P 46: University Physician Compensation

Physicians practicing in Eastern Universitys 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 physicians 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.