Budget Variance Analysis/Impact of Marketing

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 MCO's 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.

For this HMO the situation was:

(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?