ASC 954-450-25-2 specifies how a health care provider should account for insurance coverage.

Insured entities must report a liability for all claims outstanding as of the balance sheet date, including claims that are covered by insurance. To the extent that insurance coverage provides for recovery of claims, the insured entity should separately accrue the amount recoverable from the insurer as a receivable. The entity recognizes the insurance receivable at the same time that it recognizes the liability for the covered claims, and measures it on the same basis as the liability (i.e., using the same assumptions), subject to the need for an allowance for credit losses if there are concerns about the insurer's ability to pay. This generally results in reporting a receivable that mirrors the amount of estimated losses accrued that are covered by insurance. Considerations associated with recognizing the recovery are discussed at PPE 8.

Most healthcare professional liability insurance is written as a "pay on behalf" contract (that is, the insurance carrier will pay the settlement directly to the plaintiff on behalf of the health care organization). Questions have arisen as to whether ASC 954-450-25-2 must be applied if the entity does not actually pay claims, and then receive reimbursement from the insurance company. This situation is discussed in TIS 6400.51, Presentation of Insurance Recoveries When Insurer Pays Claims Directly, and paragraph BC4 of ASU 2010-24, Presentation of Insurance Claims and Related Recoveries. In these situations, the guidance is applied "as if" the insured health care organization pays the claim out of pocket and is subsequently reimbursed by the insurer; that is, the health care organization should report the gross amount of its claims liabilities (including those that are covered by insurance) as its obligations and should record a receivable as if it were entitled to receive insurance recoveries to offset those obligations. Despite the fact that an insurance entity is paying for the defense of the claim, and ultimately paying for some or all of the award or settlement, the insured health care organization is the primary obligor for payment of the claim (because if the insurer was unable to pay, the health care organization would still be liable). This approach is consistent with the reporting required by organizations in other industries.

From an expense recognition perspective, the recovery associated with the insurance receivable will generally offset the losses associated with the incurred claim. The net effect on expense of a fully insured claim should be zero.

PwC response
As discussed in TIS 6400.49, Presentation of Claims Liability and Insurance Recoveries -- Contingencies Similar to Malpractice, "similar contingent liabilities" refers to liabilities of a similar nature, such as workers' compensation claims or director and officers claims. If an entity has these types of liabilities, it should similarly report its gross claims liabilities separately from any insurance recoverable.

PwC response
Yes. Even though the insurance policy is expected to cover all claims, the health care entity is still the primary obligor in the event the insurer is unable to pay. Thus, claims subject to "first-dollar coverage" must be reflected "gross" on the health care entity's balance sheet, that is, the balance sheet should reflect both a liability for all estimated claims outstanding as of the balance sheet date, and a separate receivable representing the amount recoverable from the insurer.

PwC response
In this case, in the context of the separate financial statements of the subsidiaries, the parent is effectively acting as the insurer. Thus, the losses that arise from the health care operations conducted by the subsidiaries should be recognized as liabilities in the subsidiaries’ financial statements along with a corresponding receivable, representing the amount recoverable from the insurer (via the parent).

See PPE 8 for a general discussion of accounting for claims-made insurance. A discussion specifically directed to providers of health care services is included in AAG-HCO 8.34 through AAG-HCO 8.36.

A retrospectively rated insurance policy is one in which the premium is adjustable based on actual claims experience during the policy term. The total annual premium consists of a minimum premium and an additional amount for estimated claims that is adjusted based on actual loss experience (i.e., claim activity). Depending on the arrangement, the adjustment might be based solely on the insured entity's own experience, or instead it might be based on the collective experience of a group of insured entities. A general discussion of accounting for retrospectively rated insurance coverage is presented at PPE 8. A discussion specifically directed to providers of health care services is included in AAG-HCO 8.37 through AAG-HCO 8.40.

The amount of insurance expense recognized in any given year related to a retrospectively rated policy depends on how the total premium is determined under the policy’s terms. If a provider's total premium will be determined based primarily on its own loss experience, the risk transferred is limited to the amount of the minimum premium paid, and the transfer of cash to the insurance company more closely resembles a funding mechanism for self-insured risk than the transfer of risk to a third party through an insurance policy. Therefore, the portion of the initial premium representing the minimum premium should be charged to expense over the policy term; the experience portion (additional amount above the minimum premium based the provider’s actual claim activity) should be accounted for as a deposit. Regardless of the accounting for the payments to the insurer, the health care organization will still need to accrue the full amount of all estimated losses from asserted and unasserted claims. Insurance recoveries should not be recognized until the estimated losses exceed the stipulated maximum premium payable by the health care organization (ASC 954-720-25-1).

Example HC 6-1 illustrates the accounting for premiums that are based only on a health care organization’s own loss experience.

EXAMPLE HC 6-1
Retrospective policy – adjustable premium

Hospital maintains an adjustable retrospective policy with Insurance Company. Under this policy, the adjustable portion of the premium is based on Hospital’s own claims experience. At the end of each month during the policy period, Hospital pays Insurance Company a $100,000 minimum base premium plus an amount based on Hospital’s forecasted claim activity (the experience adjustment). In January 20X1, Hospital pays the $100,000 minimum base premium and $1,250,000 for the experience adjustment to Insurance Company.

How should Hospital record the premium payments made in January 20X1?

The minimum base premium reflects Hospital’s expense for Insurance Company’s services to administer the policy and the maximum risk assumed by the Insurance Company. The adjustable portion of the premium represents a funding mechanism for claim payments during the policy term. Therefore, Hospital should record the $100,000 minimum base premium as an expense and the $1,250,000 experience portion as an asset (e.g., a deposit). Over the policy period, Hospital would also record a liability for an estimate of losses from asserted and unasserted claims. As these claims are paid by Insurance Company, Hospital should adjust the deposit asset and the outstanding claims liability.

If a provider's total premium will be determined based primarily on the experience of a group, the full premium, which includes the minimum base and the retrospective experience adjustment, should be charged to expense over the policy term. At period-end, any additional premiums or refunds should be accrued based on the group's experience to date, which includes provision for the ultimate cost of asserted and unasserted claims before the financial statement date, whether reported or unreported (ASC 954-720-25-2). In effect, this is an accrual of the estimated ultimate cost of unsettled claims. The provider records a liability for all claims outstanding as of the balance sheet and accrues an insurance receivable related to claims that will be covered by insurance. ASC 954-720-50-1 requires providers insured under this type to disclose that they are insured under a retrospectively rated policy, and that premiums are accrued based on the estimated ultimate cost of the experience to date of a group of providers.

The health care entity must determine the extent to which its retrospectively rated policy actually provides indemnification against risk of financial loss associated with malpractice claims. Because the premium is based on the entity's own loss experience, the economic substance of the arrangement may more closely resemble a claims funding mechanism (similar to self-insurance) than a contract that indemnifies the entity against risk of financial loss. As explained more fully in TIS 6400.52, Insurance Recoveries From Certain Retrospectively Rated Insurance Policies, the facts and circumstances of the terms of the insurance arrangement must be carefully evaluated in making this assessment. If all estimated claims would be payable from the entity's own resources on deposit with the insurer, there would be no insurance recoveries to report (because the liabilities would be payable from assets reported on the entity's balance sheet). However, if it is reasonably possible that the entity's ultimate loss experience will exceed the maximum premium (and thus, the insurer will actually indemnify the portion of the loss), a receivable for insurance recoveries associated with the amount in excess of the maximum premium would be accrued.

A general discussion of accounting for claims insured under captive insurance arrangements is presented in IG 4.3. AAG-HCO 8.30 through AAG-HCO 8.33 provides a general discussion that is specific to malpractice coverage. AAG-HCO 8.41 through AAG-HCO 8.43 discusses retrospectively rated coverage provided by a captive insurer.

ASC 954-720-50-3 requires providers insured by multi-provider captive insurance companies to disclose that insurance is provided by a multi-provider captive, the provider's ownership percentage in the captive, and the method used to account for the provider’s investment in the captive. If the captive issues a retrospectively rated policy based on group experience, ASC 954-720-50-2 requires providers to disclose that the premiums are accrued based on the captive's experience to date.

PwC response
The consolidated financial statements that include the captive insurance entity would reflect all of the insurer's claims liabilities and all assets available for payment of those claims. In effect, the consolidated entity is self-insured and, thus, the "gross-up" requirements under ASC 954-450-25-2 are not relevant—that is, there is no third-party insurer from which a receivable should be recognized and only the accrual for estimated losses would be recognized in the consolidated financial statements.

In the separately issued financial statements of the subsidiary health care entities, the insurance coverage obtained from the captive insurer would be reported in a manner similar to insurance obtained from an unrelated insurer. Thus, a liability for the subsidiary's estimated claims outstanding as of the balance sheet date and a separate receivable representing the amount recoverable from the affiliated captive insurer would be reflected in the separately issued balance sheets of the subsidiaries.

AAG‑HCO 8.17 and AAG‑HCO 8.44 through AAG‑HCO 8.47 include a general discussion of the accounting for self-insurance programs. To the extent that claims are self-insured, no receivables related to insurance recoveries should be accrued.

Some self-insured organizations pay claims from the organization's general assets. Others establish trusts (usually irrevocable) and undertake a funding program to formally set aside assets to pay for malpractice claims. In such cases, as discussed in ASC 954-450-25-2A and AAG-HCO 8.20, expense for a reporting period should continue to be based on the accrual of estimated losses and adjustments thereto, not on amounts funded to a self-insurance trust.

AAG-HCO 8.44 through AAG-HCO 8.47 and ASC 954-810-45-4 provide guidance on financial reporting issues related to malpractice trust funds. Malpractice trust fund assets should be included in the health care organization's financial statements. If any portion of the estimated asserted or unasserted claims are classified as current liabilities, a portion of the trust fund sufficient to satisfy those claims should correspondingly be classified in current assets. Otherwise, such funds should be classified as noncurrent. Not-for-profit providers classify self-insurance trust assets (whether revocable or irrevocable) as "assets whose use is limited” in accordance with ASC 954-210-45-4. ASC 954-720-25-5 discusses accounting considerations related to participation in multi-provider trusts.

ASC 954-810-50-1 requires disclosure of the existence of a trust fund and whether it is revocable or irrevocable.

ASC 954-450-25-2 requires health care entities to estimate and accrue the legal costs that are expected to be incurred in connection with litigating malpractice claims in the period the incident arises.

For contingency claims other than malpractice, no definitive guidance exists on whether the estimated loss should consider the expected legal costs of defending the claim. Some health care entities apply the malpractice claims guidance by analogy. Others follow guidance in ASC 450-20-S99-2 (discussed in FSP 23) that permits making a policy election to either (a) expense claims-related legal fees in the period(s) in which the costs are actually incurred; or (b) to estimate and accrue them in the period in which the associated claim arises. Although the latter guidance specifically applies to SEC registrants, non-registrants have also used it as a basis for establishing an accounting policy election in this area.