How MCOs Intensify Accounting IBNRs

Understanding the Uncertainty of Loss

By Staff ReportersHOFMS


Because of the high degree of uncertainty inherent in the estimates of ultimate losses underlying the liability for unpaid claims, the IRS will not allow a Managed Care Organization to deduct an IBNR because the financial statements are based on an estimate (IRS, 134-155).

Loss Based Deductions

Unless the taxpayer healthcare entity qualifies for the insurance company exclusion, the IRS does not allow any taxpayer entity to deduct losses based on estimates. However, the precedent has been set that the IRS will accept an amount for IBNR claims if the amount is supported by actuarial projections and/or valid receipts of claims that the company has in-house prior to the filing of the tax return.

Time Line Controversy

There has been some controversy as to how long a reporting time period the IRS will allow to include those estimates. The time period ranges from three to six months to file a claim (IRS, 137). The process by which these reserves are established requires reliance upon estimates based on known facts and on interpretations of circumstances, including the business’s experience with similar cases and historical trends involving claim payment patterns, claim payments, pending levels of unpaid claims, and product mix, as well as other factors such as court decisions, economic conditions, and public attitudes.


There has been no clear indication from the IRS that it will accept an accrual for these losses and entities. Therefore, healthcare organizations deducting such losses may eventually find themselves in a position where the IRS may challenge the relating deductibility of those losses.


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3 Responses

  1. Gray Accounting Areas

    Accountants may be plagued by deep ethical dilemmas; even in healthcare.

    For example, there may be times when their hopsital/health entity employer asks them to twist and tweak their financial position because they’ve had a bad year. The usual reason given is that they’re definitely going to rake in the profits in the months that follow and that the deficits that have been covered up this year will more than be taken care of in the years to come. So, the accountant is left wondering if he/she should be loyal to their professional ethics or show loyalty to the company that has hired them.

    Now, did you know that unlike financial advisors, RRs, stock brokers, insurance agents most certified financial planners – doctors, CPAs and CMPs™ are fiduciaries?

    Ann Miller RN MHA


  2. Financial Advisory Firm Analogy

    Incurred but not reported (IBNR) in healthcare terms are those services that have been rendered but not invoiced. These “bills in the pipeline” pose a challenge for the healthcare industry in that medical services for a patient may not be completely billed for weeks or months after the service was provided. These costs must be accurately reflected however in current acceptable accounting terms.

    There is an analog to my business [financial advisory firm] regarding IBNRs which only occurs if a client ends the business relationship mid-quarter and does not notify us. Because we bill money management fees in arrears and assess the charge on the first day of the following quarter, in the rare circumstance that a client initiated ACAT transfer instructions at another firm and didn’t notify us it would be possible that the funds in the account would leave before we could do a final billing of the portion of the quarter that was owed. This has not yet happened to me fortunately.

    Major wirehouse firms avoid this dilemma by billing their quarters ahead of the quarter the funds are to be managed (like one pays rent at the beginning of the month) and then rebating any unused portion if the account transfers out.

    David K. Luke, MIM


  3. IBNRs [AUDIO]

    Here is a brief 5 minute snippet of an IBNR audio webinar from Dr. Marcinko.

    Contact me if you wish to order the full 60 minute version.

    Hope Rachel Hetico RN MHA
    [Managing Editor]


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