Question

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 $377 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 $334. 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		46,588				49,877			$	11,148,772
5–14		83,356				85,563				10,060,532
15–19		96,773				96,787				8,437,724
20–24		67,146				68,782				9,540,324
25–34		134,396				133,454				26,433,108
35–44		167,776				176,346				38,883,008
45–54		86,396				91,789				22,742,836
55–64		99,324				102,823				28,692,612
65–74		157,188				162,459				49,519,044
75–84		68,795				73,365				33,433,660
85 years and older		24,399				27,749				24,287,375
		1,032,137				1,068,994			$	263,178,995

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 7% 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 $359. Calculate the new target cost assuming again that VIP-MD wants to maintain the same profit per enrollee as in the current year.

Answer 1