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Target Costing; Health Care 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 (PMPM) rate is determined by estimating the health care cost per enrollee within a geographic location. The average health care coverage in North Carolina costs $368 per month which is the same amount irrespective of the subscriber's age. Because individuals are demand- ing quality care at reasonable rates, VIP-MD must contain its costs to remain competitive. A major competitor, Doctors Nationwide, is entering the North Carolina market in early 2010 with a monthly premium of $325. VIP-MD wants to maintain its current market penetration and hopes to increase its enrollees in 2010. The latest data on the number of enrollees and the associated costs follow:
Age
Enrollment in 2010
Projected Enrollment in 2011
Average Monthly Cost in 2010
1-4
45,688
48,977
$11,147,872
5-14
82,456
84,663
10,059,632
15-19
95,873
95,887
8,436,824
20-24
66,246
67,882
9,539,424
25-34
133,496
132,554
26,432,208
35-44
166,876
175,446
38,882,108
45-54
85,496
90,889
22,741,936
55-64
99,624
101,923
28,691,712
65-74
156,288
161,559
48,918,144
75-84
67,895
72,465
33,132,760
85 years and older
23,499
26,849
24,086,475
Total
1,023,437
1,059,094
$262,069,095
Required
1. Calculate the target cost required for VIP-MD to maintain its current market share and profit per enrollee in 2010.
2. Costs in the health care industry applicable to VIP-MD and Doctors Nationwide are expected to increase by 6 percent in the coming year, 2011. VIP-MD is planning for the year ahead and is expecting all pro- viders, including VIP-MD and Doctors Nationwide, to increase their rates by $15 to $340. Calculate the new target cost assuming again that VIP-MD wants to maintain the same profit per enrollee as in 2010.
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