Unpaid claims can make a mid-year loss ratio look better than it is.
Incurred but not reported claims have happened but have not yet been paid. A loss ratio that ignores them can understate the real number.
Why the claims that have not been paid yet still matter
Health claims are not paid on the day care is delivered. A member has a procedure in March, the provider bills in April, and the carrier pays in May. At any point in time there is a pool of claims that have been incurred but not yet reported or paid. Actuaries estimate that pool and hold a reserve for it.
This matters for the loss ratio because a simple comparison of premiums to paid claims in the first months of a plan year makes the plan look better than it is. The most recent months are the least complete. A reliable loss ratio uses incurred claims, with a completion factor applied to the recent months, or it waits until the data has matured.
The issue is sharper for level-funded and self-funded plans. When the plan is terminated or the employer changes carriers, outstanding claims still have to be paid, and the contract determines who pays them. A paid-basis stop-loss contract and an incurred-basis contract can leave the employer with a very different exposure at the end of the term.
When we read a renewal we ask whether the loss ratio shown is on a paid or incurred basis, how many months of run-out it includes, and what completion factor was used. A figure without those answers is hard to trust.
What to decide and where it connects
Experience Rating
How claims are used in rates.
Pooling
How large claims are treated.
Run the Calculator
Calculate your group’s loss ratio.
Questions about this topic
What does incurred mean?
Claims that have occurred, whether or not they have been paid yet.
Why does IBNR matter?
Recent months look lower until claims run out, so mid-year loss ratios can be misleading.
Who estimates IBNR?
Carriers and actuaries, using claim lag patterns.
Ready? Send us your renewal, or talk it through with someone first. General information, not legal or tax advice.
Where these details come from.
CMS: Medical Loss Ratio: Federal MLR rule and rebate guidance.
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