Reserves for Claims and performance-Based Arrangements

3 Months Ended

Mar. 31, 2020

Reserves for Claims and performance-Based Arrangements

Reserve for Claims and Performance-Based Arrangements

The Company maintains reserves for its liabilities related to payments to providers and pharmacies under performance-based arrangements related to its specialty care management services. The Company also maintains reserves for claims incurred but not paid related to its capitation arrangement and for its health plan, True Health, in New Mexico.

Reserves for claims and performance-based arrangements for our Services and True Health segments reflect actual payments under performance-based arrangements and the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily composed of accruals for incentives and other amounts payable to health care professionals and facilities. Reserves for claims and performance-based arrangements also reflect estimated amounts owed to NMHC under the reinsurance agreement, as discussed further in Note 10.

The Company uses actuarial principles and assumptions that are consistently applied each reporting period and recognizes the actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions.

This liability predominately consists of incurred but not reported amounts and reported claims in process including expected development on reported claims. The liability, for reserves related to its specialty care management services and True Health, is primarily calculated using "completion factors" developed by comparing the claim incurred date to the date claims were paid. Completion factors are impacted by several key items including changes in: 1) electronic (auto-adjudication) versus manual claim processing, 2) provider claims submission rates, 3) membership and 4) the mix of products.

The Company’s policy for reserves related to its specialty care management services and True Health is to use historical completion factors combined with an analysis of current trends and operational factors to develop current estimates of completion factors. The Company estimates the liability for claims incurred in each month by applying the current estimates of completion factors to the current paid claims data. This approach implicitly assumes that historical completion rates will be a useful indicator for the current period.

For more recent months, and for newer lines of business where there is not sufficient paid claims history to develop completion factors, the Company expects to rely more heavily on medical cost trend and expected loss ratio analysis that reflects expected claim payment patterns and other relevant operational considerations, or authorization analysis. Medical cost trend is primarily impacted by medical service utilization and unit costs that are affected by changes in the level and mix of medical benefits offered, including inpatient, outpatient

and pharmacy, the impact of copays and deductibles, changes in provider practices and changes in consumer demographics and consumption behavior. Authorization analysis projects costs on an authorization-level basis and also accounts for the impact of copays and deductibles, unit cost and historic discontinuation rates for treatment.

For each reporting period, the Company compares key assumptions used to establish the reserves for claims and performance-based arrangements to actual experience. When actual experience differs from these assumptions, reserves for claims and performance-based arrangements are adjusted through current period net income. Additionally, the Company evaluates expected future developments and emerging trends that may impact key assumptions. The process used to determine this liability requires the Company to make critical accounting estimates that involve considerable judgment, reflecting the variability inherent in forecasting future claim payments. These estimates are highly sensitive to changes in the Company's key assumptions, specifically completion factors and medical cost trends.

Activity in reserves for claims and performance-based arrangements for the three months ended March 31, 2020 and 2019, was as follows (in thousands):



	For the Three Months Ended March 31,
	2020								2019
	Services ⁽¹⁾			True Health ⁽³⁾		Total			Services ⁽¹⁾			True Health ⁽³⁾			Total
Beginning balance	$	54,510		$	6,640	$	61,150		$	17,715		$	9,880		$	27,595

Incurred costs related to current year	112,760			23,556		136,316			$	33,777		$	31,498		$	65,275
Incurred costs related to prior year	(638		)	111		(527		)	6,879			6,259			13,138
Paid costs related to current year	77,351			14,883		92,234			28,684			11,682			40,366
Paid costs related to prior year	9,820			5,702		15,522			6,871			7,156			14,027
Change during the year	24,951			3,082		28,033			5,101			18,919			24,020

Other adjustments ⁽²⁾	(173		)	—		(173		)	(438		)	(21,158		)	(21,596		)
Ending balance	$	79,288		$	9,722	$	89,010		$	22,378		$	7,641		$	30,019

⁽¹⁾ Costs incurred to provide specialty care management services are recorded within cost of revenue in our statement of operations.

⁽²⁾ Other adjustments to reserves for claims and performance-based arrangements for Services reflect changes in accrual for amounts payable to facilities and amounts owed to our payer partners for claims paid on our behalf. Other adjustments related to the True Health segment represent premiums received less administrative expenses related to the reinsurance agreement for amounts in 2019. Refer to Note 10 for additional information about the reinsurance agreement.

⁽³⁾ There is no single or common claim frequency metric used in the health care industry. The Company believes a relevant metric for its health insurance business is the number of customers for whom an insured medical claim was paid. Number of claims processed for the three months ended March 31, 2020 and 2019 were 112,032 and 86,368, respectively.