Better Benefits, No Headaches
Do You Have The Right Tools For Reserve Savings?
Do You Have The Right Tools For Reserve Savings?
Have you been given the right tools to not only project your annual costs but also determine the appropriate reserves needed to ensure cash flow stability?
One of the most common situations we run into with public, self-insured entities is that they might know what to budget for the year, but they have not been provided guidance how much they should have in reserves to deal with the rainy day, the anomaly year, or anything above their ‘incurred but not reported’. They often have never seen a formal strategy for this, don’t know how it interacts with the annual budget process, or that it is not as simple as “a few months of claims.”
The following are the key components of Reserve Policy:
- Purpose
- Appropriate Fund Balance Level/Reserve Target Methodology
- Reporting of Reserve Funds
- Replenishing Funds or Surplus Funds
- Deviations of the Reserve Policy
- Updates to the Reserve Policy
Purpose
The purpose statement is to clearly identify the amount of reserves to be kept on hand for payment of self-insured healthcare claims to allow the district to meet cash flow needs while simultaneously minimizing potential shortfall and not accumulating surplus reserves, the methodology to calculating these targets, timeframe to achieve targets, and criteria for the use of excess reserves or replenishing reserves.
Appropriate Fund Balance Level/Reserve Target Methodology
3 Methods Most Conservative to Least
- The most conservative method:
- Using a IBNR claim corridor and reserve claim factor to develop the most conservative approach to reserving.
- The median conservative method:
- Using Annual Allocation rates, margin factor and a reserve claims factor.
- The least conservative method:
- Utilizing monthly expense totals and reserve claim factor.
Reporting of Reserve Funds
Your policy should state how often the reporting should be updated and a sample document or word description of the reserve target methodology.
Replenishing Funds or Surplus Funds
Your policy should clearly identify when reserves should be used, how reserves will be replenished (and how quickly) and what happens when reserve balance drop below designated levels. As well, the policy should state the range of ordinary reserves, insufficient reserves, and surplus reserves as it relates to a percentage of total needed reserves.
Deviations of the Reserve Policy
Your policy should state if there should or should not be any deviations to your reserve policy, who has the authority to make these decisions and who will be presented at what committees for action.
Updates to the Reserve Policy
Your policy should state that any changes, additions, or deletions to the Reserve Policy will be brought forward to the appropriate audience/committee for review and how often the policy will be reviewed/discussed to ensure the policy is effective, and remains current with general accounting and financial best practice standards, as well as any regulatory changes that may occur over time.
These are the three most often reserve questions that come to us:
1. What goes into a standard healthcare reserve policy?
2. What is the appropriate reserve balance for my healthcare fund?
3. What do we put in place for a policy if we have a shortfall or surplus of needed reserves?