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Changes to Accounting for Accrued Medical Malpractice Claims and Expenses

The accounting related to recording malpractice claims and the related insurance recoveries recently changed with Accounting Standards Update 2010–24, Health Care Entities: Presentation of Insurance Claims and Related Insurance Recoveries, which made significant alterations to current practices. Prior to the year ended December 31, 2011, healthcare entities generally netted malpractice insurance claims against malpractice insurance recoveries on the balance sheet. The impact of this method of accounting understated malpractice-related assets and malpractice-related liabilities accordingly. 

During 2010, the FASB decided to end this practice by updating Accounting Standards Codification Topic 954 to eliminate the industry exception enjoyed by the healthcare industry allowing the netting treatment of these assets and liabilities. For years beginning after December 15, 2010, with early adoption permitted, healthcare entities no longer have this exemption and must record the related assets and liabilities associated with malpractice claims at their gross amounts.

What this means for most healthcare entities is they will increase the receivables due from their related third-party malpractice insurers and re-insurers and the total amount of claim liabilities to be paid will also need to be increased accordingly. The impact on the organization in most cases will be a balance sheet “gross up” (e.g., increasing current assets and liabilities); however, the entity recording the claims and related recoveries will also need to assess the related recoveries for collectability.

To read further regarding these topics and to see the actual related standard updates as well as changes to the codification, visit fasb.org. 

For more information contact Paul D. Smith, Jr. at psmith@BlackmanKallick.com or 312-980-2901 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.