HCA Holdings 2012 Annual Report Download - page 122

HCA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1 — ACCOUNTING POLICIES (continued)
Professional Liability Claims
Reserves for professional liability risks were $1.297 billion and $1.291 billion at December 31, 2012 and
2011, respectively. The current portion of the reserves, $324 million and $298 million at December 31, 2012 and
2011, respectively, is included in “other accrued expenses” in the consolidated balance sheets. Provisions for
losses related to professional liability risks were $331 million, $244 million and $222 million for 2012, 2011 and
2010, respectively, and are included in “other operating expenses” in our consolidated income statements.
Provisions for losses related to professional liability risks are based upon actuarially determined estimates. Loss
and loss expense reserves represent the estimated ultimate net cost of all reported and unreported losses incurred
through the respective consolidated balance sheet dates. The reserves for unpaid losses and loss expenses are
estimated using individual case-basis valuations and actuarial analyses. Those estimates are subject to the effects
of trends in loss severity and frequency. The estimates are continually reviewed and adjustments are recorded as
experience develops or new information becomes known. Adjustments to the estimated reserve amounts are
included in current operating results. The reserves for professional liability risks cover approximately 2,700
individual claims at both December 31, 2012 and 2011 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. During 2012 and 2011, $335 million and $240 million, respectively, of net payments were made for
professional and general liability claims. The estimation of the timing of payments beyond a year can vary
significantly. Although considerable variability is inherent in professional liability reserve estimates, we believe
the reserves for losses and loss expenses are adequate; however, there can be no assurance the ultimate liability
will not exceed our estimates.
A portion of our professional liability risks is insured through a wholly-owned insurance subsidiary. Subject
to a $5 million per occurrence self-insured retention, our facilities are insured by our wholly-owned insurance
subsidiary for losses up to $50 million per occurrence. The insurance subsidiary has obtained reinsurance for
professional liability risks generally above a retention level of $15 million per occurrence. We also maintain
professional liability insurance with unrelated commercial carriers for losses in excess of amounts insured by our
insurance subsidiary.
The obligations covered by reinsurance and excess insurance contracts are included in the reserves for
professional liability risks, as we remain liable to the extent the reinsurers and excess insurance carriers do not
meet their obligations under the reinsurance and excess insurance contracts. The amounts receivable under the
reinsurance contracts include $17 million and $25 million at December 31, 2012 and 2011, respectively, recorded
in “other assets”, and $32 million and $14 million at December 31, 2012 and 2011, respectively, recorded in
“other current assets”.
Financial Instruments
Derivative financial instruments are employed to manage risks, including interest rate and foreign currency
exposures, and are not used for trading or speculative purposes. We recognize derivative instruments, such as
interest rate swap agreements and foreign exchange contracts, in the consolidated balance sheets at fair value.
Changes in the fair value of derivatives are recognized periodically either in earnings or in stockholders’ equity,
as a component of other comprehensive income (loss), depending on whether the derivative financial instrument
qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or a cash flow hedge.
Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in earnings, along
with the changes in the fair value of the hedged items related to the hedged risk. Gains and losses on derivatives
designated as cash flow hedges, to the extent they are effective, are recorded in other comprehensive income
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