Office of Internal Audit

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1 Office of Internal Audit March 4, 2013 Dr. Kirk A. Calhoun, President The University of Texas Health Science Center at Tyler U. S. Hwy 271 Tyler, TX Dear Dr. Calhoun: As part of our Audit Plan, we completed the. This audit was included in our Plan at the request of the UT System Executive Vice Chancellor for Health Affairs. The objectives of the audit were to determine if the compensation plan received the appropriate approvals in accordance with the MSRDP By-Laws; the compensation plan is transparent and understood by plan members; management and/or the appropriate compensation committee is monitoring the compensation plan and making modifications where and/or if needed; compensation was paid in accordance with the compensation plan; and if there is a trend with respect to work RVUs/revenue/collections/volume or other metrics that can demonstrate changes to productivity. The detailed results are included within the report. This audit was conducted in accordance with guidelines set forth in The Institute of Internal Auditor's International Standards for the Professional Practice of Internal Auditing. We appreciate the assistance provided by management and other personnel and hope the information presented in our report is helpful. Sincerely, Kris I. Kavasch Director of Internal Audit Enclosure cc: Dr. Kenneth I. Shine, UT System Executive Vice Chancellor for Health Affairs rbuckingham@utsystem.edu Mr. J. Michael Peppers, UT System Chief Audit Executive systemauditoffice@utsystem.edu Mr. Richard St. Onge, UT System Associate Vice Chancellor for Shared Services richardstonge@utsystem.edu Dr. David Coultas, Vice President, Clinical and Academic Affairs and Physician-In-Chief david.coultas@uthct.edu Mr. Vernon Moore, Vice President, Chief Business and Financial Officer vernon.moore@uthct.edu Dr. Bola Olusola, FY 2012 Faculty Compensation Advisory Committee Chair bola.olusola@uthct.edu Dr. Steven Cox, Faculty Compensation Advisory Committee Chair steven.cox@uthct.edu Ms. Anne Heitke, UT System Audit Manager aheitke@utsystem.edu Legislative Budget Board - ed.osner@lbb.state.tx.us Governor - internalaudits@governor.state.tx.us State Auditor s Office - iacoordinator@sao.state.tx.us Sunset Advisory Commission - sunset@sunset.state.tx.us

2 March 4, 2013 THE UNIVERSITY OF TEXAS HEALTH SCIENCE CENTER AT TYLER OFFICE OF INTERNAL AUDIT US HIGHWAY 271 TYLER, TX

3 TABLE OF CONTENTS Executive Summary... 4 Background... 5 Audit Objective... 5 Audit Scope and Methodology... 5 Audit Results... 6 Conclusion...10 Summary of Significant Findings

4 Audit Report Executive Summary This audit was completed as part of our Audit Plan. The engagement was requested by the UT System Executive Vice Chancellor for Health Affairs and is being performed systemwide at all UT System institutions that have a clinical faculty compensation plan. The scope of our audit was FY The audit objectives and results are as follows: Objectives Determine if the compensation plan received the appropriate approvals in accordance with MSRDP By-laws. Determine if the compensation plan is transparent and understood by plan members. Determine if management and/or the appropriate compensation committee is monitoring the compensation plan and making modifications where and/or if needed. Determine whether faculty compensation was paid in accordance with the compensation plan. Determine whether there is a trend with respect to work RVUs/revenue/collections/volume or other metrics that can demonstrate changes to productivity. Results The Clinical Faculty Compensation Plan was not approved in accordance with MSRDP By-laws, which require approval of the UT System Executive Vice Chancellor for Health Affairs. The Clinical Faculty Compensation Plan itself is transparent and understood by plan members; however, members do not believe that overall the institution s faculty compensation program is fully transparent. Executive management and the appropriate compensation committee are properly monitoring the compensation plan and making modifications where and/or if needed. In FY 2012, faculty compensation was paid in accordance with the compensation plan. Although there is no definite trend demonstrating changes to productivity, during the period FY compensation plan participants experienced an average of 49% higher wrvus than faculty members who were on fixed compensation. Work RVUs may be lower for faculty who are on fixed compensation due to being newly hired, or having administrative, teaching or research responsibilities. Detailed results are included in the Audit Results section. 4

5 Background The UTHSCT Medical Service Research and Development Plan (MSRDP) By-laws Article IX provides the framework for the institution s clinical faculty compensation plan. The By-laws require each UT System institution that has a physician practice plan to create a separate document detailing the institution s process for compensating clinical faculty performance while maintaining and enhancing faculty excellence in support of patient care, education, and research. To comply with requirements of the MSRDP By-laws, UTHSCT developed and implemented the UTHSCT Clinical Faculty Compensation Plan that is applicable institution-wide. The Compensation Plan details general principles, components of faculty compensation, accrued leave, insurance and benefits, and compensation appeals. The Compensation Plan with a revision date of November 3, 2008 was in effect through most of the FY 2012 period under review. On June 25, 2012 the Compensation Plan was revised to incorporate changes to the method for paying leave entitlements. During FY 2012, UTHSCT had approximately 35 faculty members on fixed compensation and 16 faculty members who participated in the Compensation Plan. The Compensation Plan applies to all clinical faculty members who do not receive a fixed annual appointment at UTHSCT. Annual fixed appointments are at the discretion of the UTHSCT President in consultation with the Faculty Compensation Advisory Committee and appropriate Administrative Officers. The primary driver for the Compensation Plan is physician work RVUs (wrvus). Physician wrvus are the relative level of time, skill, training and intensity to provide a given service. The wrvu is a component of every CPT (current procedural terminology) code for professional services. Audit Objectives The objectives of the audit were to determine if: The compensation plan received the appropriate approvals in accordance with MSRDP By-laws The compensation plan is transparent and understood by plan members Management and/or the appropriate compensation committee is monitoring the compensation plan and making modifications where and/or if needed Compensation was paid in accordance with the compensation plan There is a trend with respect to wrvus/revenue/collections/volume or other metrics that can demonstrate changes to productivity Audit Scope and Methodology The scope of our audit was FY 2012 (September 1, 2011 through August 31, 2012). For analyses and review we included fiscal years 2010 to 2013 data as needed. To achieve the audit objectives we performed the following procedures: 5

6 Interviews were held with certain key management and faculty, Faculty Compensation Advisory Committee Chairs and members, Compensation Plan participants, and faculty who received fixed salary appointments Documentation was reviewed to validate information A sample of payroll transactions was tested to determine if compensation was made in accordance with the Compensation Plan A three-year analysis was performed to evaluate whether there is a trend with respect to work RVUs and productivity Since the majority of UTHSCT clinical faculty members were on fixed compensation in FY 2012, a three-year analysis of plan participation was performed to identify reasons for excluding faculty from the Plan We conducted our audit in accordance with guidelines set forth in The Institute of Internal Auditors International Standards for the Professional Practice of Internal Auditing. Audit Results Based on the results of procedures performed we determined the following: The Clinical Faculty Compensation Plan was not approved by the Executive Vice Chancellor for Health Affairs in accordance with MSRDP By-laws. The Clinical Faculty Compensation Plan itself is transparent and understood by plan members; however, members do not believe that overall the institution s faculty compensation program is fully transparent. Executive management and the appropriate compensation committee are properly monitoring the compensation plan and making modifications where and/or if needed. In FY 2012, faculty compensation was paid in accordance with the compensation plan. Although there is no definite trend demonstrating changes to productivity, during the period FY compensation plan participants experienced an average of 49% higher wrvus than faculty members on fixed compensation. Work RVUs may be lower for faculty who are on fixed compensation due to being newly hired, or having administrative, teaching or research responsibilities. Detailed results are as follows: Approvals There is no documentation to support that the UTHSCT Clinical Faculty Compensation Plan received the appropriate UT System approval in accordance with the MSRDP Bylaws. UTHSCT MSRDP By-laws section 9.3 requires for the institution s Clinical Faculty Compensation Plan (Plan) to be submitted to the UT System Executive Vice Chancellor (EVC) for Health Affairs for approval. We found that for the last two Plan revisions made in FY 2009 and FY 2012 that were in effect during the period under review there was no 6

7 documentation available to support that either of the revised Plans were submitted to or approved by the EVC for Health Affairs as required. The UTHSCT VP, Chief Business and Financial Officer indicates verbal approval was obtained from the EVC for Health Affairs for the FY 2009 revision but Audit could not corroborate that assertion. Due to an unintentional oversight, the VP for Clinical and Academic Affairs and Physician-In-Chief did not submit the FY 2012 revised Plan to the UT System Office of Health Affairs for approval. Recommendation #1: The VP for Clinical and Academic Affairs and Physician-In-Chief should implement processes to ensure that the UT System Executive Vice Chancellor for Health Affairs approves UTHSCT Faculty Compensation Plan revisions prior to implementation. Management s Response: Processes will be implemented immediately to ensure that future revisions of the UTHSCT Faculty Compensation Plan will be approved by the UT System Executive Vice Chancellor for Health Affairs prior to implementation and documentation will be retained to support this approval. Implementation Date: February 27, 2013 Plan Participation We found that most of the faculty members who are not participating in the UTHSCT Clinical Faculty Compensation Plan have been excused from participating by the President and VP for Clinical and Academic Affairs and Physician-In-Chief because the faculty member is either newly hired, in a new or growing program or in a department considered to be a "feed" department such as Emergency Room, Radiology, and Pathology. Executive leadership indicates that UTHSCT does not have enough patient base for certain disciplines to meet benchmarks. In addition, management has excused Family Medicine physicians from participating because of their teaching responsibilities for the Family Medicine Residency Program. Also, if a faculty member is highly involved in Research activities they have also been excused from participation. The Faculty Compensation Plan does not denote a requirement for participation but notes that the Plan is applicable to all clinical faculty who do not receive a fixed annual appointment at UTHSCT. A fixed appointment at UTHSCT is documented via a faculty member s annual Memorandum of Appointment which is signed by the institution s President. The UTHSCT MSRDP By-laws are silent concerning the expectation for the level of participation in the Compensation Plan. The optimal level of participation in the Compensation Plan is decided upon by the institution s Executive Leadership. Decisions are made on a case-by-case basis and are not limited to the reasons noted above. The results of our three-year analysis, specifically for fiscal years 2011, 2012 and 2013 (year-to-date through January 2013), reflected little change in participation between the years. For this three-year period there were four faculty members who were removed from 7

8 the Compensation Plan. One faculty member resigned and three were moved to fixed compensation based on concerns about patient base and teaching responsibilities. During the three year period participation in the Clinical Faculty Compensation Plan decreased from 36% to 24% and faculty placed on fixed compensation increased from 64% to 76%. Much of the change resulted from new hires being placed on fixed compensation. Plan Transparency To gain a broad perspective of the transparency of the UTHSCT Clinical Faculty Compensation Plan, we interviewed a sample of FY 2012 Clinical Faculty Compensation Plan participants, FY 2012 Faculty Compensation Advisory Committee members and faculty on fixed compensation. We selected a cross-sectional representation of faculty members from various disciplines. We found that faculty members interviewed believe the UTHSCT Faculty Compensation Plan is a fairly simple plan that is transparent and generally understood by participants. They understand the components that comprise the plan and most comprehend the basic mechanics of calculating faculty compensation. Faculty members interviewed were aware that salaries and wrvus for the Plan are based on Medical Group Management Association (MGMA) rates, which they all believed to be the most appropriate benchmarks available for the institution. Participants expressed that they believe their participation in the Plan is financially beneficial to them and the Plan overall impacts productivity at the institution. All believe they receive adequate and timely reports from management to help them monitor and improve their performance. All faculty members interviewed believe management is accessible for questions or concerns about their compensation and will sufficiently address any concerns presented. Faculty members interviewed expressed concern that the majority of faculty members are on fixed compensation, which excuses these members from participating in the Compensation Plan. Although all believe the Compensation Plan itself is transparent many believe that overall the faculty compensation program at UTHSCT is not fully transparent. Faculty concerns identified were as follows: Structured criteria and guidelines are needed for making decisions concerning when to place a faculty member on fixed compensation Time limits for leaving a faculty member on fixed compensation need to be enforced Salaries for faculty hired who are not on the Compensation Plan should be commensurate with the industry, discipline and institutional salaries Clear progression measures are needed to appropriately link salaries to a faculty member's contribution, productivity and quality of work rather than a faculty member's negotiating skills Disparities in salaries between disciplines that perform the same or similar work need to be resolved When setting wrvus management needs to consider the effects on the physician's 8

9 productivity for factors out of the physician's control such as excessive telephone messaging system outages and implementation of electronic medical records For faculty who are on fixed compensation, consider rewarding higher than expected performance (wrvus exceeding annual benchmarks) or alternately consider placing more faculty back on the plan and making adjustments to their benchmark wrvus for administrative, teaching or other non-clinical assigned responsibilities The Compensation Plan needs to include quality related drivers in addition to wrvus currently used Recommendation #2: To promote transparency, the VP For Clinical and Academic Affairs and President should review these concerns and take appropriate action to resolve concerns faculty have about compensation. Management s Response: The VP for Clinical and Academic Affairs and President will consider all faculty concerns presented and will develop a communication plan to address them. Implementation Date: August 31, 2013 Communication There is no process in place for formally informing MSRDP Faculty Compensation Plan participants when changes are made to the plan. We found that although some Compensation Plan participants were informed about the FY 2012 Plan revision and its effects on the participant s compensation, others were not informed. Members who attend MSRDP Board meetings and faculty who serve on the Faculty Compensation Advisory Committee are generally better informed of changes than others. For the last two revisions of the Plan, which were made in FY 2009 and 2012 there is no documentation to support that all Compensation Plan participants were informed about changes made to the Plan. Recommendation #3: The VP for Clinical and Academic Affairs and Physician-In-Chief should implement communication processes for informing participants when significant changes are made to the Faculty Compensation Plan. Management s Response: Processes will be implemented immediately for formally notifying plan members when changes are made to the Faculty Compensation Plan. Implementation Date: February 27, 2013 Monitoring Executive management and the Faculty Compensation Advisory Committee are closely monitoring the compensation plan and making modifications where and/or if needed. The 9

10 plan is monitored specifically by the VP for Clinical and Academic Affairs and Physician- In-Chief, VP, Chief Business and Financial Officer, President and the Faculty Compensation Advisory Committee. Compensation Payments We tested two separate payroll transactions for each of the sample of six of the sixteen (37%) faculty members who participated in the Plan in FY Faculty members whose compensation were tested are members of the departments of Pediatrics-Pulmonary, Pulmonary Medicine, Family Medicine, Internal Medicine, Gastroenterology, and Cardiology. The selection included some faculty who were 100% clinical and some who split their time among clinical, research, and contract activities. Testing included two separate payrolls processed and the one-time additional vacation/sick/other leave payment for FY 2012 resulting from the FY 2012 revision of the Plan. Based upon these testing results, FY 2012 clinical faculty compensation was paid in accordance with the UTHSCT Clinical Faculty Compensation Plans in effect during FY 2012 as applicable. Analysis We performed a three-year analysis of physician wrvus for fiscal years 2010, 2011 and The data reflects that during the three-year period faculty who were on the incentive plan realized an average of 49% higher wrvus than the faculty who were on fixed compensation. However, it is important to note that administrative, teaching and research responsibilities for faculty who participate in the Compensation Plan may be lower than faculty who are on fixed compensation. Also, new faculty members who are in the process of growing a new program or patient base are initially placed on fixed compensation. Conclusion We concluded the following: The Clinical Faculty Compensation Plan was not approved by the UT System Executive Vice Chancellor for Health Affairs in accordance with MSRDP By-laws. The Clinical Faculty Compensation Plan itself is transparent and understood by plan members; however, members do not believe that overall the institution s faculty compensation program is fully transparent. Executive management and the appropriate compensation committee are properly monitoring the compensation plan and making modifications where and/or if needed. In FY 2012, faculty compensation was paid in accordance with the compensation plan. Although there is no definite trend demonstrating changes to productivity, during the period FY compensation plan participants experienced an average of 49% higher wrvus than faculty members on fixed compensation. Work RVUs may be lower 10

11 for faculty members who are on fixed compensation because of their administrative, research and educational responsibilities. In addition, new faculty members who are in the process of growing a new program or patient base are initially placed on fixed compensation. Kris I. Kavasch, Director of Internal Audit 11

12 Summary of Significant Findings According to The University of Texas System, a significant finding is one that may be material to the operation, financial reporting, or legal compliance of the university if corrective action has not been fully implemented. This would include an internal control weakness that does not reduce the risk of irregularity, illegal act, error, inefficiency, waste, ineffectiveness, or conflict of interest to a reasonably low level. In view of the above requirements, the UTHSCT for had no significant findings. 12