AC599 Unit 1 Accounting Capstone Proposal Example

One Month of Claims, or What the Lag Data Says? A Unit 1 Capstone Proposal on a Health Plan Reserve

[Student Name]

Purdue University Global

AC599: Graduate Capstone in Accounting

Unit 1 Capstone Proposal

[Instructor Name]

[Date]

Hollis Creek Supply, its plan and every figure are composite; the standards, actuarial guidance and textbooks cited are real.

Title Block

Organization: Hollis Creek Supply, a composite distributor of plumbing, HVAC and irrigation parts. Question: Is the December 31, 2026 liability for incurred but unpaid health claims fairly stated? Intended reader: the chief financial officer.

Profile

Hollis Creek runs fourteen branches in three Southeastern states, with about 380 employees and a calendar year end. It switched its employee health plan from fully insured to self-funded three years ago, paying claims through a third-party administrator and buying stop-loss insurance that reimburses any single member's claims above $150,000 a year. It borrows under a bank revolver whose covenant sets a 1.20 floor on fixed-charge coverage; the June test came in at 1.22. Owners receive distributions only while the covenant is met.

The Ledger Fact

At each year end, the controller records a liability equal to the plan's paid claims for December, on the reasoning that roughly one month of claims is always in the pipeline. For 2026, that is $410,000. The rule was set when the plan converted and has never been tested against actual claim payment patterns. Since then, enrollment has grown, pharmacy claims are paid through a separate manager, and two members have had claims large enough to trigger stop-loss.

The Question, Narrowed

The broad question, "Is our health plan reserve right?", cannot be researched as asked. It is narrowed in three steps. First, to one balance and date: the liability for claims incurred on or before December 31, 2026 and paid after it. Second, to a measurable standard: an obligation goes on the books once it is probable and can be measured with reasonable confidence (Financial Accounting Standards Board, 1975), and actuarial practice estimates unpaid health claims from the pattern of past payment delays (Actuarial Standards Board, 2011). Third, to evidence within reach: the administrator's monthly report of claims by month incurred and month paid for thirty-six months, the pharmacy manager's equivalent, enrollment counts and the stop-loss contract.

The proposal turns a habit, one month of claims, into a testable claim: if past claims took longer than a month to be paid, the lag data will show it, and the reserve can be estimated from Hollis Creek's own history rather than a rule set three years ago.

Why It Matters

If the reserve is understated, expense and the liability are both understated, which overstates the earnings the bank uses for its covenant. With the June ratio at 1.22 against a 1.20 floor, an understatement of a few hundred thousand dollars could matter. The plan also changes deductibles in January, which will shift the payment pattern, so a policy set now would guide future years.

Scope and Exclusions

The capstone covers the medical and pharmacy claims liability at December 31, 2026, the stop-loss receivable that offsets it, and the policy for future estimates. It excludes plan design, premium equivalents charged to employees and the plan's legal compliance, which are not accounting questions.

Why the Rule Seemed Reasonable

The one-month rule was not careless when it was adopted. Under the old fully insured plan, the insurer carried the claims risk and Hollis Creek simply paid a fixed premium each month, so there was no claims liability to estimate. When the plan converted, someone needed a quick number for the first year end, and one month of paid claims was a sensible guess. The problem is that a guess made for one year became a policy, and the data that could test it arrived every month without anyone comparing the two. A capstone that asks whether the guess still holds is testing a common pattern in accounting estimates: a temporary method that outlives the conditions that justified it.

What a Good Answer Would Look Like

A good answer will give a best estimate with a range, show how the estimate was derived from Hollis Creek's own claims, test the method against a past year where the true answer is now known, and say what policy should replace the rule. It will not give tax or legal advice about the plan, and it will not judge the plan's benefits.

Plan of Work

Units 2 to 5 will state the problem's stakes, research the standards, set the method and collect evidence. Unit 6 will estimate the liability, Unit 7 will report findings, and Units 9 and 10 will recommend and report. Methods for estimating unpaid claims from payment triangles are well established in actuarial practice (Friedland, 2010).

References

Actuarial Standards Board. (2011). Incurred health and disability claims (Actuarial Standard of Practice No. 5). Actuarial Standards Board.

Financial Accounting Standards Board. (1975). Accounting for contingencies (Statement of Financial Accounting Standards No. 5). FASB.

Friedland, J. (2010). Estimating unpaid claims using basic techniques. Casualty Actuarial Society.