AC599 Unit 6 Capstone Analysis Draft Example

$410,000 Recorded, $623,300 Indicated: A Unit 6 Capstone Analysis Draft of a Health Claims Reserve

[Student Name]

Purdue University Global

AC599: Graduate Capstone in Accounting

Unit 6 Analysis Draft

[Instructor Name]

[Date]

Hollis Creek Supply and every figure are composite; completion factors and claims are illustrative; the actuarial guidance, standards and texts cited are real.

Exhibit A: The Lag Triangle and Completion Factors

The reconciled medical lag report covers incurred months from January 2024 to December 2026, with payments through December 2026. For months with at least nine months of run-out, the average share of the eventual cost paid by each lag is: 51 percent in the month of service, 84 percent by the end of the following month, 94 percent by lag two, 97 percent by lag three, 99 percent by lag five and effectively 100 percent by lag eight.

These factors show why the rule of thumb falls short. Under the one-month rule, everything older than one month would be fully paid. In fact, about 16 percent of a month's cost is still unpaid at the end of the following month, 6 percent at the end of the month after that, and smaller amounts trail for months. The pipeline is longer than one month.

Exhibit B: The Estimate by Month

September and October 2026. Paid to date is divided by the completion factor at the corresponding lag. September, at lag three with $398,600 paid, has an expected total of $410,900 and $12,300 unpaid. October, at lag two with $371,200 paid, has an expected total of $394,900 and $23,700 unpaid. Older months add $9,500 in total.

November and December 2026. For these months, little has been paid, and completion factors would magnify noise. The per-member projection is used instead. Cost per member per month over the past twelve months, trended for medical inflation, is $453, and with 1,018 covered members, expected incurred cost is about $461,200 a month. November has $352,300 paid, leaving $108,900. December has $3,200 paid in the month itself, leaving $458,000, since services in late December are mostly unbilled.

Medical incurred but unpaid totals $612,400.

Pharmacy. Pharmacy claims are paid on a two-week cycle. Applying the pharmacy manager's one-lag factor to December fills gives $48,900 unpaid.

Stop-loss. One member's 2026 claims reached $188,000 by year end, $38,000 above the $150,000 specific deductible. The contract requires reimbursement once the claim file is complete, and the carrier has acknowledged the filing. The $38,000 is probable of recovery. Because the stop-loss contract allows the carrier to reduce future premium payments by amounts it owes, this draft nets the recovery against the liability; whether that offset is supported is flagged for review at the seminar checkpoint.

Exhibit C: The Total

Medical $612,400 plus pharmacy $48,900 gives a gross liability of $661,300. The stop-loss receivable of $38,000 brings the net cost to $623,300. Against the recorded $410,000, the reserve is short by $213,300 on a net basis, or $251,300 gross with a separate $38,000 receivable.

A range is computed by applying the highest and lowest completion factors observed at each lag over the thirty-six months: $571,000 to $684,000 net. The recorded $410,000 lies well outside the range.

Exhibit D: The Hindsight Test

Run as of the 2025 year end with nothing but that date's information, the method estimated $574,000 of unpaid claims, net of stop-loss. Actual payments for 2025 services made after December 31, 2025, through September 2026, totaled $588,200. The method was within 2.4 percent of the actual run-out, inside the 5 percent threshold set in the methodology memo. The one-month rule had recorded $380,000 at that date, short by $208,200, or 35 percent.

The rule of thumb was not slightly off; it missed last year's actual run-out by more than a third, while the lag method, using only what was known at the time, came within two and a half percent, which is the evidence that justifies replacing the rule rather than adjusting it.

What the Shortfall Means

The 2026 shortfall of $213,300 is made up mostly of the prior year's shortfall carried forward. Because the reserve was understated by $208,200 at the end of 2025, 2025 expense was understated and 2026 expense absorbed that difference as claims were paid. The change in the shortfall during 2026 is only $5,100. How the correction is reported, and how the bank's covenant treats it, is a question for the findings.

Sensitivity

The estimate is most sensitive to the December per-member projection. A 5 percent change in cost per member moves the liability by about $46,000, since it affects both November and December. It is much less sensitive to the completion factors for older months, which are stable.

Why the Estimate Is a Liability, Not a Choice

The accrual is required, not optional: services were received before December 31, the plan must pay for them, and the amount can be estimated from history (Financial Accounting Standards Board, 1975). The only judgment is how much.

How the Estimate Compares With Benchmarks

Two rough benchmarks support the result. Employer health plans of Hollis Creek's size commonly carry unpaid claims of about one and a half months of incurred cost, and $661,300 is about 1.4 months of the $461,200 monthly incurred cost. And the hindsight test's actual 2025 run-out, $588,200, was about 1.4 months of that year's cost. Both point the same way: the pipeline is closer to six weeks than four, which is why a one-month rule falls short every year by roughly the same amount.

What the Draft Leaves for the Findings

The draft does not yet decide how the shortfall should be recorded, how the bank's covenant treats it or what policy should replace the rule. Those belong to the findings and recommendation. The draft's job is to establish the number and show that it can be trusted.

A Check on the Pharmacy Figure

The pharmacy estimate was checked a second way. December pharmacy fills averaged about $3,500 a working day, and roughly fourteen days of fills are unpaid at any time under the two-week cycle, which gives about $49,000, close to the $48,900 from the factor.

Both checks are rough, but agreement between independent approaches is part of what makes the estimate defensible to an auditor.

Limitations

Three limits apply. The lag data begins only in January 2024, so completion factors rest on about two years of fully developed months. The per-member projection assumes 2026 costs follow the recent trend. And the administrator's processing speed, confirmed stable through the third quarter, could change in the fourth (Actuarial Standards Board, 2011; Bluhm, 2012; Friedland, 2010).

References

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

Bluhm, W. F. (Ed.). (2012). Group insurance (6th ed.). ACTEX Publications.

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.