ASC 450-954
Health Care Entities
450 Contingencies
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This subtopic applies Topic 450 loss-contingency principles to health care entities, principally medical malpractice claims, prepaid health care contract losses, and preferred provider "stop-loss" guarantees. Malpractice liabilities must be accrued when the incidents giving rise to the claims occur — including losses from incidents probable of having occurred but not yet reported — based on best estimates of ultimate claim costs, and may not be presented net of anticipated insurance recoveries. Losses on prepaid health care contracts are recognized when it is probable that expected future health care and maintenance costs on a group of existing contracts will exceed anticipated future premiums and stop-loss recoveries.
Key points (7)
- Ultimate costs of malpractice claims and similar contingent liabilities, including litigation and settlement costs, are accrued when the incidents giving rise to the claims occur (450-954-25-2).
- A malpractice liability shall not be presented net of anticipated insurance recoveries; an indemnified entity recognizes an insurance receivable at the same time and on the same basis as the liability, subject to a valuation allowance for uncollectible amounts (450-954-25-2).
- Accruals are based on estimated ultimate losses and settlement costs, not on recommended funding amounts, which improperly include credit for investment income and a margin for risk of adverse deviation (450-954-25-2A); the adverse-deviation factor does not meet the Topic 450 liability recognition criteria (450-954-25-2B(a)).
- Estimated losses from asserted and unasserted claims are accrued individually or on a group basis using all relevant information — industry experience, the entity's own historical experience, existing asserted claims, and reported incidents — and include losses from unreported incidents probable of having occurred before period end (450-954-30-1); estimates are not based on payments to a trust fund (450-954-25-3).
- The greater the volume of operations, the greater the likelihood that the minimum estimate of probable unreported incidents exceeds zero, and industry data must be adjusted for comparability and currency (450-954-30-2).
- Losses under prepaid health care services contracts are recognized when it is probable that expected future health care and maintenance costs (fixed and variable, direct and allocable indirect) under a group of existing contracts will exceed anticipated future premiums and stop-loss insurance recoveries, with contracts grouped consistently with the provider's premium-rating method (450-954-30-3 through 30-4).
- Estimated losses are reviewed and changed at each reporting date, with changes recognized currently as additional expense or a reduction of expense (450-954-35-1); entities must disclose their malpractice insurance program and, if claims are discounted, the discounted carrying amount and the interest rate(s) used (450-954-50-1 through 50-2).
For students. The classic trap is netting: a health care entity must gross up the malpractice liability and record a separate insurance receivable, never report the liability net of expected recoveries, and must accrue for incurred-but-not-reported incidents rather than only asserted claims. A second trap is confusing an actuary's recommended funding amount (which builds in investment income credit and a risk margin) with the GAAP loss accrual.
medical malpractice claimsincurred but not reported claimsloss contingency accrualgross presentation of insurance recoveriesinsurance receivableprepaid health care contract lossesrisk of adverse deviationdiscounting of accrued claims
Machine-generated study aid for ASC 450-954. Check the source paragraphs below.
450-954-00Status
Source downloaded: .Record version 9c7c00c87f42. Effective date must be checked in the source.
450-954-00-1
The following table identifies the changes made to this Subtopic.
| Paragraph | Action | Accounting Standards Update | Date |
| Stop-Loss Insurance | Added | Accounting Standards Update No. 2014-06 | 03/14/2014 |
| 954-450-25-1 | Amended | Accounting Standards Update No. 2014-06 | 03/14/2014 |
| 954-450-25-2 | Amended | Accounting Standards Update No. 2010-24 | 08/27/2010 |
| 954-450-25-3 | Amended | Accounting Standards Update No. 2012-04 | 10/01/2012 |
| 954-450-25-3 | Amended | Accounting Standards Update No. 2010-24 | 08/27/2010 |
| 954-450-30-4 | Amended | Accounting Standards Update No. 2014-09 | 05/28/2014 |
| 954-450-65-1 | Added | Accounting Standards Update No. 2010-24 | 08/27/2010 |
450-954-05Overview and Background
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450-954-05-1
This Subtopic provides guidance on accounting for contingencies for health care entities within the scope of this Topic.
450-954-15Scope and Scope Exceptions
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Overall Guidance
450-954-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 954-10-15.
450-954-25Recognition
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450-954-25-1
Sometimes health care providers enter preferred provider arrangements with self-insured employers whereby the provider guarantees that the employer's health care cost will not increase over a specified amount or percentage. In substance, these providers may have provided aggregate stop-loss insurance to the self-insured employer, and a material liability to the provider may exist. Topic 450 provides guidance on accounting for these contingencies.
Medical Malpractice Claims
450-954-25-2
The ultimate costs of malpractice claims or similar contingent liabilities, which include costs associated with litigating or settling claims, shall be accrued when the incidents that give rise to the claims occur. A health care entity shall evaluate its exposure to losses arising from claims and recognize a liability, if appropriate. The liability shall not be presented net of anticipated insurance recoveries. An entity that is indemnified for these liabilities shall recognize an insurance receivable at the same time that it recognizes the liability, measured on the same basis as the liability, subject to the need for a valuation allowance for uncollectible amounts. The provisions in Section 720-20-25 and Subtopic 944-40 discusses accounting for insurance claims costs, including estimates of costs relating to incurred-but-not-reported claims. Subtopic 450-20 discusses the accounting for loss contingencies.
450-954-25-2A
Pursuant to paragraph 954-720-25-3, an accrual for malpractice losses shall be based on estimated ultimate losses and costs associated with settling claims. Accruals shall not be based on recommended funding amounts, which in addition to a provision for the actuarially determined liability also includes a provision for both of the following:
- a Credit for investment income
- b A margin for risk of adverse deviation.
450-954-25-2B
The following are examples of factors to consider and adjustments that may be required to convert actuarially determined malpractice funding amounts to an appropriate loss accrual to be reported in the financial statements:
- a The risk of adverse deviation is an additional cost factor applied to bring a funding requirement to a selected confidence level. This factor does not meet the criteria for recognition as a liability in accordance with Topic 450.
- b An evaluation shall be made of the extent and validity of industry data when the credibility factor actuarial technique is used. The lower the credibility factor, the greater the blending of industry data. This may create an unacceptable level of industry data at lower confidence levels. Further, a low credibility factor may indicate that provider-specific data is not sufficient to support the claims liability estimation process.
- c A review of the discounting approach used is necessary to develop the required disclosure. The impact on the discounting calculation of any other adjustment made to the actuarially determined amounts (such as risk of adverse deviation or the credibility of the risk management system) has to be evaluated.
- d A review of the expenses included in the loss estimation process shall be made. Such expenses include the expense of settlement and litigation (that is, allocated loss adjustment expenses).
Medical Malpractice Trust Funds
450-954-25-3
Estimated losses from asserted and unasserted claims shall be accrued and reported, as indicated in paragraphs . The estimated losses are not based on payments to the trust fund. See paragraph 954-720-25-5 for guidance concerning an entity that participates in a common trust fund and forfeits its rights to any excess funding. See also paragraph 954-810-45-4.
Prepaid Health Care Services
450-954-25-4
A prepaid health care provider enters into contracts to provide members with specified health care services for specified periods in return for fixed periodic premiums. The premium revenue is expected to cover health care costs and other costs over the terms of the contracts. Only in unusual circumstances would a provider be able to increase premiums on contracts in force to cover expected losses. A provider may be able to control or reduce future health care delivery costs to avoid anticipated losses, but the ability to avoid losses under existing contracts may be difficult to measure or to demonstrate. Associated entities such as hospitals, medical groups, and individual practice associations may enter into similar contracts with prepaid health care providers in which they agree to deliver identified health care services to the providers' members for specified periods in return for fixed fees.
450-954-30Initial Measurement
Source downloaded: .Record version ef9d07bbbdd3. Effective date must be checked in the source.
Medical Malpractice Claims
450-954-30-1
Estimated losses from asserted and unasserted medical malpractice claims shall be accrued either individually or on a group basis, based on the best estimates of the ultimate costs of the claims and the relationship of past reported incidents to eventual claims payments. All relevant information, including industry experience, the entity's own historical experience, the entity's existing asserted claims, and reported incidents, shall be used in estimating the expected amount of claims. The accrual includes an estimate of the losses that will result from unreported incidents, which are probable of having occurred before the end of the reporting period.
450-954-30-2
In estimating the probability that unreported incidents have occurred, some health care entities may develop a range of possible estimates of the number of unreported incidents, including zero. However, the greater the volume of a health care entity's operations, the greater the likelihood that the entity's minimum estimate of the number of probable unreported incidents will be greater than zero. In estimating losses from malpractice claims, a health care entity may need to modify data drawn from industry experience so it is relevant to developing an estimate that is specific to the entity. Various factors (such as the nature of operations, size, and the provider's past experience) shall be considered in assessing comparability. Further, industry data that are not current may not be relevant.
Prepaid Health Care Services
450-954-30-3
The estimated future health care costs and maintenance costs to be considered in determining whether a loss has been incurred shall include fixed and variable, direct and allocable indirect costs.
450-954-30-4
Losses under prepaid health care services contracts shall be recognized when it is probable that expected future health care costs and maintenance costs under a group of existing contracts will exceed anticipated future premiums and stop-loss insurance recoveries on those contracts. To determine the need to recognize a loss, contracts shall be grouped in a manner consistent with the provider's method of establishing premium rates, for example, by community rating practices, geographical area, or statutory requirements, to determine whether a loss has been incurred.
450-954-35Subsequent Measurement
Source downloaded: .Record version b2e4c6e4818b. Effective date must be checked in the source.
Medical Malpractice Claims
450-954-35-1
Estimated losses are reviewed and changed, if necessary, at each reporting date. The amounts of the changes are recognized currently as additional expense or as a reduction of expense.
450-954-50Disclosure
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Medical Malpractice Insurance
450-954-50-1
Health care entities shall disclose their program of medical malpractice insurance coverages.
450-954-50-2
Health care entities that discount accrued malpractice claims shall disclose in the notes to the financial statements the carrying amount of accrued malpractice claims that are discounted in the financial statements and the interest rate or rates used to discount those claims.
450-954-65Transition and Open Effective Date Information
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450-954-65-1
Paragraph superseded on 06/18/2012 after the end of the transition period stated in Accounting Standards Update No. 2010-24, Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries.