Bear Traps for Health Care Leaders to Avoid

The April 6 Wall Street Journal contained several useful articles on investing and managing in the current bear market. Perhaps I was jaded because I was on a plane all day, but I found the whole edition to be interesting. I picked Avoiding Bear Traps by Suzanne McGee to comment on. This feature piece was ostensibly about pitfalls to be avoided when investing after having sustained great losses. And it's worth a read for that reason alone - unless you managed to avoid the 30-40% losses the rest of us suffered in the late 08-early 09 market. But the same framework of pitfalls can be in considering a variety of risk-return scenarios related to decisions made regularly by clinical and executive health care leaders. So read the article and consider this examination of Ms. McGee's six traps in our context:

The Value Trap: For investors this means beware the tendency to think that any "cheap" stock is "undervalued" and therefore it's a bargain. But McGee points out that not all bargains are created equal. Some are cheap because it's all there are worth for fundamental reasons. For health care leaders responsible for purchasing equipment, services, real estate or physician practices - some of which may be discounted these days - it's a trap as well. Pay careful attention to the reason the price is low - is the asset in distress because it's been dragged down by potentially reversible environmental conditions or have the current conditions exposed more serious flaws that make the purchase or contract no bargain at all?

The Risk Trap: McGee sees this as the converse of the value trap. Sustaining great losses can tempt investors to take great risks in order to make themselves whole. Not a good idea in a volatile market. Health care leaders are not immune to covering their losses. Examples include having invested heavily in landing a big reputation practitioner or academician - or a rising star - who didn't deliver on the promise of huge returns can be sobering. Or having invested in a practice or service site based on market growth estimates that didn't pan out. While these experiences could lead one to one of the traps below (vide infra) or to take greater risks on similar or new ventures in order to recoup dollars, credibility, or opportunity. For all leaders, the period following a loss is a sobering one - it should be used to soberly the next evaluate options. The loss is a "sunk cost" which doesn't need to drag you down beyond the dollars lost.

The Scapegoat Trap: When investors gain, they are smart. When they lose, they have received bad advice. Now in some cases (the Madoff scandal) this might be true. But mostly it's been the market and the economy (stupid). But investors are quick to blame their investment advisors (who are as human as they) and as a result may short change themselves on valuable advice in the future. Health care leaders rely on their own intelligence, experience, and instincts to make most managerial decisions. If they are wise - they seek and use the counsel and advice of peers, consultants, and technical experts who are either more knowledgeable or more objective or more experienced in situations where strategic or operational complexity requires it. A project failed, a recruitment turned disappointing, or a strategic avenue dead-ended doesn't necessarily mean leadership was misled or misguided by others.

Each of these situations requires a thorough post mortem to determine what assumptions, or advice, led in the wrong direction and how the outcome might have been different with a different process. But scapegoating those who provided advice and retreating into making decisions in isolation will turn out to be a mistake most of the time. Bad outcomes are usually attributable to multiple factors, only a few of which are potentially avoidable. The alternative to receiving advice is much more risky - "the doctor who treats himself" etc.

The Paralysis Trap: Investors who simply can't act are afraid to manage (or have others manage) their portfolios after a loss are doomed. Their only alternative is to put their money under the mattress - hardly a risk free approach in inflationary times and not a wealth building strategy under any circumstances. Health care leaders, similarly, don't have the option of staying out of the health care business - which requires investment, risk, decisions for which there is not clearly defined right path. Whether it is recruitment or service organization, or market entry, or succession decisions, risk is unavoidable. In fact some would say - surgeons, for instance who have had a bad outcome due to non technical factors - the best antidote to a failed venture and the best preventative for potentially career threatening paralysis, is careful venturing forth again.

The Comfort Trap: At times like this, investors seek investments with a guarantee against erosion. But we all know there is a cost to this. Both in real dollars (the risk reduction premium) and in opportunity cost. As much as it hurts to lose in the markets, in the long run only investment with risk yields gain. Similarly health care leaders who seek only guaranteed and safe partnerships, recruitments, or sites of service are doomed to mediocrity at best and erosion of competitive and financial edge at worst. Not to say that risk shouldn't be minimized - but if that is prime objective there is little potential for innovation and financial, market, or clinical gain. It amounts to buying the biggest, fattest, softest mattress to try to hide the money under.

The Chasing the News Trap: Finally, McGee reminds investors that in volatile times, the news is either too early, too late, or just irrelevant. Investment decisions need to be made on a hard headed evaluation of value and a strong eye to diversification. Health care leaders need to invest and need to take risks in order to advance their careers, organizations, and vision. These can be informed and reasoned. But they remain risks nonetheless. So strategic informed (but not news-glued) diversification of markets, clinical programs, investments in plant and equipment, clinical v. investigational focus, experienced v. up and coming executives and clinicians, etc. are all much wiser ways to mitigate risk than the traps above.

Thanks, Suzanne. For a risk framework that works for Wall Street and General Hospital.