Discussion

9-904-028 R E V : O C T O B E R 3 1 , 2 0 0 5

________________________________________________________________________________________________________________ Professor Jason R. Barro, Kevin J. Bozic, MD (MBA 2001), and Research Associate Aaron M. G. Zimmerman prepared the original version of this case, Performance Pay for MGOA Physicians (A), HBS No. 902-159 which is being replaced by this version prepared by the same authors. Some names in the case have been changed. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

J A S O N R . B A R R O

K E V I N J . B O Z I C

A A R O N M . G . Z I M M E R M A N

Performance Pay for MGOA Physicians (A)

On a warm day in June of 1998, Dr. Harry Rubash stood in front of a bookshelf in his new office arranging photographs of his family and former colleagues in Pittsburgh. He looked out his window to the profusion of hospital buildings and tangled Boston streets below. It was a good picture, he thought, of the problems that faced him in his new position at the Massachusetts General Hospital (MGH). Dr. James Herndon, his former colleague at the hospital system of the University of Pittsburgh, had brought him to MGH to take over as chief of orthopaedics at Massachusetts General Orthopaedic Associates (MGOA). Herndon himself was new to MGH, having recently taken over as chairman of Partners Orthopaedics.1 Rubash and Herndon faced the ominous challenge of restoring the financial health of the ailing MGOA.

The Hospital’s History

In service since 1811, MGH was the third hospital founded in the United States and included the first orthopaedic service in the country, founded in 1899 by Dr. Joel E. Goldthwait, a pioneer in the field. The department had a long history of providing outstanding clinical care, in addition to making significant contributions to medical research and teaching. It was an MGH doctor who first made the discovery of a herniated disc. In fact, the annals of orthopaedic literature were filled with disorders that bore the names of the MGH doctors who discovered them. The prestige of both MGH and the orthopaedic department was well-deserved.

In 1998, the year Rubash and Herndon arrived, the 12 surgeons at MGOA performed over 2,000 surgeries (see Table A for the number of surgeries performed from 1997 to 1999).2 The range of procedures performed covered everything from knee arthroscopy to hip replacements, to spinal surgery. The group also had a history of providing services to a wide array of patients across the socio-economic spectrum. Table B shows the group received revenues from patients with private insurance companies, patients on Medicare (government insurance for the elderly) and Medicaid (government insurance for low-income individuals and families), those covered by worker’s compensation, and self-pay patients (those without insurance).

1 Partners Healthcare was the parent company of the Massachusetts General Hospital.

2 MGOA surgeons had 252 days of surgical time per year.

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Table A Number of Surgeries Performed by Physicians at MGOA, 1997–1999

Number of Surgeriesa Doctor 1997 1998 1999 Physician 1 0 1 208 Physician 2 1 28 196 Physician 3 437 470 536 Physician 4 26 357 374 Physician 5 175 219 233 Physician 6 292 313 258 Physician 7 74 103 113 Physician 8 46 111 161 Physician 9 137 131 185 Physician 10 26 30 26 Physician 11 67 90 107 Physician 12 43 59 88

Total 1,324 1,912 2,485

Source: MGOA internal documents. The exact data in the exhibit have been modified to prevent the identification of individual MGOA doctors. However, the patterns across doctors and over time have been preserved.

a Some types of surgery were more time-intensive than others. Given that each doctor typically specialized in one or two types of procedures, differences in surgical rates across doctors were primarily driven by the inherent time commitments of the surgeries.

Table B Charges and Payments Across Payer Types in 1999

Insurance Type Chargesa Collections Percentage of Charges

Actually Collected Private Insurance Blue Cross 9.4% 8.3% 34.6% HMO 47.5% 49.8% 40.8% All Other Private Insurance 9.7% 11.8% 47.7% Government Insurance Medicare 17.0% 13.0% 29.7% Medicaid 4.2% 2.3% 20.9% Other Workers Comp 7.1% 10.0% 54.9% Self-pay 5.2% 4.9% 36.8% Other 0.1% 0.1% 38.2%

Total 100.2% 100.2% 39.0%

Source: MGOA internal documents aCharges represent the list prices for procedures. However, essentially no patients or payers were charged list prices. Payments were the amounts actually received by MGOA from the payers and were based on pre-negotiated contracts between MGOA and the payers. The distribution of funds under charges roughly parallels the distribution of patients across different insurance types, while the amounts under collections reflect the distribution of revenues.

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Financial Woes

Although MGOA’s reputation for care and cutting-edge medical research was among the best in the world, Herndon and Rubash saw that MGOA had serious financial difficulties. In fact, that was one of the main reasons they were hired. In his previous position, Herndon had engineered a significant financial improvement at the hospital system of the University of Pittsburgh. There, Rubash had seen Herndon, chair of the orthopaedics department, with the faculty, take a relatively financially healthy department and put it in a much stronger position. When Herndon left, the department had an $18 million endowment and the revenues of the group had increased “through strategic recruitments and by building orthopaedic practices.” Now Herndon had brought Rubash to MGOA and was giving him the challenge of turning MGOA into a similar success story. Rubash acknowledged the challenge at MGOA seemed much bigger.

As a not-for-profit organization, MGOA’s primary goal had never been defined simply in monetary terms. However, decreasing reimbursements from both private and government insurers had forced MGOA to take a hard look at its financial condition. The group had long been running annual financial deficits on the order of several hundred thousand dollars. In order to finance the deficits, the group had been continually dipping into various endowment funds or borrowing money from the hospital. By the time Rubash and Herndon were recruited to MGOA, the endowment funds had essentially been depleted and the group had accumulated a debt bill with the hospital of over $1 million.

As part of an agreement with MGH, Herndon negotiated the forgiveness of the million-dollar debt.3 Rubash and Herndon would tackle any debt that accrued after their assumption of leadership, but as they told MGH during their hiring negotiations, to start out so deeply in the red was a “hit from which we could never recover.” The disappearance of the debt gave them an easier start, but it did nothing to staunch the ongoing financial bleed. The group still incurred a deficit of several hundred thousand dollars that year.

MGOA’s Mission

MGOA’s stated mission was “To provide the highest quality musculoskeletal patient care, teaching and research, with a dedication to service and a commitment to leadership.” In particular, MGOA, as a group, was committed to:

• Providing the highest quality patient care in every facet of orthopaedics.

• Devising patient centered, process-oriented, efficient clinical programs that ensured smooth delivery of care.

• Promoting orthopaedic education by facilitating exchange of concepts, information, and techniques.

• Establishing an ethos of effective cooperation by being dedicated to teamwork.

Rubash and Herndon did not change the above goals after their arrival at MGOA. However, they unofficially added an additional commitment: achieving financial stability. Rubash told the MGOA doctors “with financial security, we will be able to do all of the other things included in our mission 3 Again, the debt was a result of money MGH had lent MGOA. It was not as if MGOA had defaulted on a loan from an outside bank.

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statement—to recruit new faculty, to help researchers with pilot projects, to buy new equipment for the laboratory.”

Some Initial Changes

Rubash saw that in order to restore MGOA’s financial status, he would have to act fast to stop the monthly outflows of money. First, he began “open and frank meetings” with the MGOA doctors to alert them to the problems of the group and allow the doctors to express their own viewpoints. Second, Rubash negotiated with MGH to secure a 10% increase in operating room time for the doctors. This was important for the established MGOA surgeons, but also for the new doctors who would soon be joining the group. Third, Rubash made changes to how the group’s administrative functions were handled. Better telephone systems and computer-based scheduling applications were put into place to make the administrative staff more efficient, and billing went from being handled by an MGH-wide department to a newly-created centralized MGOA billing center.

Finally, Rubash directly addressed the problem that while some doctors were bringing in substantial profits for the group, others were actually costing the group more than they were contributing. With these latter physicians, Rubash had “candid discussions” about what he expected from them, and gave them timelines to accomplish these goals. To reward the productive doctors, he paid them bonuses based on the profits they were bringing in. According to Rubash, there were three or four physicians who were “bringing in a heck of a lot more money than they were making,” so he wanted to establish an environment in which that outcome was rewarded appropriately.

A New Idea

By the end of 1999, they had managed to turn a modest profit (see Table C), but the long-term financial health of the department was still far from secure. As they looked over figures from that year (see Table C), they saw that a fourth of the physicians (3 of the 12) still cost the department more money than they brought in. As they stood in Rubash’s office, Herndon turned to his friend. “We’re doing all right for now, but what about five years down the road?” He asked. Rubash understood that the group’s long-term financial health was going to depend on each physician taking a personal responsibility for his or her own financial contribution to the organization. “I think we’re going to have to permanently change the way we pay our doctors,” he replied. “The long-term health of the group depends on the doctors spending more time in the operating room than they currently are.”

MGOA physicians had always been paid a flat salary—historically, this was the standard arrangement for doctors in academic groups. Typically, their salaries were adjusted based on seniority, and very loosely on productivity, if at all. As an example, at MGOA there was a well- respected surgeon who, because of the length of his tenure at MGOA and his reputation in the field, received one of the highest salaries in the group, yet each year his cost to MGOA exceeded the revenue his practice brought in. This was in contrast to private practitioners and other non-academic doctors, who were compensated based on services rendered to patients. These doctors were essentially working under a piece-rate compensation plan.4

4 For several reasons, including the greater benefit of bargaining over prices with a larger group of doctors, many physicians in the 1980s and 1990s joined large physicians groups. This was particularly the case with primary care physicians, and less true with specialists like surgeons. Typically, these groups paid physicians a flat salary, much like doctors in academic groups. Many of these groups later realized that such a pay structure might have contributed to decreased productivity and thus gradually moved away from compensation systems that involved flat salaries.

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Rubash set out to transform the MGOA pay plan to look more like those of non-academic groups. He began to work on a new plan that called for each doctor to be financially self-sufficient. If a doctor were to lose money for the group, that doctor would pay the group back through his or her own funds in the next compensation period. Each doctor had a responsibility to be productive, he decided. Rubash said, “Whenever a doctor is in deficit, we’ve got to ask them, ‘Who would you like to have pay for your deficit?’ No one can argue that it is someone else’s responsibility.”

Table C Financial Performance of Physicians at MGOA in 1999

Source: MGOA internal documents. The exact data in the exhibit have been modified to prevent the identification of individual MGOA doctors. However, the patterns across doctors and over time have been preserved.

Reimbursements Flows

MGOA and the MGH

MGOA was essentially an independent academic hospital-based physician organization that operated within the facilities of the Massachusetts General Hospital. Aside from cash transfers related to the group’s use of MGH office space and surgical residents, the surgical group and the hospital were financially separate. When an MGOA surgeon operated on a patient at MGH, the patient’s insurer reimbursed the group and the hospital separately. All collections from insurers were handled by a centralized administrative staff at MGOA, who reported to the group’s management and not to the surgeons. MGOA was responsible for paying for all costs related to their business, including doctors’ salaries. The physicians had to be paid out the group’s own revenue sources—primarily reimbursements from insurers when the doctors performed surgeries.

Doctor Revenues Expenses Surplus Physician 1 $417,000 $269,000 $149,000 Physician 2 $424,000 $388,000 $36,000 Physician 3 $652,000 $514,000 $138,000 Physician 4 $495,000 $416,000 $79,000 Physician 5 $435,000 $406,000 $29,000 Physician 6 $411,000 $505,000 ($94,000) Physician 7 $270,000 $253,000 $17,000 Physician 8 $403,000 $371,000 $31,000 Physician 9 $295,000 $301,000 ($6,000) Physician 10 $99,000 $166,000 ($66,000) Physician 11 $187,000 $275,000 ($88,000) Physician 12 $495,000 $401,000 $94,000

Total $4,584,000 $4,265,000 $319,000

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Financial Flows in the U.S. Healthcare Industry

At the simplest level, MGOA generated profits by providing health care services (surgeries, office visits) to patients and receiving compensation for their activities in an amount that exceeded their costs. As with most financial transactions in the health care field, the reality was not nearly that simple. Figure A details the typical flows of services and money among the various players involved in any health care service in the United States.

There were three key groups of actors within the system: providers (physicians, hospitals), payers (insurance companies, government plans), and patients. See Table A for a list of the insurers who made payments to MGOA. At MGOA, and the health care industry at large, services flowed from providers to patients, while money flowed primarily from patients to insurance companies (in the form of insurance premiums) and then to providers (either ex post as reimbursement payments or ex ante as capitation payments).5 Typically, patients paid some small amount directly to the providers at the time of the care in the form of co-payments or coinsurance payments.

Figure A Money Flows in U.S. Health Care Industry

Patients HospitalsPhysicians

Premiums Insurance coverage

TaxesMedicare/

Medicaid

Insurance Companies

Government

Co-payments

Medical services

Co-payments

Medical services

rei mb

urs em

ent s

reimbursements rei mb

urs em

en ts

reimbursements

Flow of money

Flow of services

Source: Casewriter.

Patients and insurance companies typically contracted through the patient’s employer. In exchange for an upfront cash payment (the premium), the agreement allowed the patient to seek medical services from a specified list of providers, with the patients facing little or no cost at the time of care. The degree to which the insurance contract restricted the patient’s access to certain doctors or whether the patient needed to seek permission from a primary care physician before seeing a specialist varied by geography and type of insurance. In Massachusetts, the typical insurance contract

5 Whereas reimbursements were monies from the insurance companies to cover completed procedures, physicians received capitation payments from insurers prior to treatment. These payments were ostensibly equal to the average expected cost of treatment. A doctor could be given some amount per patient on his client roster at the beginning of the year, or could be paid on a patient-by-patient basis based on the patient’s initial symptoms, before diagnosis was made and treatment determined. After receiving the capitation payment, physicians did not receive additional payments based on the treatment given.

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through one of the major Health Maintenance Organizations (HMOs) restricted the patient to a specified set of doctors and hospitals (the network), and required the patient to begin all care with his or her primary care physician (the gatekeeper).

The diagram in Figure A shows that no money flowed from the hospital to the doctor, or vice versa. The typical financial relationships in the U.S. medical care system involved no direct payments between hospitals and doctors at the time of care. For example, suppose an insured patient had surgery performed by a physician in the operating room of a given hospital. Following the surgery, the hospital and the physician would each bill the patient’s insurer for their services and would be reimbursed. The hospital, however, would not charge the physician directly for the use of the facilities, nor was the physician an employee of the hospital.

The World of Academic Medicine

Research

Since MGH was one of the world’s premier teaching hospitals, physicians there, including those affiliated with MGOA, regularly spent a significant portion of their time doing research funded by outside grants from organizations like the National Institutes of Health (NIH) and the Orthopaedic Research and Education Foundation (OREF). Most grants came from the NIH, and were typically for about $80,000 to $100,000 per year, which covered research costs and augmented the doctor’s salary. Each grant came with a condition requiring the recipient to spend a certain percentage—from 50% to 100%—of his or her time on research. For example, a grant for $80,000 specified that a doctor spend 75% of his time every week doing research. These percentages assumed a 40-hour workweek, meaning the recipient of this grant should spend about 30 hours in the lab.

In actuality, many doctors at MGOA (and in most teaching hospitals) worked 90 to 100 hours per week. Dr. Steve Howett, one of MGOA’s younger doctors, described a typical day at MGOA:

I begin with rounds at 5:30 in the morning. Basically this involves checking in on patients and checking their progress after surgery. At 6:00 am, there’s a conference with the other doctors in the department. These conferences cover everything from M&M6, to general orthopaedics, to more specialized aspects of orthopaedics.7 I have to give one of these presentations a week for the residents, which takes a few hours to prepare, by the way. After that I head to the operating room at 7:30 or 8:00 am, and I’m in surgery until 8:00 pm. After the last surgery, I always have some paperwork to wrap up or I work on my research. I call it a day around 9:00 pm. To get my research done I really have to do it in the evening or on weekends. That’s just how it is.

Doctors typically used research grants to cover the administrative costs of their research, such as hiring an assistant, and to cover some of their own salary. A doctor doing more intense research might have one day a week of protected research time.

There were two basic forms of research: clinical and basic science. Clinical research tracked outcomes of patients after surgery, and examined how different patients responded to different procedures. Much of this research could be done as part of a doctor’s normal work of examining 6 Mortality and morbidity reports for MGOA.

7 Specialties in a typical orthopaedic department included Hip & Knee, Shoulder, Sports Medicine, Spine, Hand and Upper Extremity, Muscular/Skeletal Oncology, Pediatric Orthopaedics, and Muscular Skeletal Trauma.

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patients prior to surgery and watching their progress after an operation. Basic science research was more time intensive and dealt with biomechanics, cellular biology, and fracture healing. Typical studies investigated new materials for implants and tested new medical devices. Basic science research had to be done in a lab.

Research was important to the mission of MGOA, since it contributed to the image of the department as a leader in orthopaedics. It was also a major factor in the careers of the doctors. Being part of a teaching hospital, the promotion system at MGH was similar to the tenure system at a university. Thus, for the doctors, publishing research results in medical journals significantly impacted their professional advancement.

Teaching & Tenure

As an academic group, MGOA doctors also spent time teaching medical school students and residents. The teaching was done in an apprentice-like system. The medical students and residents would accompany a doctor on rounds or in the operating room and attend weekly conferences on some aspect of surgery.

All MGOA physicians had an academic title with Harvard University, under the aegis of Harvard Medical School. Having the Harvard name on a resume carried such prestige for a doctor’s career and was so valuable in and of itself, the medical school did not pay MGOA doctors who served as its adjunct faculty.

The tenure process at MGOA was a long one. When the group hired a new doctor, he or she received the title of Assistant Professor of Harvard Medical School. The doctor would remain in this position, teaching, doing surgery, and conducting research, for 5 to 10 years. At that time, if the doctor were successful, he or she would be appointed an Associate Professor and continue with research, surgery, and teaching for another 10 years. At that point, the doctor would be considered for tenure.

In total, becoming a full professor took around 20 years, and not everyone made it. Promotion depended primarily on the quality of a doctor’s research and, to a lesser extent, teaching. The physician’s skill at clinical work counted less. Dr. Howett observed, “It’s mostly and up-and-out system. If you’re not publishing, not doing good research, you leave and go into private practice. If you’re not promoted, sometimes you can stay at the Assistant Professor level if you keep doing clinical work. But eventually, if you’re not publishing, you have to leave.”

Private Practitioners

In addition to the MGOA surgeons, in 1999 there were 12 private practitioners who had admitting privileges to MGH, but were not part of the academic group and were not full-time MGOA staff. Whereas MGOA doctors had full academic appointments at Harvard Medical School, these private practitioners were given “clinical appointments” at Harvard. The distinction was similar to that between a professor and a lecturer at a university. Private practitioners had a more exclusive focus on clinical practice and were engaged in varying amounts of research. A few of these individuals maintained very active research labs at MGH.

Typically, there existed a significant difference in pay between academic physicians and private practitioners. In the United States, from 1995 to 2001, private practitioners took home, on average,

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50% more in salary than their academic counterparts.8 This difference in pay was often the source of animosity between academic physicians and private practitioners. But academic physicians had long accepted this tradeoff, as Dr. David Ring, Director of Research for the MGH Hand and Upper Extremity Service, MGOA, explained: “Advancing the care of patients and the science of medicine takes a motivation beyond money.”

There were benefits for physicians belonging to an academic group. For one thing, the doctors simply enjoyed doing medical research. Also, they had easier access to patient referrals. Private practitioners, in contrast, had to build their own client base. They did this through establishing relationships with referring doctors and by generating word-of-mouth exposure through community involvement. Dr. Tom Gill, Associate Chief of Sports Medicine at MGOA summed up the benefits of being part of an academic practice:

I have the opportunity to teach residents and be involved in clinical and basic science research. Additionally, I get a great deal of satisfaction and stimulation from consulting with the top experts in all fields of medicine at MGH. While not as lucrative as private practice, an academic practice allows me to build my practice through access to an extensive referral network of primary care physicians.

Dr. Jesse Jupiter, the MGH Hand and Upper Extremity Chief, agreed that the opportunities offered by the academic group were important, but felt the doctors in the group could not ignore financial concerns and focus only on research and teaching. “An academic department has to encourage its members to focus on clinical productivity in order to survive. Whether that’s good or bad, it’s a reality of the environment that we practice in today.”

If an MGOA doctor decided to leave the academic group to establish a private practice, he or she could still admit patients to MGH, but the assignment of operating room time would remain at the discretion of Rubash and his operating room “allocation committee.” Physicians had strong preferences regarding time slots for surgical procedures.

MGOA’s Proposed New Plan

During the time he and Rubash were working on the new compensation plan, Herndon typed some thoughts in an e-mail to Rubash:

Our physicians need to be motivated to be clinically productive (as opposed to being productive in research and teaching). If salaried with no control over their expenses or income, productivity will decline and make them feel helpless in their environment. If empowered with a mechanism to control their expenses and enhance their income, they will respond with increased productivity.

The new plan, which Rubash hoped to institute at the beginning of fiscal year 2000 (October 1999), reflected this thinking. It would create a direct link between a doctor’s financial performance and the doctor’s pay. The new plan had four main components: the doctor’s base salary, the development fund tax, a bonus, and a system to adjust the base salary from year to year depending on a doctor’s financial performance.

The specific components of the plan were structured as follows:

8 Medical Group Management Association. Academic Practice Faculty Compensation and Production Survey (2000), 2.

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• Physician Base Salary

This amount would be set at the beginning of every six-month period. Rubash decided to set each doctor’s base salary at 1999 levels, which ranged from $200,000 to $300,000, unless the 1999 level was significantly out of alignment with that physicians expected contribution to department revenues. After the base salary was set, the physician would receive a regular monthly payment.

• Development Fund Tax

Five percent of each physician’s collections would be taxed to help fund the group’s development fund. The group’s management could use the fund to finance worthy activities, including research by the group’s physicians, and to reimburse physicians who ended up with a higher-than-average share of poorly-insured patients. Distribution from the fund was at the discretion of the management team and the chief of orthopaedics.

• Bonus

At the end of each six-month period, each physician would receive a bonus equal to 50% of the profits generated by his or her activities. The group’s management, however, had the discretion to change the bonus rate each period. For example, if the incentive bonus compensation would put the group as a whole into deficit, the rate could be lowered. In addition, each physician would be responsible for his or her own costs, as well as an equal share of general office costs. The following values would be used to calculate the bonus:

1. R (revenues generated by physician after the development tax)9

2. OC (costs generated by physician activity)

3. GC (physician’s share of general group costs = overhead costs/number of physicians)

4. S (physician’s base salary)

5. r (bonus rate) 10

The bonus would be the physician’s revenues minus costs and salary, multiplied by the bonus rate:

Bonus = r × (R − OC − GC − S)

The bonus at the end of any period could not be negative, although a physician deficit (R − OC − GC − S < 0) would result in a decrease in base salary in the next period up to the full amount of the deficit. After bonuses were paid out, any surplus generated for the group would be deposited in the development fund.

• Adjustment of Base Salary

9 Revenues came from collections from insurance companies for surgeries performed and thus was based on surgical volume. Different surgeries typically had different reimbursement rates. For example, the surgeon’s fee for a single-level laminectomy (a 1.5 hour spine procedure to remove bone around the disc, usually combined with a discectomy) was about $4,500. The fee for a revision total hip replacement (a 4 hour procedure) was about $1,800. Any outside grants for research funding could also be counted towards a doctor’s revenue.

10 Again, the intention of the group’s management would be that the bonus rate would be set at 50%.

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At each review period, a surgeon’s base salary would be adjusted either up or down depending on the doctor’s performance—that is, the doctor’s profitability for the group. If the doctor were in deficit, the base salary for the next period would typically be reduced by the full amount of the deficit.11 If the doctor received a bonus in any previous period, the base salary for the next period would be increased by half of the bonus amount.

The Doctors React

The Bonus Rate

In a meeting when the plan was unveiled, many physicians in the group complained that the bonus plan would simply be a tax on productive doctors. Once a doctor’s revenues went over his benchmark, they complained, the group would take fifty cents of every dollar generated in profits.12 This was especially distasteful to those doctors who knew they could bring in substantial profits. The more they brought in, the more money went back to the development fund. One doctor asked, “Why punish the doctors who are doing more than their share to cover those who aren’t bringing in enough? It’s unfair.”

Another concern was that there was no guarantee on the bonus. “What if I have a great year,” Dr. Gill asked, “and I bring in substantial profits, but the department doesn’t do well—then I may not get a bonus at all?”

But Dr. Rubash asserted, “Members of the department must understand that the goals of the group are as important as their own personal financial goals in order for the department to succeed. The 50% we withhold is how we can pay off deficits and begin to build up the development fund. Ultimately, that will get the department, and all of us, in a much better place.”

The Collection Concern

As the meeting continued, another doctor brought up a point regarding the administrative staff. “Under this new plan,” he observed, “so much of our compensation depends on collections from the insurers. Would it be possible for me to hire my own assistant to handle my collections? The cost could be counted toward my overhead.”

“I’m afraid not,” Rubash replied. “Having our collections department centralized is more efficient and eliminates the duplication of activities when each doctor has his or her own staff person. That’s why we built our own orthopaedic billing office.”

The Reservations of Researchers

Some of the pushback Rubash received regarding the plan came from doctors concerned about the fate of the group’s research agendas. Before Rubash and Herndon’s arrival, the MGOA physicians had “protected time” for conducting research. It was unclear what the status of this policy would be 11 If a new physician came to the practice, there would be a grace period of two years in which the base salary would not be ratcheted down. If the doctor still had an accumulated deficit at the end of two years, Dr. Rubash would have the discretion of whether or not to require the physician to reimburse the group.

12 The benchmark would be enough revenues to cover a physician’s own direct costs, his or her share of the group’s overhead, and the physician’s base salary.

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going forward. “An academic faculty practice should provide an environment that supports its faculty in pursuing interests in research and teaching,” Dr. Jupiter pointed out.

Rubash agreed with Dr. Jupiter in principle, but he also understood the reality of operating an academic practice in the modern American healthcare environment. “We have a responsibility,“ Rubash pointed out, “to develop a compensation plan that rewards both clinical and non-clinical activities.” He elaborated further: “The relative contribution to the departmental mission of these non-clinical activities and the remuneration associated with the activity are often greatly misaligned. A robust departmental endowment is critical for the success of the non-clinical programs. And to build that endowment, we need this new plan.”

Selling the Plan to the Doctors

As he was packing up to go home at the end of the day, Rubash’s phone rang. He picked up the receiver and was greeted by Dr. Howett. After listening to him intently for a few moments, Rubash said, “I understand your concern, Steve, and I’ll certainly keep that in mind. Let’s talk about this tomorrow.” After saying goodbye, he hung up the phone, grabbed his coat and keys, and waved to his secretary as he headed out the door.

A few minutes later, as he navigated his way through the labyrinthine corridors of MGH towards the parking deck, Rubash ran into Dr. Herndon. “Dr. Howett called me today,” Rubash mentioned. “You know he’d like to achieve some specific research goals for next year. He’s worried that under the new plan, he’d have to increase his patient load to clear the benchmark, and that his research will suffer.”

“We expected some people to have this kind of response, Harry,” Herndon replied. “I understand why Steve’s worried, but we have to do this. The end of fiscal 1999 is right around the corner. Without the discipline the plan brings, we’ll end up right where we started.”

For the exclusive use of D. Chen, 2018.

This document is authorized for use only by Dongliang Chen in HRM 5030 Comp and Bens-1 taught by MATTHEW SAMEL, Johnson & Wales University from May 2018 to Nov 2018.