VIP-MD is a health maintenance organization (HMO) located in North Carolina. Unlike the traditional fee-for-service model that determines the payment according to the actual services used or costs incurred, VIP-MD receives a fixed, prepaid amount from subscribers. The per member, per month rate (PMPM) is determined by estimating the health care cost per enrollee within a geographic location. The average health care coverage in North Carolina costs $364 per month, which is the same amount irrespective of the subscriber’s age. Because individuals are demanding quality care at reasonable rates, VIP-MD must contain its costs to remain competitive. A major competitor, National Physicians, entered the North Carolina market early in the current year with a monthly premium of $321. VIP-MD wants to maintain its current market penetration and hopes to increase its enrollees in the current year. The latest data on the number of enrollees and the associated costs follow: Age Enrollment in Current Year Projected Enrollment Next Year Average Monthly Cost in Current Year 1–4 45,288 48,577 $ 11,147,472 5–14 82,056 84,263 10,059,232 15–19 95,473 95,487 8,436,424 20–24 65,846 67,482 9,539,024 25–34 133,096 132,154 26,431,808 35–44 166,476 175,046 38,881,708 45–54 85,096 90,489 22,741,536 55–64 98,824 101,523 28,691,312 65–74 155,888 161,159 49,517,744 75–84 67,495 72,065 33,432,360 85 years and older 23,099 26,449 24,286,075 1,018,637 1,054,694 $ 263,164,695 Required: 1. Calculate the target cost required for VIP-MD to maintain its current market share and profit per enrollee in the current year. 2. Costs in the health care industry applicable to VIP-MD and National Physicians are expected to increase by 8% in the coming year. VIP-MD is planning for the year ahead and is expecting all providers, including VIP-MD and National Physicians, to increase their rates by $25 to $346. Calculate the new target cost assuming again that VIP-MD wants to maintain the same profit per enrollee as in the current year.
VIP-MD is a health maintenance organization (HMO) located in North Carolina. Unlike the traditional fee-for-service model that determines the payment according to the actual services used or costs incurred, VIP-MD receives a fixed, prepaid amount from subscribers. The per member, per month rate (PMPM) is determined by estimating the health care cost per enrollee within a geographic location. The average health care coverage in North Carolina costs $364 per month, which is the same amount irrespective of the subscriber’s age. Because individuals are demanding quality care at reasonable rates, VIP-MD must contain its costs to remain competitive. A major competitor, National Physicians, entered the North Carolina market early in the current year with a monthly premium of $321. VIP-MD wants to maintain its current market penetration and hopes to increase its enrollees in the current year. The latest data on the number of enrollees and the associated costs follow:
| Age | Enrollment in Current Year | Projected Enrollment Next Year | Average Monthly Cost in Current Year | ||||||||
| 1–4 | 45,288 | 48,577 | $ | 11,147,472 | |||||||
| 5–14 | 82,056 | 84,263 | 10,059,232 | ||||||||
| 15–19 | 95,473 | 95,487 | 8,436,424 | ||||||||
| 20–24 | 65,846 | 67,482 | 9,539,024 | ||||||||
| 25–34 | 133,096 | 132,154 | 26,431,808 | ||||||||
| 35–44 | 166,476 | 175,046 | 38,881,708 | ||||||||
| 45–54 | 85,096 | 90,489 | 22,741,536 | ||||||||
| 55–64 | 98,824 | 101,523 | 28,691,312 | ||||||||
| 65–74 | 155,888 | 161,159 | 49,517,744 | ||||||||
| 75–84 | 67,495 | 72,065 | 33,432,360 | ||||||||
| 85 years and older | 23,099 | 26,449 | 24,286,075 | ||||||||
| 1,018,637 | 1,054,694 | $ | 263,164,695 | ||||||||
Required:
1. Calculate the target cost required for VIP-MD to maintain its current market share and profit per enrollee in the current year.
2. Costs in the health care industry applicable to VIP-MD and National Physicians are expected to increase by 8% in the coming year. VIP-MD is planning for the year ahead and is expecting all providers, including VIP-MD and National Physicians, to increase their rates by $25 to $346. Calculate the new target cost assuming again that VIP-MD wants to maintain the same profit per enrollee as in the current year.
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