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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

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 rate (PMPM) is determined by estimating the health care cost per enrollee within a geographic location. The average health care coverage in North Carolina costs $361 per month, which is the same amount irrespective of the subscribers age. Because individuals are demanding quality care at reasonable rates, VIP-MD must contain its costs to remain competitive. A major competitor, National Physicians, entered the North Carolina market early in the current year with a monthly premium of $318. VIP-MD wants to maintain its current market penetration and hopes to increase its enrollees in the current year. The latest data on the number of enrollees and the associated costs follow:

Age Enrollment in Current Year Projected Enrollment Next Year Average Monthly Cost in Current Year
14 44,988 48,277 $ 11,147,172
514 81,756 83,963 10,058,932
1519 95,173 95,187 8,436,124
2024 65,546 67,182 9,538,724
2534 132,796 131,854 26,431,508
3544 166,176 174,746 38,881,408
4554 84,796 90,189 22,741,236
5564 98,524 101,223 28,691,012
6574 155,588 160,859 49,517,444
7584 67,195 71,765 33,432,060
85 years and older 22,799 26,149 24,285,775
1,015,337 1,051,394 $ 263,161,395

Required:

1. Calculate the target cost required for VIP-MD to maintain its current market share and profit per enrollee in the current year.

2. Costs in the health care industry applicable to VIP-MD and National Physicians are expected to increase by 8% in the coming year. VIP-MD is planning for the year ahead and is expecting all providers, including VIP-MD and National Physicians, to increase their rates by $25 to $343. Calculate the new target cost assuming again that VIP-MD wants to maintain the same profit per enrollee as in the current year.

3. Identify the critical success factors for VIP-MD. How can the HMO maintain its market share?

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