Financial Risks

MID-AtLANTIC SPECIALTY., Inc., is a not-for-profit corporation formed by physicians in the College of Medicine at Mid-Atlantic University. Mid- Atlantic, with more than 600 physicians, provides the medical staff for University Hospital. In addition, Mid-Atlantic staffs and administers a network of 25 ambulatory care clinics and centers at ten locations within 50 miles of University Hospital. In 2017, Mid-Atlantic generated more than
$500 million in revenues from about 40,000 inpatient stays and 750,000 outpatient visits.
More than 70 percent of Mid-Atlantic’s revenues currently come from inpatient stays, but this percentage has been declining; by 2018, more than half of Mid-Atlantic’s revenues are expected to stem from outpatient services. As improvements are made in technology and as third-party payers continue to pressure providers to cut costs, more and more inpatient services will be converted to outpatient and home care. For example, in 2007, 80 percent of Mid-Atlantic’s ophthalmological surgeries took place in University Hospital, whereas in 2017, 80 percent were performed in outpatient settings.
Although Mid-Atlantic has traditionally provided only specialty ser- vices, in 2017 it instituted a “personal physician services” program, in which patients can receive both primary and specialty care from College of Medi- cine physicians. This was the first step in Mid-Atlantic’s drive to develop an integrated delivery system, which offers a full range of patient services. Now that the system is in place, Mid-Atlantic is contracting with man- aged care plans to provide virtually all physician services required locally by plan members. Furthermore, Mid-Atlantic is examining the feasibility of contracting directly with employers, and hence bypassing managed care
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84 Cases in Healthcare Finance

plans, but no decision has yet been made. Indeed, state insurance industry representatives expressed opposition to the idea when Mid-Atlantic first announced the possibility of direct contracting. The insurance industry’s position is that direct contracting with employers to provide a complete healthcare benefit package is an insurance function, which can be undertaken only by licensed insurance plans.
As part of its continuing education program, Mid-Atlantic holds monthly nonclinical grand rounds for its physicians, in which various staff members and outside specialists conduct seminars on nonclinical topics of interest. As part of this series, Chris Johnson, Mid-Atlantic’s chief financial officer, has been invited to conduct two sessions on the financial risk inherent in integrated delivery systems. His main concern is that physicians, although very sophisticated in clinical matters, have a limited understanding of basic financial risk concepts and will not appreciate the financial issues involved in integrated delivery systems without first gaining an understanding of financial risk fundamentals. Thus, he plans to devote the entire first session to basic concepts.
In preparation for the seminar, Chris has identified four investments for Mid-Atlantic to consider:

1. 1-year T-bill. This is short-term (one-year or less maturity) US Treasury debt securities.
2. Healthcare fund. This is a mutual fund of securities from a wide range of healthcare corporations.
3. Inverse ETF. This is an inverse exchange-traded fund that performs as the inverse of whatever index or benchmark it is designed to track. These funds work by using short-selling, trading derivatives, such as futures contracts, and other leveraged investment techniques. By providing short-term performance opposite to their benchmark, inverse ETFs give a result similar to short selling the stocks in the index.
4. Biotech fund. This is a mutual fund of securities from large and small biotech corporations.
   Chris has obtained forecast one-year return distributions and historical returns from Hudson and Allen, the investment adviser used by Mid-Atlantic (see exhibits 12.1 and 12.2). With this information, he can start to prepare his presentation on analysis of stand-alone and market risk.

Case 12: Mid-Atlantic Specialty, Inc. 85

EXHIBIT 12.1
Mid-Atlantic Specialty, Inc.: Estimated One-Year Return Distributions on Four Investments and the S&P 500

ETF: exchange-traded fund; S&P: Standard & Poor’s; T-bill: Treasury bill

ETF: exchange-traded fund; S&P: Standard & Poor’s; T-bill: Treasury bill
Note: These return distributions are fictitious and not meant to describe actual market conditions at the time you work this case.

EXHIBIT 12.2
Mid-Atlantic Specialty, Inc.: Historical Return Distributions on Four Investments and the S&P 500