Solved: VIP MD is a health maintenance organization HMO

located in Nor

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 demanding 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:

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 providers, 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 in2010.

ANSWER
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