Does MD Anderson Use Enron
Accounting Techniques?

By

Leonard Zwelling

         I simply cannot figure it out. How is it that MD Anderson, a
non-profit associated with the University of Texas, is always showing a profit?
Whoops. I mean a margin, as if there is a difference. And how is it that MD
Anderson is a non-profit showing a profit that does not pay federal taxes? And, perhaps,
most mysteriously of all, how transparent is all the financial reporting at
Anderson anyway?

         Here are some examples of accounting practices that MD
Anderson used when I was Vice President that seemed rather unconventional to
me. I have no idea if they are still in use.

         The value of free care. MD Anderson calculated the amount of care
it gave away by using the price of
the services provided for which it was not reimbursed. This seems odd given
that only the occasional uninsured sheikh who wheels his 747 to the front of the LeMaistre Clinic actually pays list price for any clinical services. Most
insurers, including the federal government, operate by reimbursing Anderson at
a steep discount from price although, I am sure, at a premium to cost.

         Cost. Does MD Anderson really know the cost of any
clinical service that it provides? I doubt it for I doubt any other medical
care provider has a fully allocated cost system either but operates on cost to
charge ratios. That’s not true cost, of course. As an example, how does MD
Anderson allocate the cost of air conditioning all those buildings into the
price of any given imaging exam? It is basic accounting to declare how you
allocate costs across the price of your services.  How exactly does MD Anderson do that?

         Booking philanthropic donations. If some high roller
donates $50 million to Anderson, it is booked to the bottom line all in the
year of its donation despite the fact that the pay out may well be years in the
future and may even require the President to raise matching funds as was the
case with the Pickens donation for the Mendelsohn Building. John earned the
naming opportunity as he raised the matching funds or, I believe, shifted funds
to the bucket called matching funds. At least, that was what I have been told. If this isn’t Enron-style mark-to-market accounting, I don’t know what is, for it assumes the future value of that which has yet to arrive.

         Naming opportunities. One of the buildings on the
South Campus was named for a donor who, it turned out, did not come up with the
cash and the name was removed. Perhaps MD Anderson should make it a policy to
reserve ordering the letters of the donor’s name for the building until the
check clears.

         I have been wondering about all of this as I read The Smartest Guys in the Room, a book
about the rise and fall of Enron. Remember fully half of the Presidents in MD
Anderson’s history were Enron board members. Perhaps they brought some lessons
home with them from board meetings.

         I hope not!

         Any way, in the wake of the recent victory for the faculty
that seems to be making shared governance a reality, perhaps a comprehensive
and comprehensible balance sheet, income statement and statement of cash flows
might be made available to the faculty as well. Then close attention needs to
be paid to the accompanying notes because as any MBA will tell you, it is
within the notes in the annual report of a company that the truth about the
company’s financial health can be found. It is way more than the numbers. It is
HOW the numbers came to be.

         An MRI of the MD Anderson accounts is in order and MRI
doesn’t stand for More of Ron’s Income.

         In all my years as an executive at Anderson, I could never
understand the finances. The form of the annual statements was always explained
to me as being mandated by the state, but these so-called “fund accounting”
statements still were not easy to decipher and all I ever asked Mr. Leach to
explain were the answers to two questions:

         How much does it cost to see the next patient?

         How much does it cost to hire the next faculty member?

         And I meant fully allocated costs, counting all additional
personnel and fixed and variable costs incurred to see a new patient or retain
a new faculty member—secretaries, nurses, PAs, study coordinators, trucks, furniture
including couches, air conditioning and environmental health and safety along
with all of that bureaucracy that is deemed so vital. All of that costs money.
How is it accounted for against the revenue and how is the information used to
set prices? Or is the price simply a function of the contract signed with the
insurance companies and thus has no bearing on cost and is subject to annual
renegotiation unassociated with the annual increase in cost for personnel and
services?

         Why is this important?

         MD Anderson was always getting bigger. So it was always said
that Anderson was taking advantage of the “economies of scale” curve that meant it made more money per unit work as the faculty did more work. The problem is that curve is
a biphasic sigmoidal one.  The back end
is the dys-economies of scale curve (the more you do the LESS you make per unit
of work due to inefficiency and size) and the only way you can know where you
are on the curve is by taking multiple accurate readings and tracking it.

         My bet is that MD Anderson has been on the extreme right end
(the “dys” end) of the economies of scale curve for years and the reason there
is such a drive to see so many new patients is that MD Anderson is trying to
make up in volume what it loses in inefficiency. (If you sell watches at two
cents under cost, you have to sell a lot of watches to make a living. This is an old joke from the Catskill Mountains recently repeated by Jackie Mason).

MD
Anderson terms itself a premium provider of quality care, but doesn’t
demonstrate the quality (which I believe is really there, but is, as yet,
unmeasured) and acts like WalMart as it claims to be Tiffany. (Those minimally smiling
heads in the new commercial look more like Tiffany jewelry than the latest bauble
from China on the shelves at WalMart).

The
inefficiency comes from huge fixed costs in the form of buildings and people. Remember
the ratio of non-money making personnel to revenue-generating personnel
(faculty) is close to 20 to 1. So even if a new patient only makes MD Anderson
a single dollar based on current fixed costs, that’s a dollar Anderson did not
have before. Thus, beat the faculty to work harder as 85% of the revenue comes
from patient care and even on the wrong end of the curve, MD Anderson will make
a bit more if more patients flow through the front door.

         I have no stock in MD Anderson other than my minimal pension
based on my limited time in the “old retirement plan.” But all of you still
working have a vested interest in all of this. You might ask these questions
yourselves.

         If you get clear answers, let me know.

         Bet you a nickel you don’t, and that nickel could be the
profit (errr, margin) on the next stage 4 melanoma patient seen in your clinic.

Leonard Zwelling