Task: All America HMO pays its chief care physicians (PCPs) by capitation however the percentage of the total capital amount is withheld and distributed to individual PCPs which are based on aggregate PCP performance. The financial goal of significance to All America is to attain total actual specialty care and hospital costs less than budgeted. To this end, All America gives 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 differentiation between the actual and budgeted specialty care and hospital cost. More specifically, All America uses the following risk sharing rules:

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

ii) If a total referral loss < total withhold, then the difference (withhold - referral loss) is returned to the PCPs based on number of patients per PCP

iii) 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. Compute the total compensation of each PCP at the end of the year.

b. Were each of the PCPs fairly compensated? What incentive does this single risk pool based on aggregate PCP performance present to the individual PCPs? What must be investigated to assess the fairness of PCP compensation?