HCA Holdings 2012 Annual Report Download - page 73

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)
claims-made basis for losses in excess of $50 million per occurrence. Provisions for losses related to professional
liability risks were $331 million, $244 million and $222 million for the years ended December 31, 2012, 2011
and 2010, respectively.
Reserves for professional liability risks represent the estimated ultimate cost of all reported and unreported
losses incurred through the respective consolidated balance sheet dates. The estimated ultimate cost includes
estimates of direct expenses and fees paid to outside counsel and experts, but does not include the general
overhead costs of our insurance subsidiary or corporate office. Individual case reserves are established based
upon the particular circumstances of each reported claim and represent our estimates of the future costs that will
be paid on reported claims. Case reserves are reduced as claim payments are made and are adjusted upward or
downward as our estimates regarding the amounts of future losses are revised. Once the case reserves for known
claims are determined, information is stratified by loss layers and retentions, accident years, reported years, and
geographic location of our hospitals. Several actuarial methods are employed to utilize this data to produce
estimates of ultimate losses and reserves for incurred but not reported claims, including: paid and incurred
extrapolation methods utilizing paid and incurred loss development to estimate ultimate losses; frequency and
severity methods utilizing paid and incurred claims development to estimate ultimate average frequency (number
of claims) and ultimate average severity (cost per claim); and Bornhuetter-Ferguson methods which add expected
development to actual paid or incurred experience to estimate ultimate losses. These methods use our company-
specific historical claims data and other information. Company-specific claim reporting and settlement data
collected over an approximate 20-year period is used in our reserve estimation process. 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, 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 $1.130 billion to
$1.346 billion at December 31, 2012 and $1.134 billion to $1.354 billion at December 31, 2011. 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 $71 million
or reduce the reserve estimate by $65 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, 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. The average
time period between the occurrence and payment of final settlement for our professional liability claims is
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