Target Costing; 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
|
Projected Enrollment in 2011
|
Average Monthly 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
|
|
Total
|
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.