An improved accrual: Reducing medical malpractice year-end adjustments

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By Richard C. Frese | 02 August 2012

It’s difficult to determine the appropriate accrual amount at the beginning of the year that will allow adequate reserves on year-end financial statements. Programs can be significantly overaccrued or underaccrued when losses don’t develop as expected because of the complicated, low-frequency, and high-severity nature of medical malpractice losses as well as insurance program changes during the year. Because of this, redundant reserves may need to be eliminated or capital to reduce a deficit may need to be found quickly.

An increasing number of healthcare entities book the unpaid claim liability reserve at a single point estimate (the actuarial central estimate, formerly known as the “best estimate”) instead of booking within a range to accommodate evolving guidelines and standards. However, this change in practice limits healthcare finance leaders’ flexibility in determining an appropriate accrual amount for total year-end reserves.

A better understanding of the accrual process and a few simple guidelines can help resolve such issues. This article discusses how healthcare organizations can improve their year-end malpractice insurance accruals by:

  • Maintaining productive communication.
  • Matching accrual and accounting policies.
  • Adjusting the amount of credit to own historical loss experience.
  • Requesting more frequent analysis.
  • Obtaining a second opinion.

This article was published on hfma.org, the healthcare financial management association's website. 

Read or download the article (requires subscription to hfma.org)