The 2008 annual report for HCA, Inc., a nationwide chain of hospitals, contains the following statement in the footnotes to the financial statements:
We operate in a highly regulated and litigious industry.
Furthermore, the company discloses,
Reserves for professional liability risks were $1.387 billion and $1.513 billion at December 31, 2008 and 2007, respectively. The current portion of this reserve, $279 million and $280 million at December 31, 2008 and 2007, respectively, is included in "other accrued [liabilities]" in the consolidated balance sheet. Provisions for losses related to professional liability risks were $175 million, $163 million and $217 million for 2008, 2007, and 2006, respectively (and) are included in "other operating expenses" in our consolidated income statement. Provisions for losses related to professional liability risks are based upon actuarially determined estimates. Loss and loss expense reserves represent the estimated ultimate net cost of all reported and unreported losses incurred through the respective consolidated balance sheet dates.
REQUIRED:
a. The term reserve refers to accrued liabilities. What portion of the reserves reported in 2008 and 2007 is listed in the current liability section of the balance sheet?
b. What entries were made in 2006, 2007, and 2008 to record additional reserves?
c. Estimate the cash payments made during 2008 to cover professional liability risks.
d. Discuss how management could manage earnings in this industry.