UNDERSTANDING INCURRED BUT NOT REPORTED HEALTHCARE CLAIMS
[An Unappreciated Liability of the Indirect Medical Payment System]
By David Edward Marcinko
By Hope Rachel Hetico
The new ruler must determine all the injuries that he will need to inflict. He must inflict them once and for all – Niccolo Machiavelli
One of most relevant financial issues of contemporary medical reimbursement is known as Incurred but Not Reported (IBNR) claims.
IBNR claims are an indirect result of prospective payments systems, the insurance industry and commercial risk contracts, and to some extent fee-for-service medicine. IBNR claims represent a risk and an opportunity for managed care companies, healthcare organizations, clinics, and medical providers alike.
Medical groups, Group Practice Without Walls (GPWW), clinics, physician-hospital organizations (PHs), independent practice associations, hospitals, and other managed care organizations (Moss) first began experimenting with and accepting reimbursement for medical services according to a prospective payment system (PPS) several decades ago. It was not until recently that this type of insurance payment achieved critical mass as capitated and other medical risk contractors faced a potentially significant tax burden for IBNR claims.
IBNR is an industry term referring to those claims that actually result in a medical service or healthcare cost prior to the end of a reporting period for which the insuring entity has not received a bill from the provider or other healthcare entity.
This issue originally began related to self-funded employer plans that were ostensibly operating as an insurance company. The Internal Revenue Service (IRS) ruled on several occasions that self-funded employer groups could not deduct IBNRs because the deduction was based on an educated guess or estimate, and still generally maintains that any reserve based on estimates reflected in the tax return of non-insurance company entities will be denied.
For purposes of financial consistency, medical provider organizations typically report their financial results according to generally accepted accounting principles (GAAPs) that require organizations to accrue IBNRs in their financial statements in order to not overstate earnings. Of course, the IRS is not as interested in organizations overstating earnings as private investors, shareholders, and stockholders might be.
Accordingly, this chapter addresses the following IBNR issues:
- current definition of IBNR claims;
- problems of IBNRs in healthcare organizations;
- managed care exacerbation of IBNRs;
- net present value (NPV) of IBNRs;
- possible solutions to the IBNR dilemma;
- IBNR methodology calculations; and
- tax consequences of IBNRs relative to the above.
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