Question

VIP-MD is a health maintenance organization (HMO) located in North Carolina. Unlike the traditional fee-for-service model...

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.

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