HCA Holdings 2011 Annual Report Download - page 70

HCA HOLDINGS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Critical Accounting Policies and Estimates (Continued)
Professional Liability Claims (Continued)
historical and current case loss reserves, actual and projected hospital statistical data, professional liability
retentions for each policy year, geographic information and other data.
Reserves and provisions for professional liability risks are based upon actuarially determined estimates. The
estimated reserve ranges, net of amounts receivable under reinsurance contracts, were $1.134 billion to
$1.354 billion at December 31, 2011 and $1.067 billion to $1.276 billion at December 31, 2010. Our estimated
reserves for professional liability claims may change significantly if future claims differ from expected trends.
We perform sensitivity analyses which model the volatility of key actuarial assumptions and monitor our
reserves for adequacy relative to all our assumptions in the aggregate. Based on our analysis, we believe the
estimated professional liability reserve ranges represent the reasonably likely outcomes for ultimate losses. We
consider the number and severity of claims to be the most significant assumptions in estimating reserves for
professional liabilities. A 2% change in the expected frequency trend could be reasonably likely and would
increase the reserve estimate by $18 million or reduce the reserve estimate by $17 million. A 2% change in the
expected claim severity trend could be reasonably likely and would increase the reserve estimate by $78 million
or reduce the reserve estimate by $71 million. We believe adequate reserves have been recorded for our
professional liability claims; however, due to the complexity of the claims, the extended period of time to settle
the claims and the wide range of potential outcomes, our ultimate liability for professional liability claims could
change by more than the estimated sensitivity amounts and could change materially from our current estimates.
The reserves for professional liability risks cover approximately 2,700 individual claims at both
December 31, 2011 and 2010 and estimates for unreported potential claims. The time period required to resolve
these claims can vary depending upon the jurisdiction and whether the claim is settled or litigated. The average
time period between the occurrence and payment of final settlement for our professional liability claims is
approximately five years, although the facts and circumstances of each individual claim can result in an
occurrence-to-settlement timeframe that varies from this average. The estimation of the timing of payments
beyond a year can vary significantly.
Reserves for professional liability risks were $1.291 billion and $1.262 billion at December 31, 2011 and
2010, respectively. The current portion of these reserves, $298 million and $268 million at December 31, 2011
and 2010, respectively, is included in “other accrued expenses.” Obligations covered by reinsurance contracts are
included in the reserves for professional liability risks, as the insurance subsidiary remains liable to the extent
reinsurers do not meet their obligations. Reserves for professional liability risks (net of $39 million and
$14 million receivable under reinsurance contracts at December 31, 2011 and 2010, respectively) were
$1.252 billion and $1.248 billion at December 31, 2011 and 2010, respectively. The estimated total net reserves
for professional liability risks at December 31, 2011 and 2010 are comprised of $817 million and $758 million,
respectively, of case reserves for known claims and $435 million and $490 million, respectively, of reserves for
incurred but not reported claims.
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