Healthcare Incurred but Not Reported

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.

Managed Care and IBNR

Managed care exacerbates problems associated with IBNR because it suggests that healthcare providers should estimate the cost of treatment for a patient but also take measures to minimize costs over time associated with patient care. Healthcare providers do not want to overestimate the cost of care to prevent insurance premium or coverage's from rising. In addition no matter how well one plans for expected expenses all health care by nature involves some expenses above and beyond those initially expected or incurred at some point or another. Solutions may be complicated. A reasonable solution would seem to be to aspire to calculate IBNR reserves with greater accuracy, however this would prove difficult at best.

One solution that may help is negotiating medical expenses and contract terms with insurance agencies that may enable them to "invest capitation payments prior to periodic financial settlements" with the insurer (Sussman, Fairchild, Colling and Brennan 1). Other solutions include ensuring that payment is made in a timely fashion and predictable manner, this again may be accomplished by negotiating contract terms.

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.