Self-funded health plan IBNR and COBRA rate support

IBNR is the estimated cost of claims for care received on or before the balance sheet date that the plan has not yet paid or been billed for, and the year-end accrual needs it because the liability exists whether or not the bills have arrived. The accrual test comes from FASB Statement No. 5, paragraph 8: record a liability when a loss is probable and the amount can be reasonably estimated. A health plan that has received a month of care and paid only part of the claims meets both tests.

The estimate has a recognized home in the standards. ASOP No. 5, Incurred Health and Disability Claims, effective September 1, 2017, covers how actuaries estimate unpaid claim liabilities for self-funded employer plans, and the American Academy of Actuaries lists an ASC 450 determination as a typical statement of actuarial opinion in its US Qualification Standards. That is why the final number is reviewed and signed by a credentialed signing actuary, not handed over as a spreadsheet.

What the finance team receives from our side is the workpaper behind the number: the data reconciliation to paid-claims totals, the triangle, the factors, the projection and the tie-out to the ledger. The auditor can follow it line by line.

The claims lag method treats each incurral month as a fraction paid and a fraction still to come, and the completion factor is the fraction paid at a given age. Divide paid-to-date by the completion factor and you have projected ultimate claims for that month. Subtract paid-to-date and what remains is IBNR for that month. Months far in the past are nearly complete, so the largest share of IBNR sits in the last two or three months.

The table below is Illustrative, with made-up numbers, not an estimate for any plan. Valuation date is December 31, 2026. Lag 0 means paid within the incurral month, lag 1 means paid by the end of the following month, and so on. The pattern assumed is 30%, 70%, 88%, 95%, 98% and 100% paid by lags 0 to 5. Amounts are in $000.

Each row divides exactly: 1,078 / 0.98 = 1,100, and 7,300 less 5,792 paid is 1,508. The diagram shows the same data as a development triangle, with the latest diagonal being the paid-to-date column. The lower-right cells are empty because those payments have not happened yet. This is an illustration, not an actuarial opinion.

A margin is an explicit load on the central IBNR estimate for the risk that the factors are off, and whether to carry one is a decision for the plan sponsor, its auditor and the signing actuary, not a default. The central estimate is the actuary's expected value. A sponsor that wants the accrual to be more likely adequate than not can add a percentage margin, and some carry none, treating the best estimate as the accrual.

We show the margin as a separate line so the choice is visible. In the illustration above, a 5% margin on the 1,508 central estimate is 75.4, which gives 1,583.4 in $000. The memo states the central estimate, the margin percentage, the dollar amount and who decided it, so the auditor never has to infer which part of the accrual is estimate and which is cushion.

Large single claims distort lag data. We flag any claim above the plan's stop-loss attachment point, show the triangle with and without it, and keep reimbursements from the stop-loss carrier on their own line, because a receivable is a separate accounting question from the liability.

For a self-funded plan, the COBRA applicable premium is a reasonable estimate of the cost of coverage for similarly situated beneficiaries, determined on an actuarial basis, unless the plan administrator elects the past-cost method. Both options sit in Internal Revenue Code section 4980B(f)(4)(B). The past-cost method takes the plan's cost for the same period in the preceding determination period and adjusts it by the change in the GNP implicit price deflator. It is not available where coverage or the covered employees changed significantly between the two periods.

The plan may then charge up to 102% of the applicable premium, or up to 150% during the disability extension, under 26 CFR 54.4980B-8, Q&A-1. The premium has to be fixed before the determination period begins, and the period is any consistent 12 months the plan selects (Q&A-2 and section 4980B(f)(4)(C)).

The table is Illustrative: a made-up monthly cost per enrolled employee by tier and the resulting maximum COBRA charge at 102%.

At 150% the employee-only charge during a disability extension would be $930.00. The rate is the plan administrator's determination, set on the actuarial basis or past-cost method it elects. Our workpaper shows the data and arithmetic behind it, and the signing actuary reviews it, since the Academy lists COBRA premium determination as a typical statement of actuarial opinion.

The budget by tier multiplies projected enrollment by the monthly cost per enrolled employee for each tier and by twelve, then adds the tiers. It uses the same cost basis as the rates, so a variance later in the year can be traced to enrollment, claims trend or a large claim instead of to two unrelated models.

The illustration below is made up. Monthly costs match the table above.

Check: 200 x 620 x 12 = 1,488,000, and the four tiers sum to 4,998,000. Real budgets add trend, plan design changes, stop-loss premium and fixed administrative fees. We show each as its own line, and we run a version with the IBNR change from the lag work so the finance team sees the cash cost and the accrual effect together.

In a self-funded plan the employer pays claims, so unpaid claims at year end are the employer's liability even when a TPA processes them. Stop-loss insurance caps large claims but does not remove the accrual. A level-funded plan bundles expected claims, stop-loss and administration into one monthly bill, and the claims side still sits with the employer.

Ask your TPA for a monthly claims lag report showing incurred and paid dates, because the IBNR estimate is built from it. A small employer with thin claims history often leans on the actuary's completion factors more than a large one. Finbryn prepares the lag triangle and accrual workpapers from de-identified data; a credentialed signing actuary reviews and signs the estimate, and your auditor tests it.

The fee depends on four things: how many claims are in the data, how many plans or benefit packages need separate triangles, how clean the claims file is, and how often you want the work refreshed. A single plan with a tidy file and an annual refresh is a small engagement. Three plans, a mid-year acquisition and a claims file that needs reconciling to paid totals first is a larger one.

Data quality moves the fee. A lag file that already ties to the general ledger takes less time than one where paid dates, incurral dates and plan codes need to be rebuilt. Quarterly refreshes cost less per run than a one-off, because the triangle and factors carry forward.

We looked for public procurement records that state a comparable fee for this work and did not find one that is current, specific and primary enough to quote, so this page does not publish a range. Finbryn confirms the scope and fee in writing before work starts, and the quote names who signs.