No company is immune to fraud. You may have stringent internal controls, and rigorous hiring and training programs, but still employees may find ways to violate standards.
“It is not enough to have a strong personal ethical code. It needs to be communicated and enforced to become corporate culture,” says Mariah Webinger, Ph.D., an assistant professor of accountancy at John Carroll University. “When it comes to enforcement, you need to proceed cautiously to make sure you are achieving your goals.”
Smart Business spoke with Webinger about dealing with employee fraud.
What should you do if you suspect an employee of fraud?
First, sit down, take a deep breath and think. It is never a good idea to confront a suspected employee right away. You probably don’t have the evidence you need to prove either innocence or guilt. Confronting the employee puts them on guard and makes it even less likely you can get that evidence.
Secondly, you could be wrong. Accusing a suspected employee can be very demoralizing to your workforce and creates an atmosphere of suspicion, forcing bystanders to choose sides.
Third, you never want to interview a suspect when you are emotional. Acting on emotion rarely makes good business sense, so give yourself a break to cool down before you make any decisions.
Finally, communicate the issue and the consequence internally, and perhaps to external stakeholders. When you do, try to stick to the facts and avoid value statements about the employee or the situation.
Does the type of employee misconduct affect consequences and communication?
All types of employee misconduct should be handled thoughtfully and not emotionally. However, the type of conduct will influence the consequence, which in turn will influence how it is communicated. If it is a minor policy infringement, it may be acceptable to have a reprimand as a consequence and an internal memo for communication.
Embezzlement or fraud should result in termination, regardless of size, since these violations are willful and never accidental. Also, fraud indicates an internal control weakness. These weaknesses need to be rectified and should be communicated.
Should a fraud perpetrator ever be retained as an employee?
The short answer is ‘no.’ Usually two reasons are given for wanting to retain an employee after a fraud: The fraud was a small amount or the person is a great employee. All frauds start small. Keeping a dishonest employee on the payroll sends a message to your other employees that fraud is acceptable as long as it is small or if you are a valuable employee. No employee is as irreplaceable as your corporate culture. If they are a good person and a talented employee they will have a great career elsewhere. The consequences of violating an ethical code might be the most important business lesson they will ever learn.
When should you pursue legal action?
Collect your evidence first. Law enforcement is usually overworked and generally not an expert in business. It is unlikely that they will pursue something unless there is a very tight case.
When do you need to hire a forensic investigator?
Generally your current employees will be more efficient at collecting evidence than an external expert because they are more familiar with your company. However, if the issue is contentious or involves office politics, it is helpful to have an independent investigation.
Also, that the fraud was perpetrated suggests there is a weakness in the internal skill set. Usually fraud involves accounting and/or information technology. If you don’t have internal experts in those fields, try to hire a forensic investigator with that expertise.
Where can you find a forensic investigator?
Avoid the yellow pages. It is hard to differentiate between a good forensic investigator and an imposter. Ask your auditor or accountant. They may not be able to do the work for you because of independence issue, but they can usually refer you to someone who can. Also ask your attorney. Most likely they have worked with forensic accountants or business experts and can recommend someone. If all you have is a Web search or the phone book, ask for references and check them. •
Mariah Webinger, Ph.D. is an assistant professor of accountancy at John Carroll University. Reach her at (216) 397-4225 or email@example.com.
Insights Executive Education is brought to you by John Carroll University
The bulk of the Affordable Care Act (ACA) will be implemented on Jan. 1, 2014. Even though large employers don’t necessarily need to go through the chess game of whether or not to offer insurance — pay or play — a number of new initiatives still come online.
The community rating rules, which limit how insurance carriers can classify small employer groups, the individual mandate and $8 billion insurer tax all will shape health care and premiums in the coming year.
“You’ve got to keep your eyes open, and continue to see what’s going on,” says Mark Haegele, director of sales and account management at HealthLink.
Smart Business spoke with Haegele about how to develop a year-end checklist of responsibilities related to health care reform.
What is the first thing an employer must do?
The ACA is not going away, so you must determine how the law applies to your business.
Let’s say you are contemplating offering in 2015 minimum essential coverage plans, ‘skinny plans,’ that just cover preventive care. Employers with 50 or more full-time equivalent employees may want to consider making this move in 2014, even though the employer-shared responsibility provision, or employer mandate, isn’t in effect. This prevents employees from getting subsidies and going through the new health care exchanges, or marketplaces, and then losing these funds in 2015 when you move over to a lower-level plan.
Consider any future health care changes, and how they will impact your employees for the next couple of years. You don’t want to aggravate staff and cause retention problems.
What’s important to know about your insurance?
Many people expect to see sharp spikes in health insurances costs and premiums after Jan. 1, 2014, which could be unsustainable. The $8 billion insurer tax, which likely will be passed onto employers in the form of premiums, is being calculated as a 4 to 6 percent increase. The community rating rules could drive premiums up by more than 60 percent if your insurance group is a young, healthy population. Out-of-pocket maximums have been limited to no higher than $6,350 for self-coverage and $12,700 for family coverage for most insurance.
The upcoming January 2014 health insurance renewals are the last to come into compliance before many large employers face fines. Consider where you are, and the steps it will take to come into compliance before your 2015 renewal.
Business executives need to analyze the costs and benefits of remaining with their current insurance plan or moving to self-funding, which has more freedom from regulations. Take the time to examine this regularly. No one is sure how the insurance market will react to ACA measures.
Beyond strategic decisions, what concrete actions need to be completed?
You need to make sure you sent out the notice to your employees about the new health care marketplaces, or exchanges, required as of Oct. 1, 2013. It’s a good idea to include this with your orientation materials to ensure all new employees are notified.
In addition, a Summary of Benefits and Coverage, an easy-to-understand summary of health care benefits, must be given to eligible participants at least 30 days before your plan year begins. Your insurer, health reimbursement arrangement provider or third-party administrator usually provides this.
Verify your employee-waiting period meets new requirements. A group health plan cannot make new employees wait more than 90 days for health insurance coverage as of Jan. 1, 2014.
Even though the employer mandate was delayed, large, fully insured employers should use 2014 as a trial year. Set up your tracking procedures for employee hours, especially those who work part time, so you can spot any problems. Because of the delay, the government will likely be less tolerant of any mistakes in 2015.
Health care compliance will continue to be a major concern for businesses. You need to make time to understand how the ACA will impact your company, even if it takes outside expertise to manage all your obligations. ●
Insights Health Care is brought to you by HealthLink
The greatest impediment to the successful resolution of a commercial dispute is the failure of both clients and attorneys to understand and think adequately about the extent, nature and amount of damages at issue in the dispute, says Eric N. Macey, partner at Novack and Macey LLP.
“While clients will invest huge amounts of time and money to focus on the merits of a case to prove they are ‘right,’ they either ignore or fail to give the same consideration to damages issues,” he says.
Yet, in order to resolve the dispute, management needs to properly evaluate damages so they can engage in meaningful settlement discussions or understand what they can expect to get or lose if the case goes to trial.
“Simply put, commercial disputes are about risk, and you need to monetize that risk early in the case to intelligently develop a strategy for the suit,” he says.
Smart Business spoke with Macey about understanding and evaluating damages.
What are the steps in evaluating damages?
Begin your damages analysis very early in the case. Talk to counsel about the various theories of damages available to you or your adversary. Are lost profits an issue? Do you want damages for monies that you gave to your counterparty that you now want back, or do you want damages for the costs you incurred by reason of your opponent’s conduct?
Identify various methodologies to calculate damages. For example, if you or your opponent assert damages in the form of lost profits, you need to identify with great specificity how that figure will be calculated. As part of that analysis, you will need to decide if an expert is necessary and also understand the physical evidence you will need to support your arguments.
Read contracts or purchase orders front to back, including all the fine print. Contracts often contain provisions that limit damages.
You need to identify whether there is any statute that impacts your damages analysis. There are many statutes that limit or expand damages. For example, if you manufacture and/or market consumer goods, you may be subject to claims under consumer fraud statutes like the Illinois Consumer Fraud and Deceptive Business Practices Act. That statute expands damages because it provides that a successful plaintiff can recover both punitive damages and attorneys’ fees. Similarly, Title VII of the Civil Rights Act of 1964 limits certain remedies. If your business is sued for employment discrimination under Title VII, that statute imposes limits on the amount of compensatory or punitive damages that a person can recover, which varies based on the size of the employer. Consequently, you need to include any statutory expansion or limitation on damages in your risk analysis when you try to monetize your exposure from such a claim.
What other factors could affect a case?
Be sure to think through mitigation of damages. If you or your counterparty brings suit to recover damages for breach of contract, the party asserting the claim has a duty to mitigate damages. This is called the doctrine of avoidable consequences and simply means that the party asserting a claim must take all reasonable steps to keep its damages from getting larger and larger.
Let’s say you are in the business of selling a certain type of customized computer hardware, and through your efforts, your business enters into a $2 million contract with a manufacturer that needs your technology. You deliver some of the hardware and get paid $1 million on the contract amount, but for some reason the manufacturer tells you it will not honor the balance of the deal. So now you’re stuck with the equipment and out $1 million. You sue for the $1 million. However, you still have a duty to mitigate your damages, which means that you must use reasonable efforts to sell the equipment to another manufacturer. If you do nothing in this regard, the court or jury can take this into account and reduce your damages even if you win the case.
In sum, do not blindly pursue or defend claims solely on the merits without evaluating what you may recover in damages or risk paying. Remember, commercial litigation is just resolution of a business dispute in another, albeit unique, forum with special rules. This does not mean that you forego monetizing your risk. It is imperative to do so to manage your case successfully. ●
Insights Legal Affairs is brought to you by Novack and Macey LLP
Challenging times present opportunities for organizations to perform detailed assessments of their operations. Performing operational assessments can help organizations identify, mitigate and take advantage of the risks that they face. These assessments focus on process design and execution risks.
“When properly performed, operational assessments identify areas where process design and execution risks are not aligned with an organization’s risk tolerance,” says James P. Martin, a managing director at Cendrowski Corporate Advisors LLC.
Smart Business spoke with Martin to learn more about operational assessments.
How can operational assessments help?
Organizations must achieve a diverse set of strategic objectives. This is accomplished by translating strategic objectives into what are often interdependent yet, disparate operational objectives.
Operational objectives include revenue growth, operational efficiency, compliance with laws and regulations, public perception, corporate responsibility and market leadership, as well as customer and employee satisfaction. Attainment of each requires the assumption of inherent risks.
Operational assessments focus on mitigating inherent process design and execution risks through the use of controls. Controls are employed to reduce an organization’s residual risk, or risk after control implementation, to a tolerable level.
What’s included in operational assessments?
Operational assessments examine whether an organization’s processes enable the achievement of strategic objectives. The first step is breaking down process design and execution elements into tasks performed by employees. This is often accomplished through employee interviews, as well as through observation in the workplace.
Once tasks have been identified, risks associated with the accomplishment of tasks are enumerated, as well as controls centered on mitigating risks. Risks are quantified by likelihood and impact. High-likelihood and/or high-impact risks are prioritized for mitigation in operational assessments, as they pose the greatest threat.
How can organizations decrease high-likelihood and/or high-impact risks?
High-likelihood risks can be decreased through preventive controls, while high-impact risks can be decreased by detective controls. For example, organizational training regarding fire hazards decreases the likelihood that a fire will occur. This is a form of preventative control. Proper placement of fire detectors throughout an organization’s premises decreases the potential impact should a fire occur. This is a form of detective control.
For risks that remain at a level too high for the organization to tolerate, new controls must be developed to bring residual risks in line with the organization’s risk tolerance. Otherwise, the organization should consider outsourcing the risk — for example, utilizing hedging strategies and insurance contracts that transfer risk to a third party.
What can be missed when performing operational assessments?
A key element that is sometimes missed by those performing operational assessments is the assignment of clear roles and responsibilities to team members who will oversee the creation and redesign of process controls. Without accountability, proper incentives are not present, and the operational assessment may struggle to achieve its intended results.
How do these assessments differ?
Risk assessments primarily assist organizations in preserving shareholder value, while operational assessments also help organizations grow shareholder value. More specifically, a risk assessment is really a deep dive into one component of an operational assessment. It involves the identification and analysis of potential risks that may impede an organization from achieving its strategic objectives.
By performing risk assessments across the organization, organizational managers can develop plans to mitigate the risks an organization may face, helping preserve its objective from potential threats and, hence, its shareholder value.
Actively identifying internal risks also can help organizational managers remove the opportunity for fraudulent activity. ●
Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC
The Ohio Bureau of Workers’ Compensation’s (BWC) Destination Excellence program allows employers to choose programs that best fit their risk management needs. It focuses on safer workplaces, return to work and savings options for administrative functions.
“These programs essentially offer discounts for things employers already do,” says Randy Jones, senior vice president of TPA Operations at CompManagement, Inc.
Smart Business spoke with Jones about Destination Excellence and how it fits with Ohio’s other premium discount programs.
What programs make up Destination Excellence and what are the discounts?
- Industry Specific Safety Program — Complete one to three loss prevention activities related to your industry, depending on your total payroll, as well as an online safety management self-assessment. Activities include industry specific training classes, attendance at BWC’s Safety Congress & Expo and/or on-site field consulting with a member of the BWC’s Division of Safety & Hygiene. The benefits are an increase in workplace safety and the implementation of industry best practices. It offers a 3 percent discount.
- Drug Free Safety Program — Prevent on-the-job injuries by integrating drug-free efforts into your safety program. The benefits are an increase in workplace safety, productivity and morale. The basic program offers a 4 percent discount, while the advanced program offers 7 percent.
- Safety Council — Regular attendance at safety council meetings in your community to increase awareness of workplace safety and health issues as well as affecting the frequency and severity of claims in your workplace. It’s a chance to learn best practices, increase collaboration among local business owners, improve public relations and increase safety. It also offers a 2 percent discount each for participation and performance.
- Transitional Work — Program to return injured workers to productivity in the workplace by providing modified job duties and other methods that accommodate medical restrictions. There are 3-to-1 matching grants available from BWC to start a program. This could lead to lower injury downtime, improved employee recovery time and increased worker morale, all of which protect your workforce. It also offers up to a 10 percent bonus discount for using an established and approved transitional work program with applicable claims that have dates of injury within that policy year.
- Go Green — Report your company’s payroll electronically and pay premiums in full on the BWC’s website. This reduces paperwork and helps the environment. It also means a discount of 1 percent of your premium, up to a maximum of $2,000 per policy period.
- Lapse Free — Pay premiums on time without a lapse in coverage during the past 60 months and get a 1 percent discount on your premium, up to a maximum of $2,000 per policy period.
Are the Destination Excellence programs compatible with other BWC discounts?
While participating in the Destination Excellence program, employers can participate in the following programs:
- Group Rating.
- Experience Modifier cap.
- $15,000 Medical-only.
- Grow Ohio Incentive Program.
- One Claim Program (private employers).
- Early Payment Discount (cannot be combined with Go Green).
The Go Green and Safety Council discounts within Destination Excellence are compatible with the above programs, as well as Group retrospective rating, Individual retrospective rating and Large/Small Deductible. Small Deductible also can be used with the Drug Free Safety Program.
What are the enrollment deadlines?
The private employer deadline is the last business day of February. For public employers, it’s the last business day in October. Employers wishing to participate in a Safety Council must enroll in a local program by July 31.
What’s the best way to calculate savings?
Contact your workers’ compensation third-party administrator to request a ‘feasibility study.’ It can help you evaluate how the programs could impact your costs. ●
Randy Jones is senior vice president of TPA Operations at CompManagement, Inc. Reach him at (800) 825-6755, ext. 65466, or firstname.lastname@example.org.
Insights Workers’ Compensation is brought to you by CompManagement, Inc.
A growing business may think a national or large regional bank would best serve their business needs, but in reality, it is easy to get lost in the shuffle. As big banks tend to cater to big business, community banks offer many advantages as a dedicated business partner.
A local bank is knowledgeable about the community in which a business operates and can make quicker decisions from a local perspective instead of relying on decision-makers in another city or state. Business owners many times are able to talk directly to the head of lending or the president about their business.
“When considering where to bank, look no further than around the corner. Community banks only thrive when their customers and communities do the same, so taking care of their customers and looking out for the best interest of their community is inherent in the way community banks conduct business,” says Gene Lovell, CEO and president of First State Bank.
Smart Business spoke with Lovell about why community banks might be the best place for your corporate and personal banking.
Why are community banks important?
A community bank understands firsthand that businesses are the backbone of a local economy. If a community bank is to succeed, local businesses must do the same. Local bankers take time to listen and understand a business owner’s vision because small businesses are the bank’s mainstay.
Large banks are not tethered to the places they operate. Too many times, the deposits that national banks collect from local residents and institutions leave the state to be invested in distant communities, countries, or on Wall Street, far removed from local account holders’ interests.
By banking with a community bank, money is put to work in the surrounding area in the form of loans to residents and business owners. In addition, by banking locally, consumers and businesses ultimately invest in their hometown by stimulating the economy and creating growth.
How else are community banks different from national banks?
The ownership of the bank — and board of directors — is generally made up of individuals who live and work in the communities they serve. They are business leaders who are deeply ingrained in the community and are more likely to serve on other local boards, attend community functions and know area business leaders.
Their local knowledge of the market area provides a significant advantage for the bank and its customers. Because they are so involved locally, they can spot needs and talk to clients before they even walk into the bank. At the same time, business owners have better access to management. Bank decision-makers make personal visits and really get to know their customers. Staff doesn’t rotate to other locations or departments; when you walk in, you see the same people with whom you have already established a relationship.
Community banks also tend to heavily participate in U.S. Small Business Administration loan programs.
How else do community banks help small businesses?
The largest 20 banks account for 57 percent of all bank assets, but only 18 percent of their commercial loans went to small businesses, according to the Federal Deposit Insurance Corporation. While small and midsize banks, which together account for 22 percent of all bank assets, lent 56 and 33 percent, respectively, to small businesses. In addition, smaller institutions continued to lend to small businesses at a steady rate during the recession, when big banks abandoned the market.
What makes a community bank a better place to do business?
The majority of community banks remain among the most financially sound in the country, because of conservative management practices. Where the federal government was quick to bail out ‘too big to fail’ banks during the economic crisis, most community banks were left to fend for themselves and came through the crisis as stronger banks. Most community banks were loyal and continued to lend to customers when many big banks did not. The community bank can be a safe haven from impersonal bank practices. ●
Insights Banking & Finance is brought to you by First State Bank
The Jumpstart Our Business Startups Act (JOBS), passed in early 2012, mandates that the Securities and Exchange Commission (SEC) adopt rules to help start-ups and small businesses raise capital. Because of this, companies can advertise, market and publicly disclose that they are fundraising. The change also allows companies to raise up to $1 million from a large number of “nonaccredited,” or non-high net worth investors.
Smart Business spoke with Mark L. Skaist, shareholder and co-chair, Corporate and Securities Practice, at Stradling Yocca Carlson & Rauth about what this could mean for businesses.
Why does it matter that companies can advertise that they’re fundraising?
Companies need to either register their securities offering with the SEC or find an exemption from registration. Registration is often prohibitively expensive for start-ups, so most emerging companies rely on an exemption from registration, the most common of which is Rule 506 under Regulation D. This permits sales of an unlimited dollar amount of securities to an unlimited number of accredited investors and up to 35 nonaccredited investors. However, in order to rely on this exemption, companies had been prohibited from offering or selling securities through any form of general solicitation or general advertisements.
By allowing companies to advertise their securities offerings to the general public, companies should have a bigger pool from which to solicit investments.
There are, however, two conditions companies must meet in order to use general solicitation and advertisement and sell securities under Rule 506. Namely, all purchasers in the offering must be accredited, which for natural persons generally means net worth in excess of $1 million, or annual income of at least $200,000. Also, the company must take ‘reasonable steps’ to verify that the purchasers are accredited.
How are companies supposed to verify that a purchaser is accredited?
The SEC has said that companies need to make an objective determination in the context of the given facts and circumstances. It has come out with a nonexclusive list of verification methods that can be considered ‘reasonable steps.’ The specific methods and types of information the SEC considers sufficient include written representations of investors combined with two years of federal tax returns; bank statements combined with credit reports; and written confirmation from a broker, attorney, investment adviser or accountant.
How are the proposed rules regarding crowdfunding supposed to work?
These proposed rules provide that companies may sell up to $1 million of securities during any 12-month period to accredited and unaccredited investors. They also limit annual crowdfunding investments by investors with annual income or net worth below $100,000 to the greater of $2,000 or 5 percent of the investor’s annual income or net worth. For investors with annual income or net worth in excess of $100,000, annual crowdfunding investments cannot exceed 10 percent of their annual income or net worth.
There are also proposed initial and annual filing requirements by the company doing crowdfunding financing, which may include financial statements, a business plan and tax returns. Companies can use intermediaries, such as brokers and funding portals, and may not advertise the offering other than to provide a notice directing potential investors to the intermediary.
Based on the proposed rules, which require that companies raising between $100,000 and $500,000 through crowdfunding provide reviewed financials, and companies raising more than $500,000 provide audited financials, it’s likely that the accounting fees alone are going to be a significant roadblock to many small companies relying on this exemption.
While it seems steps have been taken toward making it easier for start-ups and emerging companies to raise money, time will tell whether they have any real impact. In the meantime, businesses are popping up that are looking to get involved with these types of offerings, either by verifying that investors are accredited or by setting up funding portals for crowdfunding. ●
Insights Legal Affairs is brought to you by Stradling Yocca Carlson & Rauth
The vast amount of public funds and programs in federal, state and local governments can make it difficult to keep track of expenditures. Far too many people seize this opportunity to commit fraud, which in turn halts intended improvements or services.
For example, the Houston-based Dubuis Health System and Southern Crescent Hospital for Specialty Care Inc., in Riverdale, Ga., were accused of overcharging Medicare. The hospitals allegedly hospitalized patients longer than necessary to obtain larger reimbursements from the government. They agreed to repay the U.S. government $8 million to resolve various False Claims Act (FCA) allegations dating back to 2003.
“When fraud involving public funds occurs, the amount of goods or services those funds can purchase diminishes, and taxpayer dollars are wasted. Constituents see declining value. Public officials and stakeholders face questions regarding the use of tax dollars or other people’s money,” says Trish Fritsche, a senior manager in Forensics and Litigation Services at Weaver.
Smart Business spoke with Fritsche about how public sector officials and other stakeholders can respond to fraud schemes with the help of forensic accountants.
What are the most prevalent fraud methods used in the public sector?
Common ways to divert public funds from intended use are asset misappropriation, corruption and financial statement fraud. Although internal controls can be put in place to prevent fraud, in reality, fraud is potentially as unlimited as the human ingenuity to circumvent those controls.
How should organizations respond?
Once an incident of suspected fraud is identified via a hotline or other source, questions to ask include:
- Should the investigation be handled internally or externally?
- Who are the stakeholders?
- What are the resources needed?
- Should the entity self-report fraud?
At this time, attorneys and forensic accountants may need to become involved. Forensic accountants possess the skills necessary to appropriately respond in a crisis. They understand how to discover and develop information that can be used by governmental entities, boards and others with fiduciary responsibility. Forensic accountants also provide consulting services or expert testimony. They work closely with law enforcement and others to properly address the fraudulent conduct.
What laws can assist with addressing fraudulent conduct?
The Fraud Enforcement and Recovery Act of 2009 (FERA), enacted just after the American Recovery and Reinvestment Act, seeks to reduce fraud involving federal money and property. The act expanded various civil and criminal fraud statutes to include mortgage businesses, as well as entities associated with recovery act funding.
Liability under the FCA was originally limited to individuals or entities that directly or indirectly induced payment by the federal government. FERA, however, expanded that. Now, the FCA not only applies to direct recipients of government funds, but also to any contractor or other entity receiving funds. It explicitly prohibits the retention of government overpayments to individuals or entities.
The Racketeer Influenced and Corrupt Organizations Act (RICO) was enacted in 1970 to combat organized-crime activities. It has since been used to prosecute other offenses, including fraud cases involving government funds. Under RICO, anyone who has committed any two crimes from a list of 27 federal and eight state crimes —such as bribery, embezzlement and money laundering — within a 10-year period can be charged with racketeering. RICO allows a U.S. Attorney to temporarily seize a defendant’s assets and prevent the transfer of potentially forfeitable property. In addition, private parties are allowed to file civil lawsuits under certain circumstances.
Each fraudulent act involving public sector funds not only decreases the funds available, it also causes constituents to lose faith in officials. Effectively combatting fraud enables entities to do the greatest good for the greatest number, while establishing trust among all stakeholders. ●
Insights Accounting is brought to you by Weaver
Approximately 60 percent of the U.S. commercial population is self-funded today, and as health care premiums continue to rise under fully insured plans, self-funding looks to become even more attractive. However, many employers don’t realize how much self-funded health insurance has evolved with strategies and plans designed to help control costs.
“Self-funding does not look the same as it did just a few years ago,” says Mark Haegele, director of sales and account management at HealthLink.
Smart Business spoke with Haegele about how self-funding fits into health care today.
What’s driving the increase in self-funded health insurance?
Health insurance premiums are increasing at an unsustainable rate. Employees pay 89 percent more for family health care premiums, compared to a decade ago. In 2013, premiums only rose 4 percent, but that’s more than twice the rate of wages.
Self-funded premiums typically aren’t as costly. A recent Department of Labor report found that in 2011 fully insured premiums increased by $808, while self-funded premiums only increased by $248.
In response, 60 percent of companies self-insured their health benefit programs in 2011, up from 49 percent in 2000, according to a Kaiser/HRET survey. This increase can be partially attributed to more self-insured employers with fewer than 1,000 people in their health plan programs. In just two years, small and midsize employers that self-insure nearly doubled, according to PricewaterhouseCoopers data from 2010.
How has self-funded insurance changed?
Fifteen to 20 years ago, employers were afraid to trust self-funding, even though they knew it brought certain advantages, such as avoiding premium taxes, risk charges and state mandates. A self-funded environment gives employers more plan flexibility, depending on the disease prevalence or demographics of their population, as well as more access to data and lower fixed costs. But a piecemeal approach to health insurance that went against the insurance market culture was a foreign concept.
Today, there is less fear and higher adoption rates. At the same time, historical best practices still exist — avoiding taxes, risk charges and state mandates with lower fixed costs — as well as additional cost savings where self-funded plans avoid rules and regulations of the Patient Protection and Affordable Care Act.
What do self-funded plans look like today?
There is a market culture shift in the self-funded environment with more flexible plan designs. Member data is now transformed into actionable intelligence. Plans target specific high-dollar categories, such as high-dollar claimants, high-cost imaging, cancer and dialysis treatment, and pharmacy. With more transparency, employers can influence purchasing decisions by aligning incentives.
High-dollar categories like pharmacy are an area where vendor selection is key. Self-funded plans today have more administrator and vendor integration to better control these costs. A majority of employers spend around 16 percent of their total health care budget on pharmacy.
In addition, self-funded plans can be designed with custom networks, based on the cost of care. Through data analytics, plan sponsors can identify preferred facilities, procedures and/or services, and then use the plan design to cover a higher percentage of a preferred procedure or service.
Another strategy is using domestic centers of excellence. With this type of contract, providers offer preferred pricing due to exclusivity and volume. Employers can achieve savings on the unit cost. There’s also a performance component to eliminate waste — the provider gets a bonus for avoiding surgeries.
With pay-for-performance, a budget is set with expected costs, and the health care providers and employer agree on how to measure performance, looking at readmission rates, member pharmacy compliance, minimum levels of care, etc. Then, providers receive a percentage of the savings realized, as an incentive.
Self-funded plans are even utilizing alternative delivery models, such as telemedicine, on-site or near-site clinics and concierge health services.
Self-funded insurance may not be what you thought, so take the time to see if today’s plans would work for your business. ●
Insights Health Care is brought to you by HealthLink
In 2012, more than 40,000 businesses filed for federal bankruptcy protection. When this happens, the bankrupt entity or the bankruptcy trustee will sometimes seek to recover certain payments previously made to the bankrupt entity’s creditors so that those funds can be redistributed in accordance with the U.S. Bankruptcy Code. One type of payment that the bankrupt entity or the trustee may seek to recover is called a preference.
Smart Business spoke with Julie Johnston-Ahlen, of counsel at Novack and Macey LLP, about how to deal with being sued for preferential payments.
What is a preference?
A preference is a transfer or payment on an existing debt. It’s made by a soon-to-be bankrupt debtor to a creditor within the 90-day period preceding the bankruptcy filing.
Why can’t you keep the money that the bankrupt entity paid you?
The purpose of the law on preferential transfers is to try to make the bankruptcy process as fair as possible for all of the bankrupt entity’s creditors. When a business has insufficient cash flow, it will often pay certain creditors in full and not pay others, depending on which goods and services are most critical to the soon-to-be bankrupt entity’s business. In an effort to maximize the fair distribution of the bankrupt entity’s assets, creditors that receive preferential payments are often forced to return the money to the bankruptcy estate for redistribution, subject to the supervision of the court.
Do you have to return the money?
It depends. The bankrupt entity or trustee has the burden of proof. So, it must be demonstrated that there was a transfer or payment of property of the debtor, to or for the benefit of a creditor, on account of antecedent debt. This must occur within 90 days of bankruptcy and enable the creditor to receive more than it would in a Chapter 7 liquidation. In addition, the transfer or payment must have been made when the bankrupt entity was insolvent.
Even if these elements can be established, many creditors have viable defenses that may enable them to keep some or all of the money they received. These defenses are fact specific, and in practice, can be difficult to assert without the assistance of an attorney familiar with defending preference actions.
What should you do if you are sued for a preference?
In most cases, you have two options: you can pay back the full amount of the payment, or you can fight the claim. If you fight it, you have a good chance of keeping some portion of the payment, particularly if you can demonstrate that you have one or more viable defenses. Further, even if you don’t assert specific defenses, but you make a reasonable offer of partial repayment, the bankrupt entity or trustee may be willing to settle for that lesser amount. This is particularly true in larger bankruptcy cases where the bankrupt entity may be pursing repayment from many creditors. It’s often not feasible to fight with every creditor in an attempt to recover the full amount of each transfer.
Should you accept payments from a customer that might be having financial trouble?
Generally speaking, yes. There is nothing ‘wrong’ with accepting a payment that turns out to be a preference. You just might be forced to pay the money back later.
Creditors are almost always better off accepting payment from the future bankrupt entity, and then later dealing with any efforts it makes to recover the money. Again, it is often the case that the bankrupt entity or trustee will settle the claim for less than the full amount of the payment. The creditor keeps the rest, and it’s almost always the case that it ends up recovering more money than if it had not received the payment. ●
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