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 $362 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 $319. 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		45,088				48,377			$	11,147,272
5–14		81,856				84,063				10,059,032
15–19		95,273				95,287				8,436,224
20–24		65,646				67,282				9,538,824
25–34		132,896				131,954				26,431,608
35–44		166,276				174,846				38,881,508
45–54		84,896				90,289				22,741,336
55–64		98,624				101,323				28,691,112
65–74		155,688				160,959				49,517,544
75–84		67,295				71,865				33,432,160
85 years and older		22,899				26,249				24,285,875
		1,016,437				1,052,494			$	263,162,495

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 6% 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 $344. 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

Requirement 1: Calculate required target cost as shown below: Current total costs (a) Total enrolls (b) Cost per enroll (c = a + b) Current Price (d) Profit (e=d-c) $263.162,495 1,016,437 $258.91 $362.00 $103.09 New Price (f) Required Profit (e) Target cost (g=f-e) $319.00 $103.09 $215.91 Hence, the required target cost is $215.91. Requirement 2: Calculate New Target Cost to maintain the same profit as shown below: Current total costs (a) Total enrolls (6) Cost per enroll (c = a +b) Costs in the next year ($258.91x106%) $263.162.495 1,016,437 $258.91 $274.44 New Price (d) ($319+$25) Required Profit (e) Target cost (f=d-e) $344.00 $103.09 $240.91 Hence, the New Target Cost is $240.91.