R
esearch Assistant David P. Huelsbeck and Professor Kenneth A. Merchant prepared this case as a basis for class discussion rathe
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than to illustrate either effective or ineffective handling of an administrative situation.
Marshall School of Business
University of Southern California
A210-02-TN
Family Care Specialists Medical Group, Inc.
Teaching Note
Teaching Objectives
This case has two main purposes. First, it offers students an opportunity to ponder and resolve
the issues involved in designing a performance measurement and incentive compensation
Suggested Assignment Questions
1. What purposes are served by the FCS physician compensation system? Must some of the
doctors compensation be made performance dependent?
2. Is the current system an improvement over the QIIP that it replaced? Explain why, listing
3. Are the incentives provided by the existing system balanced or are some forms of
initiative rewarded more generously than others? In particular, compare the average reward
4. What are the major constraints on the design of any physician compensation system for
FCS? In particular, how should FCS decide the appropriate reward, if any, for higher
performance?
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5. What changes to the FCS physician compensation system, if any, would you recommend to
Dr. Samaniego?
1. What are the goals of FCS?
a. Make money.
b. Provide quality care to patients in an underserved community, many of whom are
covered by the governments Medicare and Medicaid plans, which provide more limited
coverage than private insurance plans.
c. Train young doctors through a residency program at White Memorial Hospital.
d. Provide a desirable workplace for the medical practitioners.
All of these goals are important, but to some extent they conflict.
It is important to highlight the fact that the goal is not maximization of profit (value).
Finances are important because they help to attract and retain good doctors, and they
provide an operating safety cushion. But finances are a constraint rather than a primary
goal.
To highlight the trade-off, ask the students which type of patient FCS would rather have:
a. One from outside the neighborhood, who has a premium private health care insurance
plan; or,
2. The old plan (QIIP)
Clarify the key elements of this plan, including the points allocated to specific areas of
performance and the payout potentials (2025% of total compensation, which is the same as
2533% of base salary).
Points to raise or to let emerge in this discussion:
a. The plan is quite subjective. Only the meetings measure can be captured objectively.
The other items must be judged subjectively.
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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3. The new plan
Points to raise:
a. Doctors can work weekends if they want.
b. They get pay for being on call (first and second call).
c. Productivity incentive (target = 14 patients per half-day session).
d. No bonus if only teaching duties.
Issues:
a. Why is the target set at 14? Doctors can still earn a bonus if they see fewer patients than
4. What purposes are intended to be served by each of the FCS compensation plans?
A. Generically
Incentive compensation systems can be designed with some or all of the following purposes
in mind:
a. Motivation, which includes two elements:
i. Direction
ii. Effort
b. Wealth sharing:
i. Signals that were all in this together. Can lead to social/cultural control.
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
B. The old (QIIP) plan
The old plan was aimed primarily at motivationinforming the doctors about what was
expected of them and rewarding them for doing what was expected. But it seemed not to
provide incentives necessary to attract and retain staff. In the Los Angeles area, Kaiser was
the largest employer of doctors and tended to set the market for pay. Kaiser offered doctors
C. The new plan
The new plan was designed, first and foremost, to help improve FCSs ability to attract and
retain good doctors. It provided the doctors with opportunities to earn more money. Doctors
can earn more money by working more hours or by working more productively (seeing
more patients per session). The plan also provides the benefit of allowing doctors who want
to earn more to reduce the burden of other doctors who wish to work fewer hours.
5. Evaluation
The current system is arguably superior to the QIIP on nearly every one of the objectives
developed in the prior analysis. However, the current system may not be the best system for
achieving the objectives. The most obvious feature of the current system is that it focuses almost
exclusively on patient volume, whether through clinical efficiency or total scheduled hours. In
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efficiency with the incentive to take extra shifts on dollars per patient encounter. The strongest
per patient encounter incentive for clinical efficiency is that for increasing the average
encounters per session from 12 to 13. If eight sessions per month is considered the full-time
clinical load, a physician must see roughly an additional 31 patients per month (= 1 patient per
session 8 sessions per week 46 weeks /12 months) in order to qualify for the $500 per month
In order to attempt to optimize the system we must first consider the constraints on any possible
changes. The overriding constraint is what can be achieved through incentives. Only effort and
the allocation of effort can be directly affected by incentives. Particularly for highly skilled
knowledge workers, effort is only one factor contributing to productivity. Ability, skill, and
experience are important factors unaffected by incentives. In settings where intrinsic motivation
is already high, the amount of additional effort that can be induced by incentives may be
provided to manage care patients produce no direct contribution. However, market rates for
moonlighting physicians provide a reasonable estimate of the upper bound for the marginal
patient encounter. In order to support the stated market rate of $500 per shift given productivity
10 See, for example, Frey B., and Jegen R. (2001). “Motivation Crowding Theory”. Journal of Economic Surveys, 15(5), pp. 589611.
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6. Suggestions
The best student suggestions usually involve combinations of the old and the new systems. They
recognize that FCS must allow the doctors to earn more money to serve attraction and retention
Teaching Strategy
The proper strategy for teaching this case depends on students prior knowledge, particularly of
the health care industry. One important aspect of the industry is the use of third party payers.
The patients generally do not pay the doctors directly (except perhaps for a token co-pay
amount). The payments come from an insurance company or the government. They must
understand that different health insurance plans pay different amounts. Medicaid payments