Reference no: EM13877450

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.