Pho Case

In the proposed contract, the PHO will assume full risk for patient utilization. This should result in an increased allocation for PHO administration/overhead to cover unforeseen costs. To appease primary care physicians, the allocated amount was increased due to their current average of receiving only 60% of charges. To allocate premium dollars for the specialists, Gapenski and Pink (2011) show that typical allocation of the premium dollar for specialist is 16% (Exhibit 17.3, pg. 629). According to Gapenski and Pink, "Risk-sharing arrangements typically allocate 10 to 20 percent of each reimbursement dollar to one or more risk pools (p. 625). Thus, 10% * 16% = 1.6% while 16%-1.6%= 14%. Hospital allocations were also decreased because in creating risk-sharing arrangements inpatient services along with specialty care need to be reduced so primary care physicians can increase their share. Since out-of-pocket providers, prescription drugs and ancillary services are not mandated by the PHO, the figures remain the same.

2) For this PHO, risk pools are essential to increase profitability. The hospital will need to have professional services risk pool for the physicians only, along with inpatient services risk pool shared equally among all (primary care physicians, specialists, and hospital). According to Gapenski and Pink (2011), "Risk pools are designed to reward providers that are most able to control costs through better utilization management, better cost control, or both" (p. 625). Financial incentives along with non-financial goals such as higher quality can be achieved through risk pools.

The professional services risk pool would be split 50/50 between primary care physicians and specialists. For the inpatient services risk pool, again the pool would be evenly split 33.3% among the three providers. Based on the Excel spreadsheet figures, because the primary care physicians are capitated, the actual payment equals the premium allocation. A reduction in specialist referral reduces the amount a primary care physician can receive from the professional services risk pool ($960,000 to only $96,000). "Under capitation, providers have an incentive to decrease utilization because decreased volume leads to increased profits" (p. 623). The specialist actual payment of $19,008,000 is greater than the premium allocation ($17,280,000) due to the specialists being reimbursed on a discounted fee-for-service system. The specialist share of the professional services risk pool is reduced $960,000 to $96,000 due to a decrease in referrals from the primary care physicians. Additionally, poor hospital utilization reduces specialist and primary care physician shares of the inpatient service risk pool from $1,320,000 to $132,000. Thus, risk pools provide the right incentive for control of specialist referrals and for hospital utilization.