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 $374 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 $331. 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 | 46,288 | 49,577 | $ | 11,148,472 | ||||||||
| 5–14 | 83,056 | 85,263 | 10,060,232 | |||||||||
| 15–19 | 96,473 | 96,487 | 8,437,424 | |||||||||
| 20–24 | 66,846 | 68,482 | 9,540,024 | |||||||||
| 25–34 | 134,096 | 133,154 | 26,432,808 | |||||||||
| 35–44 | 167,476 | 176,046 | 38,882,708 | |||||||||
| 45–54 | 86,096 | 91,489 | 22,742,536 | |||||||||
| 55–64 | 99,624 | 102,523 | 28,692,312 | |||||||||
| 65–74 | 156,888 | 162,159 | 49,518,744 | |||||||||
| 75–84 | 68,495 | 73,065 | 33,433,360 | |||||||||
| 85 years and older | 24,099 | 27,449 | 24,287,075 | |||||||||
| 1,029,437 | 1,065,694 | $ | 263,175,695 | |||||||||
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 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 $356. Calculate the new target cost assuming again that VIP-MD wants to maintain the same profit per enrollee as in the current year.
ANSWER
Answer 1.
| Current total costs | $263,175,695 |
| Total enrolls | 1,029,437 |
| Cost per enroll | $255.65 |
| Current Price | $ 374 .00 |
| Profit | $118.35 |
| New Price | $331.00 |
| Required Profit | $118.35 |
| Target cost | $212.65 |
Answer 2.
| Current total costs | $263,175,695 |
| Total enrolls | 1,029,437 |
| Cost per enroll | $255.65 |
| Cost in the next year (256.87*107%) | $ 274.85 |
| New Price | $356 |
| Required Profit | $118.35 |
| Target cost | $237.65 |
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