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 $374 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, National Physicians, entered the North Carolina market early in the current year with a monthly premium of $331. 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

1-4 46,288 49,577 $ 11,148,472

5-14 83,056 85,263 10,060,232

15-19 96,473 96,487 8,437,424

20-24 66,846 68,482 9,540,024

25-34 134,096 133,154 26,432,808

35-44 167,476 176,046 38,882,708

45-54 86,096 91,489 22,742,536

55-64 99,624 102,523 28,692,312

65-74 156,888 162,159 49,518,744

75-84 68,495 73,065 33,433,360

85 years and older 24,099 27,449 24,287,075

1,029,437 1,065,694 $ 263,175,695

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 7% 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 $356. Calculate the new target cost assuming again that VIP-MD wants to maintain the same profit per enrollee as in the current year.