellowships.
2) These examples are from anesthesiology.  Adjust the anticipated salary for your particular field.
3) This assumes a PGY-5 salary for a one year accredited fellowship.  If you pursue a non-accredited fellowship or earn income moonlighting on the side, your income can often be much higher (mine was $110,000 in my fellowship year).


Three Things to Consider in the Opportunity Cost Calculation

1. Lost Salary as Attending Physician

One of the common misconceptions of opportunity cost when choosing a fellowship is to simply determine your first year's salary (including benefits such as quarterly or annual bonuses) as an attending and subtract that from your fellowship salary.  It may look something like this in my field, Anesthesiology:

(Wrong perception)
Opportunity Cost = 1st Year Attending Salary – Fellowship Salary
Opportunity Cost  = $250,000 – $60,000 = $190,000

There is an inherent problem with this line of thinking.  In academia (and private practice) the first day that you step onto the job as an attending physician you start a timeline.  In academia, that timeline is to your next promotion (From Assistant Professor to Associate Professor).  In private practice, this is usually a track to partnership (i.e. a “two-year partnership track”).

By choosing to do a fellowship, you are delaying this by a year.  So, the opportunity cost isn't really at the beginning of your career (1st year's attending salary), but on the last year of your career that you would have been paid at your anticipated top rank (Associate or Full Professor or Partner).   In reality, it looks like this (again, in anesthesiology):

Opportunity Cost = Anticipated Peak Salary – Fellowship Salary
Opportunity cost = $400,000 – $60,000 = $340,000

Now, that we are thinking about things properly we can see that an anticipated opportunity cost of $190,000 and $340,000 are two vastly different numbers.  And, yet, it still isn't that simple!

[Editor's Note: I'd argue that number should be adjusted downward for taxes.]

2. Missed Investment

The lost salary doesn't account for the increased money you'd likely put away into investments in your first year as an attending physician that would compound over the next 20 prior to your early retirement.  So, let's add that in!  Assuming you are saving 20% as a fellow (I saved less) and first-year attending here is the difference:

20% of Fellowship salary =$60,000 x 0.2 = $12,000
20% of 1st year attending salary = $250,000 x 0.2 = $50,000
Difference = $38,000

When you compound that $38,000 over your 20 years to early retirement that turns into $177,166. If you don't invest during fellowship at all, that number is even higher ($50,000 compounding on interest).

[Editor's Note: This is good to think about, but I'd argue this should be included under # 1. You can't count the same dollars twice- once as salary and again as invested salary. A better way to do it would be to adjust upward the increased salary to account for the time value of money. Whether you invest it or spend it, it has the same value, which is higher now than it will be later.]

3. Unpaid Debt Accumulating on Compounding Interest

Many people also do not pay loans during residency or fellowship.  If that fits you, then you are also missing out on paying down debt as it continues to accumulate.  The most simplified way of thinking about this is to consider the amount of debt you have and interest at which it compounds.  If you have $200,000 in debt compounding at 6.8% interest daily some complicated math is involved, but it turns out to cost you about $14,000. 

A Calculator to Run Fellowship ROI!

Don't be overwhelmed because of the math! I've created an easy to use TPP Opportunity Cost Calculator . Simply download the excel sheet and plug in your numbers to find out your opportunity cost.


Total Opportunity Cost of a Medical Fellowship

So, now combining the three numbers above, in this anesthesiology scenario, your opportunity cost for pursuing a fellowship is $531,166. Now THAT is a big number.  If your fellowship is more than one year, you can double or triple that number. Can you ever really catch up on that and break even for an “adequate” ROI?


Breaking Even on ROI

Promotion (Academic Medicine)

In anesthesiology (at least where I work), it is often easier to promote from a subspecialty where you can focus your research and networking efforts.  A typical promotion in academia is around 10%.  So, if you were making $250,000 you can expect that the next step will be between $20,000 and $25,000.  If you promote two years earlier secondary to pursuing a fellowship than you would have as a generalist, that is making up some ROI.

For example, two years x $25,000 = $50,000 (invest 30% = $15,000). Remember, you were going to retire at 20 years and average time to promotion is 5-7 years.  So, taking that $50,000 increase, that is $35,000 (two year's of increased salary, which was not invested) + $15,000 (the invested portion of increased salary) compounding at 8% interest for 15 years OR $82,582!
However, in academic medicine (unlike most private practices) there are two large promotions.  From Assistant to Associate Professor and from Associate Professor to Full Professor.  Let's say this comes two years earlier as well (it may come more!) given that your first advancement sped up the timeline.  That's another $50,000 (invest 30% =$15,000).  Now, you have 10 years left to your early retirement.  So, that's another $35,000 + $15,000 compounding at 8% interest = $67,383.
Compound interest can work for you in your ROI just as it worked against you in your opportunity cost. If you are a wise investor, you will put some/most of this lifestyle increase into investments!

Making More Money: Academic Bonus, Higher Pay

Many academic centers provide productivity bonuses involving research and education.  This can range from a few thousand dollars to tens of thousands of dollars.  While it is possible to do research as a generalist in most fields, it is often easier to perform research if you have a niche where your research can be performed.  Additionally, your subspecialty group may have a different set of resources that facilitate research and make it easier.

In both academics and private practice, specialists sometimes make slightly (or a lot) more than their generalist colleagues.  Some examples are obvious (a cardiologist compared to a general IM hospitalist; or a pediatrician who chooses to do peds EM).  Fellowship can provide significant increases in your annual salary.  This helps you catch up on your opportunity cost quickly.

Let's say that you anticipate making an additional $10,000 each year that you wouldn't have otherwise made without the fellowship.  We will further say that you, the smart investor, plan to invest that $10,000 you wouldn't have otherwise made each year (or put it towards debt, both accomplish building wealth).  With your twenty-year retirement timeline, and at 8% compounding interest this would amount to: $494,229If you think you'll earn an extra $20,000 per year, then you can double that!  That's $988, 458. Compounding interest is wonderful, isn't it!

In the scenario where you earn an extra $10,000 per year and invest this money in addition to the money you may have made through early promotion, you will easily make up your opportunity cost and achieve an “adequate” ROI.


So, Is A Medical Fellowship Worth It?

Looking back at our original calculation, you will have to decide for yourself.  There certainly is an opportunity cost to be calculated.  This is often easier to calculate than the possible reward of doing a fellowship unless you are in a field with a substantial and obvious increase in salary that will pay dividends in compounded interest over your career.  The ROI calculation has a lot of moving parts, maybe I'll make a calculator for that at some point, too.

[Editor's Note: Bear in mind that we're attaching a financial value to what may not be a financial decision. For example, in emergency medicine, fellowships pretty much never increase your income and often decrease it (Peds EM anyone?)  Everything in life isn't about the money. If you'd be happy doing nephrology but not general internal medicine, that may be worth “spending” a lot of money on even if the income doesn't increase much. In addition, the financial value of doing something you love for 30 years versus something you hate for 15 should not be discounted. Longevity of career matters more than income in many instances, even when looked at purely from a financial standpoint.]


My Fellowship Story

I ended up doing a non-accredited Regional Anesthesia and Acute Pain Medicine fellowship.  The opportunity cost for me was $290,000 in salary alone + $288,979 ($60,000 at 8% interest for 20 years) + my accumulated interest on student loan debt (180,000 at 6.8%) = $591,644

My ROI is yet to be realized but has already been substantial in my first year as I stand to make more money from my section being short this year (hoping to hire!) in addition to academic incentives that I would not have had easy access to as a general anesthesiologist.  My research niche is in my fellowship, which was one of the reasons I chose it.  I stand to easily make up an adequate ROI from my fellowship investment!

What do you think?  Did you choose a fellowship to make more money or because you really enjoyed the subspecialty?  Will you get your ROI on your fellowship?  Was your opportunity cost high?