The health care industry faces numerous specialized accounting dilemmas that require deep professional knowledge to unravel. One such element that is specifically faced by health care providers is accounting for medical malpractice. This brief article is meant to highlight some of the important facets of this accounting treatment according to generally accepted accounting principles (GAAP).
According to FASB ASC 954-450-25-2, entities must recognize a liability for the estimated total costs of a medical malpractice at the date the incident potentially leading to a claim occurs. Such an estimate should be accrued as a gross amount, not decreased by potential insurance recoveries. In this case, the entity should also recognize an insurance receivable subject to the same conditions as the accrued liability.
Under the right conditions, it would be permissible under GAAP to discount the accrued medical malpractice liability amount according to the time value of money. The right conditions in this case include 1) the amount of the liability is fixed or reliably determinable, 2) the amount of the future cash payouts are also fixed or reliably determinable, and 3) the expected insurance recoveries are also discounted.
Some health care providers establish trust funds for the purpose of paying out claims for medical malpractice. Such a fund should be recognized on the balance sheet with the portion of the fund expected to be paid out in the next year or less classified as a current asset and the remainder classified as a non-current asset.
There are many requirements for disclosures in the financial statements in regard to medical malpractice claims. Typically, a disclosure is preferred over an accrual if a reasonable estimate cannot be made of the potential loss.
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