We’ve got a budget crisis! Instead of a surplus of almost $100,000, we’re looking at a potential deficit of over $145,000. Not only won’t we be able to buy the new equipment that everyone’s been screaming for, but I don’t see how we can pay physicians the bonuses they’re counting on.
Maria Delgado, M.D., the senior physician member of Bandon Medical Associates, a small physician group practice located in Oregon, was expressing her concern about the results of the year’s operations. One reason for the problem was that third party payers had lowered the rate for one of the group’s visit types, but there appeared to be some other, perhaps more important, explanations as well. Dr. Delgado decided to analyze the reasons for the poor performance and present her findings at the group’s annual strategic planning retreat, which was about 10 days away.
Bandon Medical Associates (BMA) had been established about 20 years ago by Dr. Delgado and a colleague she had met during her residency. Over the years, the group had grown, and currently comprised six physicians. In addition, the group used medical assistants as extenders for the physicians. Last year there were two extenders, but during the most recent year, at the insistence of several of the newer physicians, four additional extenders had been hired to meet the increased demand for services.
Three years ago, BMA had joined Coos Bay Health System, a large integrated delivery system (IDS) with several primary care and multi-specialty group practices, a free-standing laboratory, a free-standing radiology unit, two acute care hospitals, a nursing home, a home health agency, and a hospice. Coos Bay coordinated care, negotiated contracts with third party payers, and provided some central services, such as information systems support.
The costs of Coos Bay’s central services were allocated to each provider entity in the IDS according to some prearranged formulas. Bandon Medical Associates (A) contains details on this and several other financial arrangements that had been agreed to at the time BMA was purchased by Coos Bay. (Knowledge of these financial arrangements is not needed for the analysis of this case.)
BMA’s physicians were paid according to a combination of a base salary and a bonus. Because different visit types required different levels of physician intensity, Dr. Delgado and her colleagues had had a lengthy discussion at last year’s retreat about different approaches to measuring productivity. They had finally settled on revenue as the best method. Everyone had agreed that, since the payment for each visit type was a rough reflection of its intensity, revenue generation was not only a good way to measure each physician’s productivity, but a simple one as well. . . .
- Be sure you understand how Exhibits 2 and 3 were prepared. Do you agree with Mr. Hawkins’ analyses so far?
- Besides changes in the number of visits and the payment rate per visit, what are the other reasons why actual results might have diverged from budget?
- Calculate the variance associated with each of the reasons you gave in Question 2. How, if at all, might this information be used in managing the group practice?
- How might BMA’s approach to physician compensation have affected the group’s financial performance for the year?
- What should Dr. Delgado do about the bonuses? What changes, if any, should she make to the group’s budgeting and control system?