Understanding Money Market Account Risks

Terms and Definitions for Physician Investors

By Staff Writers56371606

The recent banking industry debacle has prompted several of our cost-conscience doctor-clients to rethink money market account risks and related products. We trust this brief review is helpful to all concerned.

Money Market Deposit Accounts

First, the term “money market account” must be defined.

Link: http://www.HealthDictionarySeries.org

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There are two types of money market accounts [MMAs] that most people refer to when using this term. The first is a money market deposit account (MMDA). This is an account at a bank designed to compete with money market mutual funds (MMMF). MMDAs usually pay less interest than money market mutual funds and in return offer federal insurance on balances, now up to $250,000 with convenience through check writing and access through ATMs [reverts back to $100,000 after December 31, 2009]. MMDAs under this amount do not have any risk of failure because they are insured by the US government.

Money Market Mutual Funds

Money market mutual funds are mutual funds that invest in short-term instruments with maturities of less than one year, and usually offer check writing on the account. They are not federally insured, but are considered safe in stable economic times. Net Asset Value [NAV] is one dollar; USD. Nevertheless, a few have “broken-the-buck” with NAV at some increment below $1.00 USD.

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Evaluation Methods

The first way to evaluate the MMMF risk is to look at the average length of maturities in the portfolio. The shorter the maturity – the safer the MMMF. The second way is to look at the type of security owned by the fund. Government securities are generally less risky than corporate securities. Interested investors can also contact a rating service that evaluates the securities in a MMMF’s portfolio.

And now – a few related words about “so-called” high-yielding CDs.

High Yielding Brokered Bank CDs

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First, the physician-investor should determine if the CD is issued by a federally insured institution. If the answer is yes, the investor knows that a portion of his money is safe if the institution fails. If the answer is no, the doctor should obtain the institution’s ratings from the appropriate rating agencies and analyze the institution’s financials. Second, the physician-investor should investigate the volatility of the CD’s return.

Assessment

When interest rates fluctuate, the price of MMAs and CDs fluctuate much like bonds. Therefore, short-term securities are less risky than long-term securities; all things being equal.

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. Are you looking at these terms and conditions more closely during this national economic crisis? Please opine and advise.

 

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

 

This Time the Hospital Financial Crisis is Different

Oh Really … No so Fast!

Submitted by J. Wayne Firebaugh, Jr; CPA, CFP®, CMP™ho-journal2

Dr. Malcolm T. MacEachern, Director of Hospital Activities for the American College of Surgeons, presciently observed that:

… Our hospitals are now involved in the worst financial crisis they have ever experienced. It is absolutely necessary to all of us to put our heads together and try to find some solution. If we are to have effective results we must have concerted and coordinated immediate action. … Repeated adjustments of expenses to income have been made. Never before has there been such a careful analysis of hospital accounting and study of financial policies. It is entirely possible for us to inaugurate improvements in business methods which will lead to greater ways and means of financing hospitals in the future … It is true that all hospitals have already trimmed their sales to better meet the financial conditions of their respective communities. This has been chiefly through economies of administration. There has been more or less universal reduction in personnel and salaries; many economies have been affected. Everything possible has been done to reduce expenditures but this has not been sufficient to bring about immediate relief in the majority of instances. The continuance of the present economic conditions will force hospitals generally to further action. The time has come when this problem must be given even greater thought, both from its community and from its national aspect…

Source:  Steinberg, C. Overview of the US Healthcare System; American Hospital Association 2003.

Many hospital CXOs, healthcare administrators and physician executives would agree that Dr. MacEachern accurately describes today’s healthcare funding environment. However, they might be startled to learn that Dr. MacEachern made these observations in 1932! There is the old truism that there is nothing new under the sun.

American Hospital Association Statistics

Healthcare statistics suggested that the financial crisis is much the same today as it was for hospitals during the Great Depression. The American Hospital Association’s (AHA) reported gloomy statistics for hospitals include:

  • In 2001, 29% of hospitals had negative total margins.
  • Approximately $101.3 billion of uncompensated care was provided between 1997 and 2001 with an average annual increase of 16% during that time period.
  • Emergency departments in 62% of all hospitals report operating at, or over, capacity.
  • Technology costs are soaring as traditional technologies such as X-Ray machines, for $175,000, are being replaced by contemporary technologies such as CAT Scanners at $1 million that are in turn being replaced by CT Functional Imaging with PET Scans costing $2.3 million. Even such a “simple” instrument as a scalpel that costs $20, is being replaced by equipment for electrocautery costing $12,000, that is then being replaced by harmonic scalpels costing $30,000.
  • Between 2000 and 2002, 33% of hospitals reported increases in liability premiums of more than 100%.
  • The average age of hospital plants has increased 21% from 7.9 years to 9.6 years in just one decade.
  • In the four years ending 2002, hospital bond downgrades have outpaced hospital bond upgrades by almost 5 to 1.

Editor’s Assessment

As editor’s of the premium subscription, two volume, 1,200 pages, institutional print-guide Healthcare Organizations [Financial Management Strategies], we prefer engaged readers and contributors like Mr. Firebaugh, who demand and create compelling content like the above. Please review these links for same.

www.HealthcareFinancials.com

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Conclusion

Always beware the words: “this time it’s different;” as it rarely is. And so, your thoughts and comments on this Medical Executive-Post are appreciated. Please opine and subscribe to the ME-P here; it’s fast, free and secure.

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