TIME VALUE of MONEY in Biz and Medicine

You know how you want something so bad that you can taste it? It was one of those wants. We all have them from time to time. Things that matter little in the scheme of things, yet at the appointed hour they burst open this bouquet of desire. I thought as I stood in line for the future value of the shiny product. Hmm… it could do a lot of things that would make life easier for me. Easier, did I say? Maybe a bit more complicated is the correct phrase. Eventually, ending up third in line for the shiny object while waiting, you know that ethereally nebulous thing that pricks a bubble in your conscience, pricked mine and I proceeded to exit the line to the gaping mouths of the patrons behind me who had gotten to know one another over the past few hours. Yup, I left. And here is why…

Before I go there, here is a question for you. Is buying a used car better in time of value, all things being equal in quality, better for you? The answer will surprise you. Ask any sane person and he will tell you that the depreciated value of a product is cheaper than buying it brand spanking new. Less money same bang for the buck – four wheels, an engine and a personally desired chassis is the same as under the lights of the showroom. This is a form of time value of money.

Ok, now keep that in your mind as I go down this rabbit hole. And there are plenty of finance-majored caterpillars asking, “Who are you?”

There is something called Time Value of Money or TVM. You might have heard of it. It turns out TVM is the biggest single business issue that occupies a financier, financial analyst, manager, a CEO and anyone else involved in the complex world of commerce.

Tomorrow’s dollar will buy just a bit less than today’s. It so happens that this rude thing is called inflation, or “less buying power.” This little culprit has robbed us of our wealth in many different ways. Most people have never even thought much less dreamt about them. Look up the difference between “nominal” and “real.” Go ahead look it up. This can wait.

Let us say we have $100 in our pocket and the current interest rate is 5% then the simple equation to understand the Future Value (FV) as it relates to Present Value (PV) of that $100 is:

FV = PV (1 + r) and (r = interest rate) = 100(1+ 0.05) = $105 The Future value rises doesn’t it…also meaning that what cost $100 now costs $105. Or the future buying power of that $1 is now $0.95. Oh dear!

So if we want to know the FV in n years we plug in the formula: FV = PV (1 + r)^n where “n” represents the number of years = 100 (1 + 0.05) ^5 =$127.62 which is more than the simple interest rate of 5% yielding $125 (or $105+$105+$105+$105+$105=125) that is if the interest was added only to the initial principle and not on the accrued amount. Simple isn’t it? But look here, here is another nifty thing about this formula; If you want to see what today’s value is for tomorrow’s money than a simple algebraic magic gives us:

PV = FV (1/1 + r) ^n (n being the number of years) You see, nothing to it. Got it?

Now let us look at how big people exploit this little formula to their advantage…

Heard of the Revenue Cycle? That is if you sell a product, you send an invoice and the buyer then has 30, 60 or 90 days to pay off the bill. Here is the subtle catch, the buyer can use that money (designated to the seller) for other things and since time is advancing, the value of the amount owed is also dwindling in real terms of purchasing power. Huh? You say, but it is not even a year yet. How can that be?

Elementary, there is another beauteous term called “Compounding Interest.”  If the buyer’s money is compounding interest on a daily rate his value in 90 days based on compounding interest will be a bit more than if he pays it off immediately. So he has taken advantage of the Future Value of today’s money. Or in simplistic terms he is paying with dollars that have less buying power. Smart, eh? Oh, by the way the formula of the continuously compounding rate (and that my friend is the real golden goose) is slightly modified. I call it “Pert. ”

P = Principal amount (Initial Investment)

r = Annual Interest Rate ( as a decimal)

t = Number in years

A = Amount after time t

FV = P * (e)^rt  ~here “e” is the natural log (2.7182818) and “r” is interest rate and “t” is time in years. So you see if the bank for instance charges you a continuously compounding rate but pays you interest on your savings at an annual compounding rate, guess who wins? = 100 * (2.71828) ^0.05*5 = $128.40 vs $127.62. You won’t scoff at that number if you figure those transactions in the billions!

Let us see how the Medical Revenue Cycle permits such shenanigans. If you want to know a little more about Medical Revenue Cycles it is here.  http://jedismedicine.blogspot.com/2013/09/the-medical-revenue-cycle.html?spref=tw

A doctor sees the patient who needs a surgical procedure. After the operation the doctor sends a bill to the insurance company. You might as well know this little known caveat up front that almost 11-18% of the bills are automatically denied, some for not dotting the (i)s and others for not crossing the (t)s and still others because they can, by requiring more justification needed for the surgery. It’s the need based on “patient’s welfare” excuse as if they the clerks know better than the surgeon. They DON’T (my emphasis)! So the delay continues and finally the payments are made sometime 6 -12 weeks later for amounts much lower than what was billed. I know you are clamoring to know a surgeon’s bill say for a cholecystectomy. Current Medicare and other insurer payments range from $367-580. That is it and within that payment is bundled a 90 day post-operative free included global follow-up (that means the doctor is responsible for all care pertaining to the surgery)! Guess what, but I guess by now you have already figured out the opportunity cost (the cost of using that money for other purposes by the insurer or keeping it in the investment vehicle of their choice where it would yield a continuously compounding rate will deliver a higher amount than what is paid out to the doctor both by delay (TVM) and by denying (TVM) and by decreasing the reimbursement actually due. A win-win for the good ol’ insurer dudes!

These dollar amounts are miniscule, you might say, “What’s the clamor all about?” Now simply multiply the 850,000 physicians overseeing the care of 320,000,000 people in the United States on a daily basis and the numbers get huge. I mean astronomically huge!  Hence, the delay tactics by the insurers to enrich themselves with the ballooning Future Value is more than a delay tactic, It is a handsome reward! And that is how the AVERAGE Healthcare CEO salary is now tipping at $11.4 million apiece. These CEOs are , most of them anyway, if anything, not dummies!

You might see businesses sending you invoices that say if you pay in 15 days you can get a 2% discount ($1 in hand is better than $2 in the future) or after 30 days they charge 2% and 5% after 60 days. They have it calculated to a tee. They ain’t losing money honey! Based on receiving their money quickly, they can put that money to investment which can have a better rate of return than the 2% they give you. And you thought CEOs just had wild parties. They do but after they finish counting their loot.

Hopefully you have a better understanding on games business people play.

ABIM Retreat Resort

I was going to end there but this juicy script of the ABIM redirected my attention.

Let us start with a company that makes a widget. The widget company obviously has costs to make the widget, right? So the money from the sale (called Revenue) of the widget  goes to pay off the expenses related to the widget and what is left, is called in business parlance “Gross Margin.” If operational costs are subtracted from that then it is called EBIT (Earnings before Interest (on loans) and Taxes.  So in ABIM’s case they claim 200,000 physicians are certified and roughly 12,000-14,000 physicians take their certification and recertifying examination annually (based on ABIM website) and 80,504 certified physicians are taking part in MOC every 2 years. Given what I have paid in the past, I would put the cost at somewhere around an average of $2000 ($1385-Internal Medicine-$2830 Sub Specialty- from ABIM website). If you multiply the number of physicians to the cost of the exam, that is big money. Add $500 per MOC event to that and it takes on a whole new meaning about BIG money! And that is all Cash receipts up front. Their expenses, they claim, are the cost of making up questions and organizing a Gestapo-style examination where a physician is “searched” before entry and afforded other indignities. And if you cancel before the exam date you forfeit 30-45% of the fee.  Huh? I guess they plan to limit cash flow reduction issues – read on. They claim creating the test questions and organization of these examinations costs a lot. And self-promotional articles as “Evidence” for the recertification and MOC needs cost money. They might have to pay to blind the co-authors about Conflicts of Interest, maybe? Okay, so deduct maybe, what, 20% on the high side? The left over is their Gross Margin. And where the money goes in this non-profit 501 (c) 3 organization is to pay the executive compensation. Getting back to the TVM, the money they take from physicians is at least 3 months before the certifying examination and at the beginning of each segment of the MOC. The computerized certifying examination results are reported 3 months later – minimal effort on the human element just tell the computer what number of doctors should fail so that they can come back for another examination and pay for it again. The excess dollars in the kitty after the lavish $1 million salaries are disbursed, going towards the multimillion dollar condo in Philadelphia and the Mercedes limousine under the auspices of the ABIM Foundation (a valued partner for slush funds) and to cater to their extremely secretive meetings about how to write more examination questions.

Photo from Newsweek Article

Kurt Eichenwald exposed the Accrual-based accounting thatABIM is doing. It appears that their net asset value which is based on the Present Value of the discounted Future Cash Flows is propped up to a robust number while simultaneously bleeding out the cash for Executive Compensations and other expensive resort “Retreats.” They are hoping that the Future CashFlows will continue to grow as a consequence of “undertaking this herculean effort for the public good.” What they might not have considered was the fact-finding- storm that led to a physician backlash over MOC and is going to leak some future cash flow. One would think that their estimates of the Present Value of their discounted future cash flows will drop significantly in the very near future. You think? The future of this new Present Value is going to be interesting to behold as less comes in to pay those handsome salaries. Maybe put the Philly condo up for sale (for saving face) and go on a diet at the retreats? Possibly?  Just maybe? Maybe? Uh? (That sentence reminds me of MacFarlane’s Stewie).

It is time to consider what will be from what is and likewise what is from what will be. It is also time for physicians to consider why pay into a corrupted system.  That money for MOC and recertifying examination has opportunity costs for better investments than going through the rigors of an examination like MOC/ABIM recertification conducted in a Gulag environment and holds no beneficial, educational, value to a physician or to the patient, unless you are a masochist - there I said it! That money is spent better elsewhere, in your practice, taking care of your patient!

There you have it, a peek from the business end of the stick and the derriere of the physicians; a story about the trials and tribulations of the many who serve a few (masters).

Oh, by the way, I got that shiny object three months later for half the price…