Hospital Capital Formation, Harry Markowitz and Modern Portfolio Theory

Posted on February 16, 2010 by Dr. David Edward Marcinko MBA MEd CMP™

Strategic Risk Considerations for Physician-Executives and Healthcare CXOs

[By Calvin W. Wiese; MBA, CPA, CMA]

To most all financial advisors, wealth managers and stock-brokers, the work of Harry Markowitz and Modern Portfolio Theory [MPT] is not usually discussed in terms of hospital capital formation. But, perhaps it should!

Capital Investments Create Risk

Capital investments create risk. Risk is the uncertainty of future events. When hospitals make capital investments, they commit to costs that affect future periods. Those costs are known and relatively fixed. What are unknown are the benefits to be realized by those capital investments.

Defining Risk

For capital investments, risk is the certainty of future costs coupled with the uncertainty of future benefits. In some cases, while the future benefits are uncertain, there is a high degree of certainty that the benefits will exceed the costs. In these cases, risk can be very low. Risk may be better defined as the degree to which the uncertainty of unknown benefits will exceed the known and committed costs.

Asset Burdens and Benefits

When capital assets are purchased, both the burdens and the benefits of ownership are transferred to the owner. The burdens are primarily the costs associated with acquisition and installation. The benefits are primarily the revenues generated by operating the capital assets. Risk of ownership is created to the degree that the benefits are uncertain.

Understanding Risk

Hospital managers need to be skilled at putting hospital assets at risk. Without clear knowledge and understanding of the benefits and the burdens, hospitals can quickly find themselves at unacceptably high levels of risk. Risk must be continually assessed and evaluated in order to successfully put hospital assets at risk. Hospitals require many varied capital investments; their capital investments represent a risk portfolio. An effective combination of risky assets can often create risk that is less than the sum of the risk of each asset.

Modern Portfolio Theory

Of course, financial managers have know this for years as a basic principle of Modern Portfolio Theory (MPT), first introduced by Harry Markowitz, PhD, with the paper “Portfolio Selection,” which appeared in the 1952 Journal of Finance. Thirty-eight years later, he shared a Nobel Prize with Merton Miller, PhD, and William Sharpe, PhD, for what has become a broad theory for securities asset selection; and hospital assets may be viewed as little different.

Prior to Markowitz’s work, investors focused on assessing the rewards and risks of individual securities in constructing a portfolio. Standard advice was to identify those that offered the best opportunities for gain with the least risk and then construct a portfolio from them. Following this advice, a hospital administrator might conclude that a positron emission tomography (PET) scanning machine offered good risk-reward characteristics, and pursue a strategy to compile a network of them in a given geographic area. Intuitively, this would be foolish. Markowitz formalized this intuition.

Detailing the mathematics of diversity, he proposed that investors focus on selecting portfolios based on their overall risk-reward characteristics instead of merely compiling portfolios of securities, or capital assets that each individually has attractive risk-reward characteristics. In a nutshell, just as investors should select portfolios not individual securities, so hospital administrators should select a wide spectrum of radiology services, not merely machines.

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Assessment

Savvy hospital managers will mitigate ownership risk by constructing their portfolio of risky assets in a manner that lowers overall risk

Conclusion

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Evaluate our 2-Volume Institutional Print Guide

Posted on April 4, 2009 by Dr. David Edward Marcinko MBA MEd CMP™

Healthcare Organizations [Financial Management Strategies]

ADVERTISEMENTho-journal2

www.HealthcareFinancials.com

Our 1,200 pages, 2-volume, quarterly institutional print guide Healthcare Organizations [Financial Management Strategies] is available on a 30-day, risk-free trial.

You may contact http://www.STPub.com at (604) 983-3434, fax (604) 983-3445, or e-mail at custinfo@stpub.com to place an order, or ask questions regarding pricing and/or availability.

All shipments arrive within 5 to 10 days. Prepayment is required for all international shipments and a small courier charge will be added to the subscription price.

After hours, we suggest you review the STP website FAQs section for answer to your inquiry: www.stpub.com/pubs/custinfo.htm

Assessment

Rest assured, Healthcare Organizations: [Financial Management Strategies] will become an important peer-reviewed vehicle for the advancement of working knowledge and the dissemination of research information and best practices in our field. In the years ahead, we trust these principles will enhance utility and add value to your subscription. Most importantly, we hope to increase your return on investment [ROI] by some small increment.

Review and Ordering Information:

Specialty Technical Publishers

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1-800-251-0381

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Note: The guide is sponsored by www.MedicalBusinessAdvisors.com with contributions from www.CertifiedMedicalPlanner.com and is edited by ME-P’s Dr. David E. Marcinko and Professor Hope R. Hetico; RN, MHA. Definitions and terms supplied by www.HealthDictionarySeries.com

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated? Reviews from current journal-guide subscribers are encouraged and appreciated.

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

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Hospital Financial Capital Capacity

Posted on February 10, 2009 by Dr. David Edward Marcinko MBA MEd CMP™

An Economic Risk Measurement

By Calvin Weise; MBA, CPAho-journal5

Hospital capital capacity is all about risk.

A Risk Measurement

Since capital investments have risks associated with them, capital capacity is a measurement of how much risk a hospital can bear. Capital capacity is not simple to determine. Capital investments introduce varying levels of risk, depending on the relative uncertainty of the benefits to be derived.

For example, one million dollars invested in an MRI at a hospital that has a two-month backlog for scheduling MRIs has much lower risk than $1 million invested in a new service like a PET scanner.

Profit Margins

Profit margins affect capital capacity. Larger profit margins create larger capacity for uncertainty which implies more risk and that means more capital capacity. Higher liquidity means more capital capacity. Lower debt leverage means more capital capacity. Liquidity and leverage are balance sheet ratios. Both imply capacity to absorb uncertain outcomes; both affect capital capacity.

Capital Determinations

Determining capital capacity is more art than science because of the variability in risk presented by various capital investments and the subjectivity associated with trying to measure that uncertainty.

That having been said, it is important to build models that estimate capital capacity. Most capital capacity models ignore the variability in risk presented by capital investments. They are typically built from published rating agency financial ratio medians. These models are based on the view that financial ratios of similar rating categories represent equivalent risks.

Of course, this is a simplistic view as it suggests that credit analysts simply categorize risk on the basis of financial ratios. It is not the case as the recent financial meltdown has demonstrated. Even the major credit rating agencies have been implicated as suspect; of late

Assessment

Published medians are the result of credit analysis, not the basis for credit analysis. Importantly, what is not usually published is the range or distribution around these medians. Models that estimate risk need to differentiate among risks presented by capital investments. Capital investments with little risk should consume less capital capacity than capital investments with a lot of risk.

Link: www.HealthcareFinancials.com

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. How does your practice, medical clinic or hospital measure and report capital risk; does it?

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

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Charity Care Law Violations

Posted on January 11, 2009 by Dr. David Edward Marcinko MBA MEd CMP™

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Collections Agency Sued for Alleged Violations

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

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According to Ann Zieger of Fierce HealthFinance on January 7, 2009, a Washington state healthcare collection agency is being sued by a law firm for allegedly violating state charity care laws. This is a case that could become a class action if the firm gets its way.

The Case Argument

The case hinges on a Washington measure that, among other things, defines individuals and families with annual incomes below 100 percent of the federal poverty level as officially eligible for hospital charity care with no charges.

The Law Firm

Seattle-based Phillips Law Group has filed a lawsuit claiming that healthcare collection firm Audit & Adjustment Company has been misleading patients by telling them they owe the full charges on hospital billing statements.

The Argument

The suit argues that the collections firm is required to tell patients that they might potentially be entitled to charity care that would cut or eliminate their hospital debts. It also alleges that this behavior violates not only Washington’s charity care law, but also the Consumer Protection Act [CPA] and the Fair Debt Collection Practices Act [FDCPA].

The Remedy

The attorneys seeks to stop the agency from attempting to collect from charity care-eligible patients, as well as to establish procedures to allow patients to qualify for charity care, and let patients from which it has collected in the past four years become eligible for reductions in their debt.

Related Cases

In an unrelated matter, a Missouri hospital based in St. Joseph, owned by Heartland Health, Inc has been sued over allegations that it too allowed its captive collections agency to collect without letting patient-debtors know the agency was owned by the same company as the hospital. Kansas City Attorney Derek Potts filed suit against the hospital, Heartland Regional Medical Center, on behalf of three clients, and is asking the court for class action status. The collection agency, Northwest Financial Services, is owned by Midwestern Health Management, which is also owned by Heartland. 

And, here in Atlanta, charitable entity Grady Memorial Hospital, the region’s only a Level I trauma center, just received a $200 million grant from a private foundation with ties to Coca-Cola. It was the largest gift on record to a single public hospital, according to the Center on Philanthropy at Indiana University. Grady has been struggling financially for some time, now.

Assessment

Considering the financial mismanagement and extreme revenue seeking tactics of some not-for-profit hospitals today – much like Mrs. Jellyby the misguided do-gooder in Charles Dickens’s “Bleak House” – some hospitals practice a form of “telescopic philanthropy” [first termed by Richard Oastler; in 1727]. As you may recall, Jellby neglected her chaotic family to devote time to improving conditions in distant Borrioboola-Gha, Africa. Conclusion

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Risk Management and Insurance Strategies for Physicians and Advisors

Posted on October 12, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Foreword and Book Review

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By Lloyd M. Krieger; MD, MBA

Insurance is an important part of all our lives. 

This is especially true for physicians. I currently have no fewer than 10 separate insurance policies associated with my plastic surgery practice. I understand very little about the policies other than that somebody at some point told me I needed each and every one of them, and each made sense when I bought it.

For example, am I over-insured and thus wasting money?  Am I under-insured and thus at risk for a liability disaster?  I never really had the means of answering these questions, until now www.jbpub.com/catalog/9780763733421

The Book

Risk Management and Insurance Strategies for Physicians and Advisors is an essential textbook because it explains to physicians and insurance professionals the background, theory, and practicalities of medical risk management and insurance planning.  The insurance haze is lifted by-dual degreed editor, and Certified Medical Planner™ Dr. David Edward Marcinko MBA, and his team of contributing authors www.jbpub.com/catalog/9780763733421

Goaded Physicians

Doctors, like most people, tend to experience losses more intensely than gains, and evaluate risks in isolation. So it’s no surprise that goaded physicians might prefer vehicles like the guaranteed minimum death benefit of variable annuities, or the assurance that comes with disability or long term care insurance, or traditional cash value life insurance policies, despite their decidedly higher costs and commissions.

Denial Mode

Similarly, physicians may enter denial mode and eschew the potential business impact of HIPAA and Balanced Budget Act risks; self referral risks; OSHA, DEA, EPA, OCR, P&C or managed care risks; managed care contract capitulation risks; employee, expert witness, peer review and on-call risks; and even educational debt load risks, among so many others.

Insurance Professionals

For real insurance professionals on the other hand, this is an exciting time to be practicing medical risk management, because there is much research and creative enlightenment occurring in academic and practitioner communities.

But, one must be willing to abandon ancient thoughts and remain open to new ideas that identify and provide solutions to the contemporaneous problems of physicians.

As an example of this epiphany, the economist Christian Gollier revisits the raison detra’ of insurance, by asking: should one even buy insurance since the industry itself is so skilled at exploiting human foibles?

Although this emerging work is descriptive, it is not yet time tested since some of it aspires to be normative, as developing modern models of savings and consumption hint that insurance may deserve a smaller role in personal risk management than previously believed.

Assessment

Risk Management and Insurance Strategies for Physicians and Advisors fulfill its promise as a peerless tool for physicians wanting to make good decisions about the risks they face. It is also ideal for financial planners, insurance agents and healthcare business advisors wishing to re-educate and help doctors by adding lasting value to their client relationships. With time at a premium for all, and so much information packed into one well-organized resource, this book should be on the desk of every physician, or financial advisor serving the healthcare space. Simply stated, if you read this compelling text with a mind focused on the future, the time you spend will be amply rewarded www.jbpub.com/catalog/9780763733421

Conclusion

Your thoughts and comments on this best seller are appreciated.

Lloyd M. Krieger; MD, MBA

Rodeo Drive Plastic Surgery

The Rodeo Collection

421 North Rodeo Drive

Beverly Hills, CA  90210

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Risk Management: It’s Not All About Medical Malpractice Anymore

Posted on August 2, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Book Review

By Murray J. Goodman; MD

In the narrow world of our day-to-day practice, orthopaedic surgeons often think of risk management strictly in terms of avoiding exposure to medical liability lawsuits. But, in the book Insurance and Risk Management Strategies for Physicians and Advisors, author, physician, and healthcare economist David E. Marcinko has assembled a cadre of experts who address the broader issue of risk management.

Link: http://www.amazon.com/Insurance-Management-Strategies-Physicians-Advisors/dp/0763733423/ref=sr_1_3?ie=UTF8&s=books&qid=1217606361&sr=1-3

15 Chapter Overview

This book examines the many important risks that we, as physicians, face daily in the practice of medicine. You may not think of life insurance, sexual harassment, Medicare fraud, marital divorce, and privacy issues as part of a risk management plan, but they are. Dr. Marcinko has written a book that provides an initial reference point for these diverse issues.

Each of the 15 chapters covers a single area, providing a broad overview as well as specific information and recommendations. This book addresses the personal, professional and business risks physicians face on a daily basis.

Personal Insurance Matters

The personal side of insurance is first, beginning with a discussion on insuring the doctor’s life. The chapter explains the various types of policies available, as well as various permutations and combinations of policy provisions. It briefly discusses both health insurance and long-term care insurance. It includes the critical features to look for in selecting a long-term care policy for yourself and the necessary criteria for successfully filing a claim under such a policy.

Practice Insurance Matters

Many orthopaedic practices are also small businesses, so property insurance and the business uses of life insurance, such as in buy-out and succession planning, are covered. The author reviews the use of restrictive covenants and employment contracts, providing examples of what works and what does not. One of the questions this chapter addresses is the difference in applicability between a restrictive covenant with regard to a departing employed physician and a restrictive covenant included in the sale of a medical practice.

Compliance Topics and Medical Workplace Regulations

Recent actions by the Department of Justice [DOJ] and activities of the Office of the Inspector General [OIG] regarding Medicare have focused attention on compliance issues. The text provides a good overview on medical documentation and healthcare compliance, including a summary of record-keeping obligations.

In addition, the author includes pointers on how a medical practice can avoid running afoul of the federal False Claims Act, fraud and abuse statutes, Stark and safe harbor laws, and the “alphabet soup” of HIPAA, OSHA, and ERISA regulations. Risks involved with serving as an expert witness, doing peer review and taking call are also covered. The discussions are as timely as those sponsored by the AAOS. The chapter on medical malpractice even includes a discussion of physician self-regulation and expert witness discipline.

Sexual Harassment Issues

The section on sexual harassment explains what constitutes a hostile work environment and what the physician’s role should be in risk avoidance. Complimenting an employee’s dress or telling a slightly off-color joke may seem innocent enough, but not if they meet the two criteria that determine offensive behavior and can lead to a lawsuit. Violence in the workplace is discussed as it relates to patients and employees, both as perpetrators and as victims. The author recommends that every orthopaedic practice have a policy and a plan in place to deal with these issues should they arise.

Malpractice Liability and Going to Court

One-quarter of the book is devoted to medical liability risks. Although the discussion of the medical liability crisis might be a bit dated and only too familiar to many readers, the section on the anatomy and procedures of a medical liability trial and the physician defendant’s role in that process is excellent. From subpoena to verdict, the process is laid out. Written by a malpractice attorney who is also a physician, the chapter provides solid advice on how to respond to the subpoena, secure the medical record [make an exact copy and seal it], and find personal counsel.

Pre-Nuptial Agreements, Divorce and Asset Protection

The financial risks of divorce are rarely covered in books geared to medical professionals, but this text examines them in detail. It also discusses prenuptial agreements and the special circumstances surrounding older divorcing medical professionals. Final chapters cover asset protection principles and how to select insurance and financial advisers who specialize in serving medical professionals.

Recommended Reading

Each chapter is authored by an expert in that particular field, but the text has a uniform consistency and approach, listing basic principles and citing specific examples to illustrate the issues involved. Ample references are provided, including written texts and articles, case law, and Internet Web sites. The table of contents is functional, and the index is well-organized for quick reference.

Insurance and Risk Management Strategies for Physicians and Advisors[Jones and Bartlett Publishers, Sudbury, Mass] is a comprehensive examination of risk management strategies. It does not provide specific legal or financial advice, but it does provide a background in many areas germane to the practical aspects of maintaining a medical practice in this millennium. Although not a stand-alone text, it gives the reader the vocabulary and information necessary to take many of these issues to the next level.

Assessment

“This book is recommended reading for those about to enter the practice of medicine; those already in practice will find it a helpful reference when seeking resources on a particular issue”.

Personal

My wife tells me that because it also addresses the personal and emotional issues affecting physicians’ lives, it is suitable for spouses as well.

Note: Murray J. Goodman, MD, is a member of the Medical Liability Committee. He can be reached at mj-goodman@comcast.net June 2008 AAOS Now http://www.aaos.org/news/aaosnow/jun08/managing2.asp

From the article of the same title AAOS Now (06/08) Goodman, Murray J.

http://www.asoa.org/resources/practice-mgmt-news/practice-management-news.cfm

Conclusion

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