Question

13-7.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 $371 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 $328. 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	45,988	49,277	11,148,172
5–14	82,756	84,963	10,059,932
15–19	96,173	96,187	8,437,124
20–24	66,546	68,182	9,539,724
25–34	133,796	132,854	26,432,508
35–44	167,176	175,746	38,882,408
45–54	85,796	91,189	22,742,236
55–64	99,924	102,223	28,692,012
65–74	156,588	161,859	49,518,444
75–84	68,195	72,765	33,433,060
85 years and older	23,799	27,149	24,286,775
Total	1,026,737	1,062,394	263,172,395

Required:

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

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 $353. 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

A.Cost per enrollee of current year = 263172395/1026737= $256.32

Since the cost per enrolle is to stay the same next year,

Estimated cost = cost per enrollee*expected enrollee=

256.32*1062394= $272312830.08

B. Cost to be increased by 7% next year= 256.32+7%= $263.32

New estimated cost = 263.32*1062394 = $279749588.08