Kaiser Permanente Article K At Risk Compensation contract with physicians

ARTICLE K
At Risk Compensation

Section K-1 Planned At Risk Compensation

Medical Group is placed at risk with respect to a portion of its planned compensation, called
Planned At Risk Compensation. The amount of Planned At Risk Compensation for each calendar year will be set forth, or determined in the manner set forth, in the Memorandum of Understanding. The reasons for placing Medical Group at risk with respect to a portion of its planned compensation are to:

(a) Provide Medical Group with an economic interest in achieving optimum efficiency and economy in the provision of Medical Services, Hospital Services and Administrative Services incident to the conduct of the Medical Care Program, consistent with maintaining appropriate standards of quality and services; and

(b) Help protect the solvency of Health Plan by transferring a portion of the financial risk of conducting the Medical Care Program to Medical Group; and

(c) Meet the requirement of the Health Maintenance Organization Act of 1973, as
amended, and regulations and rulings thereunder, to the extent that they require
Medical Group to be placed financially at risk.

Section K-2 Calculation of At Risk Compensation Planned At Risk compensation will be adjusted as follows to produce At risk Compensation:

(a) If there is zero Net Program Revenue, Planned At Risk Compensation will not be adjusted;

(b) If there is a deficit in Net Program Revenue, Planned At Risk Compensation will be reduced by an amount equal to the lesser of Planned At Risk compensation or 50% of the deficit in Net Program Revenue;

(c) If there is any Net Program Revenue, Planned At Risk compensation will be increased by an amount equal to 50% of Net Program Revenue, except that At Risk Compensation will not exceed 10% of Medical Services Costs for the year. If At Risk Compensation (that would be payable were it not for said 10% limitation) exceeds 10% of Medical Service Costs, then the excess over 10% will be retained by Health Plan and utilized in furtherance of general Medical Care Program objectives such as increasing benefits to Members, adding to or improving facilities, or minimizing rate increase requirements in future years.

Section K-3 Determination of Net Program Revenue

The sum of the following amounts will be subtracted from Program Revenue:

(a) All Health Plan costs and expenses for the year (including the cost of wage, salary and fringe benefit increases for employees of Health Plan, but excluding the amount of such increases to nonunionized employees not approved by Medical Group), except that the cost of any qualifiedretirement plan is the amount budgeted to fund the retirement plan trust ("Trust") regardless of the amount computed pursuant to Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions ("FASB 87"), but excluding (i) depreciation, (ii) taxes and other governmental impositions or charges, (iii) expenses, if any, allocable to the production of Excluded Revenue, and (iv) actual compensation to Health Plan and Hospitals management personnel determined at year end, in addition to monthly salary, as recognition for services performed during the year; plus

(b) Base Compensation to Medical Group for the year under Article J of this Agreement; plus

(c) Planned At Risk Compensation and planned compensation to Health Plan and Hospitals management personnel determined at yearend, in addition to monthly salary, as recognition for services performed for the year; plus

(d) Base Compensation to Hospitals for the year under Article G of the Hospital Service Agreement, except (i) amounts allocable to depreciation, and (ii) taxes and other governmental impositions or charges; plus

(e) Revenue attributable to Nonmember and Workers' Compensation Services; plus

(f) Other Revenue; plus

(g) Miscellaneous Revenue collected and retained by Hospitals (which reduces Base

Compensation to Hospitals referred to in (d) above; plus

(h) The net amount, if any, by which the aggregate sum of actual expenses is less than the aggregate sum of planned expenses (as set forth in the Operating Budget) to the extent attributable to:

(i) Delays in or early openings of new facilities; and

(ii) Delays in or early acquisition of facilities or sites for proposed facilities; and

(iii) Medical Group extraordinary expenses generally related to new facility startup costs; and

(iv) Any other item agreed to in writing by Health Plan and Medical Group; plus

(i) The amount set forth in the Operating Budget and Memorandum of Understanding as planned cash generation to meet the planned capital requirements of Health Plan and Hospitals,

(A) reduced by the amount, if any, by which the amount budgeted to fund any Health Plan or Hospitals Trust exceeds the amount computed pursuant to FASB 87, and (B) increased by the amount, if any, by which the amount budgeted to fund any Medical Group Trust exceeds the amount paid to Medical Group for contribution to the Trust; plus

(j) The planned amount of taxes and other governmental impositions or charges upon or payable by Health Plan or Hospitals, increased or decreased by the actual amount of any variance from forecast in any such tax, imposition or charge, but excluding any increase or decrease attributable to a variance due to a change in organizational status or classification, change in law, administrative or judicial decision, or mistake of law; plus

(k) Any other item agreed to in writing by Health Plan and Medical Group.

The balance of Program Revenue, if any, remaining after all of the foregoing have been

deducted is Net Program Revenue.

Section K-4. Payment of At Risk Compensation

At Risk Compensation will be determined on an annual basis and final payment will be made
within a reasonable time following completion of the outside audit for the year, but in no event later than April 1 of the following year. Health Plan will periodically estimate and report to Medical Group the status of At Risk Compensation, and advances against estimated At Risk Compensation may be paid at any mutually agreed time.

Section K-5 Distribution of At Risk Compensation

At Risk Compensation will be paid to Medical Group, free from restriction, for distribution
among employees of Medical Group in such manner as Medical Group, in its discretion, may
determine. Medical Group intends to implement equitable arrangements under which At Risk

Compensation will be distributed on an individual, department, subgroup, or other
appropriate basis so as to constitute an effective incentive for efforts of individuals, departments and subgroups to further the common interests of Health Plan and Medical Group in providing maximum benefits to Members at the most reasonable cost consistent with maintaining accepted professional standards of Medical Services and Hospital Services.

Section K-6 Determination of Net Medical Group Revenue

Net Medical Group Revenue is the amount, if any,
by which the sum of:
(a) Base Compensation to Medical Group; plus
(b) At risk Compensation; plus
(c) Revenue attributable to Nonmember and
Workers' Compensation Medical Services; plus
(d) Other Revenue; plus
(e) Any other revenue agreed to in writing by

Health Plan and Medical Group as subject to this definition; exceeds all Medical Group expenses (including salaries of Physicians and any Residual Claim paid by Medical Group but not reimbursed by Health Plan, but excluding any payments under Section K-4) incurred by Medical Group during the calendar year relating to performing Medical Services and other services under this Agreement. If the sum of (a) through (e) above is less than all Medical Group expenses as herein described, then Net Medical Group Revenue will be a negative number.

Section K-7. Negative Variance in Net Medical Group Revenue

Sections K-7 and K-8 will be applied after calculation of Net Program Revenue and Net
Medical Group Revenue. If there is a negative Variance in Net Medical Group Revenue, then
Health Plan will pay Medical Group a portion thereof (multiplied by the number of Eligible
Physicians) according to the following table: Amount of Negative Variance Amount to be

At Least Up To Paid By Health Plan
0 $ 500 20%$ 500 $1,000 $100 plus
50% of variance over $500 $1,000 No
Limit $350 plus 90% of
variance over $1,000

If application of this Section K-7 is necessary, it will be applied only once each year.

Section K-8. Positive Variance

(a) Reduction in Payments to Medical Group. If there is a positive Variance in Net Medical

Group Revenue, then a portion thereof (multiplied by the number of Eligible Physicians) will be deducted according to the following table and applied as provided in Section K-10:

Amount of Positive Variance
Amount of Positive Variance Amount to be
At Least Up To Paid By Health Plan
0 $ 500 20% $ 500 $1,000 $100 plus
50% of variance over $500 $1,000 No
Limit $350 plus 90% of variance
over $1,000

(b) Addition by Health Plan

If there is a positive Variance In Health Plan Cash Generation (after reduction by any payment under Section K-7), then (i) the amount of such Variance will be divided by the number of Eligible Physicians, (ii) portions of the resulting amount will be calculated according to the table set forth in Section K-8 (a), (iii) the resulting amount (corresponding to the "Amount to be Deducted" in the foregoing table) will be multiplied by the number of Eligible Physicians, and (iv) this amount will be
applied as provided in Section K-10.

Section K-9. Negative Variance in Health Plan Cash Generation

If there is a negative Variance In Health Plan Cash Generation (after applying Section K-7), then all or part of the amount thereof may at Health Plan's election be included in the next Ratemaking Forecast, and the amount thus included will be solely for the account of Health Plan.

Section K-10. Application of Positive Variances After all computations and payments to be made pursuant to this Agreement have been made, the sum of the amounts, if any, determined under Section K-8(a) and (b) will be applied first to reduce Health Plan's negative net worth, if any, and then in furtherance of general Medical Care Program objectives such as increasing benefits to Members, adding to or improving facilities, or minimizing rate increase requirements in future years.

Section K-11. Limitations on Amendments of Certain Agreements

Health Plan will not amend the Hospital Service Agreement in a manner that increases payments to Hospitals and reduces payments to Medical Group without Medical Group's written consent, and will amend or rescind the Guaranty Agreement among Health Plan, Kaiser Foundation Hospitals, Kaiser Foundation Health Plan, Inc. and various subsidiaries of Kaiser Foundation Health Plan, Inc., executed effective April 1, 1989 ("Guaranty Agreement") only (a) with Medical Group's written consent or (b) upon at least 8 calendar months' written notice to Medical Group. If the Guaranty Agreement is amended or rescinded under (b) without Medical Group's consent, then (x) all obligations (whether or not then
known) incurred or accrued prior to the effective date of amendment or rescission will remain subject to the guaranty of the Guaranty Agreement as now in effect or as it may hereafter be amended, and (y) "15th month" in Section I-2(e) will be deemed to read "5th month" if the First Notice is given by Medical Group (but shall remain "15th month" if the first Notice is given by Health Plan), but if Health Plan gives a First Notice, then by notice in writing to Health Plan given within 30 days thereafter Medical Group may elect to have "15th month" in Section I-2(e) read "5th month" or any higher number month less than

Section K-12. Limitation on Changes in Compensation Methods

Neither Health Plan, Hospitals nor Medical Group will change its system or method of
personnel compensation that is reflected in the Operating Budget without the consent of both
parties hereto.

Note from Dr. Phillips:

Toward the end there is the Corridor concept mentioned in the 1985 Medicare documents whereby there will not be so much fluctuation year to year. Also in K-12, the Plan cannot change the reimbursement percentage without the docs approval. It is the same 50-50 that Dad Bechtel proposed to young Henry Kaiser to get him to join the San Francisco Exchange and bid large project together. [I think you would also find it at the heart of Halburton International.] As Dad Bechtel put it (see "Can Physicians Manage The Quality And Costs of Health Care - The Story of The Permanente Medical Group", Charpter 1, page 8), this is the only way two partners can respect each other.

I became interested in Article K when I noticed Kaiser left it out of the documents they were forced to submit to the court in Oakland on the Pill Splitting case. This money accumulates under the plan - immune from all outsiders even bankruptcy trustees - until the Kaiser doc proves himself or herself by vesting to 20 years, keeping silent forever, and never turning against the Permanente Culture. Once you are in, don't try to get out - til death do us part.

Dr. Phillips