Estimating the Value of

an MD Degree

Marc J. Kahn, MDMBA (to be)

Professor of MedicineSr. Associate Dean

Tulane University School of Medicine

Topics Value of Money

Risk and Return

Net Present Value

Questions Would you rather have $1,000,000 now or

$250,000 each year for the next 4 years?

What is $250,000 a year for 4 years worth today?

Time Value of Money

Most basic concept of finance

Money is worth more today than in the future.

Opportunity costs

Investment alternatives

Definitions Interest—money paid for use of your money

Future value—amount to which an investment grows after earning interest

Present value—amount of money you start with

Interest Simple—interest earned on initial investment

Example: You invest $100 at 6% annual interest.

=$100 (1.06) = $106 after one year

Compound—interest earned on interest

Example: You invest $100 at 6% interest compounded monthly.

=$100 (1 + .06/12)12 = $106.17

If compounded daily = $100(1 + .06/365)365 = $106.18

Compound Interest Payments APR = Annual Percentage Rate (most

common)

EAR = Effective Annual Rate

Example: You have a credit card with an APR of 18%. What is the “real” interest rate annually?

APR = monthly rate x 12

Monthly rate = 18/12 = 1.5%

EAR = (1 + 1.5%)12 – 1 = 19.56%

Why Compounding

Matters Grains of wheat on a chessboard

One grain in square one, double each successive square

Total wheat is more than that in the entire world!!

= 1.92 x 10109

Future/Present Value

FV = PV (1 + r)t

Original Questions

Would you rather have $1,000,000 now or $250,000 each year for 4 years?Obviously, money is worth more now!

What is $250,000 a year for 4 years worth today?

Assuming 5% interest rate per year =$886,488

Looking at this another way, you would need $282,012 per year for 4 years to have the same amount of money as $1,000,000 now!

Risk Higher rates of return for HIGHER RISK

Rewarded for RISK

Treasuries are considered risk free

Extra payment is “risk premium”

Historically treasuries have paid 3%, S & P has averaged 5.7% so historic market return is 8.7%

Remember importance of standard deviation and variance!

Questions How much is an MD degree worth over a

physicians lifetime?

At what cost of medical school attendance is an MD no longer financially advantageous?

Net Present Value Financial tool

Takes into account costs/revenues at various points of time

Corrects for opportunity costs

Equation

NPV = C0 + SCt/(1 + r)t

Opportunity Cost (r)

Can be thought of as an interest rate

Considers what could have been done with money if used differently

Also called the “discount rate”

Calculating Discount Rate

Capital Asset Pricing Model (CAPM)

Expected return = Risk Free Return + b(risk premium)

Risk free return = T-bill rate = 3% Risk Premium = 5.7% (historical average) b = 0.7 – 1.2 for health care stocks

(measurement of market risk)

Model Summary

Value of MD = total change in salary– cost of attendance – lost wages

Corrected for Discount Rate

Present Value

PV = FV/(1 + r)t

Assumptions Discount rate = 6, 8 or 10%

Expected salary after college without medical school = $60,000 per year with 3% annual growth

Residency training is 4 years in duration

Salary of a resident is equivalent to that of a college graduate

Incremental salary increase after completing residency is +$130,000

35% tax rate

Physician salary is expected to increase 3% per year for 30 years of practice

Setting NPV = $0 and solving for annual cost of attendance results in the breakeven cost of medical education

ResultsAnnual Cost of

Attendance

Net Present Value

Annual Cost of

Attendance

NPV @ 6% NPV @ 8% NPV @ 10%

$10,000$673,727 $497,985 $375,590

20,000$634,290 $459,621 $338,235

30,000$594,852 $421,257 $300,881

40,000$555,415 $382,893 $263,526

50,000$515,977 $344,529 $226,172

60,000$476,539 $306,165 $188,817

70,000$437,102 $267,801 $151,463

80,000$397,664 $229,437 $114,109

90,000$358,227 $191,073 $76,754

100,000$318,789 $152,709 $39,400

Break Even Point

$139,805

Conclusions Obtaining an MD has high NPV, even at the

highest costs of attendance

Only at a cost of attendance of over $130,000 is the NPV less than zero

In the current economic climate, the discount rate is less than 8.7%; this would make an MD degree MORE valuable

Based on economic considerations, the supply of future physicians ought to be secure

Pearls You want your money NOW

Investing early can compound earnings

Rate of return is related to risk

Variance defines range of risk

Diversification minimizes variance and risk

Getting an MD is a good financial deal

QUESTIONS?