Self Funding Actuarial Services will provide an actuarially-determined claims reserve for health care plans using a modified method of computation. Such modification is a statistical method by which best estimates, variances, confidence limits, etc. are developed. That is, the traditional (deterministic) model is replaced by a modified (stochastic) model. Also, claims run-out appropriate to prior reserve computations are also shown.
Claims Reserve Amendment
The traditional Claim Reserve has these four conditions:
- Makes no provision for any safety margins
- May be based upon submitted claims (lag data) that include claims over the specific stop-loss limit thereby overstating the claim reserve
- Does not account for claims that have been reported but are in a lengthy delay-in-processing status (e.g. COB, lawsuits, managed care network adjudications, Medicare Secondary adjustments)
- Excludes claims settlement expenses.
This amendment services makes specific provisions for each of these four conditions.
The need for claim reserves arises due to the following:
- Accountant under authority of AICPA FAS 5 8, wishes such claim reserve to be booked as a liability to a GAAP 9 statement of an employer with a general asset plan.
- Accountant, under authority of AICPA SOP 92-6 10, wishes such reserve to be actuarially-determined by such standard for purposes of the independent accountant’s statement required by IRS/DOL Form 5500 11.
- Accountant, under authority of IRC §419A, wishes to have claim reserves actuarially determined in lieu of relying upon the 35% safe-harbor rules.
- Actuary, in determining COBRA premiums, uses claim reserves on such computations.
Increasingly, accountants are requiring claim reserves for self-funded plans:
- FAS 5 – contingency reserves as an employer liability.
- Independent audit of many plans with over 100 participants requires accrual accounting (i.e., claim reserves).
- IRS Form 990 (IRC §501 (c)(9) trust) requires a claim reserve.
If the employer is unable to obtain such reserve from the TPA, the employer will either (a) hire an actuary for such function or (b) let the actuary, employed by the accounting firm, provide such. This may be the easy out for the TPA, but often will ill-serve the best interests of the employer or its plan (more expensive, contrary to concept of one-shop shopping, weakens the dominance of the TPA, e.g.). Of considerable concern is that the employer will lose all control over such reserve determination by having an outsider do the calculation. This does not imply reserve-rigging rather expresses the reality that the TPA is closer to the claim lag than the accountants.
To provide the computation, a twelve-month lag study ending as of the valuation date is needed. Also, if the computation date is more than one-month after the valuation date, a twelve-north lag ending as of the computation date is needed.