All America HMO pays its primary care physicians (PCPs) by capitation, but a percentage of the total

capitated amount is withheld and distributed to individual PCPs based on aggregate PCP performance. The

financial goal of importance to All America is to achieve total actual specialty care and hospital costs less

than budgeted. To this end, All America provides a financial incentive to its PCPs to encourage careful

referral of patients to these services. The financial incentive is based on the referral gain or loss, defined

as the difference between the actual and budgeted specialty care and hospital cost. More specifically, All

America uses the following risk sharing rules:

If a total referral gain, then all of the total withhold is returned to the PCPs

If a total referral loss < total withhold, then the difference (withhold - referral loss) is

returned to the PCPs based on the number of patients per PCP

If a total referral loss > total withhold, then none of the withhold is returned to the PCPs

Last year, All America's capitation payment to the PCPs was $20 PMPM, but 15 percent of this amount was

placed into the PCP risk pool. The budgeted amount for specialty and hospital costs was $50 PMPM. At

the end of the year, the following data were recorded for the four All America PCPs:

Dr Smith Dr Barney Dr Wells Dr Fargo

Number of patients 600 800 1,000 1,600

Actual referral costs $504,000 $470,000 $590,000 $880,000

a. Calculate the total compensation of each PCP at the end of the year.

b. Were each of the PCPs fairly compensated? What incentives does this single risk pool based on aggregate

PCP performance present to the individual PCPs? What should be investigated to assess the fairness of

the PCP compensation?