ASC

ASC 720-954

Health Care Entities

720 Other Expenses

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In brief

IntermediateRecognitionSubsequent measurementDisclosureIndustry-specific

ASC 720-954 governs how health care entities account for insurance-related and other operating expenses, principally retrospectively rated insurance policies, claims-made policies, malpractice loss accruals, multiprovider captive insurance arrangements, and stop-loss insurance. The core rules turn on whose loss experience drives the premium: if the entity's own experience, the minimum premium is expensed over the coverage period and recoveries are deferred until estimated losses exceed the stipulated maximum premium; if a group's experience, additional premiums or refunds are accrued based on group experience to date, including asserted and unasserted, reported and unreported claims.

Key points (7)
  • Under a retrospectively rated policy whose ultimate premium depends primarily on the entity's own loss experience, the minimum premium is expensed over the coverage period and insurance recoveries are not recognized until estimated losses exceed the stipulated maximum premium (720-954-25-1).
  • Under a retrospectively rated policy based primarily on a group of health care entities' experience, additional premiums or refunds are accrued on the group's experience to date, including the ultimate cost of asserted and unasserted claims, reported or unreported (720-954-25-2), and the initial premium is amortized pro rata over the policy term (720-954-35-1).
  • Malpractice loss accruals are based on estimated ultimate losses and the costs of settling claims, using the factors in 954-450-25-2 through 25-2A (720-954-25-3).
  • A health care entity insured under a claims-made policy applies the Claims Made Contract Subsections of Subtopic 720-20 and still recognizes the estimated cost of incurred but not reported claims and incidents when probable and reasonably estimable (720-954-25-4A).
  • An entity insured by an unconsolidated multiprovider captive under a group-experience retrospectively rated policy follows 954-720-25-2 but must assess whether the captive has sufficient economic substance to relieve it of further liability (720-954-35-2).
  • Stop-loss insurance premiums are included in reported health care costs and stop-loss recoveries are reported as reductions of related health care costs (720-954-45-1).
  • Required disclosures include the existence and accrual basis of retrospectively rated policies, insurance through a multiprovider captive with the ownership percentage and accounting method for the investment, and the nature, amounts, and effects of significant stop-loss contracts (720-954-50-1 through 50-4).

For students. The exam trap is symmetry: recoveries under an own-experience retrospectively rated policy are deferred until estimated losses exceed the stipulated maximum premium, whereas group-experience policies require accruing premiums or refunds currently based on group experience. Students also forget that buying a claims-made policy does not eliminate the need to accrue IBNR losses.

retrospectively rated insurance policystop-loss insurancemultiprovider captive insurance entityclaims-made policyincurred but not reported claimsmalpractice loss accrualacquisition costscommon trust fund

Machine-generated study aid for ASC 720-954. Check the source paragraphs below.

720-954-00Status

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720-954-05Overview and Background

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720-954-05-1
This Subtopic provides guidance on accounting for other expenses for health care entities within the scope of this Topic.

Prepaid Health Care Services

720-954-05-2
Many prepaid health care providers incur costs that vary with, and are primarily related to, the marketing of subscriber contracts and member enrollment. These costs, sometimes referred to as acquisition costs, consist mainly of commissions paid to agents or brokers and incentive compensation based on new enrollments. Commissions and incentive compensation may be paid when the contracts are written, at later dates, or over the terms of the contracts as premiums are received. Some providers incur additional costs directly related to the acquisition of specific contracts, such as the costs of specialized brochures, marketing, and advertising. Providers also incur costs that are related to the acquisition of new members but that do not relate to specific contracts and are not considered acquisition costs. These costs include salaries of the marketing director and staff, general marketing brochures, and general advertising and promotion expenses.

Stop-Loss Insurance

720-954-05-3
In stop-loss insurance, prepaid health care providers or associated entities transfer portions of their financial risks to other entities. A provider typically contracts to recover health care costs in excess of stated amounts during the contract periods.

720-954-15Scope and Scope Exceptions

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Overall Guidance

720-954-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 954-10-15.

720-954-25Recognition

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Retrospectively Rated Premiums

720-954-25-1
A health care entity with a retrospectively rated insurance policy whose ultimate premium is based primarily on the health care entity's loss experience shall account for the minimum premium as an expense over the period of coverage under the policy. Insurance recoveries from a retrospectively rated insurance policy whose ultimate premium is based primarily on the health care entity's loss experience shall not be recognized until the estimated losses exceed the stipulated maximum premium.
720-954-25-2
A health care entity insured under a retrospectively rated policy whose ultimate premium is based primarily on the experience of a group of health care entities shall accrue additional premiums or refunds on the basis of the group's experience to date, which includes a provision for the ultimate cost of asserted and unasserted claims before the financial statement date, whether reported or unreported.

Malpractice Losses

720-954-25-3
An accrual for malpractice losses shall be based on estimated ultimate losses and costs associated with settling claims. See paragraphs 954-450-25-2 through 2A for factors to consider when determining the amount of the accrual.

Claims-Made Insurance Policies

720-954-25-4A
The Claims Made Contract Subsections of Subtopic 720-20 apply if a health care entity purchases a claims-made insurance policy. As discussed in paragraph 720-20-25-14, insured entities (except as discussed in Section 944-20-15), including those that use a claims-made approach for insuring certain risks, recognize a liability for the probable losses from incurred but not reported claims and incidents if the loss is both probable and reasonably estimable. Consequently, a health care entity that is insured under a claims-made insurance policy recognizes the estimated cost of claims and incidents not reported to the insurance carrier, in accordance with Subtopic 954-450.

Trust Funds

720-954-25-5
An entity that participates in a common trust fund and forfeits its rights to any excess funding shall expense its contributions and account for its participation in the trust fund based on the type of coverage obtained (for example, occurrence basis, claims-made, or retrospectively rated).

720-954-30Initial Measurement

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720-954-35Subsequent Measurement

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Retrospectively Rated Premiums

720-954-35-1
A health care entity insured under a retrospectively rated policy whose ultimate premium is based primarily on the experience of a group of health care entities amortizes the initial premium to expense on a pro rata basis over the policy term.

Medical Malpractice Claims Insured by Captive Insurance Entities

720-954-35-2
A health care entity insured by an unconsolidated multiprovider captive insurance entity for medical malpractice claims under a retrospectively rated policy based primarily on the experience of a group of health care entities shall account for such insurance as indicated in paragraph 954-720-25-2. However, the health care entity shall consider whether the economic substance of the multiprovider captive insurance entity is sufficient to relieve the health care entity from further liability.

720-954-45Other Presentation Matters

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Prepaid Health Care Services—Stop-Loss Insurance

720-954-45-1
Stop-loss insurance premiums shall be included in reported health care costs. Stop-loss insurance recoveries shall be reported as reductions of related health care costs.

720-954-50Disclosure

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Retrospectively Rated Premiums

720-954-50-1
A health care entity insured under a retrospectively rated policy whose ultimate premium is based primarily on the experience of a group of health care entities shall disclose both of the following:
  1. a
    It is insured under a retrospectively rated policy.
  2. b
    Premiums are accrued based on the ultimate cost of the experience to date of a group of entities.

Medical Malpractice Claims Insured by Captive Insurance Entities

720-954-50-2
The health care entity shall disclose both of the following:
  1. a
    It is insured under a retrospectively rated policy of a multiprovider captive insurance entity.
  2. b
    The premiums are accrued based on the captive insurance entity's experience to date.
720-954-50-3
A health care entity that is insured by a multiprovider captive insurance entity shall disclose in its financial statements:
  1. a
    That it is insured by such an entity
  2. b
    Its ownership percentage in the captive entity
  3. c
    The method of accounting for its investment in, and the operations of, the captive entity.

Prepaid Health Care Services—Stop-Loss Insurance

720-954-50-4
The nature, amounts, and effects of significant stop-loss insurance contracts shall be disclosed.

Related subtopics