Incurred but not reported expenses in healthcare capitation contracts

Healthcare

Incurred but Not Reported Expenses

IBNR Defined

IBNR, short for "incurred but not reported expenses" (McLean 128) refers to expenses a healthcare organization may incur or accrue as a result of managing capitation contracts (Ryan and Clay 1) but not receive payment on immediately. Expense associated with IBNR relates to the estimated costs of clinical services that doctors provide to patients under contract but insurers have not yet covered (McLean, 130). At times the expense a healthcare organization undergoes to deliver health care to a given population is not covered by immediate payment, thus cash receipts may not coincide with actual payments (McLean, 128).

Calculating IBNR and Problems Associated With To calculate IBNR an organization can estimate the cost of outstanding claims and add estimates of treatment that may be incurred to estimate the total costs of treatments to add to IBNR. IBNR is problematic within health care organizations as it requires healthcare providers to forecast treatment protocols and the costs associated with treating patients before treatment actually occurs. Organizations may also attempt to calculate IBNR liability statistically however organizations may assume risk with no historical evidence in this case if they choose to do this. IBNR estimates are often inaccurate and costs typically exceed conservative estimates based on historical expenditures or treatment protocols. One might think the solution is simply to overestimate expenses but this will result in higher premiums for healthcare organizations, something that most will attempt to avoid at all costs.

NPV and IBNR

Net present value analysis can be used with respect to IBNR in a real life investment situation where healthcare organizations are looking to decide where to invest revenues or capital for future expenditures. It may help healthcare organizations calculate the value of cash flows within the organization over varying time periods. Net present value analysis allows organizations to consider the difference in future cash flow values compared with the cost of raising capital for future investments. Organizations can use this analysis to decide whether or not to incorporate certain expenses into IBNR.

A healthcare organization can use net present value analysis for example to pick between varying investment projects for example. A hospital could for example decide whether to invest more of its resources in improved technology and security measures or whether to invest more resources in research geared to finding new treatments for cancer patients that may reduce the total costs incurred by cancer patients over time with more efficient treatment processes. NPV analysis will allow estimation of the NPV after tax cash flows, the value of working capital, the value of the initial investment and other key factors.

As another example a healthcare organization may present future estimations of claims by maximizing net present value. An organization can develop claims models

Conclusions

IBNR is short for incurred but not reported expenses. As healthcare organizations continue to attempt to manage expenses IBNR becomes more and more of an issue.

IBNR is problematic because estimations of expenses are rarely accurate. Perhaps the best way for healthcare organizations to manage IBNR is to work more diligently on contract negotiations with insurers and methods for determining more exact estimations when calculating IBNR. NPV analysis may help healthcare organizations better determine where to invest capital and discover better methods for allocating treatment within a healthcare setting.