 Hello and welcome to the session. This is Professor Farhad and the session we're going to be looking at accounting for malpractice Contingencies and insurance premium for health care providers This topic is covered in a governmental and not for profit accounting. It is surely covered on the CPA exam As always, I would like to remind you you my viewers to connect with me only then YouTube is where you would need to subscribe. I have over one thousand five hundred plus Accounting auditing and tax lectures Please like my lectures if you like them share them put them in the playlist Let the world know about them if they're benefiting you and they might benefit others as well This is my Instagram account. Please follow me on Instagram as I'm trying to grow my following This is my Facebook account and this is my website on my website if you'd like to donate support the channel Please feel free to do so. So let's talk about malpractice contingencies for health care providers This is an important big topic and big money when when it comes to malpractice Malpractice for doctors is very very expensive if something happened or for hospitals as well in any health care provider The they have to pay out really really big money That's that that's the big picture. The small picture is simple Why because we have to follow fast B5 and what is fast B5? Well, hopefully you remember what fast B5 We record a contingency. Hopefully you remember what a contingency is When both of these conditions exist one the it's a probable that we're gonna lose Two it's reasonable that we can estimate the dollar amount. So we have to know two things We have to know the probability and the probability has to be probable. It cannot be remote It cannot be possible For us to record the liability it has to be probable It's a good chance that we're going to lose plus we have to know the dollar amount We're gonna be losing under those circumstances We book a liability and let's take a look at an example The hospital estimates that the eventual cost of settling their practice screen for incident occurring in the current year will be 3 million So notice they think they can estimate and they think they are going to lose. There's a good chance. That's what they're saying About 3 million dollar. Well, they will debit an expense called Malpractice insurance claim expense or claim expense and they will credit a liability of 3 million Basically, this is an expense part of operating health care is you're gonna be sued for more malpractice That's part of being in health care. Therefore, you have to account for this as part of your operating expenses The next topic we're gonna work with in this chapter is insurance premium And we have to differentiate between two type of insurance cream Which is a little bit unusual because for us, it's different for individuals because if you have auto insurance Home insurance health insurance. Well, let's talk about it. Let's assume you have auto insurance When do you pay your insurance? Do you pay your insurance at the end of the period or at the beginning of the period? Well, guess what you pay at the beginning of the period. Well, think about it If you go through the whole year then pay at the end Well, what incentive you have to pay if you didn't get into an any accident You won't carry the insurance, right? So you always have to carry the insurance before getting the insurance before paying for the insurance before is called Prospective insurance premium. It means you pay it at the beginning of the period now When the when the when those health care provider pay for prospective insurance if they pay for two years They will expense it over two years or three years. They will expense it over three years So if they paid three hundred thousand dollar for three years Every year they will expense $100,000. Okay, so it's pretty straightforward. You expense it evenly over the policy term whatever that term is I assumed three years three hundred thousand Now hold on a second. There's something called a retrospective insurance premium. What is that retrospective retrospective means? You're gonna pay after after Hold on a second. How is that possible? Well, let me give you a little bit of background. Why? sorry Why health care providers doctors in hospitals? They pay also retrospective after here's what happened Let's assume a doctor pays just let's go to the same example three hundred thousand for one year. Just make it one year Okay, so they pay this prospectively Do you guys remember I told you back in the 80s health cost started to go up Substantially and I told you because there was no incentive for the doctor to control cost There was no incentive for the patient not to visit the doctor So the health care cost went up and part of that increase too was due to malpractice People were sewing doctors and settlements were very very large So the doctor will buy insurance to protect themselves now the insurance company find out while this doctor paid us three hundred thousand dollar But this doctor had a lot of malpractice insurance incidents. Therefore the payout we had to pay ten million dollar For that doctor therefore what they start to do is this you pay us three hundred thousand dollar Then at the end of the period we decide if you should pay an additional two hundred thousand dollar or guess what we may give you back $50,000 Depending on the risk that we experience your during that year So let's assume you went through the whole year that doctor did not have any malpractice claim They may give you back $50,000. That's good Or you may get into trouble with your with your patients and have a lot of malpractice And they may say well you have to put up an additional two hundred thousand dollar with to put up to two hundred thousand dollar or to pay You back the fifty thousand. This is called retrospective insurance premium So basically what they do they adjust your policy upon expiration to reflect loss experience or no loss experience Okay, again, that started in the 80s because what happened health and Insurance company they find out that they're making bad deals with the doctors that deals in a sense They are they are signing up doctors where they cannot afford the risk. Therefore, they told the doctor you pay something now and Depending on you know, they basically they give the doctor a moral hazard. You be careful. We give you some money back You're not careful. You're gonna have to pay us. Okay, so you can get some premium back Or you have to pay more premium Well, so when we record this additional premium, we're gonna have a contingency in a sense We're gonna have to estimate that contingency and know whether it's probable and if it's probable and reasonable we will book it Okay, hopefully we get some money back. We don't want to have a loss Let's take a look at an example to illustrate this concept The hospital paid premium on one of its malpractice insurance policy that cost for the year is 1.5 million Debit expense credit cash However, the hospital estimate that owing to act owing to actual experience during the year It will have to pay an additional $200,000. So for the 1.5 million, they will debit insurance expense credit cash To record the adjustment for the retrospective They're gonna have to debit an expense again and they're gonna have to credit a payable some sort of a liability So this is how it works for insurance premium if you happen to visit my website for additional lectures or my youtube Please consider donating to support the channel. If you're studying for your CPA exam As always Study hard. It's worth it. Good luck and see you on the other side of success