Global Health Care Medical Costs Payable

12 Months Ended

Dec. 31, 2017

Liability For Unpaid Claims And Claims Adjustment Expense [Line Items]

Global Health Care Medical Costs Payable

Note 7 – Global Health Care Medical Costs Payable

Medical costs payable for the Global Health Care segment reflects estimates of 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 comprised of accruals for incentives and other amounts payable to health care professionals and facilities.

Accounting policy. 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 is primarily calculated using “completion factors” developed by comparing the claim incurral 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 uses 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, the Company relies more heavily on medical cost trend analysis that reflects expected claim payment patterns and other relevant operational considerations. 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.

For each reporting period, the Company compares key assumptions used to establish the medical costs payable to actual experience. When actual experience differs from these assumptions, medical costs payable are adjusted through current period shareholders’ 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 medical costs payable for the years ended December 31 was as follows:

(In millions)	2017		2016		2015
Balance at January 1,	$	2,532	$	2,355	$	2,180
Less: Reinsurance and other amounts recoverable		275		243		252
Balance at January 1, net		2,257		2,112		1,928
Incurred costs related to:
Current year		20,233		19,087		18,564
Prior years		(266)		(78)		(210)
Total incurred		19,967		19,009		18,354
Paid costs related to:
Current year		17,979		17,052		16,588
Prior years		1,791		1,812		1,582
Total paid		19,770		18,864		18,170
Balance at December 31, net		2,454		2,257		2,112
Add: Reinsurance and other amounts recoverable		265		275		243
Balance at December 31,	$	2,719	$	2,532	$	2,355

Reinsurance and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims for certain business where the Company administers the plan benefits but the right of offset does not exist. See Note 9 for additional information on reinsurance.

The total of incurred but not reported liabilities plus expected development on reported claims, including reported claims in process, was $2.6 billion at December 31, 2017 and $2.4 billion at December 31, 2016. The remaining balance in both periods reflects amounts due for physician incentives and other medical care expenses and services payable.

For the years ended December 31, variances in incurred costs related to prior years’ medical costs payable that resulted from the differences between actual experience and the Company’s key assumptions were as follows:

	2017				2016
($ in millions)		$	%⁽¹⁾			$	%⁽²⁾
Actual completion factors	$	124	0.7	%	$	59	0.3	%
Medical cost trend		133	0.7			27	0.1
Other ⁽³⁾		9	-			(8)	-
Total favorable variance	$	266	1.4	%	$	78	0.4	%

(1) Percentage of current year incurred costs as reported for 2016.
(2) Percentage of current year incurred costs as reported for 2015.
(3) Other amounts in 2017 primarily related to an increase in the 2016 reinsurance reimbursement rate from CMS under the ACA. Other amounts in 2016 primarily related to increased medical costs in the Government segment resulting from sharing additional risk adjustment revenue with providers.

Incurred costs related to prior years in the table above, although adjusted through shareholders’ net income, do not directly correspond to an increase or decrease to shareholders’ net income. The primary reason for this difference is that decreases to prior year incurred costs pertaining to the portion of the liability established for moderately adverse conditions are not considered as impacting shareholders’ net income if they are offset by increases in the current year provision for moderately adverse conditions.

The net impact of prior year development on shareholders’ net income was a $112 million increase for the year ended December 31, 2017. The net impact of prior year development on shareholders’ net income was insignificant in 2016. Favorable prior year development implies primarily lower than expected utilization of medical services and vice versa while amounts close to zero imply utilization of medical services that are consistent with expectations.

The following table depicts the incurred and paid claims development as of December 31, 2017 (net of reinsurance), claims frequency metrics and incurred but not reported liabilities for Cigna's Global Health Care medical costs payable. The information about incurred and paid claims development for the year ended December 31, 2016 is presented as supplementary information and is unaudited.

	Incurred Costs
Incurral Year	2016 (Unaudited)		2017		Medical Costs Payable		Claims Frequency
($ in millions, except for claims frequency)
2016	$	19,087	$	18,822	$	159		2.7 million
2017				20,233	$	2,254		3.3 million
Cumulative incurred costs for the periods presented			$	39,055

	Cumulative Paid Costs
Incurral Year	2016 (Unaudited)		2017
2016	$	17,052	$	18,663
2017				17,979
Cumulative paid costs for the periods presented			$	36,642

Cumulative incurred costs less cumulative paid costs for the periods presented			$	2,413
Outstanding liabilities prior to 2016				41
Net outstanding liabilities for Global Health Care medical costs payable				2,454
Reinsurance and other amounts recoverable				265
Total liability for Global Health Care medical costs payable			$	2,719

More than 95% of health claims for an accident year are paid within one year of their incurred date.

There is no single or common claim frequency metric used in the health care industry. The Company believes a relevant metric for the Global Health Care segment is the number of customers for whom an insured medical claim was paid. Customers for whom no insured medical claim was paid are excluded from the calculation. Claims that did not result in a liability are not included in the frequency metric.