A large national MCO recently entered a major southwestern metropolitan market. The managed care plan anticipated that, with an intensive advertising campaign and sales effort, it would have 75,000 subscribers after two years. They planned on charging a premium of $1,800 per subscriber. Marketing and personnel costs directly related to this effort were anticipated to be $250 per subscriber. Prior to the MCOs entry into the market, two of the large tertiary facilities in the region began to offer their own managed care plans in a physician-hospital organization arrangement with their medical staffs. The result was aggressive discounting of the managed care premiums. The national MCO chain dropped its premium to $1,400 per subscriber. Direct costs remained the same, yet because of the competition, the national MCO was only able to enroll 45,000 subscribers.

1. What was the variance because of the failure to get the gross marketing contribution?

2. What was the variance due to the lack of enrollment success?

For this HMO the situation was:

Planned Number of subscribers 75,000 Actual 45,000

Premium per subscriber $1,800 $1,400

Direct costs $250 $250

Subscriber gross marketing contribution $1,550 $1,150

Sales $135,000,000 $63,000,000

Direct costs $18,750,000 $11,250,000

Gross margin contribution $116,250,000 $51,750,000