So there are a number of interesting issues that come up when we start thinking about and evaluating physician, organizations and payment, and that can give us some insights into healthcare systems and how they work. We'll take a look at a couple of them here. First risk, and second, the multi layered physician payment arrangements that are commonly found out there. First, let's know the relationship between physician payment and risk. We can start by thinking about intermediaries holding risk. They're the ones on the hook for the bill when patients need health care, but provider payments can affect that. Capitation in particular, when an intermediary pays a physician practice using capitation even partial capitation it can transfer risk from the intermediary to the provider. The intermediary pays a fixed amount to the practice. So the intermediary no longer faces higher costs if their members get sick and need a lot of care. Now, the physician group has the risk, they got the fixed amount of money and they have to deal with it if they need to deliver a lot of care. Note that capitation is really different from fee for service in this way. In fee for service, the risk stays with the intermediary and is not transferred to the physician. One implication of this is that capitation turns out to be hard to use for paying small practices, because often these practices are not large enough to be able to manage the risk effectively. If you don't have a large patient base to spread the risk over, then swings in the needs of patients over time can be large and can be really hard for the practice to manage. Only when the number of patients in a panel becomes pretty large and statistically, their needs become more predictable does it become feasible to manage the risk in a capitation arrangement. For this reason, we seldom see capitation payments used for small practices. A second topic we can look at here is the fact that there are often multiple layers in physician payment arrangements. We started with a simple picture in mind of a relationship between an intermediary and a physician and the idea that payment might go directly from the intermediary to the doctor but that is not actually often the whole story. There can be a bit of variation in how this works. Let's illustrate with some examples. First, let's take the easiest case of a small practice that decided to contract directly with an intermediary. Here the intermediary pays the practice directly, probably fee for service because small practices have a hard time with riskier payment systems like capitation. Then the physicians in the practice, commonly the owners would be paid or would pay themselves based on the profits of the practice with some method they would devise for sharing the profits among them. Maybe equal, maybe based on how much work they did something like that. Now, that's a pretty easy example and that's maybe the most direct that you're going to see as far as a relationship between an intermediary and a physician goes. As a second example a little more complicated. Consider a larger group practice here the group administration might arrange for payment from the intermediary at the group level, that group administration would then get paid by the intermediary for the collected work of all the physicians in the practice. That may be fee for service, or it may be some sort of capitation arrangement or something else. Then though, the group makes a separate and different arrangement to pay the individual doctors, for example, a larger group may use salaries, or perhaps they use salary plus some sort of bonus or something maybe based on performance criteria like patient satisfaction, or the number of RV use of work each doctor did or something like that. But the key is that the form of payment would be different at the two levels. The way the group gets paid does not have to be how the individual physicians are paid. And for a third example, let's just consider the case of smaller practices that have joined an IPA. Here the IPA will make a deal with the payer and be paid based on the collective work of all the participating practices in the IPA. Maybe this is a capitation arrangement or in principle, it could be other arrangements too. Then once the IPA is paid it in turn pays the practices according to arrangements that have been made between the IPA and the practices. This is probably fee for service if there are small practices. The practices then work out how the individual physicians will be compensated in a small practice with physician owners, maybe they divide up the profits of the practice in some way. So depending on the application, and depending on the issues you're thinking about and working on, sometimes it can be very important to keep track of the different layers and the different stages of the payments flowing from the intermediaries down to the physicians. This can really make a difference in determining how people are paid and how they're going to respond to the payment incentives.
