Topic 1 – Overview
The Reserve Amendment permits the reserve accuracy and utiity to be improved. This is accomplished by bifurcating the computational protocol. The basic part is the traditional protocol and is essentially unchanged (assume such Basic Reserve to be $665,304, as in Attachment A). The Reserve Amendment protocol is new and makes numerous adjustments to the Basic Reserve which are not measurable by lag data (assume such Reserve Amendment to be $210,612 in amount as in Attachment B).
While both Attachments A and B are work-products as defined by the Academy of Actuaries, B may not stand alone but stands only as an amendment to B. The traditional role of the actuary has been to set the upper bounds of the claim reserve. This role remains unchanged except that the upper bounds are raised.
The Amendment modifies the way by which the final reserve is determined in that the (a) inputted data if different and the (b) wishes of the engager are honored to a considerable extent .
Topic 2 – Discussion of Adjustments
One. Specific Stop-Loss Claim Reserve Adjustment
In a perfect world, the claim liability held by stop-loss carrier should be determined and used as Adjustment One. Absent this option, the next best option is for the claims administrator to estimate the specific recoveries that are (a) in process or (b) unpaid. This does not image the liability of the carrier but is a practical approximation. Such adjustment may also be made as a an asset entry on the balance sheet of the plan sponsor.
Two. Claims Settlement Expense Adjustment
This adjustment has traditionally be accepted including the IRS. What is an expense continues to be debatable. Absent supporting evidence, an expense percent of 2-3% will usually be accepted without question on audit. Accounting footnotes show “claims and expense adjustment reserves” as a single auditable item.
Three. Outlier Claims Adjustment
An outlier claim is one which has a lag but such leggedness is not suitably measured by the traditional paid/incurred computer-prepared lag reports. The recommended outlier protocol is two-part:
Part A – Once a claim is deemed to be an outlier, code it as a paid claim so as to remove it from the lag report.
Part B – Recode the claim as an outlier so that it is afforded special or per-file handling. That is, the reserve assessment is a facts/circumstances issue.
Any claim may be coded as an outlier but typically such are (a) lawsuits, (b) COB or Medicare Secondary claims or (c) single large claims with troublesome provider, stop-loss or managed care issues.
Four. Margin-of -Safety Adjustment
Such determination is the prerogative of the end-user and is based on the confidence ranges set forth in Section Three. The actuary must be in agreement with such since the presentation is covered by the actuary’s signature.
Five. Claims Made/Claims Paid Adjustment
Presume that the submitted lag data measures the time from the date of service (when care is provided) to the date of payment. Also presume that reserve is to cover the liability that commences from the (a) date the precipitating event occurred (accident date, e.g.) or the (b) date the event was formally recognized (diagnosis date, e.g.). Item Five makes an adjustment for the resulting increase in liability from this modification.
Six. Time Value of Money Adjustment
Appendix A establishes a liability of $665,304 as of 9-30-2014; most of such will be paid over the ensuing months. The unused funds may be invested and earn interest thereby lowering the payout costs. This negative adjustment allows for the time value of money.
Seven. Specific Incurred Dates
Reserve Amendment adjustments should be made for three occurrences when the (a) lag data incurred dates and the (b) actual incurred dates are different:
Institutional Care. Admission date or discharge date.
Maternity Care. Conception date or delivery date.
Rx Care. Computer-entry date or pick-up date.