Question

required intormauon The following information applies to the questions displayed below.) 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 $366 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 $323. 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 1-4 5-14 15-19 20-24 25-34 35-44 45-54 55-64 65-74 75-84 85 years and older Enrollment in Current Year 45,488 82,256 95.673 66,046 133,296 166.676 85,296 99,024 156,088 67,695 23,299 1,020,837 Proiected Enrollment Next Average Monthly Cost Year in Current Year 48.777 $ 11, 147,672 84,463 10,059.432 95,687 8.436.624 67.682 9,539,224 132,354 26,432,008 175, 246 38,881,908 90,689 22,741,736 101,723 28,691,512 161, 359 49.517,944 72,265 33,432,560 26.649 24,286,275 1.056,894 263,156,895 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 525 to $348. Calculate the new target cost assuming again that VIP-MD wants to maintain the same profit per enrollee as in the current year (For all requirements, do not round intermediate calculations and round your answers to 2 decimal places.) Required target cost 2. New target cost

Answer 1

Ans. 1 :-

• Here, we have to find the target cost for the next year so as to maintain the Profit per Enrollee same as current year. So, first we shall calculate the current year's profit per enrollment.
• Moreover, as it is said in the question that a competitor- National Physicians entered the market early in the current year only with monthly premium of $323, in order to maintain the market penetration, VIP-MD must keep their Per member per month rate also at $323.
• Assuming monthly rate per enrollment at $323, I have calculated the Current year profit per enrollee for VIP-MD as below:

Curkant Year L020837 No of Enza11meat5 323 xMonth y Premium 3.29 730 351 Less 263,166. 895 TOtal Monthly Cost Total PrdiE $G6, 563 456 Naof enaollm ents LO20 83 Prroft Per $ 65 Enn0llee

• Now, using the projected no. of enrollments for the next year and Target profit per enrollee as calculated above, we shall calculate the target cost for the next year as explained in the image here:-

Next Year Projected No of 1,056894 X Tazgct pofit Pes 65 e02011e Total Target Prafit G8,698,110 Taaget Cost Total Prajected ReveAue profit Targer L Los6.894 x 323] $ 68.698,1LLO $ 68. 698 to 341 336762 $272.68o, 652

Ans. 2:-

• VIP-MD will also increase it's rate by $25 to $348 as mentioned in the question.
• VIP-MD needs to maintain the per enrollee profit at $65 only, as calculated before.
• Calculation of Target cost using this new information:-

Takger Pardit No of Paajected E020119eots LOS 6,894 Taaget Prcfit Total profit $68.698, 11O Projected Revenye Noof Enrollents x 1,056.894 x 348 $ 367.799, 12 Rate Target Cost Target prafte G8.698 11O Parajected Revenue $ 367 793 12 1 $ 219.101L CO2 TX