MBA
Week 4 Problems .docx

Week 4 Problems .docx - P 4-6 University Physician...

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P 4-6: University Physician Compensation: Solution: The major problem with the compensation plan is that physicians only pay 30 percent of the net cost of expenses once revenues exceed the stated salary target. Thus, if the doctor values some expenditure at more than 30 percent of the cost, but its value to the practice is less than its cost, the doctor will still make the expenditure. For example, suppose the physician has revenues in excess of the salary target and expenses and is considering taking a trip to a medical conference in Hawaii. The cost of the conference is $5000. The value of the conference to the doctor is $4500. Clearly, the trip would not be taken if the doctor had to pay the full cost. But since she only bears 30 percent of the cost (or $1500) but values the trip at $4500 she will take the trip. The current salary target formula is dysfunctional. The hospital has to be careful about schemes
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