After many long meetings and sometimes-heated discussions, we finally succeeded in implementing a new compensation system for our PCPs. Now I’m not so sure that it’s appropriate, given that one of our major HMO contracts is switching to capitation next month. We’ve been working on changing the new system to deal with this, but I worry about changing so soon. I’m also beginning to wonder if its possible to create a fair system when there is both fee-for-service and capitated revenue.

The speaker was Richard Peters, MD, Director of Primary Care for Apogee Health Care (AHC), a physician-hospital organization (PHO) that had been established four years ago by Metropolitan Hospital and several physician groups. Metropolitan Hospital, an academic medical center affiliated with a prestigious medical school, was located in a highly competitive managed care market. The hospital recognized that to be successful it needed to expand its primary care base and solidify its relationships with specialty physicians, and thus formed a PHO. AHC’s strategy was to create an integrated delivery system (IDS) that provided cost-effective, quality clinical care and excellent patient service, allowed community physicians and patients easy access, and effectively managed capitated risk.

Historically, in addition to having specialists on staff, the hospital had owned both Metropolitan Physician Group (MPG), a primary care academic medical group that was located on its main campus, as well as several community health centers, all of which had primary care physicians on staff. These groups became part of the newly formed PHO. Moreover, AHC had moved aggressively to acquire primary care medical practices and to establish new practices, which also became part of the PHO. By the end of its first four years, AHC had opened 4 new primary care practices and expanded eight others. The practices were quite diverse, ranging from some based in community health centers to others with a private practice model, catering to a well-insured population. AHC recognized early on that it needed to develop a competitive primary care compensation system if it was to be successful in recruiting and retaining PCPs.

AHC’s COMPENSATION MODEL

There were several problems with the compensation system that had been in place for MPG and the physician groups at the community health centers. First, some of the more senior physicians were being paid below market rates. Second, there was a belief that some practices had . . .

Assignment

1. Consider the different kinds of responsibility centers that can exist in a management control system, and the criteria for their selection. What kind of a responsibility center are the individual practices? What kind of a responsibility center should an individual physician be within a group practice? Why? In answering these questions, think about the relationship among risk, reward, and control and how this relationship works at each level of responsibility center selection.
2. Calculate the contribution of a nurse practitioner and a physician. If a practice has to hire additional providers, which type should it choose? What factors would influence this decision?
3. Consider the four phases of the management control process. How should the six performance criteria that have been introduced be incorporated into the management control process at the individual practice level in a mixed model (i.e., capitation and fee for service)? Should there be additional criteria?
4. How should the performance criteria influence an individual physician’s compensation? Should these criteria be applied to both fee for service and capitated patients? Consider the impact of a reduction in inpatient utilization on the practice income and individual physician income under the following scenarios: 100 percent fee for service, 100 percent capitation, and 70 percent fee for service/30 percent capitation. Assume that a physician’s panel is 2,000 members and that inpatient days are 300 per 1,000 population.