HCA Holdings 2012 Annual Report Download - page 74

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)
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 $1.297 billion and $1.291 billion at December 31, 2012 and
2011, respectively. The current portion of these reserves, $324 million and $298 million at December 31, 2012
and 2011, respectively, is included in “other accrued expenses.” Obligations covered by reinsurance and excess
insurance contracts are included in the reserves for professional liability risks, as we remain liable to the extent
reinsurers and excess insurance carriers do not meet their obligations. Reserves for professional liability risks
(net of $49 million and $39 million receivable under reinsurance and excess insurance contracts at December 31,
2012 and 2011, respectively) were $1.248 billion and $1.252 billion at December 31, 2012 and 2011,
respectively. The estimated total net reserves for professional liability risks at December 31, 2012 and 2011 are
comprised of $789 million and $817 million, respectively, of case reserves for known claims and $459 million
and $435 million, respectively, of reserves for incurred but not reported claims.
Changes in our professional liability reserves, net of reinsurance recoverable, for the years ended
December 31, are summarized in the following table (dollars in millions):
2012 2011 2010
Net reserves for professional liability claims, January 1 ........................ $1,252 $1,248 $1,269
Provision for current year claims ...................................... 324 298 272
Unfavorable (favorable) development related to prior years’ claims .......... 7(54) (50)
Total provision ................................................ 331 244 222
Payments for current year claims ...................................... 677
Payments for prior years’ claims ...................................... 329 233 236
Total claim payments ........................................... 335 240 243
Net reserves for professional liability claims, December 31 ..................... $1,248 $1,252 $1,248
The favorable development during 2011 and 2010 related to prior years’ claims resulted from declining
claim frequency and moderating claim severity trends. We believe these favorable trends were primarily
attributable to tort reforms enacted in key states, particularly Texas, and our risk management and patient safety
initiatives, particularly in the area of obstetrics.
Income Taxes
We calculate our provision for income taxes using the asset and liability method, under which deferred tax
assets and liabilities are recognized by identifying the temporary differences that arise from the recognition of
items in different periods for tax and accounting purposes. Deferred tax assets generally represent the tax effects
of amounts expensed in our income statement for which tax deductions will be claimed in future periods.
Although we believe we have properly reported taxable income and paid taxes in accordance with
applicable laws, federal, state or international taxing authorities may challenge our tax positions upon audit.
Significant judgment is required in determining and assessing the impact of uncertain tax positions. We report a
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