Reserves for Claims and Performance-Based Arrangements

9 Months Ended

Sep. 30, 2021

Reserves for Claims and Performance-Based Arrangements

Reserve for Claims and Performance-Based Arrangements

The Company maintains reserves for its liabilities related to payments to providers and pharmacies under performance-based arrangements related to its total cost of care and specialty care management services.

Reserves for claims and performance-based arrangements for our EHS and Clinical Solutions segments reflect actual payments under performance-based arrangements and the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily composed of accruals for incentives and other amounts payable to health care professionals and facilities. Reserves for claims and performance-based arrangements also reflect estimated amounts owed under the reinsurance agreements, as discussed further in Note 11.

The Company uses actuarial principles and assumptions that are consistently applied each reporting period and recognizes the actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions.

This liability predominately consists of incurred but not reported amounts and reported claims in process including expected development on reported claims. The liability for reserves related to its total cost of care and specialty care management services is primarily calculated using "completion factors" developed by comparing the claim incurred date to the date claims were paid. Completion factors are impacted by several key items including changes in: 1) electronic (auto-adjudication) versus manual claim processing, 2) provider claims submission rates, 3) membership and 4) the mix of products.

The Company’s policy for reserves related to its total cost of care and specialty care management services is to use historical completion factors combined with an analysis of current trends and operational factors to develop current estimates of completion factors. The Company estimates the liability for claims incurred in each month by applying the current estimates of completion factors to the current paid claims data. This approach implicitly assumes that historical completion rates will be a useful indicator for the current period.

For more recent months, and for newer lines of business where there is not sufficient paid claims history to develop completion factors, the Company expects to rely more heavily on medical cost trend and expected loss ratio analysis that reflects expected claim payment patterns and other relevant operational considerations, or authorization analysis. Medical cost trend is primarily impacted by medical service utilization and unit costs that are affected by changes in the level and mix of medical benefits offered, including inpatient, outpatient and pharmacy, the impact of copays and deductibles, changes in provider practices and changes in consumer demographics and consumption behavior. Authorization analysis projects costs on an authorization-level basis and also accounts for the impact of copays and deductibles, unit cost and historic discontinuation rates for treatment.

For each reporting period, the Company compares key assumptions used to establish the reserves for claims and performance-based arrangements to actual experience. When actual experience differs from these assumptions, reserves for claims and performance-based arrangements are adjusted through current period net income. Additionally, the Company evaluates expected future developments and emerging trends that may impact key assumptions. The process used to determine this liability requires the Company to make critical accounting estimates that involve considerable judgment, reflecting the variability inherent in forecasting future claim payments. These estimates are highly sensitive to changes in the Company's key assumptions, specifically completion factors and medical cost trends.

Activity in reserves for claims and performance-based arrangements for the nine months ended September 30, 2021 and 2020, was as follows (in thousands):


	For the Nine Months Ended September 30,
	2021								2020
	EHS (1)		Clinical Solutions (1)		True Health		Total		EHS (1)		Clinical Solutions (1)		True Health		Total
Beginning balance	$	56,295	$	122,532	$	9,859	$	188,686	$	4,265	$	50,245	$	6,640	$	61,150

Incurred costs related to current year	8,669		340,582		34,228		383,479		2,376		313,259		63,571		379,206
Incurred costs related to prior year	527		92		(241)		378		2,319		8		1,488		3,815
Paid costs related to current year	20,801		205,236		23,274		249,311		74,939		260,660		55,014		390,613
Paid costs related to prior year	19,174		98,363		7,378		124,915		1,608		7,460		6,975		16,043
Change during the year	(30,779)		37,075		3,335		9,631		(71,852)		45,147		3,070		(23,635)

Impact of consolidation on reserves for claims and performance-based arrangements	—		—		—		—		164,297		—		—		164,297
Disposal of discontinued operations	—		—		(13,194)		(13,194)		—		—		—		—
Other adjustments (2)	(2,047)		8,802		—		6,755		501		6,000		—		6,501
Ending balance	$	23,469	$	168,409	$	—	$	191,878	$	97,211	$	101,392	$	9,710	$	208,313

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(1)Costs incurred to provide specialty care management and EVH Passport are recorded within cost of revenue in our statement of operations.

(2)Other adjustments to reserves for claims and performance-based arrangements reflect changes in accrual for amounts payable to facilities and amounts owed to our payer partners for claims paid on our behalf.