Seeking Deeper Knowledge and Wisdom

Experts Invited … A Call for Professionally Generated Content

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Reducing Medicare Payment Denials and Reductions

Start with Diagnosis Coding Documentation Guidelines

By Patricia A Trites; MPA, CHBC, CPC, CHCC, CHCO, CMP™(Hon) 

[CEO: Healthcare Compliance Resources, Inc]

A 2003 audit of Medicare claims by the Office of the Inspector General (OIG) found that Medicare fee-for-service payments that did not comply with all of the Medicare laws and regulation was $13.3 billion in fiscal years 2001 and 2002. 

Improper payments in 2002 occurred mostly in three areas: medically unnecessary services (57.1 percent), documentation deficiencies (28.6 percent) and miscoding (14.3 percent).

And so, how do you prevent or reduce denials or reduction of payment when claims are adjudicated as “not medically necessary”?  

Begin by following the diagnosis coding documentation guidelines, which are: 

  • Code to the ultimate specificity. There is a significant difference between 716.90, Arthritis, Type and Site Not Otherwise Specified, and 716.39, Menopausal Arthritis, Multiple Sites-Joints.
  • Use Additional Codes and Underlying Disease Codes. Many conditions require, by medical-record coding rules, that you use two ICD-9 codes and that these codes are put in the appropriate order. For example, 533.30 Peptic Ulcer-Acute and Without Obstruction, and 041.86, Due to Helicobacter Pylori Infection.
  • Use multiple codes to fully describe the encounter. This includes coding any additional co-morbidities and/or signs and symptoms that affect the patient’s current encounter.
  • Choose the appropriate principals diagnosis and properly sequence secondary codes. List first the ICD-9-CM code for the diagnosis, condition, problem, or other reason for encounter/visit shown in the medical record to be chiefly responsible for the services provided. Then list additional codes that describe any co-existing conditions or symptoms.
  • Avoid using .8 and .9 “catch-all” codes. In the ICD-9 system, descriptions and digits are provided for times when a physician lack information about a patient’s exact condition or diagnosis. The codes commonly end in .8 or .9 and are commonly referred to as catch-all codes. Under Medicare coding guidelines, these codes should be used only when the specific information required to code correctly is unknown or unattainable. 

Do you use a professional coder in your healthcare entity; or do you do-it-yourself?

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Appraising a Medical Practice

Types and Levels of Medical Practice Appraisal Services 

By Dr. David Edward Marcinko; MBA

Staff Writers

Medical office valuation is as much art as managerial accounting science. And, most physicians are unaware that – much like CPT® codes and office visits – there are several levels of acuity which may be obtained for various reasons.

Although not standardized, the following are typical valuation engagement types for the industry.

Comprehensive Valuation 

An extensive service designed to provide physician-owners and/or potential purchasers with an unambiguous opinion range on the value of a medical practice, Ambulatory Surgery Center or healthcare entity. It is supported by all procedures that appraisers deem relevant to the engagement with onsite visit mandatory.  This valuation type is suitable for contentious situations like divorce, partnership dissolution, sale, etc.

The report includes a formal written Opinion of Value suitable for litigation support activities like depositions and trial. It is also useful for external reporting to bankers, investors, the public, etc.

An onsite visit is usually included. This valuation type generally adheres to appropriate USAP [Uniform Standards of Professional Appraisal Practice] guidelines

Limited Valuation

This type of engagement is the next step down in acuity from a comprehensive appraisal as it lacks the performance of additional procedures that are suggested in an USPAP appraisal.  This type of assignment can be considered an “agreed upon procedures” appraisal that should be used in circumstances where the client is the only user of the appraisal, or as an organic internal practice growth ingredient; but not for external reporting. 

An onsite visit is usually not needed for this US mail or fax delivered valuation. A formal Opinion of Value is not rendered.  

Informal Ad-Hoc Valuation 

This is the lowest level engagement where the appraiser is to provide a very gross and non-specific approximate indication of value based upon the performance of limited benchmark procedures of the firm.

No onsite visit is needed. Neither a written report nor an Opinion of Value is rendered.  May be a voice based consultation. 

Forensic Investigations  

These services are comprehensive, extra-ordinary, expensive and used for medical income and personal asset determinations and tracings; but not as an essential component of most medical practice valuation services. Often used in criminal investigations, and/or upon IRS, legal and/or FBI request. 

C.Y.A. 

This report is an opinion whether or not a medical practice valuation is required. It is ideal for the physician client or health law attorney who is unsure if a practice has value or as a way to “cover your assets.” 

Conclusion 

The above impressions and levels of service are subject to change depending on circumstances and the operating policies and procedures of the individual appraiser, or consulting firm. Nevertheless, they represent a cogent basis for further investigation. 

What have your medical practice appraisal and valuation experiences been like? 

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The Employed Physician Business Model

Employed Doctors Enjoy Several Compensation Options

By Dr. David Edward Marcinko; MBA, CMP™

biz-book1According to corporate medical recruiter Kris Barlow RN MBA, physicians can select from various employment models that may include fringe benefit packages (life, health, dental, disability insurance; medical society and hospital dues, journals, vacations, auto, and CEUs, etc.) equal to 25-40% of salary [personal communication]. 

And, this medical business model is fast growing as the various types below demonstrate. 

Independent Contractor or Employee 

A payer has the right to control or direct only the result of the work done by an independent contractor, and not the means or methods of accomplishing the result.

By contrast, anyone who performs services for another is an employee if he or she can control what will be done and how it will be done. Employed physicians are usually not compensated as independent contractors. 

New Practitioner Salaries: 

Published annually for new practitioners by The Health Care Group®, the Physician Starting Salary Survey collects and collates nationwide data on new physician employment compensation.

The guide reports first, second and third year of starting physicians’ salary and incentives, but with large high-low spreads. It also includes information about co-ownership provisions, benefits and restrictive covenants.

The survey is categorized by specialty and results are based on information provided by medical practices, health care advisors, physicians, and health care consultants across the country. The figures represent basic elements of the bid/ask process for establishing optimal salary and benefit amounts for new physicians entering private practice.

Available for no charge from the Health Care Group (800.473.0030 or www.HealthCareGroup.com) 

Public Equity Relationships 

The public equity roll-up model of medical partnerships in the late 1990s offered employed physicians experience within a large group whose decisions were made by managers.  Compensation was controlled and replaced with the stress of investor expectations, as Physician Practice Management Corporations (PPMCs) needed to grow revenues by 10-15% annually to maintain price-to-earnings ratios. If stock was held in a growing PPMC, physician employees shared in both practice and corporate compensation

But, by 2007, a survey of the Cain Brothers Physician Practice Management Corporation Index of public PPMCs, revealed a market capitalization loss of more than 95% since inception.

Newer Healthcare Delivery and Physician Compensation Models

Today, whether independent or employed, physicians can pursue several creative compensation models not available a decade ago:

MSO Contracting: 

According to consultant Jeffrey Peters, physicians maintain private practice in this model, but contract with a management services organization to relieve administrative burdens. Physicians maintain control with less stress, but, as MSO contracts are expensive (18-45% revenue), compensation diminishes, and rests on MSO competence.

Locum Tenens Practitioner:

Locum Tenens (LT) is an alternative to full-time employment for most specialties. Some younger physicians enjoy the travel, while mature physicians like to practice at their leisure.

Employment factors to consider include: firm reputation, malpractice insurance, credentialing, travel and relocation expenses (which are negotiable).  However, a LT firm typically will not cover taxes. 

Cash Based Compensation:  

A Cash Based Compensation (CBC) model attracts patients who pay cash for desirable services, such as surgeons who dispense scar reducers or in areas such as pain relief, weight loss, aesthetic procedures, and natural health.  

Any well-rounded CBC program should include: patient demand; low entry cost; little marketing costs; existing employees to administer the program; and an operational plan. With time and effort, profit for physician compensation may increase 10-20% annually.

Values Based Health Insurance Model:

According to some pundits,instead of the one size fits all approach of traditional health insurance, a “clinically-sensitive” cost-sharing system that supports co-payments related to evidence-based value for targeted patients seems plausible. 

In this model, out-of-pocket costs are based on price and a cost/quality tradeoff in clinical circumstances: low co-payments for interventions of highest value, and higher co-payments for interventions with little proven health benefit. Smarter benefit packages are designed to combine disease management with cost sharing to address spending growth.

Global Healthcare Model: 

American businesses are extending their cost-cutting initiatives to include offshore employee medical benefits, and facilities like the Bumrungrad Hospital in Bangkok, Thailand (cosmetic surgery), the Apollo Hospital in New Delhi, India (cardiac and orthopedic surgery) are premier examples for surgical care. Both are internationally recognized institutions that resemble five-star hotels equipped with the latest medical technology.  

Countries such as Finland, England and Canada are also catering to the English-speaking crowd, while dentistry is especially popular in Mexico and Costa Rica. Although this is still considered “medical tourism,” Mercer Health and Benefits was recently retained by three Fortune 500 companies interested in contracting with offshore hospitals and JCAHO has accredited 88 foreign hospitals through a joint international commission.  

To be sure, when India can discount costs up to 80%, the effects on domestic hospital reimbursement and physician compensation may be assumed to increase downward compensation pressures.

dhimc-book1Conclusion

Regardless of the salaried compensation model, its review and understanding is vital for long-term success.

How have the above compensation models affected your medical practice business model, and salary, if any?

Speaker: If you need a moderator or a speaker for an upcoming event, Dr. David Edward Marcinko; MBA is available for speaking engagements. Contact him at: MarcinkoAdvisors@msn.com

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The Independent Physician Business Model

Self-Employed Physician Compensation Models Vary

By Dr. David Edward Marcinko; MBA, CMP™

By Hope Rachel Hetico; RN, MHA, CMP™ 

According to medical benefits consultant Eric Galtress, physicians can still select from traditional self-employment compensation models [personal communications] as outlined below.  

But, the trend does seem to be against self-employment.  

Independent Physicians 

A self-employed physician has great freedom but less security, because relationships with an employer are defined in return for a set compensation. Typically, this option is ideal for those who desire control, don’t work well in structured environments, and are committed to maximizing personal compensation.

Same-Specialty Group Partnerships

A same-specialty partnership is more restrictive than independent practice, and must balance control with the security that comes from working with colleagues along a continuum-of-care. Internal competition may be fierce, but partners maintain some autonomy while reaping rewards from economies of scale. More personal time is available too, but compensation is based on individual and group performance.

Multi-Specialty Group Partnerships

The partners of a multi-specialty group have even more restrictions, but harvest power from an expanded group of physicians and the presence of a vertically integrated referral chain. Because more disciplines are within the group, a partner might be well-positioned to capture additional prospective payment contracts.

The Compensation versus Value Paradox 

Regardless of the model, physician compensation is inversely related to practice value.

In other words, the more a doctor takes home in compensation, the less the practice is worth and vice versa. This is the difference between a short-term and long-term compensation strategy.

In-Sourced Entrepreneurs 

The classic example is an inpatient specialist or hospitalist. The National Association of Inpatient Physicians (NAIP) estimated the model encompassed 40,000 hospitalists in 2005, with an average salary of $171,001. Both figures are growing.

Out-Sourced Entrepreneurs

Some physicians are risk-tolerant and utility-neutral when seeking other compensation opportunities.

For example, Vanderbilt University-trained neurologist Michel Burry, MD is a hedge fund manager at Scion Capital, LLC; Dimitri Sokoloff, MD, MBA is a venture capitalist on Wall Street; and Harvard-trained emergency room physician Gigi Hirsch, MD, is the founder of a pharmaceutical industry physician executive search firm.

Conclusion

Regardless of the independent business or physician compensation model, degree or medical specialty, its review and understanding is vital for long-term success.

Now, going forward, will the independent medical business model survive; or is it domed?

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Speaker: If you need a moderator or a speaker for an upcoming event, Dr. David Edward Marcinko; MBA is available for speaking engagements. Contact him at: MarcinkoAdvisors@msn.com

 

 

Medical “Goodwill” – Does it Still Exist?

What is the Medical Practice Goodwill Conundrum?

By Dr. David Edward Marcinko; MBA, CMP™

By Hope Rachel Hetico; RN, MHA, CMP™ 

biz-book6 In the context of long-term compensation for a lifetime of work, mature medical practitioners of all types often erroneously focus on the intangible of “goodwill” upon retirement; especially relative to medical practice worth.    

Definition

Goodwill is defined as “The ability of a business to generate income in excess of a normal rate on assets due to superior managerial skills, market position, new product technology, etc.  In the purchase of a business, goodwill represents the difference between the purchase price and the value of the net assets.” 

Yet, there are two types of goodwill, with one far more compensable than the other.  

Physician Goodwill  

Personal goodwill results from the charisma and reputation of a specific doctor. Its attributes accrue solely to the individual, are not transferable and can’t be sold. They have no economic value. Nevertheless, young uninformed physicians may over-compensate retiring doctors for this non-existent “asset.” 

Business Goodwill

Medical practice entity goodwill, on the other hand, may be transferred and is defined as the unidentified residual attributes that contribute to the propensity of patients and managed care contracts (and their revenue streams) to return in the future (Schilbach v. Commissioner, T.C. Memo 1991-556).  

However, one must appreciate the: (i) impact of a changing environment; (ii) practice transfer activity in a local market which can augment or blunt goodwill value; and the (iii) determination of whether patients or HMOs return because of goodwill or are mandated by contractual obligations.

A good medical practice is not necessarily a good business, and retiring group practice doctors can no longer extract excess compensation for this intangible asset.

Moreover, astute younger physicians should not over-pay for it, either.

So, what is your economic experience in the matter; as an emerging, mature or retiring physician?

Speaker: If you need a moderator or a speaker for an upcoming event, Dr. David Edward Marcinko; MBA is available for speaking engagements. Contact him at: MarcinkoAdvisors@msn.com  

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When to Change Money Managers?

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The Money Managers

By Clifton N. McIntire, Jr.; CIMA, CFP®

By Lisa Ellen McIntire; CIMA, CFP®

Sometimes even the best made plans just don’t work out. Despite extensive time and energy spent on due diligence before hiring an investment manager, it becomes evident that the doctor must change managers. 

Here are a few thoughts when considering a change:

 § You should have initially hired the manager with a long-term relationship in mind. Realizing that styles go in and out of favor, we were not simply buying last quarter’s best numbers. 

§ Market statistics often mask “real” performance of money managers, both good and bad. The S&P 500’s 1998 performance can be attributed to a few very large companies. 

§ Generally, a full market cycle would be required to assess money manager performance. 

Having said that, what could happen that would warrant changing managers? 

· Style Drift: You have a growth manager and when growth stocks turn down, you begin to see the purchase of “value” stocks.

· Not Sticking to Previously Established Disciplines: If the process is to sell if the price declines 20 percent down from the original buy range and now they are holding because, “This time, it is different.” 

· Personnel Changes: New analysts are hired with a different philosophy. Recent transactions seem 180 degrees off course.

·  Principals Leave: Like professional sports figures, good money managers are in demand and sometimes change firms. The replacement may be a 27-year-old MBA with little experience. 

· The Firm is Sold: This may be good new if it broadens ownership and helps retain good people. Look for long-term incentive driven “staying” bonus plans.

· Loss of Major Accounts:  Reduced revenues may force cut backs in personnel and services. Attention may shift from portfolio management to marketing.

Finally, sometimes the relationaship is just not working. Misjudgments in asset allocation and poor stock selection over a reasonable period of time can be reason enough for a doctor to change managers.

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Assessment

Do you use a money manager or self direct your own portfolio? Have you ever needed to change you money manger? 

Conclusion

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Guide to Risk-Adjusted Market Performance

What isn’t Measured – Isn’t Improved

By Jeffrey S. Coons; PhD, CFA

By Christopher J. Cummings; CFA, CFP™ 

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Market performance measurement, like physician quality improvement reports, is an important feedback loop to monitor progress towards the goals of the medical professional’s investment program. 

Performance comparisons to market indices and/or peer groups are a useful part of this feedback loop, as long as they are considered in the context of the market environment and with the limitations of market index and manager database construction. 

Introduction

Inherent to performance comparisons is the reality that portfolios taking greater risk will tend to out-perform less risky investments during bullish phases of a market cycle, but are also more likely to under-perform during the bearish phase.  The reason for focusing on performance comparisons over a full market cycle is that the phases biasing results in favor of higher risk approaches can be balanced with less favorable environments for aggressive approaches to lessen/eliminate those biases. 

Can we eliminate the biases of the market environment by adjusting performance for the risk assumed by the portfolio?  While several interesting calculations have been developed to measure risk-adjusted performance, the unfortunate answer is that the biases of the market environment still tend to have an impact even after adjusting returns for various measures of risk. 

However, medical professionals and their advisors will have many different risk-adjusted return statistics presented to them, so understanding the Sharpe ratio, Treynor ratio, Jensen’s measure or alpha, Morningstar star ratings, etc. and their limitations should help to improve the decisions made from the performance measurement feedback loop. 

[a] The Treynor Ratio

The Treynor ratio, named after MPT researcher Jack Treynor, identifies returns above or below the securities market line. It measures the excess return achieved over the risk free return per unit of systematic risk as identified by beta to the market portfolio.  In practice, the Treynor ratio is often calculated using the T-Bill return for the risk-free return and the S&P 500 for the market portfolio. 

[b] The Sharpe Ratio

The Sharpe ratio, named after CAPM pioneer William F. Sharpe, was originally formulated by substituting the standard deviation of portfolio returns (i.e., systematic plus unsystematic risk) in the place of beta of the Treynor ratio.  A fully diversified portfolio with no unsystematic risk will have a Sharpe ratio equal to its Treynor ratio, while a less diversified portfolio may have significantly different Sharpe and Treynor ratios. 

[c] Jensen Alpha Measure

The Jensen measure, named after CAPM research Michael C. Jensen, takes advantage of the Capital Asset Pricing Model to identify a statistically significant excess return or alpha of a diverse portfolio.   

However, if a portfolio has been able to consistently add value above the excess return expected as a result of its beta, then the alpha (ap) should be positive and (hopefully) statistically significant.

Thus, alpha from a regression of the portfolio’s returns versus the market portfolio (i.e., typically the S&P 500 in practice) is a measure of risk-adjusted performance.  

Now, how do you measure the success or failure of your portfolio?

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Are Capital Markets Efficient?

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What is the Efficient Market Hypothesis?

[By Jeffrey S. Coons; PhD, CFA]

[By Christopher J. Cummings; CFA, CFP™]fp-book1

The Efficient Market Hypothesis (EMH) states that securities are fairly priced based on information about their underlying cash flows and that physician investors should not expect to consistently outperform the market over the long-term. 

 EMH Types 

There are three distinct forms of EMH that vary by the type of information that is reflected in a security’s price:

·  Weak Form: This form holds that investors will not be able to use historical data to earn superior returns on a consistent basis.  In other words, the financial markets price securities in a manner that fully reflects all information contained in past prices.

·  Semi-Strong Form: This form asserts that security prices fully reflect all publicly available information. Therefore, investors cannot consistently earn above normal returns based solely on publicly available information, such as earnings, dividend, and sales data.

·  Strong Form: This form states that the financial markets price securities such that, all information (public and non-public) is fully reflected in the securities price; investors should not expect to earn superior returns on a consistent basis, no matter what insight or research they may bring to the table. 

While a rich literature has been established regarding to test whether EMH actually applies in any of its three forms in real world markets – probably the most difficult evidence to overcome for backers of EMH is the existence of a vibrant money management and mutual fund industry charging value-added fees for their services. 

In fact, no less than Warren Buffett has suggested that the markets are decidedly not efficient. 

Assessment

And so, while there has been a growing move towards index funds – as well as ETFs – the strength of the money management industry may reflect investor’s concern with risk management and asset allocation – as much as any view that a manager or individual can “beat the market.”   

Conclusion

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Revisiting EGTRRA-2001

Basic Estate Tax Law Changes from EGTRRA-2001

Staff Writers

 

For some doctors, estate taxes will decline under the Economic Growth and Tax Relief Reconciliation Act of 2001, and about 2% of all taxpayers will be able to bequeath more to their heirs on a tax-free basis, up to one million dollars.

The amount exempted from estate taxes rose to $1 million in 2002 and to $3.5 million by 2009. The estate tax will not expire completely until January 2010. After that, the estate tax repeal is scheduled to last only one year. Congress must then either repeal the tax by December 31st, 2010, or the tax will revert to present day rates.

Some economists opine that this is an accounting artifact designed to curb the cost of legislation.  

The law also gradually reduced the estate and gift tax rates to 45%, from 55%, by 2007.

 

How will EGTRRA-2001 affect you going forward?

Rent versus Buy

When is Renting a Home Less Expensive than Buying?

[By Staff Writers]

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It usually makes sense to rent a home – rather than purchase one – when the period of time you will stay in the home is short or undetermined.

Why? The reason for this is the high cost of purchasing and selling a home. 

When a physician purchases a home, he or she must pay an amount varying from the total price in cash to at least 0-3% down; and hopefully up to the traditional 20% or beyond to remove PMI – especially after the recent mortgage industry meltdown with today’s tight credit markets because of the sub-prime mortgage fiasco.

Recall, that about 13% of first mortgages that originated in 2005 and 2006 had down payments of less than 10%, according to the Mortgage Bankers Association. An additional 1% of the mortgages surpassed the value of the property.

And, if the home is purchased for cash, a majority of the expense of purchasing and selling comes in the selling via commissions and excise taxes.

Sound too much like a Pollyanna? Well, one must understand that mortgage securities are now so complex that it’s often hard to know who actually owns the underling property. If the doctor finances a home, he or she has to pay closing costs on the mortgage as well as the back-end commissions and excise taxes.  

So, it’s obvious that owning a home for a short period of time can be very costly unless the home experiences a dramatic rise in appraised value during the (short) ownership period. And, it surely did in some areas, in the past.  But, because each situation will vary, it is important to build a spreadsheet model that encompasses all of the important information when analyzing the situation. 

The Contemporary Scene for Homes

Currently, more doctors should probably concentrate on debt reduction and establishing their careers – and rent their homes. Of course, this strategy does drive up rental fees in the short term. But, home “flipping” did the same thing to prices and resulted in our current mortgage mess. 

Current Theme for Apartments 

Apartment asking rents posted their biggest increase of 2007 in the third quarter, jumping 4.2% from a year ago, to an average of $1,015 per unit, according to industry sources. And vacancy, which had edged up slightly earlier in the year because of apartment construction, tightened up in the last quarter to an average of 5.6% from 5.7% the same time a year ago. Thus, the outlook is rosy for landlords in 2008, but murky for homeowners.

Row Homes

Assessment

Hopefully in the future, home prices may shrink – and physician economic stability increase – to the point that home ownership becomes the delight it should be; rather than the burden it has become for many doctors. 

Do you rent or own? How has your strategy worked for you? Do you view your home as a place to live – or an investment? Why, or why not?

Conclusion

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The Arbitrage Pricing Theory [APT]

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A Multi-Faceted Representation of Systematic Risk

  • By Jeffrey S. Coons; PhD, CFA
  • By Christopher J. Cummings; CFA, CFP™

fp-book2Introduction 

Did you know that the economist Stephen Ross PhD developed a more generalized Modern Portfolio Theory [MPT] model called Arbitrage Pricing Theory (APT)? 

Definition

APT is based upon somewhat less restrictive assumptions than the Capital Asset Pricing Model [CAP-M] and results in the conclusion that there are multiple factors representing systematic risk.  The APT incorporates the fact that different securities react in varying degrees to unexpected changes in systematic factors other than just beta to the market portfolio.

The risk-free return plus the expected return for exposure to each source of systematic risk times the beta coefficient to that risk is what determines the expected rate of return for a given security.

Physician-Investors

An important point for physicians to keep in mind is that the APT focuses on unexpected changes for its systematic risk factors. The financial markets are viewed as a discounting mechanism, with prices established for various securities reflecting investors’ expectations about the future, so any excess return for an expected change will be arbitraged away (i.e., the price of that risk will be bid down to zero). 

For example, market prices already reflect physician and other investors’ expectations about GNP growth, so prices of assets should only react to the extent that GNP growth either exceeds or falls short of expectations (i.e., an unexpected change in GNP growth).

A Rhetorical Interrogative?

And so – we can ask – why do lay investors, medical professionals and their advisors go wrong in making passive asset allocation decisions using MPT?   The problem has less to do with the limitations of CAPM or APT as theories and more to do with how these theories are applied in the real world.

The basic premise behind the various MPT models is that both return and risk measures are the expectations assessed by the investor.   Too often, however, decisions are made based on what investors see in their rear view mirror rather than what lies on the road ahead of them.

Theoretical?

In other words, while modern portfolio theory is geared towards assessing expected future returns and risk, investors and financial professionals all too often simply rely on historical data rather than develop a forecast of expected future returns and risks.

While it is clearly difficult for physicians and all investors to accurately forecast future returns or betas, whether they are for the market as a whole or an individual security, there is no reason to believe that simply using historical data will be any more accurate.  

MPT Shortcomings

One major shortcoming of modern portfolio theory as it is commonly applied today is the fact that historical relationships between different securities are unstable.  And, it would seem that a physician or other healthcare provider should not rely on historical averages to establish a passive asset allocation.  

Of course, the use of unstable historical returns in modern portfolio theories clearly violates the rule-of-thumb related to the dangers of projecting forward historical averages; MPT is nonetheless an important concept for medical professionals to understand as a result of its frequent use by investment professionals. 

Critical Elements of Investing

Furthermore, MPT has helped focus investors on two extremely critical elements of investing that are central to successful investment strategies: 

  1. First, MPT offers the first framework for investors to build a diversified portfolio.   
  2. Second, the important conclusion that can be drawn from MPT is that diversification does in fact help reduce portfolio risk.

Assessment

MPT approaches are generally consistent with the first investment rule of thumb, “understand and diversify risk to the extent possible.”  

Additionally, the risk/return tradeoff (i.e., higher returns are generally consistent with higher risk) central to MPT based strategies has helped investors recognize that if it looks too good to be true, it probably is. 

Conclusion

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CAPM – Another Portfolio Pricing Model to Consider

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The Capital Asset Pricing Model

By Jeffrey S. Coons; PhD, CFA

By Christopher J. Cummings; CFA, CFP™

While Dr. Harry Markowitz is credited with developing the framework for constructing investment portfolios based on the risk-return tradeoff, William Sharpe, John Lintner, and Jan Mossin are credited with developing the Capital Asset Pricing Model (CAPM). 

Introduction

CAPM is an economic model based upon the idea that there is a single portfolio representing all investments (i.e., the market portfolio) at the point of the optimal portfolio on the CML and a single source of systematic risk, beta, to that market portfolio.   The resulting conclusion is that there should be a “fair” return physician investors should expect to receive given the level of risk (beta) they are willing to assume. 

Thus, the excess return, or return above the risk-free rate, that may be expected from an asset is equal to the risk-free return plus the excess return of the market portfolio times the sensitivity of the asset’s excess return to the market portfolio excess return.

Beta then, is a measure of the sensitivity of an asset’s returns to the market as a whole.  A particular security’s beta depends on the volatility of the individual security’s returns relative to the volatility of the market’s returns, as well as the correlation between the security’s returns and the markets returns. 

Thus, while a stock may have significantly greater volatility than the market, if that stock’s returns are not highly correlated with the returns of the overall market (i.e., the stock’s returns are independent of the overall market’s returns) then the stock’s beta would be relatively low.

A beta in excess of 1.0 implies that the security is more exposed to systematic risk than the overall market portfolio, and likewise, a beta of less 1.0 means that the security has less exposure to systematic risk than the overall market.

The CAPM uses beta to determine the Security Market Line or SML.  The SML determines the required or expected rate of return given the security’s exposure to systematic risk, the risk-free rate, and the expected return for the market as a whole. The SML is similar in concept to the Capital Market Line, although there is a key difference. 

Both concepts capture the relationship between risk and expected returns.

However, the measure of risk used in determining the CML is standard deviation, whereas the measure of risk used in determining the SML is beta.  

Conclusion 

The CML estimates the potential return for a diversified portfolio relative to an aggregate measure of risk (i.e., standard deviation), while the SML estimates the return of a single security relative to its exposure to systematic risk. 

Now, if this is the essence of the Capital Asset Pricing Model, what are the arguments against CAPM?

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Understanding Modern Portfolio Theory

Portfolio Management 

By Jeffrey S. Coons; PhD, CFA

By Christopher J. Cummings; CFA, CFP™

Modern Portfolio Theory (MPT) is the basic economic model that establishes a linear relationship between the return and risk of an investment.  The tools of MPT are used as the basis for the passive asset mix, which involves setting a static mix of various types of investments or asset classes and rebalancing to that allocation target on a periodic basis.  

Introduction

According to MPT, when building a diversified investment portfolio, the goal should be to obtain the highest expected return for a given level of risk.  A key assumption underlying modern portfolio theory is that higher risk generally translates to higher expected returns.

From the perspective of MPT, risk is defined simply as the variability of an investment’s returns.  While MPT is based upon the idea that expected volatility of returns is used, risk is measured by standard deviation of historical returns in practice. 

Standard deviation is a measure of the dispersion of a security’s returns, X1,…,Xn, around its mean (or average) return.   

Often, standard deviation is calculated using monthly or quarterly data points, but is represented as an annualized number to correspond with annualized returns of various investments.  

Now, let us assume Stock A has a mean return of 10.0 percent and a standard deviation of 7.5 percent. 

Then, approximately 68 percent of Stock A’s returns are within one standard deviation of the mean return, and 95 percent of Stock A’s returns are within 2 standard deviations.

In other words, 68 percent of Stock A’s returns should be between 2.5 percent and 17.5 percent, and 95 percent of the returns for Stock A should be between negative 5.0 percent and 25.0 percent. 

However, a key assumption underlying this logic is that the returns for Stock A are normally distributed (i.e., including that the distribution curve of Stock A’s returns is symmetrical around the mean).

Unfortunately, in reality security returns may not be symmetrically distributed and both the mean return and standard deviation of returns may shift dramatically over time. 

Sources of Risk 

There are many different sources of risk, but the two forms of risk hypothesized by Harry Markowitz Ph.D., father of MPT, were systematic risk and unsystematic risk.

Systematic risk is sometimes referred to as non-diversifiable risk, since it affects the returns on all investments.  

In alternate theories like the Capital Asset Pricing Model [CAPM], systematic risk is defined as sensitivity to the overall market. While Arbitrage Pricing Theory has several common macroeconomic and market factors that are considered sources of systematic risk.   

Investors are generally unable to diversify systematic risk, since they cannot reduce their portfolio’s exposure to systematic risk by increasing the number of securities in their portfolio. 

In contrast, physicians diversifying an investment portfolio can reduce unsystematic risk, or the risk specific to a particular investment.  Sources of unsystematic risk include a stock’s company-specific risk and industry risk. 

For example, in addition to the risk of a falling stock market, physician investors in Merck also are exposed to risks unique to the pharmaceutical industry (e.g., healthcare reform), as well as the risks specific to Merck’s business practices (e.g., success of research and development efforts, patent time frames, etc). 

Assessment

A physician investor can reduce unsystematic risk by building a portfolio of securities from numerous industries, countries, and even asset classes.  

Thus, portfolio risk in MPT refers to the both systematic (non-diversifiable) and non-systematic (diversifiable) risk, but a basic conclusion of MPT is that no investor would be rational to take on non-systematic risk since this risk can be diversified away.

Conclusion 

MPT is the philosophy that higher returns correspond to higher risk, and that doctor investors typically desire to earn the highest return per a given level of risk.

The tradeoff between expected return and volatility of returns to make investment decisions is known as the mean-variance framework and is central concept in many of today’s passive asset allocation portfolio management principles. 

Now, is MPT as viable today – as when it was originally proposed?

Conclusion

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Equity Price Influencers

How Economic and Business Cycles Influence Equity Prices 

Julia O’Neal; MA, CPA with Staff Writers

 

The equity markets react to the business cycle as it moves through standard phases.

For example, coming out of a recession, when gross domestic product (GDP) is increasing, cyclicals do best, since consumers are fulfilling “pent-up demand” for big ticket items that could be deferred during tough economic times.  Conversely, as the economy turns down – so do cyclicals – often slightly ahead of the overall economy.

As inflation heats up in a rising economy, companies can raise prices and profit at first as expenses stay constant.  But ultimately inflation raises interest rates and capital becomes more expensive, so companies have to spend more to borrow capital to finance growth. Gentle interest rate increases do not always make the stock market fall, but it will rise more slowly.  

However, high interest rates and high inflation ultimately are negatives for the stock market. 

A bull market in stocks generally consists of three consecutive phases:

Monetary: Interest rates are falling, either naturally as inflation eases or with the help of a central bank, like the Federal Reserve, which can artificially lower short-term interest rates.

• Earnings-Driven: Companies have been able to borrow capital cheaply and have spent the down-market time practicing efficiencies, so now they are geared up for growth. Consumers are buying, so earnings are beginning to flow through to the “bottom line.” 

Speculative blowout: The markets are responding to the good earnings reports—sometimes beyond what is justified. P/E ratios begin to get very high relative to a normal market, and markets are “overbought.” Wary physicians and canny medical investors may want to sell stocks to take profits. 

According to Goldman Sachs Research, the stock market may peak while the overall economy is still in a growth phase. Since 1952, the S&P 500 peak has led the overall economy’s peak by about seven months. During down markets, high-dividend-paying stocks and stocks of companies that sell necessary goods or services, like utilities and food companies tend to hold their value. These are called defensive stocks.  

Conclusion

Fundamental analysis takes into consideration economic factors such as consumers’ ability to buy a company’s goods or services or the company’s borrowing needs at current rates.

How has the recent economic and medical business cycle affected your investments?

Auto Ownership Costs for Docs

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What are the Costs of Physician Automobile Ownership?

[By Staff Writers]

XJ-V8-LWB Jaguar touring sedan

Automobiles are generally the fourth largest expense of a physician’s household; right behind student loans and/or practice start up costs; and home ownership loans.

The largest automobile-related expense is purchase of the car, either in the form of a monthly payment or cash.  

Other expenses include gas [especially when over $3/gal], maintenance, repairs, taxes, and insurance. Insurance is generally the next largest expenses in the automobile category unless a large repair is necessary, a factor mostly dependent on the age and type of the car.

For some cars, repairs may be the second largest expense. Maintenance costs vary depending on such factors as the age and mechanical complexity of a vehicle. Generally, money spent on regular maintenance will reduce future repair costs. 

Like the cars themselves, auto leases are generally poor deals and are not investments; merely interest payments on a depreciating consumer asset.

Assessment

What do you think about the fascination of doctor’s with “luxury” automobiles? 

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Conclusion

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Physician Homestead Affordability

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What are the Costs of Physician Home Ownership?

[By Staff Writers]

Home ownership for the physician or other medical professional can be a very rewarding experience that gives the owner a real sense of security, especially when the home is free and clear of a mortgage.  Home ownership can also be very expensive, and is generally the largest expense of a household; sans the physician’s medical practice itself. And, there are many costs to home ownership. 

First, to acquire a home, the physician home owner must make a down payment and pay closing costs on the mortgage. The down payment is usually a minimum of 5% of the purchase price, although some mortgage programs allow as little as 3% down or even nothing with interest-only deals available. The closing costs can run as high as 3% with no buy-down on the interest rate. 

Second, the physician home owner must service the mortgage with the usual monthly payments of principal and interest. This is usually the largest expense associated with home ownership. 

Third, the physician home owner must pay all of the utilities associated with the property. The mandatory utilities are water/sewer/garbage, electricity and/or gas, and local telephone. These expenses can be substantial. Water/sewer/garbage services can total over $150 per month. Electricity and gas bills usually total a minimum of $250 per month for an average-sized four-bedroom, three-bath home. 

Fourth, the physician home owner must pay property taxes, a substantial expense. As an example, property taxes average approximately 1-2% of fair market value computed on appraised value rather than the fair market value. This translates into thousands of dollars per year. 

Fifth, the physician home owner must maintain the home. These expenses include small and large home repairs and maintenance, landscaping, gardening, and remodeling. Large home repairs can include replacing a roof, painting the interior and exterior, replacing carpeting, and repairing water damage. Small home repairs and maintenance often include repairing leaky faucets, damaged flooring, broken windows, and walls that children thought would make a great coloring board. 

Sixth, the physician home owner must insure the home for property damage and liability damage related to the home. This expense varies widely but will be a minimum of several hundred dollars per year. 

The following is an example of the monthly costs of home ownership for a new doctor who owns a house worth $200,000 and has a $160,000 mortgage with an 8% rate and a 30-year term. So, a lower rate today looks even better, right? 

  • Mortgage payment: $1,174       
  • Property taxes: $166     
  • Utilities: $450
  • Insurance: $30
  • Maintenance: $300

Total $2,120

These numbers do not include large repair and maintenance expenses. When these expenses occur, they are usually paid for in a lump sum, rather than being amortized over the years of their useful life. The lump-sum cost does not include the amount of earnings lost on the money used for the expenditure.

In order to amortize these items, the physician home owner would have to borrow the money to pay for them, but this would result in additional interest expense.  

Drs. Home

There are also exit costs to home ownership. When a doctor wants to sell a home, he or she must pay a sales commission of approximately 6% and an excise tax that varies state to state. Of course, FSBO is also a sales option. 

Q: What is the biggest impediment to a home loan down payment?

A: A student loan and/or an existing automobile loan.

Q: What is the biggest impediment to a practice start-up loan; office down payment, or medical group buy-in situation?

A: A home loan; school loan and/or automobile loan.

Note, the vicious consumer debt-cycle which differentiates wants from needs!

Rents on the Upswing for 2008

On the other hand, apartment asking-rents posted their biggest increase of 2007 in the third quarter, jumping 4.2% from a year ago, to an average of $1,015 per unit, according to industry sources. And vacancy, which had edged up slightly earlier in the year because of apartment construction, tightened up in the last quarter to an average of 5.6% from 5.7% the same time a year ago. Thus, the outlook is rosy for landlords in 2008, but not necessarily the same for homeowners.

Conclusion

Now, how does the above traditional philosophy seem in light of the recent mortgage debt debacle? 

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Diversification and Portfolio Management

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What is Financial Asset Allocation?

By Jeffrey S. Coons; Ph.D, CFA

By Christopher J. Cummings; CFA, CFP™ 

Once the risk management goals and objectives for a physician’s financial portfolio have been identified and prioritized, the next step is to build a mix of investments that will best balance those conflicting goals.   

Asset allocation is defined as the portfolio’s mix between different types of investments, such as stocks, bonds, and cash.  The goal of any asset allocation should be to provide a level of diversification for the portfolio, while also balancing the goals of growth and preservation of capital required to meet the medical professional’s objectives.

Establishing the appropriate asset allocation for a physician investor’s portfolio is widely considered the most important factor in determining whether or not he/she meets his/her investment objectives.  In fact, academic studies have determined that more than 90 percent of a portfolio’s return can be attributed to the asset allocation decision.  

So, how do physician investors and their advisors typically make asset allocation decisions? 

One method is best characterized as a passive approach, in which a set mix of stocks, bonds and cash is maintained based on their historical risk/return tradeoff.  The alternative is an active approach, in which the mix among various asset classes is established based upon the current and expected future market and economic environment. 

In addition to pursuing a passive investment strategy, such as indexing, medical professionals supporting the notion that market prices accurately reflect all available information generally are not concerned with the timing of their investment decision.  

The most frequently used strategy to avoid a market timing decision when establishing an initial allocation to stocks is referred to as dollar cost averaging. Dollar cost averaging entails investing the same amount of money at regular intervals.

For example, an investor who wishes to dollar cost average may decide to invest 1/24 of the allocation on the first of each month for two years rather than investing the full amount immediately or trying to time buys when stocks are trading at a low point.

Value-cost averaging does the same thing with the same number of shares, rather than dollar amount, for its regular intervals.

Now, what is your personal favorite strategy?

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Risk Retention Groups

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RRGs and Medical Malpractice Insurance Companies

[By Dr. David Edward Marcinko; FACFAS, MBA, CMP™]

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Definition

Risk Retention Groups are owner-controlled insurance companies authorized by the Federal Risk Retention Act of 1986.  An RRG provides liability Insurance to members who engage in similar or related business or activities for all or any portion of the exposures of group members, excluding first party coverage’s, such as property, workers’ compensation and personal lines.  Authorization under the federal statute allows a group to be chartered in one state, but able to engage in the business of insurance in all states, subject to certain specific and limited restrictions.  The Federal Act preempts state law in many significant ways.

RRG Advantages:

Medical RRGs

  • Avoidance of multiple state filing and licensing requirements;
  • Member control over risk and litigation management issues;
  • Establishment of stable market for coverage and rates;
  • Elimination of market residuals;
  • Exemption from countersignature laws for agents and brokers;
  • No expense for fronting fees;
  • Unbundling of services.

Of 130 new medical malpractice liability insurance companies that entered the market between 2002 and 2006, 65 percent were risk-retention groups, according to a study conducted for the National Risk Retention Association by the actuarial consulting company Milliman Inc.

Statistics from the Risk Retention Reporter, a journal that tracks the industry, showed that through September, 43 percent of the 23 risk-retention groups formed this year across various sectors are doctor-owned, while in 2001, no new physician risk-retention groups joined the market.

RRG Disadvantages

Some doctors and industry experts warn about drawbacks of risk-retention groups and question whether the physician-run companies – most of them relatively young – can survive future claims payouts and tough market cycles, while doctors do not have access to state guaranty funds to back up their coverage if a risk-retention group struggles financially or goes out of business. The Risk Retention Reporter noted that, anecdotally, physician self-insurance companies have failed at no greater rate than traditional carriers in recent years. 

Conclusion

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Interview with Dr. David E. Marcinko of iMBA Inc [Part 1]

A THANKSGIVING DAY INTERVIEW 

PROLOGUE:

 There are a million stories out-there in the healthcare administration space and blog-o-sphere. They encompass all stakeholders from medical students, to physicians and patients, and to payers, governments and related sponsoring companies. 

My name is Dave Marcinko and I’ve held several professional hats in my career. I’m a physician-executive, health economist, financial evangelist, publisher, editor and above all continually strive to be an innovator. As Founder of our companion premium print-subscription guide Healthcare Organizations [Financial Management Strategies], I am always on the lookout for the next innovative, state-of-the-art vision or new-wave idea to stoke my passion for healthcare financial management on both the micro [medical practices and clinics] and macro [hospitals and healthcare organizations) economic scales [www.HealthcareFinancials.com] 

So, there I was – ending my day at the office in the typical fashion – looking for new trends, topics and thought-leaders in the world of domestic medical economics and finance, when this woman sat down at my desk.

As usual, it was a journalist, but an educated one. She was not your typical journalist either; she knew her stuff. Her name was Hope. She is a nurse and professor of healthcare administration – an author like me – and former national quality improvement medical director for a public company. Sure, she had a lovely face and a quick smile. But, she was hardcore to the bone; and not in a good way. We scheduled our interview – a week later on Thanksgiving Day 2007 – to get my personal take of the medical union situation specifically, and industry dynamics in general. It was a Thanksgiving Day I still remember. The topic was suggested to her from a reader. It was an excellent one. 

THE INTERVIEW

Ms. Hetico: Good afternoon Dr. Marcinko.

Dr. Marcinko: Pleased to see you, Ms. Hetico. 

Ms. Hetico: First off, in the interest of full disclosure, we have met before, correct? 

Dr. Marcinko: Yes. I was just trying to remember how long ago it was when we first met; way back in a different life. If I recall correctly, you were a nurse-executive at a small specialty hospital where I held privileges in the early eighties, right? 

Ms. Hetico: And, I recall you as a surgical department and residency program chairman, and later as the general medical staff VP. Tell me, are you still a runner? 

Dr. Marcinko: Sure thing; middle-distance for almost than 30 years now. I loved running in Philadelphia as a student, especially along Boathouse Row. It was not unusual for me to run daily from the Ben Franklin Bridge, to City Line Avenue. But, I don’t run in the rain or snow anymore, and I’ve slowed down somewhat.

Ms. Hetico: And, according to your self-written epilogue, it seems as though we’ve both had diverse career experiences since then; protean almost. 

Dr. Marcinko: My motto is: movement is life – life is movement.  

Ms. Hetico: Now, you have written and lectured on medical unions and related concepts for almost a decade, and yet the situation has waxed and waned over time with no real follow-through. How did you first get started studying medical unions, and why? Is the concept even still viable today?   

Dr. Marcinko: Well, there are 1.1 million or more physicians in the United States; including the allopaths, osteopaths, podiatrists, etc. Let’s be sure to include the optometrists and dentists as medical providers too, for larger numbers.  The brutal supply-demand calculus of the matter was that there were too many doctors, of all stripes, in the short term. 

In fact, it has been projected that if the physician supply pipeline ceased today, it would take until the Year 2010 for demand to reach market parity. Semantics aside, this slight oversupply is more than just bad distribution since physicians do have a choice of practice venue. It’s just that many do not care to live in rural or remote cities, with inhospitable climates or a dearth of cultural activities. Hence, many doctors congregate in large cities or near hospitals, surgery centers or medical schools, for collegial, professional or other social reasons.  

Ms. Hetico: Well, your thoughts seem to fly against conventional wisdom that there are not enough doctors. I mean haven’t the nation‘s medical schools just accepted the largest class in history to make up for a perceived dearth of supply? More than half are female and minorities. So, if you are correct – and I am not sure you are – one might reasonably wonder how this oversupply happened.   

Dr. Marcinko: Simple. The mothers and fathers of a bygone generation told their sons to become doctors in order to make a good living and have a personally satisfying life. In the seventies, with the advent of feminism, our daughters did not have to marry doctors to achieve these same results. They became empowered to become physicians themselves.  So, for a time, there were too many doctors chasing too few patients. Ergo, the start of a supply side disequilibrium driving medical fees – with assistance from managed care entities that recognized the trend early on – down, down, down; much to the fiscal detriment of medical providers.

But, perhaps to the benefit of the patients they served. Incidentally, President Nixon tried to flood the nation’s medical schools in the seventies, in a like manner to stoke the supply side and drive down fees; but failed. Managed care, and the woman’s liberation movement, succeeded.  

Ms. Hetico. How so, and what a sexist and/or biased idea? 

Dr. Marcinko: Not at all! If you don’t believe me, just ask any patient who has never had prior access to any type of medical care or insurance about what he or she thinks about the initial supply-side driven HMO’s – and be humbled by their positive reply – approximately 45 million uninsured strong.  

Now, if you never had healthcare before, managed care was great. It was a boon to the primary care guys, FPs and internists who became gatekeepers, etc. Not so great if you were a specialty provider however, or remembered the fee-for-service days.  But, it offered affordable care to those most in need …. Something pretty hard to criticize in theory! 

I tell interns, residents and graduate students today that if you want to be a saint – value altruism and have a passion for health and caring for humanity – then by all means go into medicine; especially global healthcare.

But, if you want to be a capitalist, go elsewhere. Just don’t let you decision to opt for medical school to be a knee jerk one, based on past and very much dated perceptions by your parents. 

Ms. Hetico: Or, enter the career by default?.

Dr. Marcinko: Exactly. 

Ms. Hetico: Go where, since all my research indicates that healthcare has, and continues to be, one of the great growth engines of the economy as well as driver of jobs?

 Dr. Marcinko: I don’t know; but young folks should take a look at telecommunications, business, engineering, computer sciences and molecular biology. And, sure the healthcare space grows jobs, but not necessarily the kind of low-paid or entry level positions that the best and brightest of our young people crave. The growth is bottom-up. 

Ms. Hetico: Don’t you have any examples at all, or just vague generalizations and pabulum?

Dr. Marcinko:  Gosh, you are harsh! 

Ms. Hetico: That’s my job and what our readers expect. 

Dr. Marcinko: OK, just take a look at emerging health firms and even new industries in the channel, like 23andMe [the Google financed company founded by biotechnologist Linda Avey and healthcare business executive Anne Wojcicki who is married to Sergey Brin].  They hope to soon launch a service that can access a patient’s genome [genotype] for disease risk analysis, physical traits [phenotype] and ancestral origin; in short the entire personalized human genome. 

So, we do have an amalgam of opportunities in medicine here [as just one example] for bright youngsters; from finance, to accounting, to medicine, genetics, marketing, the Internet 2.0 and business administration, etc. A mash-up of them all – if you will.

Ms. Hetico: Please do continue as you seem to be on a roll; albeit perhaps a misguided one. 

Dr. Marcinko: I don’t think so. Look, today you either have to be an esoteric clinical specialist to command high fees – or accept no insurance or third party reimbursements with a private-pay retainer practice opting out of Medicare for at least 2 years – or possess something other than a warm body and medically degreed pulse to flourish in the current Darwinian cost constrained environment. 

Ms. Hetico: Any other clinical examples? 

Dr. Marcinko: Sure, concierge medicine, consumer directed healthcare plans, retail medical shops, physician and nurse-executives 2.0; etc.  And, for those really inclined to be physicians, I think a medical degree is just the entry point with further education and mandatory deep-knowledge differentiation. I mean, why work to impact one clinical life at a time, when you might conceivable be able to positively affect entire groups of patients, en masse. 

Ms. Hetico: Except if that one life is your own.

Dr. Marcinko: Agreed … But for this, you’ll need deep expertise and another synergistic graduate degree; maybe even an MBA, PhD, JD or CPA, etc. Just as graduate school is the new college; a dual-degree practitioner is the new physician-executive / leader, etc. 

Ms. Hetico: Very Interesting, but I meant are there any similar union examples from the secular world? 

Dr. Marcinko: Unfortunately, most of them. Just look at the automobile industry. My immigrant dad was in the UAW for more than 50 years. He worked other jobs and was able to pay for my private medical school education along with private college and graduate school for my brother and sister, who is a trauma nurse stationed in Iraq. She retried as an operating room administrator and joined the army at age 45, after a fit of post 9/11/01 patriotism. The point is that medical unions, like the UAW, will not change the supply/demand equation. People don’t buy American cars just because they are union made-in-the-USA, or numerically abundant.

But, a dearth of medical school admission seats, or lack of interest in medicine as a profession by the best and brightest may induce a “brain drain”, which I think will ultimately lead to inferior RD first, but not necessarily worse care for patients, at least in the interim or short-term. I mean, do I have to reiterate the Institute of Medicine’s recent dismal quality proclamations, or the VA debacle at this so-called federalized union? All this is well known in healthcare. None is surprising. 

 Ms. Hetico: So, if your posited supply-side brain-drain won’t hurt patients, then the problem in healthcare today is on the demand-side? So, let blame the doctors, right? 

Dr. Marcinko: Well, consider Paretto’s Principle or the 80/20 law. In the short and medium terms, patient care won’t be materially impacted since most physicians do a good job,  and most patients don’t need heroic care. Yet, when they do, we spend 80% of our healthcare expenditure in the last year of life.  This was the promise of managed care, but we have bastardized the concept of managing the expensive 20% of care to that of restricting the remaining 80% of care. A few of us may need genetically engineered medicine to be sure, but the vast majority needs basic medical care to keep from becoming the vital few who require more intensive costly care.  

In the much longer term, RD will be affected although I am not sure how negatively. I mean, perhaps researchers will begin to use sparse resources more selectively and the rush to bring new drugs to market by big-pharma will slow down to true advancements; rather than incremental money-driven molecular moieties. 

IOW: Fewer but better drugs, evidence-based-medicine, coordinated care, etc; the basics. Ultimately however, it will affect care as the demand side takes over … as it will or already has. There are just too many patients in the baby-boomer funnel to pay for every heroic treatment under the sun; for them all. The demographics are just too insurmountable … Sans, a real generational delivery, or supply-chain break-thru – which could happen!

Ms. Hetico: So, what happens to provider fees? 

 Dr. Marcinko:  In the current scenario physician fees will go down from payers; as patient demand increases; absolutely.  And, the feverish doctor induced-demand we are experiencing to compensate for those fee reductions will pale by comparison. The fee decreases will be geometric compared with the provider-induced arithmetic demand increases, which won’t support the existing economic infrastructure.  Although this is not so controversial today, you have to realize that when I first began pontificating about it all more than a decade ago; I became quite the pariah, I might add.  

Ms. Hetico: Perhaps you were not so PC then, as you are now?

Dr. Marcinko: Age has mellowed me. And, there is a saying to the effect that: “One is never a prophet in his own tribe.” So, I really don’t take criticism personally, anymore. 

Ms. Hetico: But, what about the patients – what will happen to them and to us as future patients?

Dr. Marcinko: It’s very likely that there will be cutbacks in Medicare and the affluent will have to pay more. Alan Greenspan recently said that we will have a dramatic increase in Medicare co-payments, approaching more than one-hundred percent at the higher levels.

Ms. Hetico: So, what is the problem today with medical unions? 

Dr. Marcinko: Let’s historically back up a bit first. Please put away your pitchfork. I am only the messenger.

Ms. Hetico; OK; sorry to push so hard – but you do seem to ask for it?   

Dr. Marcinko: You’re right; I am a bit of a thespian. My daughter even uses the term “actor”; others have called me a “ham.” Nevertheless, I remember how Bill Gates of the Microsoft Corporation in Redmond Washington, annihilated IBM two decades ago with little more than 2,000 non-unionized “Microsofties”, versus over 400,000 lifetime “IBMers”.  In another example, recall how more ATT employees – unionized through the Communication Workers of America (CWA) – imploded the industry. Clearly, Mr. Gate’s concept of “masses of asses” was correct. You need more than a medical degree; you need innovation and a sustainable competitive edge – from synergy within or without the existing infrastructure.  Or, create a new framework. Doesn’t Bill wonder why a medical degree is even needed to treat some folks – at all?

Ms. Hetico: Do you know Bill Gates well? 

Dr. Marcinko: No, not at all. But, when I contacted him to write the Celebrity Foreword to a book I was writing at the time (circa 2000), he referred me to his then Chief of Global Healthcare Management, Ahmad Hashem MD, Ph, who did a great job for us.  Now, we are in the third edition of The Business of Medical Practice [Profit Maximizing Skills for Savvy Doctors] (available at Amazon.com, our corporate website or the Springer Publishing Company, etc). So, I was, and remain a great fan of Gates and MSFT.

Ms. Hetico: Do you own any MSFT stock? 

Dr. Marcinko: Not nearly enough I’m afrid.  And my point is the he didn’t disdain me like the bureaucrats (read “unions”) at some of the other Fortune 500 companies I contacted for help. I was an individual, not a group …. Individuals lead, groups follow.

Ms. Hetico: What does all this have to do with medical unions?

Dr. Marcinko: The U.S. economy has shifted over the last two centuries from one grounded in agricultural, to industry, then manufacturing, and now to an information-based technological macroeconomic infrastructure. Americans no longer labor with their backs, and pure union physical muscle is a concept best resigned to the historic past, rather than the proactive future. If not, medical unions will become like the UAW or CWA. So, ask yourself if you really want to be treated by a unionized doctor?   Moreover, the noted economist David Birch, PhD champions the idea that that the economy hasn’t “added one industrial job in the United States in fifty years and we’ve created 70 million jobs over the past five decades, and not one in manufacturing. Furthermore, labor unions in the past thirty years have exerted a disproportionate influence on the civil rights movement, even has they have declined in number, often protecting the incompetent worker from dismissal even for just cause. Labor unions just seemed determined to get crushed in the next century’s economy. And, that’s a shame since that could have provided an important voice in the debate about health benefits, job safety, child care and technology training, etc.Just look at this 2008 presidential political season. Where are the unions? Even when marginally successful, unions provide a passionless, adventure-less and wholly demoralizing life, which adds little to the human condition and lacks the self esteem and self actualization potential promulgated by Abraham Maslow and others.

Ms. Hetico: Are you going off tangent, here?
 
Dr. Marcinko: I hope not; but I’ve done it before. Just ask my students.  In 1886, Samuel Gomphers, John L. Lewis and the founders of the American Federation of Labor issued the following statement: “The various trades have been affected . . . so that the skilled trades were sinking to the level of pauper labor.  To protect the skilled labor of America from being reduced to beggary . . . the trade unions of America have been established.”  More modern day icons such as George Meany and Walter Reuther all championed the sovereignty of the working man and strove to eliminate human rights abuses in the work force. The current leadership is lost.

Ms. Hetico: You are quite the historian? 

Dr. Marcinko: Thanks. No doubt some of these greats, if alive today, would be in disbelief about how highly educated physicians are clamoring to join labor unions. After all, there are few civil rights abuses occurring in medicine and few believe that physicians, dentists and podiatrists are the exploited [healthcare] workers they had in mind.

No doctor treating tuberculosis is in danger of developing black lung disease, no overworked dentist is practicing in an oral sweatshop, and no podiatrist is working as an indentured servant against his economic will. As for the potential to contract AIDs, hepatitis, MDR-TB or other blood or air-borne communicable diseases; OSHA is alive and well. 

Therefore, the human rights issues often exposed by physician unions only serves to trivialize the real abuses which still take place in the industrial and manufacturing sector at the turn of the last century. Just ask Nike of the last decade, The Gap or other retialers about worker-abuse? 

Ms. Hetico: Atlanta is not really a union town, is it? 

Dr. Marcinko: No, it’s not. But I’m from Baltimore – a decidedly democratic and blue collared one – but I am not being parochial at all. 

Ms. Hetico: So, what about health information technology and the new medical collectivism? 

Dr. Marcinko: Analysts of the digital age claim that technology will profoundly change our culture; and the healthcare industrial complex is no exception.

Some thought-leaders and pundits like Ester Dyson, opine that technology democratizes [medical] society, so that as physicians, we are all perfect substitutes for one another – with few physicians having an edge over the other. This paradox is both a cause for depressed fees, as well as a compliment to the high quality and standardized American medical education process. Other medical ethicists fear technology may further divide medical social classes into technology, business and financial information participants. 

Ms. Hetico: Any other relevant examples? 

Dr. Marcinko: Certainty, concepts such as telemedicine, robotic surgeons, bionics and molecular biology have transitioned from the laboratory down to practical and economical production levels. Biowares, in order to blend living cells with synthetic substances to form replacement materials and organs, can be algorithmically developed.  Animal and human cloning is also within the realm of probability, rather than possibility, as recent public cloning episodes demonstrate. From monkey stem cells – to bio-tech firm Medistem Corp’s endometrial regenerative cells and Dr. Shinya Yamanaka’s skin-to-stem cell work at Kyoto University with pluri-potent human cells – all may ultimately be performed by non-physicians.

Of course, there are those medical theologians that predict technology will hasten the demise of medicine as an intensely personal process. The truth probably rests in an amalgamation of these major points of views, but almost certainly not with the reformation of labor unions. The fact remains however, that technology pushes down the skill and educational requirement of many professions, including medicine. So, if there is such a thing as an elite new-collectivism in medicine – and technically there should be – it’s more like power to the people; not the medical establishment. Today’s healthcare is about personal brains, bites and bytes, and not necessarily widespread collective union brawn.

Ms. Hetico: Yet, many docs are still technophobes, today; right? 

Dr. Marcinko: Yes, it’s a shame, and that’s why I edited the just released Dictionary of Health Information Technology and Security (Amazon.com, our corporate website, or directly at: www.HealthDictionarySeries.com)

Ms. Hetico: Was that another shameless plug for your firm, its books, or your new dictionary series on health economics, finance, managed care and health insurance? 

Dr. Marcinko: Yes it was a plug; but it wasn’t’ shameless. We were able to make dictionary lexicology exciting for the health administration space by using a digital wiki-styled contribution platform, coupled with a quasi peer-review process. Pretty unique, I am told!  

Ms. Hetico: Actually, it does seem pretty cool. 

Dr. Marcinko: Yeah, I like working with folks much smarter than I. 

Ms. Hetico: Speaking about brilliance, I understand you are a fan of Michael Porter, PhD of Harvard University. So, what about medical competitiveness, and the union experience, in 2008? 

Dr. Marcinko: I am indeed a Porter fan, and wish he would write something for this blog or our subscription premium-quarterly guide [www.HealthCareFinancials.com]; as we do have an excellent section on healthcare competition by financial futurist Bob Cimasi of Health Capital Consultants LLC, out of St. Louis, MO, from which to draw.

Mike, if you read this please contact me privately (MarcinkoAdvisors.@msn.com). Let’s talk!

Seriously, though. I used to go up to Harvard Business School from Philadelphia when I was a medical student to hear him lecture. That was several decades ago, long before he was famous. Nevertheless, old monopolies are crumbling because of tougher new competitors. For example, our newspapers have to compete with the new internet 2.0; our electric utility companies battle low-cost local start-ups, and telephone companies must begin installing fiber optic and wireless lines to fend off cable companies. The rush to more intense competition cannot be stopped. You either keep pace or get crushed. So too, are quasi-monopolistic organizations such as the medical industrial complex. 

Ms. Hetico: How so? 

Dr. Marcinko: In organizations such as PPOs, CDHCPs and concierge medicine, patients exercise greater control over physician selection, have quicker access to specialists, and encounter fewer restrictions on their care. As these market forces grow and compete against highly structured – staff model – managed care companies; some industry analysts believe that membership in such HMOs will decline and negatively impact the medical union experience that was primarily an emotional reaction to these restrictive HMOs (and their corresponding fee depressions) more than a decade ago. Although inefficiencies in any business often opens up in the short term – and can be greatly exploited by creative and visionary entrepreneurs – sane market forces usually prevail in the long run. Furthermore, unions deter rather than augment competitiveness, according to most business and economic authorities.

Ms. Hetico: Can you explain any further, with an illustration? 

Dr. Marcinko: Competitive businesses and corporations are becoming more flexible in their healthcare care requirements, while unions keep trying to regulate the workplace with union contracts to control entire industries. Yet, in the new healthcare economy of MCOs and HMOs, doctors are headed toward more internal competition and less external control over patients.  It will be interesting to see how the new UAW control of its own VEBA healthcare plan works out.  

Meanwhile, some medical union advocates want to retreat to a more regulated age. Unions function best when they soften the harshest edge of capitalism, not try to change its nature. Healthcare providers of all sorts must choose between staying flexible to ride out tough times, or adopt a hard, brittle line that might crack under the pressure of competition. 

Ms. Hetico: What about flexibility and virtual reality in the current healthcare industry? 

Dr. Marcinko: We must remain fluid and market-responsive. In most large corporations and many top-down business models, unions are not market responsive entities and the ability for rapid change is not inherent in their structure. These traditional organizations represent a rigid or “used-to-be” mentality, not a flexible or “want-to-be” mindset.   The AMA learned this lesson the hard way. Virtual medical corporations often possess a market nimbleness that cannot be recreated in a union environment.

Going forward, it is not difficult to imagine the following new rules for the new virtual medical economic climate. 

Ms. Hetico: What are your new rules of healthcare market competition?

Dr. Marcinko: Well, they are not all mine of course, but here goes:

[A] Rule No. 1 Forget about large office suites, surgery centers, fancy equipment and the bricks and mortar that comprised traditional medical practices. One doctor with a great idea, good bedside manner or competitive advantage, can outfox a slew of non-physician MBAs, while still serving the public and making money. It’s a unit-of-one healthcare economy where “Me Inc.”, is the standard and physicians must maneuver for advantages that boost their standing and credibility among patients and payers. Examples include patient satisfaction surveys, outcomes research analysis and economic credentialing. However, you should realize the power of networking, vertical integration and the establishment of virtual medical practices – which come together to treat a patient – and then disband when a successful outcome achieved. Job security in this structure is achieved with continuing successful end results, not only a degree or union card. Medical futurists even presume the establishment of virtual medical schools and hospitals, where students and doctors learn and practice their art on cyber-entities that look and feel like real patients, but are generated electronically through the wonders of virtual reality units. 

[B] Rule No. 2 Challenge conventional wisdom, think outside the traditional box, recapture your dreams and ambitions, disregard conventional gurus and work harder than you have ever worked before. Remember the old saying, “if everyone is thinking alike, then nobody is thinking”. Do union members think rationally or react irrationally?  

[C] Rule No 3 Differentiate yourself among your peers. Do or learn something new and unknown by your competitors. Market your accomplishments and let the world know. Be a non-conformist. The conformity of labor unions is an operational standard and a straitjacket on creativity. Doctors should create and innovate, not blindly follow union leaders into oblivion. 

[D] Rule No 4 Realize that the present situation is not necessarily the future. Attempt to see the future and discern your place in it. Master the art of the quick change and fast but informed decision making. Do what you love, disregard what you don’t, and let the fates have their way with you. Then, decide for yourself if unions adhere to any of the above rules? 

Ms. Hetico: I see … but what about medical union or workplace strikes, walk-outs, protests, etc? Do they have a place in the scheme of things, and are they effective? 

Dr. Marcinko: Dismiss the potential of using a walkout or strike against patients as a weapon against MCOs, insurance companies or the Federal Government. Used at the onset of an organized union effort, we saw a few years back how they rendered the nescient unions impotent and ineffectual. And, to say it was a PR disaster is an understatement.

Ms. Hetico: Why was that? 

Dr. Marcinko: For more than 175 years the strike-weapon represented the ultimate power of the unions. But, for doctors there is un-willingness with medical labor unions to withhold care (strike). While self-noble in intent, it is just plain silly in business jargon – and affords little leverage in the negotiation process.  The inability to perform collective bargaining, because of federal and/or state anti-trusts issues, is similarly disadvantageous for unions. Just, look at the recent writer’s strike in Hollywood. If the likes of Dave Letterman and Jay Leno can’t write their own jokes; maybe they don’t deserve the monikers “comedian.” See what I mean? The same with our fellow docs! 

Ms. Hetico: Off-mark, again? 

Dr. Marcinko: Maybe, maybe not. Look at the Federation of Physicians and Dentists (FPD), an 8,000 member Tallahassee, Florida-based affiliate of the AFL-CIO, as few years ago. It represented fee-for-service physicians as a third party negotiator, but laws prohibited independent contractors from collective bargaining on their behalf.  In a similar example of federal strength, the National Labor Relations Board, in Philadelphia several years ago, rejected a labor union’s (Local # 56-United Food and Commercial Workers, Pennsauken, NJ) request to represent a group of 400 plus New Jersey physicians in negotiation with a Ameri-Health, a Mt. Laurel, New Jersey based HMO. Those physicians would have been the first private-practice independent practitioners to gain that right, which is limited to salaried doctors at large HMOs and public hospitals.

Yet, without such power, many experts felt that medical unions had virtually no negotiating leverage at all; and that demise was certain. 

THE END (to be continued in January, 2008)