Community Health Systems 2015 Annual Report Download - page 100

Professional Liability Claims
As part of our business of owning and operating hospitals, we are subject to legal actions alleging liability on
our part. We accrue for losses resulting from such liability claims, as well as loss adjustment expenses that are
out-of-pocket and directly related to such liability claims. These direct out-of-pocket expenses include fees of
outside counsel and experts. We do not accrue for costs that are part of our corporate overhead, such as the costs
of our in-house legal and risk management departments. The losses resulting from professional liability claims
primarily consist of estimates for known claims, as well as estimates for incurred but not reported claims. The
estimates are based on specific claim facts, our historical claim reporting and payment patterns, the nature and
level of our hospital operations, and actuarially determined projections. The actuarially determined projections
are based on our actual claim data, including historic reporting and payment patterns which have been gathered
over approximately a 20-year period. As discussed below, since we purchase excess insurance on a claims-made
basis that transfers risk to third-party insurers, the liability we accrue does include an amount for the losses
covered by our excess insurance. We also record a receivable for the expected reimbursement of losses covered
by our excess insurance. Since we believe that the amount and timing of our future claims payments are reliably
determinable, we discount the amount we accrue for losses resulting from professional liability claims using the
risk-free interest rate corresponding to the timing of our expected payments.
The net present value of the projected payments was discounted using a weighted-average risk-free rate of
1.6%, 1.7% and 1.6% in 2015, 2014 and 2013, respectively. This liability is adjusted for new claims information
in the period such information becomes known to us. Professional malpractice expense includes the losses
resulting from professional liability claims and loss adjustment expense, as well as paid excess insurance
premiums, and is presented within other operating expenses in the accompanying consolidated statements of
income.
Our processes for obtaining and analyzing claims and incident data are standardized across all of our hospitals
and have been consistent for many years. We monitor the outcomes of the medical care services that we provide
and for each reported claim, we obtain various information concerning the facts and circumstances related to that
claim. In addition, we routinely monitor current key statistics and volume indicators in our assessment of
utilizing historical trends. The average lag period between claim occurrence and payment of a final settlement is
between four and five years, although the facts and circumstances of individual claims could result in the timing
of such payments being different from this average. Since claims are paid promptly after settlement with the
claimant is reached, settled claims represent less than 1.0% of the total liability at the end of any period.
For purposes of estimating our individual claim accruals, we utilize specific claim information, including the
nature of the claim, the expected claim amount, the year in which the claim occurred and the laws of the
jurisdiction in which the claim occurred. Once the case accruals for known claims are determined, information is
stratified by loss layers and retentions, accident years, reported years, geography, and claims relating to the
acquired HMA hospitals versus claims relating to our other hospitals. Several actuarial methods are used against
this data to produce estimates of ultimate paid losses and reserves for incurred but not reported claims. Each of
these methods uses our company-specific historical claims data and other information. This company-specific
data includes information regarding our business, including historical paid losses and loss adjustment expenses,
historical and current case loss reserves, actual and projected hospital statistical data, a variety of hospital census
information, employed physician information, professional liability retentions for each policy year, geographic
information and other data.
Based on these analyses, we determine our estimate of the professional liability claims. The determination of
management’s estimate, including the preparation of the reserve analysis that supports such estimate, involves
subjective judgment of management. Changes in reserving data or the trends and factors that influence reserving
data may signal fundamental shifts in our future claim development patterns or may simply reflect single-period
anomalies. Even if a change reflects a fundamental shift, the full extent of the change may not become evident
until years later. Moreover, since our methods and models use different types of data and we select our liability
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