West Coast Healthcare operates two medical groups, one in Seattle and one in San Francisco. The semi- annual bonus plan for each medical group’s president has three components:

a. Profitability performance. Add 0.75% of operating income.

b. Average patient waiting time. Add $ 20,000 if the average waiting time for a patient to see a doctor after the scheduled appointment time is less than 10 minutes. If average patient waiting time is more than 10 minutes, add nothing.

c. Patient satisfaction performance. Deduct $ 20,000 if patient satisfaction (measured using a survey asking patients about their satisfaction with their doctor and their overall satisfaction with West Coast Healthcare) falls below 65 on a scale from 0 (lowest) to 100 (highest). No additional bonus is awarded for satisfaction scores of 65 or more.

Semi- annual data for 2012 for the Seattle and San Francisco groups are as follows:

1. Compute the bonuses paid in each half year of 2012 to the Seattle and San Francisco medical group presidents.
2. Discuss the validity of the components of the bonus plan as measures of profitability, waiting time performance, and patient satisfaction. Suggest one shortcoming of each measure and how it might be overcome (by redesign of the plan or by another measure).
3. Why do you think West Coast Healthcare includes measures of both operating income and waiting time in its bonus plan for group presidents? Give one example of what might happen if waiting time was dropped as a performancemeasure.

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January-June July-December Seattle Operating income Average waiting time Patient satisfaction $5,575,000 12 minutes 75 $5,250,000 13 minutes 73 San Francisco Operating income Average waiting time Patient satisfaction $4,750,000 13 minutes 58 $2,937,500 9 minutes 69