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"University Physician Compensation"

Physicians practicing in eastern University's hospital have the following compensation agreement. Each doctor bills the patient (or Blue Cross Blue Shield) for his or her services. The doctor pays for all direct expenses incurred in the clinic, including nurses, medical malpractice insurance, secretaries, supplies, and equipment. Each doctor has a stated salary target (e.g., $100,000). For patient fees collected over the salary target, less expenses, the doctor retains 30 percent of the additional net fees. For example, if $150,000 is billed and collected from patients and expenses of $40,000 are paid, then the doctor retains $3,000 of the excess net fees [30 percent of ($150,000 - 40,000 - $100,000)] and Eastern University receives $7,000. If $120,000 of fees are collected and 40,000 of expenses are incurred, the physician's net cash flow is $80,000 and Eastern University receives none of the fees.

Required:

Critically evaluate the existing compensation plan and recommend any changes.

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Solution Preview

The existing compensation plan is attractive to the Eastern University only if the net cash flow of most of the doctors regularly exceed their stated fees. In such a scenario, the Eastern University gets a good pie of the excess money over the stated target.

However, if the doctors often make less than their stated salary target, ...

Solution Summary

Critically evaluate the existing compensation plan and recommend any changes.

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