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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 $364 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 $321. 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 to 4
45,288
48,577
$ 11,147,472
5 to 14
82,056
84,263
10,059,232
15 to 19
95,473
95,487
8,436,424
20 to 24
65,846
67,482
9,539,024
25 to 34
133,096
132,154
26,431,808
35 to 44
166,476
175,046
38,881,708
45 to 54
85,096
90,489
22,741,536
55 to 64
98,824
101,523
28,691,312
65 to 74
155,888
161,159
49,517,744
75 to 84
67,495
72,065
33,432,360
85 years and older
23,099
26,449
24,286,075
1,018,637
1,054,694
$ 263,164,695
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 8% 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 $346. Calculate the new target cost assuming again that VIP-MD wants to maintain the same profit per enrollee as in the current year.
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