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 $361 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 $318. 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		44,988				48,277			$	11,147,172
5–14		81,756				83,963				10,058,932
15–19		95,173				95,187				8,436,124
20–24		65,546				67,182				9,538,724
25–34		132,796				131,854				26,431,508
35–44		166,176				174,746				38,881,408
45–54		84,796				90,189				22,741,236
55–64		98,524				101,223				28,691,012
65–74		155,588				160,859				49,517,444
75–84		67,195				71,765				33,432,060
85 years and older		22,799				26,149				24,285,775
		1,015,337				1,051,394			$	263,161,395

Required:

1. Calculate the target cost required for VIP-MD to maintain its current market share and profit per enrollee in the current year.

Answer 1

ANSWER

Current total costs	$263,161,395
Total enrolls	1,015,337
Cost per enroll	$259.19
Current Price	$ 361 .00
Profit	$101.81
New Price	$318.00
Required Profit	$101.81
Target cost	$216.19

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