84 THE HEALTH PLAN-BUSINESS ASPECTS the health plan which is distributed to new members. But we simply do not advertise and do not spend any time worrying about how to avoid getting caught at something we do not do. Q. In negotiating with the Social Security Administration for your Medicare payments, were any problems raised with regard to repayment of your costs for house staff and your costs for professional staff? A. Not to my knowledge. Physicians' services fall under Part B and the house staff falls under Part A. Q. Did you have any difficulty in getting reimbursement for your Part A cost for house staff plus your physicians' services in Part B? A. No. The cost of house staff is included in the hospital per diem cost. Q. How do you relate your incentive formula-splitting earnings on a 50-50 basis between the medical group, on the one hand, and the plan and hospitals, on the other to the two planned earnings factors? A. As indicated on Table VII-1, the annual operating requirements of a region are broken down into medical services, hospital services, and so on. In the medical services category, most of the funds are used for contract payments to the medical group in two forms: (1) a fixed per capita payment based on the actual membership during the year, and (2) a contingent contractual payment. In order to develop a current dollar requirement that establishes the dues rate for the coming year, there must be included a targeted amount for the incentive payment. We use the words "incentive" and “contingent” interchangeably. I'll try to explain why. The basic per capita payment is a fixed obligation on the part of the health plan. Regardless of the overall financial results of operations for the year, that fixed payment will be paid to the medical group. The contingent contractual payment is an additional amount agreed upon in advance that becomes an additional level of earnings for the medical group partners distributed among them on a "share and share alike" basis. It is contingent because, even though a mutually agreed-upon target figure is included in the financial requirement, it will be more or less depending upon the overall results of operations for the year and thus is not precisely predictable. Any contingent dollars that exist at the end of the year are divided 50 percent to the medical group and 50 percent to the Health Plan and Hospitals. Q. The incentive compensation program seems to involve a concept of “surplus." How do you justify “surplus earnings" in a nonprofit health care program? A. Although for semantic convenience the term "surplus” or “excess" is sometimes used, we are not in fact talking about earnings in excess of the reasonable financial requirements of the program. The incentive feature of the health plan-medical group financial arrangements is contingent because it is not guaranteed and depends upon results of operations, but it is in no sense "surplus." It is a planned feature of the medical groups' physician compensation program, and consistent failure to DISCUSSION OF THE HEALTH PLAN-BUSINESS ASPECTS 85 achieve substantially the planned level of contingent compensation would represent a serious detriment with respect to recruiting and retaining the necessary professional staff. Through the incentive compensation arrangement, the physicians share in both favorable and adverse financial results and are directly involved in the financial results of total program operations. This is an important aspect of total physician compensation. On the Health Plan and Hospitals side this aspect of earnings is also planned and necessary over the long run to meet the program's capital generation requirements. The difference between short-term unfavorable fluctuations which can be absorbed, if necessary, and failure to achieve planned levels of contingent earnings over the long run is very important in appreciating how this aspect of program earnings is both contingent and essential. Q. How is your utilization experience influenced by the incentive compensation provisions? A. Basically it does not appear that the incentive compensation arrangements have any significant effect on utilization experience. The utilization experience in the regions that do not have the formal compensation arrangement is quite similar to the utilization experience in the California regions where the incentive compensation system is in effect. Moreover, the utilization experience in the early 1950's before this feature was established in the health plan-medical group contracts is quite consistent with the utilization experience since the incentive compensation provisions went into effect. Of course we have no way of knowing what our experience would be in the California regions in recent years if the incentive compensation arrangements were not in effect. We believe it is simplistic to overemphasize the significance of this particular financial incentive or to seek significant correlations between the incentive and utilization experience. There is a much more fundamental and significant incentive in effect in all K-P regions: Basically, most of our physicians have made a career commitment to the program, and their whole professional careers, including their desire for more and better facilities and equipment, etc., are intimately involved in and dependent upon the success of the total program. Perhaps the most important aspect of the incentive compensation arrangements as established in the California regions is that these embody in financial terms the fundamental concept of mutuality of interest between the medical groups and the Health Plan and Hospitals, and it may well be this general acceptance of mutuality of interest, more than any specific feature of the contract or of the financial arrangements, which provides the incentive for the physicians and the nonphysician management personnel to work together effectively toward the successful operation of the total program. A. The financial incentive is a help but it is by no means the entire picture. If you have a group of physicians who accept the responsibility of continuing medical care to a group of people in the community you have the basis for constructive incentives and an effective program. Where you have a group of physicians who are willing to accept the responsibility to strike a medically appropriate balance between 86 THE HEALTH PLAN-BUSINESS ASPECTS economy and quality then you have the appropriate utilization of facilities, inpatient and outpatient, given medical centers suitably combining inpatient and outpatient services. In this kind of program there obviously is no built-in incentive for a physician to do unnecessary surgery or to admit patients for work-up, GI series, and so on, that can just as well be done on an outpatient basis. Q. I understand that the incentive compensation feature is in effect in only two of the regions. Why is this? A. The formal contractual incentive compensation arrangement is in effect in the two large regions in California in which nearly 90 percent of the membership is located. It is not in effect in the other two established regions-Oregon and Hawaiinor in the two new regions-Ohio and Colorado. Historically, this arrangement grew out of the extensive reorganization of the K-P program which occurred in the middle 1950's, at which time the program was operating in only three regions-Northern California, Southern California, and Oregon. As indicated, each region has a considerable degree of autonomy. At the time when the incentive arrangements were established in California the medical group and regional management in Oregon chose not to adopt the new contractual arrangements but preferred to continue on a basis which was already in effect in Oregon and with which the region was satisfied. That arrangement is basically a straight per capita contract modified by certain aspects of cost reimbursement and provision for a retirement program. The Hawaii Region, which has operated until recently on essentially a per capita contract, is now experimenting with incentive compensation arrangements that are different from those in effect in the two California regions. One of the advantages of decentralized management and a high degree of regional autonomy is that it does provide a framework for diversity of approach and experimentation in different regions. With respect to the new regions in Colorado and Ohio, an incentive plan involving the distribution of net earnings is obviously inapplicable to regions which have not yet achieved a financial breakeven point. However, other types of incentive arrangements are possible even before an operational breakeven is achieved; and various possible incentive arrangements are under consideration in both Ohio and Colorado. Q. How does the incentive plan and negotiated budgeting process work so as to motivate the director of the hospital to stay within his negotiated per capita budget? And also to be sure he doesn't overrun the financial requirements which you carefully set forth as being distinguished from costs? A. With respect to hospital services the hospitals work under a carefully developed budget but not strictly a negotiated budget. The budget for hospital services, although it can be converted to a per capita, is not developed on a per capita basis. It's done on a global basis, taking into account the total hospital financial requirements as developed through a detailed budget and as reviewed and approved by hospital management and ultimately by regional management. Hospital revenue from non-health plan sources is offset against this total requirement and the balance is the DISCUSSION OF THE HEALTH PLAN-BUSINESS ASPECTS 87 net hospital financial requirement. It is a total amount of money needed from the health plan for the year. The incentive is a management incentive; a prime part of the job of all managers at all levels is to stay within the approved budget or have a very good reason for any overruns. Q. It is also not cost. You said it was not cost and therefore something larger than cost, I believe. A. Yes. It is something larger than cost. There are two systematic earning factors built into the financial requirement. Perhaps I should say three factors because we look more at cash flow than at net earnings in a strict accounting sense. Thus we do include depreciation on buildings and equipment as part of the cash flow that enters into financial requirements. Also, 4 percent per annum of the historical cost of land, building, and equipment goes into the earnings requirement, and in addition, there is a certain per capita amount, not less that 15 cents per member per month. Q. In projecting the short-term budget, it was stated that the medical group is responsible for coordination of other personnel. How does that work in the hospital? Is there continuity of administrative control with respect to both inpatient and outpatient activities? A. Not completely. The budget for which the medical group is responsible includes all of the outpatient offices, all of the nondoctor personnel, supplies, overhead expenses, as well as laboratories located in and out of hospitals, xray departments, physical therapy, etc. This budget is prepared by the medical group and is dealt with in the annual negotiation of the fixed per member per month rate under the contract between the health plan and the group. The other major activity-the hospital activity-is in fact budgeted in much the same way except that since the health plan and hospitals have a single management— at least at the level of the regional manager-this is simply a detailed departmental budgeting of personnel and nonpayroll costs of the combined operations. A. In the budgeting process the membership forecast has to be mutually agreed upon with the medical group. Once that forecast and the next year's membership is projected on a month-by-month basis, and we allocate the membership to each medical center, then we attempt to forecast the number of patient days each facility will have, by service. This is done by the department of medical economics and then is turned over to the hospital people who may modify—they may have some additional information—and finally it is agreed upon. Thus the budget assumptions are not something passed out from on high; there is real local participation. The other side of that coin is that the medical group is dealing with the same membership. It is just generating a different type of utilization. 72-759 O 72-19 |