Medical Practice as a Portfolio Asset Class?

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Valuing the Quintessential Alternative Investment

By Dr. David Edward Marcinko MBA CMP™

[Editor-in-Chief] www.CertifiedMedicalPlanner.org

Dr. MarcinkoAs all FAs, and informed physician investors know, the investment industry and Modern Portfolio Theory [MPT] strives to make optimal ‘allocations’ into different ‘asset classes’; according to some defined risk tolerance level or efficient frontier.

Equities, fixed income, property, private equity, emerging markets and so, are all ‘asset classes’, into which physician investors and mutual fund or portfolio managers will make an allocation of their total funds under management. It is quite proper for them to do this as they seek to balance the risk and potential returns for their own; ME, Inc., or other clients’ money.

But, by creating a “new” asset class, this concept opens the door to significant capital flows; advisory and management fees. Hence; the unrelenting innovation of Wall Street, and its’ commission driven and fee-seeking mavens, is unending.

Making an Impact

This secular and non-secular concept is broadly known as “impact investing”; and may be illustrated using Social Security as an example.

So, Wall Street opines,  if you’re not counting on Social Security benefits as a part of an overall asset allocation strategy, you may be missing out on bigger gains in a retirement portfolio. Those of this ilk say that retirement investors should consider the value of their Social Security as a portion of their fixed-income investments. Others believe it may be too risky for some.

The Strategy

Generally, adopting such strategy would mean shifting a big portion of investible assets out of bonds and into stocks. And, into the hands of money managers, stock brokers, wealth and endowment fund for a fee; of course. This is akin to those financial advisors who rightly or wrongly goaded clients a decade ago, to not pay off a home mortgage and instead reposition the free cash flow into a rising; and then falling; market.

Of course, there are detractors, as well as proponents, of this emerging financial planning philosophy.

Vanguard Group

Jack Bogle, founder of the Vanguard Group, often cites his penchant for basing one’s asset allocation on age. (If you’re 40 years old, you have 40% of your investments in fixed income and 60% in equities. By the time you’re 60, you’ve got 60% in fixed income, 40% in equities).

Example:

So, let’s consider Social Security, citing a physician with $300,000 in an investment portfolio, and capitalizing the stream of future payments.

If the $300,000 is all in equity funds, even equity-index funds, and $300,000 in Social Security, you are already at 50/50″ fixed income versus equities.  The next step is a conversation as a DIYer or ME Inc physician investor or advisory client. This is the nexus of where Social Security meets risk management.

Now, how will the doctor feel when market goes up and down? Some may believe the concept, but not enjoy the inevitable more fluctuating self-directed 401-k, or 403-b plan. So, one must be comfortable with taking on a larger stock position.

Source: Andrea Coombes; MarketWatch, September, 2013.

http://money.msn.com/mutual-fund/social-security-as-part-of-your-portfolio

MD

The Negative

Others experts, like Paul Merriman, opine that Social Security is not an asset class and the idea is fundamentally flawed and should not be a part of anyone’s portfolio.

Why? As classically defined, a portfolio is composed of financial assets. A financial asset is something that can be sold. Social Security cannot be bought and sold. Because of that, it has a market value of zero.

Source: Paul Merriman, MarketWatch, November 2013

Assessment

Therefore, the definitional decision is left up to the informed reader, modern physician or enlightened advisor. Is a medical practice an asset class?

MORE: About iMBA Inc Expertise in Healthcare Valuation

MORE: Social Security as an Asset Class?

Conclusion

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FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

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On Doctors Investing in Commercial Real Estate

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Want a good way to build wealth? Own commercial real estate -OR-not!

By Rick Kahler CFP® http://www.KahlerFinancial.com

Rick Kahler CFPReal estate is one of the largest asset classes in the world. The family home is the largest asset many middle-class Americans own. And real estate makes up a significant portion of the net worth of many wealth accumulators.

Direct Ownership

Directly owning real estate is not an investment for the faint of heart, the armchair investor, or the uneducated. Most wealth accumulators would do well to leave direct ownership of real estate to the pros and invest in real estate investment trusts (REITs) instead.

Some Guidelines

Still, the lure of investing in a tangible asset like real estate is enticing for high risk tolerant investors who need a sense of control and interaction with their investments. If you are among them, here are a few guidelines that may keep you on a profitable path.

1. Don’t attempt to purchase investment real estate without the help of a commercial real estate specialist who is a fiduciary bound to look out for your best interest. Engage a Certified Commercial Investment Member (CCIM) with years of training and experience in analyzing and acquiring investment real estate. To find a CCIM near you, go to http://www.ccim.com.

2. You will sign a disclosure agreement that will tell you who the Realtor represents. Be sure the Realtor you engage represents you and not the seller, both parties, or neither party.

3. Never trust the income and expense data provided by the seller’s Realtor. While a seller represented by a CCIM will have a greater chance of supplying you with accurate data, most will significantly understate expenses and overstate the capitalization rate. Selling Realtors often understate the average annual cost of repairs and maintenance. I estimate this annual expense at 10%.

4. Another often understated expense is management. Many owners manage their own properties, so the selling broker doesn’t include an estimate for management expenses. They should. Real estate doesn’t manage itself, ever. You will either need to hire professional management or do your own management (always a scary proposition). Even if you do it yourself, you have an opportunity cost of your time, so you must include a management fee in the expenses. Most small residential apartments and single-family homes will pay 10% of their rents to a manager.

5. You must verify all the costs presented to you by the seller’s Realtor. Demand copies of at least the last three and preferably five years of tax returns. Research utilities, property taxes, legal fees, insurance costs, repairs, maintenance costs, replacement reserves, tax preparation, and management fees. As a rule of thumb, expenses will average 40% of rental income on average-aged properties where the tenants pay all utilities except water. Newer properties may have expenses as low as 35%, while older properties can be as high as 50%.

6. By subtracting the vacancy rate and stabilized expenses from the rent, you will find the net operating income. This is the income you will put in your pocket—assuming the property is paid for. By dividing the net operating income by the purchase price, you will find the return you will receive on your investment, called the capitalization or “cap” rate. In Rapid City, for example, the cap rate tends to be 4% for single-family homes, 5% to 8% for duplexes to eight-plexes, and 8% to 12% for larger residential and commercial properties.

Home for Sale

Assessment

Yes, Physician-investors and all of us can build wealth with real estate. You just need to educate yourself, work hard, start conservatively, think long-term, and be prepared for lean years. This is not a quick or easy path to riches.

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Conclusion

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Financial Freedom through Commercial Real Estate Education and Investing

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A Viable Alternate Investment Class for Physicians?

By Dennis Bethel MD  www.nesteggrx.com

dennis-bethelI’ve worked as an Emergency Medicine Physician for over a decade now.  Most of that time, I’ve also been investing in real estate.  Real estate has been good to me and I’ve been asked to share my story with this ME-P, and Physician Nexus community.

Why I’m Joining the Physician Nexus Medical Advisory Board

Dr. Marcinko, your own ME-P editor, is on the P-N advisory board.

RESIDENTIAL REAL ESTATE

Not long after graduating from residency in 2002, I began investing in real estate.  I watched my father-in-law make some money in residential real estate (1 – 4 units), read some books, and jumped in feet first.  I purchased and rented out single family homes, a triplex, and multiple four-plexes (quads).  What I didn’t realize at the time was that I made two critical errors.

My First Mistake

The first mistake was that I purchased residential real estate when I should have gone bigger and purchased commercial multifamily.  I had limited resources and I thought bigger properties were out of my reach.  At that time, I had not heard of fractional investing.

My Second Mistake

The second error, that is inherent to residential real estate, is that I became a landlord.  At times I managed properties and at other times I employed a property manager and limited myself to managing the manager.  Regardless, I was putting in a significant amount of time at my unintended second career as a landlord without the desired compensation.

Not Scaleable

Since there are no economies of scale with residential real estate the cash flow is small and unpredictable.  I was on the long, hard path to financial freedom.  The rents from my properties would someday replace my income as a physician, however, that wasn’t going to happen until I paid off the mortgages completely.  Until then it was going to be too inconsistent and I would have to ride several market cycles including the very painful down-turns.

THE MOVE TO COMMERCIAL REAL ESTATE

Unfortunately, chronic understaffing in the ER coupled with increased regulation and the rigors of shift-work had begun to catch up to me.  I was beginning to feel the effects of burnout.  I began to question whether I could make it 30 years.  I began to see earned-income as a trap in which you trade your valuable time for heavily-taxed income.

Then some devastating news, my wife tested positive for the BRCA (breast cancer) gene mutation.  That was a game changer.  I could no longer rest on my laurels, slowly burning out waiting for a comfortable retirement.  The future was uncertain, and I needed to ensure our wealth.  Come what may, I was determined that she would get the best health care money could buy.

I knew real estate was an incredible wealth building investment vehicle and my path to financial freedom.  In fact, 90% of the Forbes 400 (wealthiest people in the US) either made or retain their wealth in real estate.  While I was doing far better than my colleagues who invested in the stock market, I knew that I could do better.

My New Mission

I made it my mission to become an expert in real estate.  I read even more books as well as attended numerous conferences and seminars.  I invested heavily in my education, took advanced real estate investing classes, retained mentors, and developed networks.  I also grew my experience, buying and selling more properties.

I learned that although real estate won’t make you rich overnight, it needn’t take 30 years either.  I needed to transition out of residential real estate and go bigger into commercial multifamily.  I ultimately landed on multifamily, because shelter is a basic need.  People will give up their luxuries long before they give up the roof over their head.  The difference is that I now look for properties that are between 80 – 250 units.  These types of properties afford the investor true economies of scale that provide for predictable multisource income.  I invest in these properties fractionally, pooling my money with other like-minded investors.

MULTISOURCE INCOME

Real estate is the only investment I know of in which the investor makes his or her money in four different ways.

  • Cash Flow (monthly, quarterly, or yearly distributions of net profits)
  • Appreciation (increasing value of the property as net operating income increases)
  • Tax Benefits (can result in little to no taxes on income and gains)
  • Principal Pay Down (Increased equity as the loan gets paid down by the residents)

Multisource income is an incredible benefit of multifamily commercial real estate investing.  In fact, in all of my commercial properties, I have been able to obtain double-digit returns year after year.  Making money and compounding those gains is what investing is all about.

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real estate

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SAFETY PROFILE

While all investments have risk, the safety profile of multifamily commercial real estate is impressive.  Let’s compare it to business.  We’ve all heard that 9 out of every 10 businesses fail.  These failures are not just limited to small business.  Every year, many big businesses fail as well.  Names like Circuit City, Hostess, Borders, and Mervyns just to name a few.  Many other, well known, national brands teeter on the brink of insolvency.

In contrast, the commercial multifamily properties I invest in meet current Fannie Mae underwriting standards.  Nationally these properties have a paltry 1% – 2% foreclosure rate.  That rate is even lower in the best markets.  In the hands of a quality syndicator, in thriving markets, utilizing proven property management these properties are FAR safer than stocks for capital preservation, equity growth, and current income.

Additional safety measures include the use of non-recourse lending, the ability to insure against loss, and the use of sole purpose entity structures to eliminate any liability risk.

The “Conversation”

Switching from residential real estate to commercial has enabled me to provide for my family and has allowed me to work only part-time in the emergency department.  A few years ago, I walked into the physician lounge and overheard a conversation between two colleagues.  Both around 20 years my senior, were lamenting their inability to retire.  They had each invested heavily in the stock market without any diversification into real estate.  They bemoaned the fact that they had each worked 25 – 30 years in medicine and were nowhere close to retirement.  They wondered how I could afford to work so many fewer shifts than them with two young boys to raise.

An Eye-Opener

This interaction was eye-opening.  I was grateful for the decisions I had made but saddened by the fate of my 60 year old colleagues.  I’ve watched far too many of them push back retirement as the stock market and economic cycles ruined their plans.

Assessment

I knew I could help.  I have recently started an educational website intended to demystify the subject of real estate investing.  My mission is to help physicians and other health care workers find financial freedom through real estate investing and education.

We also provide quality real estate investments for busy professionals looking to diversify a portion of their portfolio out of the stock market and into commercial multifamily real estate without having to become a landlord.  We do this by helping like-minded professionals pool their resources together to buy quality multimillion dollar assets as fractional investors.

I invite you to visit my website at www.nesteggrx.com and explore the content to learn more about real estate and see if it might be right for you.

NOTE: This ME-P is NOT a personal or professional endorsement.

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Physician’s Acquiring Real-Estate

Conclusion

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What to do with a $25,000 Windfall?

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What Do … You Do?

Doctor – Suddenly you receive a check for a large sum of money?

This infographic has some suggestions on what to do with that extra cash that will have a positive effect on your finances in the long-run.

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mint-windfall-25kkf-copy

Assessment

Now, suppose the windfall was $250,000 or $2,500,000 or even more! What to do?

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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A Value Investing Metaphor for Doctors

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Via a Cats and Dogs Allegory

By Rick MS CFP® ChFC CCIM www.KahlerFinancial.com

Rick Kahler CFP“I’d really like a Maine Coon cat, but they cost around $800. I’m not going to pay that much for a cat.”

The man who said this paid $500 for his purebred Lab. Obviously, he’s willing to spend money on things he enjoys, like hunting dogs. Yet when it comes to paying cold hard cash for a cat, he draws the line.

So, apparently, do a lot of other people. I have quite a few clients who are happy to spend hundreds of dollars for a particular breed of dog. I don’t know of a single client who has ever spent that much for a particular breed of cat.

Utility

Except my wife. Marcia has just begun breeding and selling Balinese cats, worth $1,000 each. She asked me why people are so much more willing to write checks for purebred dogs than they are for cats.

She didn’t buy my argument that dogs are inherently more intelligent, friendly, and worthwhile than cats.

If that isn’t the explanation, what is? Maybe it’s because the basic reason people buy purebred dogs or cats is to get specific looks and personality traits. Most dog breeds are quite distinct; anyone can tell a Great Dane from a Bichon Frise. Yet the only cat many people even recognize as a separate breed is probably the Siamese.

Maybe dogs are seen as more useful. I don’t know of any hunting cats, Seeing Eye cats, or watch cats. Still, that doesn’t explain all those Chihuahuas and tiny terriers that sell for hundreds of bucks a pound.

Value?

The point here is that whether a given commodity is seen as valuable depends on a variety of factors. Utility is one. In early Deadwood, Dakota Territory, an enterprising freighter brought in a load of cats and sold them at a premium to pioneers desperate for mouse and rat control. In that case, cats were more valuable than dogs.

Supply and Demand Economics

Supply and demand is another factor. A house that’s worth $150,000 in Box Elder, South Dakota, might be worth $600,000 in San Francisco, where unarguably more people would like to live. When there’s an over-abundance of cheap goods in the form of unwanted kittens flooding the market, people may be less likely to pay real cash for even purebred cats.

Commodity

Another reason people value one commodity over another is that they have been persuaded to see it as worth more. In Biblical times, frankincense and myrrh were highly prized and worth their weight in gold. Today, one pound of frankincense and myrrh goes for $13.95 on Amazon, while one pound of gold sells for around $24,000.

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gold bars

Gold

Fifteen times more gold is mined each year than platinum, the rarest of all precious metals, yet gold sells for more per ounce. Why? Gold has a long history of being perceived as the world’s most precious metal.

Designer Clothes

For much the same reason, people will pay a hundred bucks or more for a pair of designer blue jeans when they could get essentially the same thing for $19.99 at a discount store. The brand name jeans are seen as more valuable.

Marketing and Perceived Value

The simple reason for this is marketing.

When it comes to perceived value, dogs have benefitted from better marketing than cats. Just think of heroic military dogs, hard-working Seeing Eye dogs, and screen stars like Lassie rescuing people from burning buildings. Even the Taco Bell Chihuahua gets to advertise fast food. Cats get to advertise kitty litter and cat food.

Assessment

Cats just need to find a better advertising agency. They have some work to do if they want to come up with a slogan to top “Man’s Best Friend.”

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Hospitals: http://www.crcpress.com/product/isbn/9781439879900

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For Doctors Considering Rental House Investments?

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Risks versus Rewards

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Landlord!

The very word implies wealth, authority, and status. Maybe that’s one of the reasons there are so many books and seminars claiming to teach you how to build wealth by owning rental property.

Yes, medical professionals can get rich as a landlord. Doctors can go broke, too.

And, in between those two extremes, you can find yourself dealing with a bunch of problems like leaking roofs, non-paying tenants, and economic downturns. The risks of building wealth with real estate are substantial. This is true whether you want to become the biggest property owner in town or just buy a second home as a rental to help finance your retirement.

Points of Consideration

With real estate prices still low after the collapse of the housing bubble, and with the current low interest rates, it may be a great time to buy a second home. Before even considering such a purchase, though, here are some important points to consider:

1. Do you plan to eventually live in the house yourself? If so, buying it now and having a tenant pay the mortgage for you might be a great move. Still, you need to take the following factors into consideration and make your decision carefully.

2. Will you need current income from the property? Then you’ll need to be able to buy it without a mortgage. Otherwise, the mortgage and other expenses will eat up most of the rent payments, and you won’t have any cash flow.

3. Do you have the time and skills to manage the property yourself? Water heaters quit, pipes need replaced, and furnaces go on the blink. Will you be able to do your own maintenance or spend the money to hire it done? Are you available to check out prospective tenants and show the property? A management company can relieve you of the hassles of arranging for repairs and vetting tenants. You’ll still pay the bills, though, plus fees of perhaps ten percent of the rent.

4. Be realistic to the point of pessimism about your expected return. Assume that expenses—repairs, maintenance, taxes, and insurance—will be about 50% of the gross rental income. Always figure the income based on a property being vacant for several months of the year.

5. Be aware that a more expensive house won’t necessarily provide a corresponding increase in rent. The rental market eventually tops out. If a $150,000 house rents for $800 a month, a $350,000 house may only rent for about $1400.

6. If your main reason for owning real estate is investment income, and you have a small amount of money or don’t want the risk and management headaches of owning a house, a real estate investment trust (REIT) is often a wiser choice than owning real estate directly.

7. Be patient. If you over-buy income property and try to get rich quick, you risk losing it all. At one-time, Rapid City lost a number of military jobs and rental properties were sitting vacant. As I scrambled to make mortgage payments, it felt as if I didn’t own my rental houses, they owned me. Right now I have interests in companies that own paid-for rental property, but getting to that point took over 30 years.

Assessment

The IRS classifies some income from rental property as “passive.” Trust me, there’s nothing passive about being a landlord. Owning rental property can certainly be one way to add to your net worth and contribute to a comfortable retirement. Just like any other form of wealth-building, however, it requires education, good decision-making, an awareness of the risks, and plenty of effort.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Health Dictionary Series: http://www.springerpub.com/Search/marcinko

Practice Management: http://www.springerpub.com/product/9780826105752

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Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Hospitals: http://www.crcpress.com/product/isbn/9781439879900

Physician Advisors: www.CertifiedMedicalPlanner.org

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Wind Energy Alternate Investments

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Calm or Gusty?

By Children’s Home Society of Florida Foundation

The Energy Department released the “2011 Wind Technologies Market Report” this week. It noted that there was substantial growth for wind energy, but significant uncertainty about its future.

Federal Aviation Administration

In a parallel development this week, the Federal Aviation Administration issued tentative approval of Cape Wind, a planned wind farm off the shore of Cape Cod and Nantucket Island. The 130 wind turbines of Cape Wind will stand 440 feet tall. The wind farm is opposed by the Alliance to Protect Nantucket Sound.

However, the FAA approved the wind farm and noted that the towers would be required to include appropriate lights and be painted in colors that made them more visible to aircrafts. With the FAA approval, the Cape Wind developers may now seek final financing and could receive a 25 year lease from the federal government.

2011 Growth

The energy report on wind technology showed significant growth in 2011. Approximately 6.8 GW (gigawatts) of new wind energy capacity were added in the United States.

Of all the new energy facilities created, wind represented 32% of the total in 2011. However, total wind capacity is now just 3.3% of America’s electricity demand. Cape Wind will be the first major offshore U.S. wind project.

China Rising

The world leader in wind energy is China. The U.S. is now in second place with about 20% of global wind capacity. The states with major commitments to wind energy are Texas, California, Iowa, Minnesota, North Dakota and South Dakota.

Assessment

The major concern affecting wind energy in 2013 is the potential loss of federal and state wind tax benefits.

In addition, wind faces substantial competition from natural gas. With the development of “fracking,” natural gas production has substantially increased. With a large new supply of natural gas, there are now sufficient reserves to support the U.S. needs for 100 years. This increased supply reduces the cost of natural gas and makes it more attractive than wind energy.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

Our Other Print Books and Related Information Sources:

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Practice Management: http://www.springerpub.com/product/9780826105752

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Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Hospitals: http://www.crcpress.com/product/isbn/9781439879900

Physician Advisors: www.CertifiedMedicalPlanner.org

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