(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 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 |
| 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.
