Case study : Target Costing; Health Care VIP-MD

(Adapted from a problem by Joseph San Miguel)13-46    TargetCosting; 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 ProjectedEnrollment in 2011 AverageMonthly Cost in 20101–4 45,688 48,977 $ 11,147,8725–14 82,456 84,663 10,059,63215–19 95,873 95,887 8,436,82420–24 66,246 67,882 9,539,42425–34 133,496 132,554 26,432,20835–44 166,876 175,446 38,882,10845–54 85,496 90,889 22,741,93655–64 99,624 101,923 28,691,71265–74 156,288 161,559 48,918,14475–84 67,895 72,465 33,132,76085 years and older 23,499 26,849 24,086,475  1,023,437 1,059,094 $262,069,095Required1.    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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