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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 2010ProjectedEnrollment in 2011AverageMonthly Cost in 2010
1–445,68848,977$ 11,147,872
5–1482,45684,66310,059,632
15–1995,87395,8878,436,824
20–2466,24667,8829,539,424
25–34133,496132,55426,432,208
35–44166,876175,44638,882,108
45–5485,49690,88922,741,936
55–6499,624101,92328,691,712
65–74156,288161,55948,918,144
75–8467,89572,46533,132,760
85 years and older23,49926,84924,086,475
 1,023,4371,059,094$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.

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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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