3.3.1 Unpaid Claims Liability
Using incurral and processing dates as appropriate, the actuary should estimate unpaid claims liabilities for claims incurred as of the valuation date.a. Purpose or Use of the Unpaid Claim Estimate
The actuary should identify the intended purpose or use of the unpaid claim estimate. Potential purposes or uses of unpaid claim estimates include, but are not limited to, establishing liability estimates for external financial reporting, internal management reporting, and various special purpose uses such as appraisal work and scenario analyses. Where multiple purposes or uses are intended, the actuary should consider the potential conflicts arising from those multiple purposes and uses and should consider adjustments to accommodate the multiple purposes to the extent that, in the actuary’s professional judgment, it is appropriate and practical to make such adjustments.b. Plan Provisions
The actuary should review the relevant plan provisions to determine if they create obligations for services or payments after the valuation date (for example, medical benefits that extend beyond the contract period, or long-term disabilities). The actuary should determine if these obligations are part of the current or future period’s liability, or if these obligations make up a separate reserve.c. Data and Reporting
The actuary should consider the relevant reporting systems for processed claims, exposure units, and premium rates, and the various dating methods the systems use (for example, loss recognition, service rendered, reporting, or payment status). The actuary should use professional judgment in estimating the extent to which an adjustment to the reported data is needed, based on the dating methodology.d. Provision for Adverse Deviation
Recognizing that the estimation of liabilities for incurred but unpaid health and disability claims involves an estimate of the true obligations that will emerge, the actuary should consider what explicit provision for adverse deviation, if any, might be appropriately included. If a provision for adverse deviation is included, the unpaid claims liability should be appropriate, in the actuary’s judgment, for the intended use. For example, in certain situations, a provision for moderately adverse deviation may be appropriate. In other situations, the appropriate provision for adverse deviation may vary as the level of uncertainty varies, for example, based on credibility of the data or stability of payment patterns.e. Time Value of Money
The actuary should consider if the time value of money will have a material effect in the estimation of incurred claims. The use of any interest discounts depends on the purpose for which incurred claims are being estimated and should reflect any applicable accounting standards.f. Consistency of Assumptions and Methodology
The actuary should use assumptions and methodology consistent with those used for estimating related liabilities and reserves, such as claim settlement expense reserves, unless it would be inappropriate to do so.3.3.2 Categories of Incurred Claims
The actuary should consider separate estimation of incurred claims for each category that may exhibit different lag patterns, costs per exposure unit, trends, or exposure unit growth rates. If separate estimation is performed, the actuary should define categories of incurred claims in a manner that is appropriate to the available data and to estimation method(s) being used. Categories may be defined broadly, such as fee-for-service claims paid to health care providers, capitation payments to providers, or disability income paid to insureds. Categories might be further refined to more accurately analyze or project costs and utilization data, for example, by method of payment (such as electronic vs. manual), type of contract, type of service, geographic area, premium rating method, demographic factors, distribution method, and provider risk-sharing arrangements.3.3.3 Reinsurance Arrangements
The actuary should consider the effect of reinsurance arrangements in estimating the incurred claims. In particular, the actuary should consider the effect of different lag patterns due to the extended reporting or recovery periods often associated with certain types of reinsurance.3.3.4 Large Claims
The actuary should consider the effect of large claims, as defined by the actuary using professional judgment. Specifically, large claims can distort claim payment patterns or historical per-unit claim levels that the actuary considers when estimating incurred claims. The actuary should understand how large claims, if any, impact the particular method being employed to estimate incurred claims and make appropriate adjustments. For example, incurred claim estimates may be overstated if completion factors are applied to processed claims levels that include an unusually high number or amount of large claims.3.3.5 Coordination of Benefits (COB), Subrogation, and Government Programs
The actuary should make a reasonable effort to understand the relevant organizational practices and regulatory requirements related to COB, subrogation, and government programs (state or federal). The actuary should consider how these items are reflected in the data (for example, negative claims or income) and make appropriate adjustments for COB, subrogation, and payments or recoveries resulting from government programs.3.3.6 Provider Contractual Arrangements
The actuary should consider the relevant contractual arrangements with providers and any changes in such arrangements. These arrangements can affect trends, claim cost levels, and claims processing. The actuary should consider any relevant variation in these arrangements by region or product, and any provider contractual arrangements that do not provide for reimbursement through the claim payment process. Some examples of these latter arrangements include the following:b. amounts initially withheld from provider payments, which may later become payable based upon contractually defined experience outcomes;
c. reimbursement of services based on the expected cost for an episode of care, in which more services are at risk than would normally be the case for a given fee-for-service event;
d. bonuses or other contractual incentive payments based on financial results or achievement of contractually defined quality metrics; and
e. stop-loss contracts which limit the provider’s risk for certain high cost, infrequent services.
Certain contractual arrangements may also result in amounts due from providers (for example, risk sharing receivables, pharmacy rebates) based on financial results or other experience metrics. The actuary should consider the impact of unpaid medical costs resulting from failed providers bearing a material portion of the risk or losses incurred by providers deemed to be related parties.
