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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 $374 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 $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 to 4 46,288 49,577 $ 11,148,472
5 to 14 83,056 85,263 10,060,232
15 to 19 96,473 96,487 8,437,424
20 to 24 66,846 68,482 9,540,024
25 to 34 134,096 133,154 26,432,808
35 to 44 167,476 176,046 38,882,708
45 to 54 86,096 91,489 22,742,536
55 to 64 99,624 102,523 28,692,312
65 to 74 156,888 162,159 49,518,744
75 to 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.

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