Who Profits from a Broken Healthcare System?

Transcription – WCI – 492

INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
Welcome back to the podcast. I hope you're having a great day today, whether you're on your way to or from work, walking the dog, working on some chores, working out, whatever you're doing today. We're glad you're here. Without you, it's not much of a podcast.

 

QUOTE OF THE DAY

Dr. Jim Dahle:
We've got a great interview today. We've got Jordan Grumet here today. And so we're going to use one of his quotes for our quote of the day. He said, “Whether we accept it or not, doctors and patients are both pawns. We've been weaponized against each other while third parties tiptoe into the bank vault and empty our safety deposit boxes.”

We'll be talking more about that quote and what it means later in the interview. But before we get there, I want you to know how much we appreciate what you do on a daily basis. It is not easy work. And I'm reminded of that every time I go into the emergency department. I was there yesterday. I got crushed. There were so many patients. I think 12 patients checked in in like 45 minutes. And so, I ran all day. It's a hard job sometimes. And I'm dealing with a whole bunch of people on one of the worst days of their lives, as I know you do as well. So thank you for doing that.

This episode is brought to you by KeyBank. For six years, White Coat member benefit partner Laurel Road has been part of KeyBank. As of March 16th, that partnership becomes even stronger as Laurel Road is now officially under the KeyBank brand.

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Hey, here's a freebie for you. We talked about the importance of having a written financial plan frequently, but many people tell me they don't know what that actually means. We help you make one in our Fire Your Financial Advisor online course. But if you want to know what needs to be included and see an example of a plan, you can go to whitecoatinvestor.com/plan and download a financial plan template that you can use to build your own financial plan.

All right, let's get Jordan on the line and get started with this interview.

My guest today on the White Coat Investor podcast is none other than Jordan Grumet, who I hope is not unknown to most of you. He's been on the podcast before. He's spoken at WCICON multiple times. He's coming back this next year in Orlando. He is a doc. He is a blogger. He is a podcaster. He is an author. He's got a new book out we're going to be talking about today. Jordan, welcome back to the White Coat Investor podcast.

Jordan Grumet:
Thank you. This is one of my favorite places to come and chat about everything health care and wealth.

Dr. Jim Dahle:
Well, for people who don't know you and admittedly, not everybody has listened to every podcast. Give us the brief rundown of who you are, maybe kind of outline what you've done in your career so far.

Jordan Grumet:
My story is a simple one. My father died when I was young. He was a doctor. I'm like, “I'm going to save all the problems in the world by becoming a doctor too.” I did so and quickly burnt out. And then I was lucky enough to encounter you. You sent me a copy of your book because I was writing a medical blog at the time. I learned all about financial independence. I said, “Boom, this is for me.” And I was actually pretty much there because my parents had modeled great financial information for me.

And so I started to build a world outside of medicine. I slowly left medicine, started blogging, podcasting and eventually writing. And what I'm so excited about today is I've spent a lot of time talking about why I left medicine because it wasn't fulfilling my sense of purpose. The piece that I've never talked a huge amount about is why I thought the system was so broken. And that was the other piece of my burnout. So with The Healthcare Heist, now I'm talking a little bit about why our health care system feels broken and what it's doing to doctors and patients alike.

Dr. Jim Dahle:
Now, you're completely out of medicine now?

Jordan Grumet:
I still practice hospice medicine about 10 hours a week. I run a few teams. It's not direct patient care. It's mostly supervision.

Dr. Jim Dahle:
But you're not practicing all that much less than I am these days.

Jordan Grumet:
Yeah, it's just the right amount. What's lovely for me is I get to maintain this doctor identity, what I worked all these years to accomplish, but yet can do it in such a way that doesn't feel stressful, doesn't feel like anxiety. I feel like I'm just helping people. But then I get to use the rest of my time to pursue whatever I like, which often is things like writing books or podcasting.

Dr. Jim Dahle:
It's still a privilege, I find, to go to the bedside and to sit with the patient. Yesterday in the ER, I had a patient who came in with back pain and told me she'd been scanned the week before. And her husband was there with the results of the scan on his phone. I'm like, “Has anybody called you about this scan, about these results?” And he's like, “No, but they were scanning her to make sure it wasn't from a kidney stone.” And so I asked the obvious follow-up question after reading this CT scan was, “Do you have a history of cancer?” Because this CAT scan report talked about metastases and all these other issues on the report. And so, of course, I had to break the news to her that her cancer was back and that was the cause of her back pain.

And it always reminds me that it still is a privilege. It's fun to work in things outside of medicine. It's fun to find purpose elsewhere. There are certainly other ways to make money other than being in medicine. But that thing I dedicated my 20s to, to become, is still a pretty worthwhile pursuit and a pretty fun thing to do and pretty gratifying and purposeful and it makes a difference in the world to sit with people and help them on some of the worst days of their lives.

Jordan Grumet:
People ask me all the time if you had the chance and could start all over again, would you do this again? And the answer is always absolutely yes. There are some fundamental truths about being a physician that just are unlike any other field you can go into. We walk into the office or the emergency room or into the hospital every day and know that we can specifically make a difference in people's lives, not just with our knowledge, but with our humanity. We can step into maybe the worst situation a person is going through and be some calm and be the knowledge and be the support people need. And that's incredibly powerful.

Dr. Jim Dahle:
Yeah, it's a pretty awesome experience. But let's talk a little bit about this new book. You have three books out. You have had The Purpose Code, I think we've talked about on the podcast before. Your first book, Taking Stock: Hospice Doctor's Advice on Financial Independence, Building Wealth, and Living a Free Life. And now The Healthcare Heist.

And I told you before we started recording, I was super impressed you took this on because this has been a little bit of, I don't know if it's a dream for me, but a problem that I felt was worth dedicating some time to fixing our broken healthcare system, but it's always seemed so big to me. I figured just fixing the inability of doctors to manage their money was a way easier problem to solve.

Our healthcare system is like 18% of GDP. It's monstrous. It's this huge issue. It's sometimes embarrassing to be a part of it, but you've at least started taking it on with this book. So kudos to you for that. And it's obviously going to take a lot more of us working on this problem to solve it. But you've taken the first steps. So tell us about why you wrote The Healthcare Heist, what its main message is, and why you think it's important for White Coat Investors to read it.

Jordan Grumet:
As I was kind of saying before, this idea that I've always explained why I left medicine because it didn't fulfill my sense of purpose, but I've really left out how frustrating it was to practice day in and day out and feeling like instead of being allies with our patients, we were combatants in a game that neither of us understood. And I came to the realization, this was actually after being sued and being dropped from a lawsuit when the lawyer admitted that he was just using me as leverage to get a bigger settlement out of the nursing home after five years of being embroiled in this legal battle.

I realized that we, the doctors, as well as the patients, and let me give the caveat, whenever I'm saying doctors today, it's just the easier short form. What I'm really talking about is everyone in healthcare who delivers it. So, I'm talking about nurses, I'm talking about occupational therapists and physical therapists and wound care therapists and chaplains and social workers, all of us who are delivering care in the healthcare system. I say doctors as a shorthand, but what I realized is that doctors and patients alike are being used as levers to enrich these third parties.

And I've seen this before. We've all seen this before in the world where we have entrenched interests, which are creating an unfair system that doesn't serve anyone but themselves. And the interesting thing about history is what we see is that all is not lost, but you need almost a mini revolution. I'm not talking about bayonets and guns, but I'm talking about this idea of main stakeholders in the system, when they come together and they form bonds of allyship and they fight together, we get revolutionary change.

I always talk about the civil rights movement. It's a perfect example. Rosa Parks, the story of the woman who couldn't find a seat on the bus, that became the nucleus, a story in which the shared stakeholders came together and it eventually ends in the Civil Rights Act.

So, we've seen this before where entrenched interests are trying to stop us from doing what's right. But time and again in history, and that's just one example, if we can ally with the people who are the main stakeholders, we can change the system. And I deeply in my heart feel like we can create a system that's better for doctors and patients.

Listen, you and I talk about finances. What kind of world do we live in where the major form of bankruptcy in the United States is medical debt? What kind of world do we live in where you and I coach and deal with all these people who get to financial independence and they're so excited and they're ready to retire, but they can't because they can't figure out how they're going to pay for health insurance.

What kind of world do you and I live in where people retire and then they hit 70 or 80 and have something happen that they didn't expect, and they don't have any long-term care coverage and have to worry about bankrupting themselves in order to get the care they need? This is not the beautiful country we live in. I think we all deserve better, and this is how we get change, as we say, this is not acceptable.

 

DOCTORS AND PATIENTS ARE ON THE SAME SIDE

Dr. Jim Dahle:
Now, in the book, you set up some opponents. There's some bad guys in the book. The bad guys are big pharma, they are health insurance, they're private equity buying medical practices, etc. How come those people are bad guys and all the rest of us are on the good side? What's the difference? How do you decide who's on the bad side, who's on the good side?

Jordan Grumet:
Well, basically, what we need to do is we need to look at our health care system and really decide who's delivering value and who is getting the bounty at the end of the day. When we look at our health care system, we really, again, have two main stakeholders. We have those delivering care, the people I'm calling doctors today, but doctors, nurses, social workers, everybody in health care, and then we have the patients.

And so the question is, can we build a system that serves both of those entities before it serves other people? What we're seeing today is actually we have all these fingers in the cookie jar that are taking all the money out of the system, and they're not actually improving the system.

So, it is the health insurers, it is the pharmaceutical companies, it's the electronic medical records companies, it's the medical malpractice organizations and lawyers, it is private equity and venture capital. What we see is these groups are coming in and they are changing health care, but they're not nearly delivering the benefits they should be for all the money they're taking out of the system.

And so, there are good guys and bad guys. But if you look at the bad guys, you'll see that they're doing a huge amount of work to try to convince patients that doctors are at fault, and they're trying to convince doctors that patients are at fault. So, it's really the divide and conquer strategy, because if they can keep us all squabbling with each other, we'll never point any fingers at them.

Dr. Jim Dahle:
We have a capitalistic health care system. It's run by, for the most part, there are nonprofits out there, there are government entities out there, but for the most part, it's a for-profit system. And I suspect you would probably argue that is the root cause of a lot of the problems we see.

But capitalism is classically the worst system out there, except everything else that has been tried. There are some benefits to having a market system at play here. And you could throw all that out and have VA for everybody or Medicare for everybody, but that comes with consequences, as well. Why is that not the solution?

Jordan Grumet:
I think what we found is that hypercapitalism and unchecked systems don't work. And so yes, we should have capitalism, but there always have been, within our history, constraints. And so, the idea is to have capitalism with some general constraints.

Why do you need constraints? Well, if we look at what's happened politically with things like Citizens United and campaign finance reform, we've found that these third parties, the wealthy third parties, the ones that are extracting a lot of money out of the system, can pay in order to lobby Congress members. And those payments end up creating laws that further their economic gains, but don't necessarily help the American people.

And so we see this over and over again. You can go back, for instance, to the Bush years. When Medicare Part D was passed, they also passed as part of that legislation, this idea that the government couldn't negotiate with pharmaceutical companies for better prices.

How crazy is that? Why ever would any politician agree to that other than they were receiving money from these third parties? It doesn't serve them at all. It doesn't serve the American system. People wonder why Americans are ordering meds from Canada and ordering them from other countries. The reason why is other countries weren't silly enough to get rid of the bargaining power they had. Their governments were the biggest buyers of medications and they allowed their government to basically negotiate with pharmaceutical companies.

So, we see this over and over again. There are limits to everything. There are limits to democracy, there are limits to capitalism. I believe in a capitalistic system. I believe that we just have to have some checks and balances. And when those checks and balances aren't working, and certain parties become altogether too powerful, that's when you get the need for revolution. And again, we see this over and over again in American history. If you want to go back to another situation that makes this utterly clear, we believe in capitalism.

But back in the day of Upton Sinclair, he wrote the book, The Jungle. Upton Sinclair, an avowed socialist, basically saw the atrocities in the meatpacking industry and saw that it was not only unsanitary, but the workers were being treated horribly.

Now he wrote this book, The Jungle, trying to show how bad the workers were being treated. What happened after this book became popular? Not what he expected. Actually, the government realized how poorly we were taking care of our food sources and started to place more regulations on the care of food. However, if you go about 20 to 30 years out from that book, we have the first laws about collective bargaining. So eventually it led to things like unions too.

The point being here is that unfettered capitalism just isn't always healthy. That doesn't mean that capitalism is bad, and that doesn't mean that we shouldn't have an 80 to 90% capitalistic society. It just means that occasionally governments are made to install breakers when things get out of hand. And I think that's the situation here.

Dr. Jim Dahle:
So you're arguing for more constraints than we already have, because there are some constraints. Let me give you an example. One of the other bad guys in the book is the medicolegal complex. And Utah has done something about this issue in medicine. They basically passed a law last year that said if doctors carry a $1 million malpractice policy, they can't lose personal assets in a malpractice lawsuit. Basically took that fear off doctors' heads so they would quit ordering tests that were only being ordered for CYA purposes and put that constraint in place. So there weren't these basically unlimited malpractice lawsuits out there. But you're arguing we need more constraints. That's the issue. We need more of them.

Jordan Grumet:
Yeah. And we need nationwide constraints, and we need common sense constraints. So let's look at medical malpractice since you mentioned it. Do you have any idea what percentage of medical malpractice cases are dropped without a finding before they reach court? Any idea how many of them are dropped?

Dr. Jim Dahle:
I think the last time I looked at it for my asset protection book, the figure popping in my head was something around 80%. It's a lot.

Jordan Grumet:
70% of cases are dropped completely, no finding. And then once you get to court, what percentage of cases find for the doctor and not the plaintiff? 85%. And so, 70% of cases are dropped immediately and then 85% of cases are dropped in court. What this suggests is far less than 10% of cases actually have adjudicated malpractice.

That's pretty striking. Look how much money we are spending on health care and medical malpractice for something that is exceedingly rare. By the age of 55, a grand majority of doctors have been sued already. And yet the likelihood that they actually committed malpractice is very low, which you could say, fine, nothing major lost.

But there have been studies. The most recent study I could find was from 2008. So, we don't have a lot of studies on this, but it was on defensive medicine. And it showed that in 2008, we spent about fifty-five billion dollars on defensive medicine. In other words, doctors who are afraid of being sued or doctors who have been sued order unnecessary tests. That is more than was actually handed out to plaintiffs. And so this is extraordinarily costly to the system. And no one's really winning here.

Dr. Jim Dahle:
To be fair, unnecessary is a lot easier to determine in retrospect than it is prospectively. A lot of times I'm sitting there, “Do I order a CT on this patient?” I don't know. It's necessary until it comes back negative. And so the person that gets to decide it was unnecessary is maybe biased as well sometimes. Not to mention, I think a lot of the motivation behind doctors isn't necessarily I don't want to get sued, but I don't want to miss something. I don't want to hurt a patient.

I think it's really hard to tease that out when you're looking at these defensive medicine studies. How much of this is to avoid being sued, and how much of this is that I just want to be perfect? I don't want to miss anything. And this patient, as an individual, just wants to be 100% sure, even though when we look at all the individuals together, that practice is maybe bankrupting the system.

Jordan Grumet:
Yeah. And you have to put this into perspective. It doesn't actually even matter the doctor's intention. Whether the doctor's intention is not to be sued or the doctor's intention is not to miss something “again.” The point is that objectivity and rationality are being overcome by emotions.

And we all know this. One of the keys to being a good doctor, especially in the midst of crisis, is to learn how to be objective. It's something we train our whole careers for. And we know through studies that doctors basically get a version of PTSD from being sued that really affects their objectivity. And this is where we all lose.

 

THE MONEY IS GOING TO THE WRONG PLACES

Dr. Jim Dahle:
As we talk about constraints that will save the system money, what's to keep the system from implementing constraints on doctors, maybe capping their income at a quarter million dollars or something like that? What if we're going to constrain big pharma, and we're going to constrain the medical-legal complex, and we're going to constrain insurance companies, and we're going to constrain private equity. What's to keep them from constraining doctors and their incomes next? Because there's a lot of docs out there making $500,000, $600,000, $800,000 that would not be thrilled to be making an income like doctors make in France or England or Spain or Argentina or wherever.

Jordan Grumet:
I love this argument. And one of the reasons I love this argument is because it makes zero sense. So, let's break it down into two points of view. First and foremost, doctors get about 20% of health care dollars, and about 10% of that goes to overhead. Let me repeat that doctors get about 20% of health care dollars, and 10% of that goes to overhead. So, 10% is used to pay themselves.

So let's think about this. You could take every doctor in America and cut their salary in half, and you'd go from them being 10% to 5% of our health care spend. Guess what? Wouldn't move the needle. But you know what would happen? You'd have a lot of doctors who'd leave medicine. And so even if you cut our pay in half, it wouldn't really change things that much. That's point one.

Now, let's talk about point two, the comparison to other countries. It's a little bit disingenuous to compare us to other countries. Why? Well, in the United States, you could go into debt $500,000 to get your degree, and it could take you to your late 20s, your early 30s to start practicing. We're making subminimum wage or nothing at all.

So compare that to other countries. Most other countries, really, they do not pay nearly as much in health care education, if anything at all. And they have a quicker system. And so, yes, they make less when they come out, but they don't go into nearly as much debt. That's part one.

Part two, doctors work longer hours and take less vacation in the United States than almost anywhere else. We are famous for working 50- to 60-hour work weeks, as well as taking only a week or two of vacation, which does not match European countries or South American countries.

Dr. Jim Dahle:
Yeah, we should all take August off like France does.

Jordan Grumet:
Exactly. Point three: people in the United States tend to make more money than in other countries. It just is. So it's not just doctors. Lawyers, accountants, engineers, business people. We make a lot of money in the US. It's part of this hyper-capitalistic system. Again, if you're going to blame doctors here, you've got to blame all careers. It's not just physicians.

And last but not least, if you look just in the health care sphere, look what the allied professions are making. So, look at a CEO of a health care company. Look at someone running an insurance company. Look at the CEO of a pharmaceutical company. They're making hundreds of millions of dollars a year, yet not a single one of them is being woken up at 03:00 in the morning to make a life-altering decision, something doctors have to do all the time. So, you can make the argument that doctors make too much, but I don't think it really holds water when you look at all the facts.

Dr. Jim Dahle:
What I like about the argument you make in the book is that physicians and patients together are in a unique place to change the system. And I've always believed that's true as well, because nobody else is there in the middle, seeing all the problems. And so I do think any solution that takes place has to be doctor-led, has to be patient-led, because nobody else has the incentives to fix the system. Nobody else has the expertise, the incentives, particularly for the patient, and the expertise, particularly for the doctor. So, any fix for our health care system has to be patient- and physician-led.

I love that you made that argument. And I think a lot of people don't realize that this really, I mean, yes, eventually it's got to involve some laws and politicians and some things like that. But really, this has to come from a grassroots kind of level. It can't be top-down. It's got to be a bottom-up change.

Jordan Grumet:
There are two major streams that are making that harder and harder. One is, as I talked about, these third parties are really trying to divide and conquer. So they're trying to separate doctors and patients so they can't come together. That's part one. Part two is that there's a real intimacy gap between doctors and patients, so we don't feel as close to each other as we used to.

If you go back to the 1900s, you can imagine your doctor lived in your neighborhood. They probably went to your church. Your kids and their kids were probably on the football team together. And when you got sick and you couldn't come to the office, they came to your house. And guess what? In 1900, if you couldn't pay your doctor's bill, they would have taken eggs or a chicken or some type of barter.

What does that mean? It means there was a real intimacy between doctors and patients, such that the doctor could also walk into your home, put on their shield, and be objective. And yet out in the world, you felt natural intimacy between you and them because they were part of your community.

Fast forward to today, most people have to drive to their doctor's office because it's so far away. Their doctors don't live in their communities. No one does house calls anymore. There are all these third parties that now come between you and your doctor, including health insurance companies, pharmaceutical companies, and billing companies.

And so we've lost the intimacy between doctor and patient. Yet patients show up every day and disclose their biggest, most worrisome secrets, and then literally disclose their bodies as they take off their clothes to be examined. Patients are the only ones showing intimacy. Doctors now come in; they're objective. You don't know them from anyone else. You don't live in their community.

So we've really moved to a unilateral intimacy in the doctor-patient relationship. And that's why part of the reason it's really hard for doctors and patients to fight together, because we don't feel like we're part of the same society. We don't feel like we're part of the same community.

So you take that, and then you take the deliberate confrontation that I think is being introduced by these third parties. And you've got a system where it becomes very hard for us to feel like allies. And as you said, the only way this gets better is if we all come together and push for grassroots change.

Dr. Jim Dahle:
Doctors feel less empowered, I think, than they used to. They have less control over the delivery of the healthcare system. I think the last statistic I looked at said something like 75 or 77% of physicians are employees. They're employees. They come in, they punch the clock, they're told what to do by the bosses, they get their paycheck, they're paid on W-2. They just have less control over the practice than doctors used to.

And so, while you're calling for doctors to take more control of the healthcare system, they are out there for various reasons, whether they're lifestyle reasons, whether it's consolidation of medicine reasons, or whether it's demographic changes among the physician workforce. They're far more likely to be employees than they ever were before. Is that trend going to have to reverse in order for doctors to have the control needed to really make these changes?

Jordan Grumet:
I certainly think it's part of it. We can look at Daniel Pink's ideas of autonomy, mastery, and purpose. Physicians have purpose in spades, mostly, because most of them go into medicine because they want to help people. And they have mastery in the sense that they're continuously learning and growing their knowledge and getting better. But we've 100% lost autonomy.

I think it was 2018 might have been the year in which we went from having more physician-owned private practices to now we have more either hospital-owned or private equity venture capital-owned practices. And the studies are pretty clear. When physician practices are taken over, physicians find that their enjoyment of their practice goes down significantly. But also, and they've done studies specifically in hospitals, the number of hospital-based errors goes up. And so the quality of care goes down.

And so, not only for our patients' well-being, but for our own emotional happiness and well-being, being able to steer our ship, having some of that autonomy really changes the game. We don't talk about burnout as much as moral injury nowadays. What is moral injury? This idea is that you know the right thing to do and yet feel like you're thwarted from practicing the right thing for the patient and then seeing the patient get hurt by it.

What else are pre-authorizations? What else are formularies? What else is meaningful use in this idea that you have to spend your time filling out your electronic medical record as opposed to talking to your patient? We've had our autonomy taken away. It is causing moral injury, which is leading to poor outcomes, and no one is happy. It's not good for patients. It's not good for doctors.

Dr. Jim Dahle:
The counterargument is that doctors won't control costs. And so, some sort of external factor must be put on them, whether that's formularies or pre-authorizations or whatever, because the doctors just want to give the patients whatever the patients want or whatever the doctors think will help them.

And we actually can't afford to give everybody the very top-notch care that everybody wants because health care is really expensive. You have highly trained people that have high liability that spent a decade in school that are working all these hours 24/7, 365, with expensive equipment and expensive drugs and all this sort of stuff. It's really expensive to deliver, and there's this idea out there that health care is a right and not a privilege, and every type of health care, the very top-notch level of health care that can be delivered, is a right for everybody.

The problem is if there's no sort of cost constraints, all of a sudden, instead of it being health care being 18% of GDP, now it's 36% of GDP, and we really can't afford that as a society. Somebody's got to say no, and if it's not going to be the doctors, well, who's it going to be?

Jordan Grumet:
This is a wonderful point if it were true. Unfortunately, data actually shows that's not true at all. First and foremost, if we go back to Obamacare, Obamacare changed the laws of self-referral. The idea was that you didn't want doctors referring to themselves and making excess profits, and it wasn't good for patients.

Well, that rule, unfortunately, caused a lot of doctor-owned hospitals to close, and guess what? They found doctor-owned hospitals, especially doctor-owned specialty hospitals, gave better quality of care and ran way more financially efficiently than non-doctor-owned hospitals.

It's the exact opposite. They find, for instance, that when you have orthopedic hospitals that specialize in hip replacement or knee replacement or orthopedic procedures, they tend to cost the system much, much less.

Listen, we have a choice here. Doctors take the Hippocratic Oath, which says that they will care for their patients even at their own peril. They will do whatever they have to do for their patients. That's one group.

What type of oath do businesses take? The pharmaceutical companies, insurance companies, private equity, venture capital, they don't take an oath. You know what they have? They have something called fiduciary responsibility. Their responsibility is to repay their shareholders and deliver profits.

Who do you want to practice medicine? The people who took a Hippocratic Oath to protect your health or the people who took an oath to increase profits? Right now, we are letting businesses practice medicine. Every time a business takes over a medical practice and tells them what they can order, how they can order, and how often they have to see patients, you have a business practicing medicine.

Every time we have a pharmaceutical formulary and an insurance company says, ” We'll cover this drug but not that drug,” you have a business practicing medicine. Businesses don't have any oaths or responsibilities to patients. They only have oaths and responsibilities to shareholders.

This is the fundamental problem of the system. The answer is not to put more power in the businesses. If anything, your likelihood is that physicians are more constrained than businesses are.

We not only have the Hippocratic Oath, but we also have the Standard of Care Oath. It's not really an oath, but basically you are held to a standard of care by medical malpractice. A lot of these businesses aren't. We are constrained in two very important, significant ways. These businesses are not. I would have to make the argument that we're in much better hands having the physicians pull the strings than the businesses.

Dr. Jim Dahle:
There is a vast difference in the cost of various levels of care. I saw a patient with Crohn's the other day who has uncontrolled Crohn's disease because he couldn't afford the medication that his GI doc wanted him on. It was a very expensive medication. I can't remember how many thousands of dollars it was a month, but it was a lot.

In the short term, while he was trying to get the insurance company to pay for that drug, we had to do something about the Crohn's disease. So I got the GI doc on the phone, and we decided to put him on a taper for the next month of prednisone. Prednisone is pennies. It costs nothing. It's basically free. It's not as good. But it's dramatically less expensive.

I feel like physicians are not trained and/or not willing to actually have those discussions with their patients about the costs of care and let the patients make that decision. Do you want to spend $120,000 a year when you have an income of $60,000 a year on this Crohn's medication? Or would you rather have one that's not as good and has quite a few lousy side effects, but it's going to cost you $100 a year? We don't have those discussions with patients nearly as often as we should. Part of that is because we were not empowered to know the costs of stuff.

One of my favorite parts of being in the Air Force is that every time I prescribed a drug in the Air Force, I can't even remember what the name of the EMR in the Air Force was, but every time I prescribed it electronically to the pharmacy, they told me how much every pill cost the Air Force. How much did it cost the Air Force to give that pill? Obviously, it didn't cost the patient anything. Their care was totally free. But I knew it was a $0.01 pill or a $0.04 pill or a $0.02 pill or whatever.

We just don't provide that information to doctors so we can help patients make those decisions. We can go, well, yeah, it's a little better, maybe, but it's also three times the cost. We shouldn't put them on that drug. I don't think doctors are making those cost-conscious decisions nearly as often as they should be.

Jordan Grumet:
There are a few things about this. First and foremost, we aren't trained to do that. Some would argue, based on the Hippocratic Oath, that maybe we shouldn't. But that doesn't prohibit us from forming our own societies that can bring all the experts together and come up with plans for affordability, what should be covered, what shouldn't be covered, and how we should walk through this maze.

We have the possibility, maybe the responsibility as clinicians, to have a major say in those decisions. Each specific clinician maybe doesn't need to, but we need to form groups who study these things and put out recommendations. That's point one.

Point two is, maybe the better question is, why the heck are some of these pharmaceuticals so expensive? There is a lie out there that says that pharmaceutical companies, poor, poor pharmaceutical companies, are spending so much money innovating that there's no way they could possibly, possibly take this new cancer drug and give it to people for $100 a dose instead of $5,000 a dose.

That all sounds good until you actually look at the protections in our system for pharmaceutical companies. Look, pharmaceutical companies perform or outperform the top 10 companies in the S&P 500 regularly. Their profit margins far, far exceed those of most successful companies. I don't know, since AI has been making such a move, if it's the same case anymore, but pharmaceutical companies are doing fine.

Most of the studies show that for every drug a pharmaceutical company produces, it might cost them about $1.8 billion in R&D, but they tend to make about $18 billion on those drugs. There's 10 times a return.

Nowadays, a lot of the pharmaceutical companies, especially the big ones, aren't even doing the R&D anymore. Smaller pharmaceutical companies that pay a lot less in R&D are actually developing the new drugs, and then the big pharmaceutical companies simply buy them from them.

You know what pharmaceutical companies spend most of their dollars on? Not R&D. They spend it on marketing. There's no reason why drugs have to be protected for an average of 38 years. That's right, 38 years. Patent protection is supposed to be 18 years, but they modify the drugs. They use them for different reasons, with different recommendations. They find all sorts of legal loopholes to extend patents up to 38 years, which means no competition, which means skyrocketed pricing. And guess what? The government can't even negotiate for Medicare and Medicaid, so why would they ever charge less?

Have you noticed the pharmaceutical companies sell the drugs to other countries for much, much less? Why? Because their governments are able to negotiate. Ours isn't. Maybe the real question is not whether doctors can control costs more, but the better question is: why are costs so high from these companies that are killing it? A lot of studies show they barely pay any taxes. Most pharmaceutical companies and insurance companies pay 1% to 2% in taxes. We're talking tiny amounts of tax. There's all sorts of loopholes. There are all sorts of protections. Maybe they should just be charging less.

Dr. Jim Dahle:
Here's another dilemma, Jordan. You talk about these pharmaceutical companies as if they're somebody else, but in reality, these big publicly traded corporations are us. You own them in your index fund. You own them in your 401(k) and your Roth IRA. These are owned by the American people, for the most part. Our pensions and our retirement accounts and these sorts of things. Obviously, people who are wealthier own more of them than people who aren't so wealthy, but it's us. We're on both sides of this transaction. How do you reconcile that with positioning them as the enemy?

Jordan Grumet:
There are attempts to defund bad actors economically. We've seen this over and over again. It just doesn't work. It didn't work, for instance, with the tobacco industry. No one defunded the tobacco industry. If you held tobacco stocks over the years, you did really, really well.

It is true, but it's really hard to make change that way. What we're saying is that companies a priori on their own shouldn't be interested in social good or doing the right thing. They should be forced by the consumer. We know it just doesn't always work that way. That's, in fact, why hypercapitalism doesn't work.

We generally need some constraints from time to time. That's the whole point of governments. Why have a government if you're not going to have any constraints? You don't really need a government. Why have taxes? Why have Medicare? Why have Medicaid? It's socialism. Of course, it's socialism. We buy into some socialistic properties to build a society that works.

Yes, we could try to convince the world of investors not to invest in these lucrative stocks, bonds, and index funds, or we could actually try to build some common-sense constraints that keep entrenched interests from using their money to basically overtake or overcome a system that's supposed to serve the people.

Ultimately, governments are formed to serve the people. I don't think we should put the onus back on the people. It's like, “Well, you shouldn't invest in that pharmaceutical company.” I think we should require the pharmaceutical companies to start doing the right thing either way, or at least the reasonable thing.

We're not saying don't have profits. We're not saying don't make new drugs. We are saying that maybe you need to pay more than 1% to 2% in taxes. We are saying that when your marketing budget is so much higher than your R&D budget, maybe you shouldn't get 38 years of patent protection.

Remember, patent protection is not capitalism. Capitalism says that there shouldn't even be patent protection. Best man wins. You make the drug. You make it affordable. You win the game. A generic company copies what you have. They make a better, cheaper version of the drug. They should win the game. That's real capitalism, but no one bats an eye when we say, “Well, we're going to give the pharmaceutical companies patent protection to protect them.” Well, that's not capitalism anymore anyway.

The point of the matter is capitalism is fantastic. It's what makes our country better, I think, than many countries, but there have to be some constraints. I don't think it's the responsibility of the people. That's why we elect governments. That's the whole idea behind having politics and politicians.

 

REBUILDING HEALTHCARE FROM THE GROUND UP

Dr. Jim Dahle:
When you talk about revolutions and bayonets and muskets, that sort of idea can be taken to an extreme, i.e., Luigi Mangione.
Jordan Grumet:
Yes.

Where do you draw the line on this revolution? Where do we stop revolutionizing and stick with the rule of law? How much should we be in the streets protesting the cost of health care? How far do you take this revolution?

Jordan Grumet:
I simply believe in the idea that the word is sharper than the sword. And so, yes, Luigi Mangione is the sign and a symptom of a system that is no longer serving the people, but I never condone violence, and I think that's the wrong way to go about it.

I think the way to go about it is how revolutions have happened peacefully throughout history. So let's talk about a big revolution and why it's important to the United States. There was a revolution that peacefully changed health care in another country that we could mimic, and that is the UK.

If you go back to the early 1900s, the UK had no system of health care and no system of health care payment. They had things like poorhouses, and they had charity, but they didn't really have anything. And there was a movement by a number of socialist leaders at the time to try to institute some type of health care system, and it was shot down decade after decade.

And then something magical happened. There is a guy, a physician; his name is A.J. Cronin, and he wrote a fictional tale about his experiences of taking care of people in the UK's system. It showed basically how corrupt and wrong the system was and how people were hurting. He wrote this book called The Citadel. The book became so popular that it is actually credited with the passing of the NHS, which was the world's first universal health care system, covered more people than any other system had, and to this day operates imperfectly and yet delivers a very reasonable quality of care.

It never would have happened without the story written by this one doctor that changed the world. Peaceful revolutions, most of them, center around stories. Stories get the stakeholders to become allies and fight for what's right. We go back to Upton Sinclair. We go back to Rosa Parks and the story of not being able to sit on the bus. These are the sentinel stories. This is when words work better than swords.

And so, I think the answer, the way we fix this, is that we tell better stories. Patients have been telling their stories forever, but we as doctors have been slow on the uptake. We are great at telling people what we know. We give lectures about how to avoid heart disease or when not to use the statin.

But what we don't do is we don't tell people who we are. We don't tell them what it feels like to be working in our health care system. We don't tell them our intentions. Most people don't know what their doctors go through on a daily basis. When we rush into the room 15 minutes late, and we are brusque because we don't have time for that blood pressure check, they don't realize that we were just spending 45 minutes in the room next to them telling someone that their loved one is going to die.

They don't know these stories because we don't tell them. And this is where things like social media and books and podcasts are a wonderful place for doctors to tell who they are, to bring back this allyship, to get rid of the unilateral intimacy, and start creating the stories that are going to cause a silent and peaceful revolution.

People feel like everything is lost, and I'd like to say the exact opposite. And here is how we know it's the exact opposite. Obamacare in the end didn't work. But if you think about it, there were three main ideas. It was supposed to increase access, it was supposed to decrease the cost of care, and it was supposed to maintain quality.

Well, guess what? Even though Obamacare was defanged over and over again by Congress and Republicans, it still maintained quality and increased access. The only thing it didn't do is, unfortunately, it didn't cut the cost of care; it rapidly increased it. But actually, it was a significant move forward. It was a sign that the American people were ready to elect a president who wanted to change things.

Look today. What is the group within the Democratic Party that's getting a lot of movement? It's the Democratic Socialists. I'm not going to talk here about what I believe politically, and I don't think it's important. But a main part of the Democratic Socialist platform is universal health care. And who is voting for the Democratic Socialists? Young people. It's people who feel like Luigi Mangione but don't want to do something violent. They want to change the right way by electing different politicians.

Agree with the Democratic Socialists, don't agree with the Democratic Socialists. The point is, this is a sign that we're starting to change. People are starting to collect those stories that bring allyship. We might not see the change this year and next year, but the trend is that some story will break through and convince the stakeholders that enough is enough. And it'll convince the politicians that no matter how much money they're getting, ultimately they need to change. It seems far-fetched, but it has happened in history over and over again. I don't think we're that far.

Dr. Jim Dahle:
It's not that hard to increase access and increase quality if you just spend more money. But at a certain point, you've got to go, “How much should we really be spending on health care? Is 18% of GDP not enough? Do we really have to spend 25 or 30 or 35% of GDP on health care?” At a certain point, you've got to figure out the cost thing too.

Jordan Grumet:
So, let's look at a different problem, a problem I'm going to make up. Let's say you own the local pool, and as the weather gets colder, people still want to swim, but the water's too cold. And so you're like, “Well, I can increase the heat of the pool, and people are going to want to swim later, and I'll make more money. But in order to do this, I'm going to have to charge people a little more. I'm going to have to pay for electricity.” Sounds great. Or whatever it is you do to increase the heat of the pool. I don't know how they do it. I'm not a pool technician.

But whatever system they have to install and maintain to keep the water temperature higher, they're going to have to do. If we compare that to the US system, we have the pool operator who's paying all sorts of money to increase the heat of the pool. But then we have 10 other third parties who are like blowing fans away from the pool.

And what they're saying is we're pushing the cool air away from the pool with these really expensive fans. And because these are really expensive fans, we're going to charge you all $1,000 a year to pay for these fans, which makes no sense because a pool pass is $10. And the guy owning the pool is like, “Well, if I increase the pool pass to $15, I can heat the pool, and people can enjoy it much longer.”

The problem with the American health care system is not that we're not putting enough money in it. We're putting money in the wrong places to the wrong people who don't have the patients' and physicians' needs at hand. They have their own needs.

Let's look at electronic medical records. You talked about working in the Air Force. The Air Force, as well as most of the VA system, uses VIST-A. VIST-A is an electronic medical record system developed in the 1970s, exceedingly cheap, exceedingly easy to use. And every time the VA tries to change it or replace it, people die, and they have to go back to VIST-A because it works so well.

Why have we opened up electronic medical records to third parties and, starting in the 2000s, basically allowed these third parties to certify with the government and provide medical records? What have they done? They've charged billions of dollars to the American health care system, whether that be providers, hospitals, or eventually it comes out of patient payments because how are we going to pay for all this?

Most of the studies show that electronic medical records haven't actually improved anything. Morbidity and mortality aren't any better. We don't make fewer errors. We just make different errors. So some errors we make less of, but now we make different and newer errors.

The point of the matter is, if electronic medical records never happened, our medical system would be in the exact same place. But we've spent billions and billions of dollars implementing it. The person who owns Epic is a billionaire. They're a billionaire. They built a system that has really solved zero problems. We could have implemented VIST-A around the country back in 2000. It would have cost people very, very little, and we'd be in the same place.

The problem is not that we're not spending enough. It's that we're paying the wrong people for the wrong actions, and they are enriching themselves, but we're not actually improving the system. We're being inefficient. That's the problem.

Dr. Jim Dahle:
Well said. There are a couple of other ideas in the book that I wanted to give you a second to explain a little bit, one of which is the culpability myth. Can you talk about what that is and what White Coat Investors need to understand about it?

Jordan Grumet:
There are basically a few main ways in which the system has tried to divide and conquer patients and doctors by making it look like doctors were the bad actors. And so, the question is, who is responsible for our healthcare system? Patients have been led to believe that it's doctors, and I think there are a few reasons why this isn't true.

But let's look at the three main streams of thought, and I'm going to go over them real quickly. The first is medical malpractice. In 1997, there was a study called To Err is Human, which basically said that up to 97,000 deaths a year are due to medical error in hospitals. This was followed up in 2016. I think it was Marty Macri who did a study that showed that up to 200,000 or 300,000, maybe even 400,000 people a year die because of hospital-oriented errors. This would mean that one in three patients die from error. It would be the third leading cause of death.

The problem with all these studies is they were bulls**t. They literally were extrapolated from small patient studies that were built for other reasons and not to show morbidity or mortality.

If you just look at it on its face, anyone working in our healthcare system knows that one in three patients who die in a hospital is not because of medical errors. What they did is they made all sorts of mistakes. They over-extrapolated. They found the occurrence of errors. So let's say a patient was given normal saline instead of half-normal saline, and half-normal saline was written for, and it happened for three hours and then was corrected. That was coded as an error, and then the patient died from sepsis two days later. Basically, the idea was, well, they died because of the normal saline error and not because of the sepsis.

Basically, these studies ended up being BS, but it painted the picture of doctors being careless and actually being the instrument of death. That was one stream that divided doctors and patients and made doctors seem culpable.

The second, and you mentioned this already, were HMOs. Basically, the idea behind HMOs is that primary care doctors were supposed to be the gatekeeper, and were supposed to decide what care patients should and shouldn't get, which makes some sense, but doctors really weren't trained to do that. All of a sudden, because patients would see the doctor as the one who was keeping them from getting the care they needed, it turned doctors and patients away from each other.

ACOs are the same thing. Advanced Care Organizations are like the next-level HMOs, and basically, it pits doctors against patients by making the doctors the gatekeepers. Last but not least, the government actually has played a huge role. Have you ever heard of the Physician-Patient Sunshine Act?

Dr. Jim Dahle:
Yeah.

Jordan Grumet:
The Physician-Patient Sunshine Act basically said doctors are receiving money from pharmaceutical companies, and so it should be publicly searchable so you can go and see what money your doctor has received from a pharmaceutical company. The problem was, the point of the legislation was not just doctors; it was actually to call out pharmaceutical companies and hospitals that were all guilty of the same thing.

And in fact, when you look at the studies, most doctors receive somewhere around $100 to $500 a year from things like meals from pharmaceutical companies and pens and stuff like that. If you have a doctor making $350,000 a year, that $500 doesn't really change much, but if you look at the increase in sales from pharmaceutical companies from doing these activities, it is very one-sided, the benefit.

Anyway, look at the name of the act, Physician-Payment Sunshine Act. Pharmaceutical companies mentioned in that? Nope. Hospitals mentioned in that? Nope. Basically, the name of that act makes it seem like doctors were the sole bad actors in the system, and most people don't even realize that doctors are groomed as medical students by pharmaceutical companies. They are invited to the hospital, they bring meals, they bring all these really attractive salespeople. Those salespeople literally befriend the medical students, residents, and attending physicians, all in an attempt to sell more drugs.

The system makes it look like doctors are the sole bad actors, and for all of these reasons, the myth is that the doctors are culpable for all that's wrong in healthcare, and it's just wrong.

Dr. Jim Dahle:
That's the culpability myth.

Jordan Grumet:
That's the culpability myth.

Dr. Jim Dahle:
Okay, our time is getting short. We've talked a little bit about what the individual doctor can do about this issue. You've encouraged them to tell stories, to tell them publicly, to tell them privately, to tell them on social media, etc. Is there anything else that the individual doctor can do about this issue?

Jordan Grumet:
I think there are a bunch of things individual doctors can do, and I think there are a bunch of things that patients can do. You as a doctor are also a patient at times, and your family is a patient. Let's talk about things everyone can do today that could fix or improve this.

We need to take money out of these third parties' pockets. How do you do this? If you are denied care by an insurance company, appeal. Appeal, appeal, appeal. They actually overturn appeals, and if we don't start holding them accountable, they're just going to deny everything.

If you go to your doctor and the doctor says, “Boy, we've been watching your blood pressure forever. I think we need to put you on a medicine.” Ask for a generic. If you need a cholesterol pill or a high blood pressure pill, there are so many good generics out there. You do not need the latest and the greatest, the one that's going to cost more, the one that's under patent control from the pharmaceutical company.

If you're shopping for a new doctor or hospital or place to get your mammogram, try to find a place that's physician-owned. The more we go to hospital-owned, venture capital-owned, private equity-owned, the more money that goes into their pockets, but there are still some physician-owned practices and establishments. You can go there, and you can give them your business.

Think about concierge care or direct private care. If you have a little bit of money, you can divorce the insurance company from affecting your decisions by going to these doctors who have looked at alternative models. These are all ways in which we, the people, can slowly chip away at the benefits that all these third parties are reaping from our healthcare system.

Dr. Jim Dahle:
All right. Jordan Grumet, author of The Healthcare Heist, podcaster, blogger, physician. It's been wonderful chatting with you about this. Before I let you go, I want you to talk just a minute about what you're going to be speaking about in Orlando at WCICON, February 24th through 27th at the Rose and Shingle Creek Resort. Tell us a little bit about what you'll be talking about there.

Jordan Grumet:
First and foremost, the best conference of the year by far. I've enjoyed it every time I've gone. I am going to talk about The Healthcare Heist. We're going to talk about these third parties and what we can do about it. We're going to talk about how we can change the system. I think we're all tired of not being able to give the care we want to give. This is a chance for us to change the world.

Dr. Jim Dahle:
Awesome. You can sign up for that at whitecoatinvestor.com/wci. You can get Jordan's book on Amazon, and anywhere books like this are sold. Jordan, thank you so much for your time today.

Jordan Grumet:
Thank you for having me.

Dr. Jim Dahle:
Hope you enjoyed that as much as I did. I know that was a long interview. This is a subject that's near and dear to my heart and one I've spent a lot of time thinking about, maybe becoming a third career in my professional life. But it's always been so intimidating because it's such a huge problem to solve.

So, thank you for allowing me to indulge myself in poking my nose a little bit into some potential solutions to the issues our healthcare system faces. Sometimes it's a little embarrassing to be part of it, but the truth is it does far more good than bad. And I appreciate those of you who are working alongside me shoulder-to-shoulder and helping people in our country to have the best possible health they can and to build as much happiness as they can in their lives.

 

SPONSOR

Dr. Jim Dahle:
This episode is brought to you by KeyBank. KeyBank is one of the nation's largest full-service banks offering banking, lending, and financial solutions for healthcare professionals at every stage of their career. Key's suite of services includes student loan guidance and financial education tools to help clients find financial peace of mind.

To learn more and for terms and conditions, please visit whitecoatinvestor.com/keybank.

All right, don't forget about that freebie financial plan template. I told you at the beginning of the podcast, you can download that at whitecoatinvestor.com/plan.

Thank you for those of you who have left us five-star reviews wherever you download your podcasts. They really do help spread the word. A recent one came in from Danny who said, “Thank you for delivering the best financial advice. You made a tremendous change in my financial life.” Five stars. It's all it takes and helps somebody else get connected with this critical information and inspiration.

Keep your head up, your shoulders back. You've got this. We're here to help. See you next time on the White Coat Investor Podcast.

 

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

Transcription – MtoM – 295

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
Welcome to the Milestones to Millionaire podcast. This is the podcast where we celebrate you. We celebrate what you've accomplished. We use it to inspire others to do the same. If you'd like to be a guest on this podcast, you can apply at whitecoatinvestor.com/milestones.

Well, I'm back at work today, and while I've been gone, the crew have been doing some awesome things in this room. If you normally listen to the podcast, I recommend to stop by the YouTube channel to check out everything they've been doing. You can't quite see it all, but we're using new software as part of this podcast. We also have all kinds of new equipment.

I have a new desk in here, a new microphone, a new fancy big teleprompter, and they're even talking about getting me some new clothes I'm going to be wearing soon. But we got new lights and a whole new background. So if you've never seen the background of this podcast, this is the episode that's revealing it. They've been working hard on this. We've had a drape down over it for a few weeks as we recorded podcasts, but the crew has really done a fantastic job doing this.

Megan, in particular, our producer, has been working very hard at giving us this new look and providing higher quality for you on this podcast. Wendel, our AV guy, gets a shout out. Brett, our COO, of course, has been working hard as well. His background as a contractor has come in very handy as we have rebuilt this studio. First built in, well, what? 2020. We have redone it in the last few weeks, and I'm grateful for those staff members who put in so much hard work to do it.

And the background's now a little bit more, I guess, about me. While we're trying to move the White Coat Investor away from me, we made the background more about me, I guess. We got some climbing stuff and some hockey stuff, and even a great picture of some canyoneering on the wall behind me. So I hope you enjoy that. Something else to look at while listening and watching this podcast.

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I have mentioned this before on the podcast, but people come and visit Utah a lot. It's a mecca for tourists. They come in the winter and ski. And we do have great skiing here. It's true. I only live 8 or 10 miles away from two very world-class ski resorts and plenty of backcountry skiing. We're also a mecca for national parks. People come to Zion. They come to arches. They come to canyon lands. The Grand Canyon is technically outside of the state, but not by much. Bryce is here and our state parks are also spectacular. They'd probably be national parks in most other states in the country.

But people come here at the wrong time. They come here in the winter for skiing, which is fine, I guess. That is when the skiing is. And they come in the blazing hot summer when the kids are out of school to do these national parks. Why anybody would ever want to be in arches in July is beyond me, but people come.

Whereas the best time to be here is actually September and October. September in northern Utah, October in southern Utah, but both are pretty similar in both places because the weather's awesome. Wonderful. Hardly any humidity, very stable hardly any storms, hardly any rain, and perfect temperatures. The lows aren't too low. The highs aren't too high. And you can do all kinds of fun things outdoors, which is why most people come to Utah in the first place. We're not New York City. You're not coming here for Broadway and the world's best restaurants and whatever people go to cities for. People don't come to Utah for that.

And so, I try to spend a lot of time outside in those months. September is actually my favorite month of the year. Yes, the kids are back in school, but that means there's hardly anybody else out there doing these outdoorsy things at the very best time of the year to do them.

So, I went up to Idaho, spent a week floating the salmon in September. That was wonderful. I've had a chance to do a couple of three rivers really this year. It's been awesome. I had a little bit of carnage, of course, when we went and did the Westwater Canyon on the Colorado River. But rafts flip back over just as quickly as you flip them in the rapid, it turns out. And our crew for the Grand Canyon next year is definitely getting up to speed and ready to run the big rapids down there.

I've also been training. Nobody tell Whitney this, okay? She invited me to run a half marathon with her at Halloween time. And like when my sister invited me to do this 15 plus years ago, I just said, maybe, and if I do, I'll just do it off the couch. Well, I am not going to do it off the couch. I've been training pretty hard, actually. I even lost a little bit of weight training for this half marathon.

But as part of that training, I ran a race this week and I got a plaque. Those of you watching on YouTube, check out this plaque. I won the race in my age group, admittedly. There were seven men who finished ahead of me and five women who finished ahead of me in this 10K. But none of them were my age. All the people my age, I beat. And I am not a runner. I actually hate running. I just like being in shape so I can do some of the things I love to do. But it was a trail run. It was like 1400 vertical feet. So it was my kind of running. I'm not afraid to run down a trail and bounce around from rock to rock and so on and so forth. And so, I did pretty well and actually won the race. So I'm very proud of that. So I just had to brag a little bit.

The other thing I did in September, besides a fair amount of running, was an annual trip I take to go canyoneering. I actually do it twice a year most of the time. And the type of canyoneering I do is exploring slot canyons. And some people have done this with a guide or a lot of people go to Zion National Park to do this. And they rappel and they hike and they swim. And they work their way down a slot canyon. The canyoneering I tend to do with my friends and adventure buddies tends to be more exploring.

I've stood in a lot of places that nobody else has really ever stood on the planet, which is a lot of fun to go down a canyon for the first time, not knowing exactly what challenges you're going to run into on the way down. And we kind of take an ethic where we try not to ruin that experience for the next people who come along. We don't call them first descents. We call them explorations because we don't really know if anybody else has done what we're doing in them. Most of the time we don't think they have or because there just aren't that many people doing this sort of thing.

But we use a technique we call ghosting, where you leave nothing behind in the canyon except footprints. And those footprints, of course, get wiped out in the next flash flood. And so, these canyons tend to have instead of having a bunch of bolts you repel off of, you have to figure out a way to do the repels without leaving anything behind. And so that might mean that the last person jumps, there's a big pool of water. You can often do that safely. It might mean the last person in the crew actually climbs down and sometimes is captured or the other members of the team actually catch them as they slide down the last little bit of what might be a repel in a more mainstream canyon.

And of course, everybody else can just repel off what we call meet, the last person. The last person, they can attach the rope to that person and repel down the cliff. But you just have to figure out how to get the last person down.

So, these more challenging canyons tend to have challenges that are one of three types. One is the anchors. You got to figure out the anchors and how the anchors are going to follow you down the canyon. And that might be you're literally repelling off a tarp with sand on top of it or you're repelling off a bag of water.

And these are set up such that you can empty them using another rope and then pull them over the cliff after you. Or maybe you're just wrapping a rope around a tree or something like that, a rock with a releasable knot that works the same way. But in essence, you don't leave anything behind. You don't leave any bolts or any webbing or anything else behind in the canyon when you leave.

And so, I had the opportunity to do this this last week and I ended up doing nine canyons in six days, three of which I'd never done before. One of which we think we're only the second party to ever do before. And it was a good experience. The repels were interesting. The canyon was very pretty. But we ran into a little bit of bushwhacking, Alaska-esque bushwhacking, it turned out. And there was some water running down the canyon. Plants were growing quite prodigiously. And everything was fine, I guess. Bushwhacking stinks, but you get through it. And a high tolerance for suffering is definitely the most important trait for a canyoneer.

And then we came to a solid wall of poison ivy. Literally, there was no way to go down the canyon. You certainly weren't going to go back up a canyon. We'd already repelled over 150 foot cliffs or so. Other than to go through this poison ivy. And I was wearing tights and long-sleeved shirt and gloves and as much protective gear as I had. We had not taken wetsuits on this canyon because it wasn't that cold. But no choice but to go through the poison ivy. And thankfully, I think I was able to do it without getting any contact dermatitis. But that's a classic canyoneering challenge.

Some other challenges we ran into, besides just figuring out how to make your anchors follow you down the canyon, sometimes there's challenging climbing that you have to do in a canyon. And sometimes there are potholes. Where you're going down the canyon and all of a sudden you find yourself a mouse in a bucket. It's literally uphill to go any further down the canyon. And I was in one canyon, found myself in a pothole with the edge was four or five or six or eight feet above me. I couldn't jump out of this pothole. And the challenge of climbing out of it is it was covered with about three inches thick of very slippery mud.

And so as I'm working my way up out of this pothole using my arm as a windshield wiper to push this three inches of mud out of the way and wash off the rock underneath so I could climb on that to get out of this pothole, I was left to reflect on the impact of what a weird sport this is that I do. It's just bizarre sometimes, but that's what it took to get out of that pothole.

On another section of the same canyon, I was the first member of the team down and found myself maybe thinking I could down climb something that maybe I couldn't, at least not with my pack on. But at that point, I'd kind of committed to it. I couldn't go back up, but I also was going to fall if I went any further. So meanwhile, I'm whimpering to the next person in line, “Hey, need a little help up here.” And he came and saved me, pulled me back up on the ledge, took my pack off and was able to down climb it with my pack off without a problem.

But it reflects on the need for teamwork. And we do have teams. We know this from our medical lives. We work with teams and in our families, we work together as a team. Well, you got to do that sometimes with your investing and your financial life as well to rely on other people that can help you. Sometimes when you get yourself in a little more trouble than maybe you should have, and that happens from time to time.

Canyoneering is a lot of fun, something I enjoy. I'm sure there are things out there that you enjoy. I got an email this morning from somebody who pointed out just how busy my life is. And they were right. This was in response to a blog post we had recently.

And this listener or this reader wrote in and said, “Hi, Jim, your life is full. You're on two hockey teams, games and practices. You coach two hockey teams.” I’m actually coaching four right now. “You do four to five international trips a year. That's one every other month. You spend two weeks canyoneering. You still do six day shifts in the ER. You have two jobs at church. You're still raising kids and they must have activities too. You're the WCI founder and that takes a lot of time. Podcasts, monthly meetings, books, webinars. Your wife has two jobs. My head is spinning just thinking about it.”

And that is true. I have a hard time saying no, between organizing trips and going and doing fun things and making a contribution to the world around me. But I was left to reflect on some good advice that I heard in a church talk once. It was called good, better and best. And the idea was there's lots of good things in our lives. Sometimes we have to drop the good things in order to do the better things. Sometimes we have to drop the better things in order to do the best things.

So, as you engage in activities in your life, both things that are fun for you and things that help build you physically and spiritually and mentally and contributions you're making to the world around you, try to rank things. Rank them good, better and best. And don't be afraid to sacrifice the good things or even the better things in order to have time and energy and enthusiasm and expertise to do the best things.

Our champions program is up and running. You can apply for that at whitecoatinvestor.com/champion. But there's something new this year which we're super excited about. And we're excited to launch, well, two new things really. One is a new book. It's finally out. I've been working on this thing for a long time. It's called the White Coat Investor's Guide for Residence. It's now available. It's on sale at Amazon. It's in the White Coat Investor store which is the best place to go if you want to buy bulk copies, by the way.

But perhaps more importantly, like the student book, I primarily wrote this book to give it away. We want to give it away for free to as many PGY1s as possible through our Resident Champion Program. Similar to our Student Champion Program where we'll give away the books to everybody in your first year medical and dental class. In the Resident Champion Program, we'll give the book away to everybody in your first year resident or fellowship class.

The financial habits and education built during residency determine how well professionals handle the most important financial transition of their career, the jump to an attending paycheck. The right information at the right moment can be worth literally millions of dollars. And we are on a mission to make sure residents have this information and we want you to help.

So here's what you can do. If you're willing to be a champion, so somebody in that first year of the program, whitecoatinvestor.com/residentchampion gets you to the signup for that. whitecoatinvestor.com/champion is for the student program. whitecoatinvestor.com/residentchampion is for the resident program. Literally all you have to do to be the champion is pass out the books. How hard is that. You can do it to the next grand rounds. All we need is your address and we make sure you're actually in the program and how many residents are in the program and then we send you the books. That's literally all the champion program is.

So thanks so much for being willing to do that. It's just too much of a pain to send them out one at a time. Too expensive to ship them one at a time. So we need to ship them in bulk and then you pass them out. So if you want to save your fellow residents literally millions of dollars in their lives, volunteer to be a champion, whitecoatinvestor.com/residentchampion.

 

INTERVIEW

Dr. Jim Dahle:
Okay, we have a wonderful, wonderful interview today. Somebody who has done everything right, which is always fun to hear, but not necessarily at the end of his career yet. We've had a few decamillionaires on this show this year. That's not what we're talking about today. Just somebody that knocked it out of the park coming out of training. So, let's get him on the line and chat about it.

Our guest today on the Milestones to Millionaire podcast is Will. Will, welcome to the podcast.

Will:
Thank you. It's great to be here. A pleasure.

Dr. Jim Dahle:
Tell us a little bit about you, what part of the country you're in, how far you are out of your training, what you do for a living.

Will:
I am a podiatric surgeon. I am just over five years out of my training and I am in California.

Dr. Jim Dahle:
Very cool. And what have you accomplished recently?

Will:
A couple of weeks ago, I just paid off $415,000 in student loans.

Dr. Jim Dahle:
$415,000, that is a ton of money. How long did this take you to do?

Will:
Because I was in the loan deferment, I actually kind of was holding on to a little bit of money, knowing when they came due, I'd start paying. So I actually paid it off in 36 months.

Dr. Jim Dahle:
36 months, starting after a couple of years, you got started, it sounds like.

Will:
Yeah, October of 23 is when I started.

Dr. Jim Dahle:
Okay. Give us a sense of what your income has ranged from over the last five years since you got out of training.

Will:
I'm in private practice and part of that time, I actually paid off, bought the practice that I took over as well. That was almost $200,000 in that also. And over that time, my income has been around probably $300,000 to $400,000.

Dr. Jim Dahle:
Okay, $300,000 to $400,000 a year. Basically after tax, you take at least a quarter of that off. This is a big chunk that went toward buying the practice and paying off your student loans.

Will:
Huge chunk, yeah.

Dr. Jim Dahle:
Did you invest any money along the way as well?

Will:
I did, yeah. I came across your podcast and really started kind of looking at my life and financial choices when I was in residency and decided to start paying into retirement. So I opened up a SEP IRA. I also work part-time for an Indian health job. And so I put into a 401(k) there as well. And my wife manages our office. And so, she's put in some retirement through our practice. So yeah, we've put some money into retirement and then threw everything I could at the loans.

Dr. Jim Dahle:
Very cool. Well done. And I bet as you hang out in the White Coat Investor community for much longer, I'll bet you end up swapping that SEP IRA for a solo 401(k) too for a few additional advantages there.

Okay, you had this issue that lots of new docs have. All kinds of great uses for money and not enough money to do them all and having to choose your priorities and find a balance between investing and buying your own practice and paying off your student loans. Tell us how you guys looked at that and decided to balance those priorities.

Will:
That was a difficult thing for me. I remember first sitting down a few years ago and actually calculated how much interest a month I was accruing. And it made me sick to my stomach. And I just thought, I need to throw everything I can at this. There's no reason in paying a million dollars for my education. And so, I had an opportunity to buy into a surgery center. And I just thought, this is going to be a better long-term investment to get out of debt with the student loans and then have the ability to throw other money wherever I need in the future.

Dr. Jim Dahle:
So it sounds like the first thing you did as far as investing available cash that you had was to increase your income. And this is a big deal for dentists too. A lot of dentists come out and their associates making $140,000 or $190,000 a year. And if they can own their own practice, they can double or triple that income. And so, sometimes it makes sense to figure out how to own the practice first and then focus on the student loans. It sounds like you did something similar with that surgery center.

Will:
Yeah, I did. And actually looking at the private practice versus other job opportunities that I had, that was the exact thought process that I went through. I had other job opportunities. And as I was interviewing, I was looking at the options of being an associate and salary jobs. And they were a fraction of what I anticipated I could make in a private practice.

I love your quote and your philosophy of “live like a resident.” And while I truly believed in that, I also looked at an investment in purchasing a private practice would be better in the long-term. Because one time I actually calculated it and I figured to become a partner at an associate practice, I was going to probably make the practice a million dollars over several years and then have to buy in after that. And I said, why can't I do this on my own? Why don't I just take all of that and make it for myself and invest in myself?

During my third year of residency, I figured out how to calculate the purchase of a practice and go through the acquisition process and talked with my wife. And we decided to take that step. And it was a big leap, but I feel like it was a great blessing and it paid off in the long run to invest in ourselves.

Dr. Jim Dahle:
Yeah. You guys have acquired quite a bit of wealth. The swing in your net worth is, I don't know, might be close to a million dollars over the last five years. But give us a sense of what your lifestyle looked like to do this. What you actually spent on yourselves over the last five years, not counting taxes, not counting money going into the practice, not counting paying off the student loans. What do you actually live on?

Will:
Not a lot. Decent amount. We definitely live comfortably. A couple of years ago, we did purchase a house and that was a big spend and we put 20% down. It was about $160,000 that we put down to purchase our home so they wouldn't have PMI and stuff. But really, we tried to live comfortably but not well beyond our means. We have three kids and most of our time is taken up with sports and their events and stuff. And so, I would say really overall of our actual income living off of a quarter of probably what we were bringing in.

Dr. Jim Dahle:
Yeah, it wouldn't surprise me. We're talking $75,000 or $100,000. Essentially, you'd lived like a resident and used all your other income to do these wealth building activities, to pay off student loans, to buy a practice, save up or down payment on your house. Well done. You did the program. It worked. You've been doing this for five years. Now, you have the practice. You have the doctor house. You paid off the student loans. Now, what does life look like going forward?

Will:
Now, it's throwing money at my wife's loans. She has a master's degree. My goal, my next step is to throw money at her. She's got about $75,000 for her master's degree. So, my goal is to throw money at that and within the next 12 months be completely out of debt minus the mortgage for our house.

Dr. Jim Dahle:
What about the practice and surgery center? Are you carrying any debt for that still?

Will:
No. The practice is completely paid off and then the surgery center can be purchased in at any time. So, I think I'm going to continue to wait and throw money at the debt, the loans before I go into the surgery center.

Dr. Jim Dahle:
Very cool. Okay. So, somewhere out there, somebody else is trying to do what you just accomplished or they're thinking about doing what you just accomplished. What advice do you have for them? Go back five years. Give yourself advice. What you'd like to hear from somebody five years down the road.

Will:
Invest in yourself. Look at your opportunities and see if you are building somebody else's wealth or if you have an opportunity to sacrifice, live like a resident, live below your means and have delayed gratification. I think that's the biggest thing. We go through a long training process and we look at what people we think have wealth of what they portray on the outside. And as you've spoken vastly about most doctors don't have that. There's high-income earners that put on this persona that they have much more wealth than they probably do. And so, I would say the biggest thing is delayed gratification and invest in yourself.

Dr. Jim Dahle:
Very cool. Classic lesson from a classic book, The Millionaire Next Door that you can be a millionaire, you can look like a millionaire, but they're not the same thing. Very cool. Well, congratulations to you, Will, and thanks so much for being willing to come on the podcast and share your experience with others and inspire them to do the same.

Will:
Thank you. I appreciate all you do and this wonderful community and just wish everyone the best of luck.

Dr. Jim Dahle:
Okay, I hope that was helpful. It was a great demonstration of what you can do by living like a resident. Maybe increase your spending a little bit. That's okay. But the point is the majority of your net income for a few years after you come out of training is going toward things that build wealth. Paying off student loans, buying into a practice or surgery center, saving up a down payment for your home, investing for retirement, these things that build wealth. The majority of your income the first few years out of training, and then you can slowly grow into most of your income. You can never grow into all of it, obviously. And that jumpstart in your finances gives you options at mid-career. Options you're going to want.

I promise people want these options, the ability to reduce call or change jobs or go part-time or go on the parent track or maybe even punch out of medicine altogether, whatever. You're going to want options. And the way you get those options is by living like a resident for a few years. Just a few years. The idea is not live like a resident your whole career. You get to decide when this period ends. Maybe for you, it's only six months. Maybe it's two years. Maybe it's four years, whatever. You get to decide.

15 years isn't the right answer. You shouldn't be living like a resident for 12 years. You should be financially independent before then if you're doing that. But the point is to use a few years to really boost your savings, to really get ahead financially and then enjoy the fruits of your labors the whole rest of your career and throughout your retirement.

 

FINANCIAL BOOT CAMP: FIXED VS VARIABLE RATE LOANS

Dr. Jim Dahle:
Let's talk for a minute about two different types of loans. Fixed versus variable interest rate loans. What's a fixed rate loan? It's just where the interest rate stays the same for the entire life of the loan. So, the monthly principal and interest payment remains predictable. Same payment, month after month after month for however long the loan term is, whether it's three years or 30 years. Same, same, same, same, same.

It's a nice benefit. Essentially, you're paying for the lender to run interest rate risk because as interest rates change, that's either more beneficial or less beneficial to the lender, but it's all the same to you. So you're basically protected from interest rate risk.

On the other hand, a variable rate loan is where you take on the interest rate risk. The interest rate on this loan can change over time. If interest rates go up in general, your interest rate goes up and your payments become larger. You still pay it off in the same length of time, but you might be paying more interest every month.

On the other hand, if interest rates go down, more of your payment, the payment is probably the same with most of these loans, but more of your payment is going toward principal. And so, you actually pay the loan off faster.

And this is a difficult decision for a lot of people. They start going, “Well, should I take a variable later? Should I take a fixed rate?” Well, the truth is a variable rate usually has a lower rate, at least initially. Because you're taking on more risk. You should get a lower rate. There should be a benefit to you for taking on that interest rate risk so the lender doesn't have to.

And so, you're accepting the possibility that rates will go up while you still have this loan, but if they don't go up, which they often don't, or better yet, if they go down, you actually come out ahead with a variable rate loan. So, it's a bit of a trade-off. You're giving up certainty versus maybe a little bit lower cost on your borrowed money.

So, what do you have to really ask yourself? You have to ask yourself, “Can I afford the worst case scenario?” Because a lot of times this variable interest rate might have a cap. Maybe you're starting out with a loan of 3.5% and it can go up every year, up as much as 2%, but never goes higher than 10%.

Well, can you afford those payments at 10%? And if you can, then maybe it makes sense for you to take a variable rate loan. If you can't, that would be devastating to your financial situation or keep you from accomplishing your financial goals or would just irritate you a lot, then pay the lender to take that risk and take a fixed interest rate loan. Maybe instead of getting 3.5%, you get 4% or 4.5% or whatever.

And this is the same, whether we're talking about student loans, whether we're talking about mortgages, right, whether we're talking about car loans, there can be fixed and variable rate loans for all of these things.

So, people often use a fixed rate loan for long-term home ownership. Because interest rates are almost surely going to go up at some point while you own a home for 15 or 20 or 30 years. And so, a lot of people get a fixed rate mortgage because of that. It's also a relatively large payment in the financial life of most people. And the consequences of that rate going up are much higher than the consequences if your car loan went up a little bit in interest rates and you're going to have paid off in six months anyway, maybe it's not as big a deal compared to a mortgage that you might be making 25 years of payments at a higher interest rate.

And so, the longer term the loan's going to be, the bigger a piece of your financial life it's going to be. And if you really highly value that predictability, maybe a fixed rate loan makes a little bit more sense for you. It definitely makes sense if you have very tight monthly cashflow.

But a variable rate loan can make sense as well, especially if you don't expect to have it for very long. Like a lot of times people use ARM mortgage, an adjustable rate mortgage for buying their home. For example, if you knew you're only going to be in the home for five years, you might get a 5/1 ARM. What that means is that the rate will be fixed for five years, then it can change once a year, every year after that for 30 years.

Well, if you're only going to be there for five years, a 5/1 ARM is exactly the same as a fixed rate loan. I guess there's a risk you might stay there longer than five years and the interest rate might go up. But if you're pretty darn sure you're only there for five years, a 5/1 ARM might be a discount over a 30-year fixed mortgage. And so, that might be a good way to go. There are 3/1 ARMs and 1/1 ARMs and 7/1 ARMs. And so you can kind of sometimes pick that period and get a little bit of a discount off what a 30-year fixed mortgage might be.

Variable interest rates get a bad rap. And that's because every now and then, there's a period of time like 2022 when interest rates went up 4% in like six months. It is the greatest, largest, fastest rise in interest rates I think the US has ever had. And of course, bonds had a terrible year that year because the value of a bond goes down when interest rates go up.

But those who are borrowing money at variable rates, they didn't have a very good year either, just like those bondholders didn't. They did not enjoy 2022 at all. And in fact, a lot of people that had maybe borrowed a little too much money at variable rates got in trouble. A lot of real estate investments that had done this got in trouble and they had to call capital from their investors or they had to scramble to try to refinance into anything they could get that allowed the investment not to completely blow up.

So, variable interest rate loans get this reputation as being something to always avoid. Well, I don't think you have to always avoid them. You just need to pay attention to the worst case scenario. Can you handle the worst case scenario? And if you can't, well, maybe it's time to lock in that interest rate using fixed interest rate loan rather than a variable interest rate loan.

But on average, most of the time, you actually come out ahead with variable interest rate loans. And you'll see that in lots of spaces real estate investing is one of them. Sometimes business loans is one of them. A lot of times you can't get the money unless you accept the interest rate risk, unless you use a variable interest rate loan.

So, my point is you need to look beyond the initial rate. You need to understand how any adjustment caps work, what the rate ceilings might be, what the worst case scenario is going to be, and evaluate the real cost and your ability to run that interest rate risk.

Don't take on debt you don't understand. Don't take on interest rate risk that you don't understand or can't handle. Make sure you match the loan structure when you do have to borrow money to your financial plan, your timeline, and your risk tolerance rather than just trying to guess future interest rate risk.

Trying to predict interest rate changes is about as difficult as trying to predict the movements of the stock market. It's not a game you should try to play. If you have a crystal ball that works well enough for you to do that, you should be a gazillionaire managing other people's money rather than just trying to figure out what to do with your loans. I hope that's helpful as you decide whether to use fixed interest rate or variable interest rate loans.

 

SPONSOR

Dr. Jim Dahle:
Earlier, we mentioned working locums with CompHealth, the number one staffing agency. But CompHealth isn't just a locums agency. CompHealth staffs regular permanent positions across the nation as well. They also offer telehealth, medical missions, and more.

And that's what makes them unique. They can look at your situation and offer multiple solutions to build your career your way, the way you want it, and meet your financial goals. They know their stuff, especially when it comes time to negotiate contract, which they're willing to do for you.

So whatever career move you're looking for, visit whitecoatinvestor.com/comphealth and use the power of CompHealth to career your way.

Okay, that's it for this episode. We appreciate you. We're grateful for what you're doing. It's important work. Give yourself a pat on the back if you're on your way into work or on your way home from work. If nobody told you thank you, let me be the first. And tune in next time for the next episode of the Milestones to Millionaire podcast.

 

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

This is the White Coat Investor Podcast: Financial Bootcamp, your fast track to financial success.

Dr. Jim Dahle:
Irrevocable trusts can be useful both in estate planning and in asset protection. Irrevocable means when you put assets in it, when you gift assets to the trust or sell assets to the trust, you can't take them back out. That's different from a revocable or a living trust, where you can take assets in and out anytime you like.

The main purpose of a revocable trust is just to avoid probate, which can be expensive, which can be time-consuming, which is a public process, often worth avoiding by using a revocable trust. But you don't need an irrevocable trust to avoid probate.

Irrevocable trusts are generally used to reduce your estate taxes or for asset protection purposes. Because it's no longer your money, you can't take it back. It belongs to the trust. It's outside your estate, and so you will no longer owe estate taxes on the value of that asset when you die, nor any earnings it makes or any increase in value it has from the time you put it in the irrevocable trust until your death.

So that's why people use it to reduce estate taxes. They have something that's appreciating rapidly or that produces a lot of income. They want it outside their estate, and they figure they're probably not even going to need to spend it during their lifetime. So they put it in an irrevocable trust. They figure it's going to a charity or their heirs or whatever when they die, and so they get it out of their estate, put it in the irrevocable trust, and then any increase in its value over time does not go against their exemptions for estate tax purposes when they die.

The other benefit of having something owned by a trust and not by you is if you get sued, they can't take the stuff that's in the trust. Now, it can't be a fraudulent transfer. You can't wait until you hurt somebody or until they file suit against you and then move all your stuff into an irrevocable trust. It doesn't work that way. That's a fraudulent transfer. You have to do it in advance.

But the truth is, once it's been in there a certain amount of time in a given state, your creditors cannot get it back out of that trust. It doesn't belong to you. You could declare bankruptcy. It doesn't affect that trust whatsoever. And so those are the main reasons that a physician or other high-income professional or a high-net-worth person would consider an irrevocable trust: estate planning purposes and asset protection purposes.

Obviously, it also helps make sure your things go to where you want them to go in a non-public, rapid way after death. It's not going through probate, so there are these estate planning benefits associated with it. But for the most part, it's a tax play. It's an asset protection play.

So, what do you give up when you put assets into an irrevocable trust? You give up some control unless you're one of the trustees of that trust, and you certainly give up the ability to bring it back out of the trust and use it for your own benefit. Most irrevocable trusts, you can't be the trustee and the grantor, the person who funds the trust, and the beneficiary. That's just not the way they work. It doesn't provide any asset protection benefits if those three things are all the same person.

That is not the case in some states, though. Some states have decided we want people to be able to do that, and those are called domestic asset protection trusts, where you literally can be the beneficiary of the trust that you are the grantor for. And there's some uncertainty as to how well these work in a true above-policy-limits judgment asset protection situation, but it's probably better than nothing.

It probably does help protect your assets in at least some situations, especially if it's been in there for a long time and if you followed all the regulations of your state, and if the lawsuit's in your state, and you're still in the state, and the assets are in your state, then it's probably going to work. Just recognize there's some uncertainty there. There are other ways that people try to get around this issue.

They want the asset protection benefits. They want the estate tax benefits of having money in an irrevocable trust, but they kind of still want to use some of the money, or at least want the option to use some of the money if they have to.

One of the things that people have come up with in this sort of a situation is a type of intentionally defective grantor trust, an IDGT, they're often called, and one type of those is a SLAT. The SLAT stands for a spousal lifetime access trust. So it's very interesting. The grantor is one spouse. The beneficiary is the other spouse. So they're not the same person. So that's fine, right? So it gives you some estate tax benefits. It gives you some asset protection, etc. But assuming you're on pretty good terms with your spouse, they're going to share those benefits from the trust with you.

So some people set up just one of these, with just one spouse being the beneficiary. Some people set up two different trusts, one where each spouse is the grantor and the other spouse is the beneficiary. Recognize that those trusts can't be exactly the same. It's probably best if their terms are slightly different and they're started at slightly different times, or they might be outlawed in an asset protection kind of situation.

Another type of irrevocable trust that's worth knowing about is a charitable trust. There's basically four main types of these. There are lead trusts and remainder trusts, and in each of those types, there are unitrusts and there are annuity trusts.

A lead trust means the charity. These are all split-interest gifts between the charity and somebody else. Somebody else might be you or one of your heirs. But in a lead trust, the charity gets the money and then pays some type of a benefit to a beneficiary for a certain number of years or until they die. With the remainder trust, the trust pays the beneficiary some amount each year until they die, or for five or 10 or 20 years, and then the charity gets whatever's left. So the lead or the remainder refers to the charity.

With a unitrust, it's more about what the trust is earning as it goes along and how much is paid out. On an annuity trust, that amount is somewhat fixed. And so for some people, for estate planning purposes, it can make a lot of sense to use something like a charitable remainder unitrust.

Particularly if they're selling a business and they'd have to pay a lot of taxes on the sale of that business, they might move it into a charitable remainder unitrust and then have it pay them an income for 20 years, if they want it to, and then the remainder goes to charity. It doesn't make sense to set these things up unless you have some charitable intentions anyway. But if you do, there are some significant tax benefits available for using those types of trusts.

Now, one thing to be aware of is you have to follow the rules with these trusts. If you are the trustee, you've got to do the things that you're required to do as a trustee. If you're going to hire a professional trustee, you've got to pay for that. You might have to pay somebody to manage the assets inside the trust, and so they can be expensive, and there's certainly some significant hassle associated with having two entities. It's not just you. It's you and a trust, maybe multiple trusts.

And so you need to ask yourself: Is this complexity worth it? Are the benefits I'm getting for this worth it to me in order to reduce my estate tax or to have some asset protection in the very unlikely situation that I'm the recipient of an above-policy-limits judgment? And for a lot of people, the answer is going to be no, that it isn't worth it. But if it is, make sure you understand how it works. Try to minimize those costs and that hassle, and go ahead and move forward. Hope that helps you understand what irrevocable trusts can be used for.

 

DISCLAIMER

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.