An injured worker incurred $600 in medical costs in 2004, $1,200 in 2005, and $800 in 2006. How should future medical expenses be reserved per year?

• A. $2,600 total
• B. $866 a year
• C. $870 a year
• D. $1,000 a year

Answer: (C)

In reserve calculations for future medical costs, you determine the annual reserve by averaging the most recent three years of actual medical expenses and using that average as the per-year amount.

Here, the costs are 600, 1200, and 800. The three-year average is (600 + 1200 + 800) / 3 = 866.67. Rounding to the nearest ten dollars gives 870. Therefore, the annual reserve for future medical expenses is 870.

Note that adding the three years would total 2600, which is the overall past costs, not the per-year reserve. The 870 figure reflects the annualized amount based on recent history.