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....

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 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) isreturned 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 of America's capitation payment to the PCPs was $20 PMPM, but 15
percent of thisamount 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:
600800
1,000 1,600
Actual referral costs $504,000 $470,000 $590,000
$880,000
1. Calculate the total compensation of each PCP at the end of the year.
2. Were each of the PCPs fairly compensated? What incentives do this single
risk pool based on aggregate PCP performance present to the individual PCPs?
What should be investigated to assess the fairness of PCP compensation?