The only sure thing with health care reform is that things are changing. No one is sure how, exactly, those changes will play out as current reform legislation is reviewed in the Supreme Court, or what will happen following the presidential election.
That uncertainty makes planning for the significant and steadily escalating cost of health care a real challenge for businesses. As costs increase, how can employers continue to provide benefits that attract and retain quality workers while managing their expenses?
“One of the things that employers should be doing now is reviewing their health care costs to begin to identify ways to control their costs, regardless of what happens with health care reform,” says Ron Present, principal, health care advisory services, Brown Smith Wallace, St. Louis, Mo.
Smart Business spoke with Present about what employers should know about the current state of health care reform and how they can begin to prepare for the future.
What are employers’ greatest concerns surrounding health care reform?
The biggest fear is that their health care costs will increase significantly, and that is a valid fear. Then there is the question of how to manage expenses while continuing to offer quality benefits to employees. In today’s market, companies must begin to view health care as more than just an employee benefit — it’s a recruiting and retention tool that provides companies with a competitive advantage.
Employers must look at benefits from a strategic perspective and consider how they can position their health insurance offering as an incentive. At the same time, they must manage the bottom line, and that won’t be easy. In addition, there is widespread confusion about health care benefits in light of the uncertainty in health care reform. In the end, it is the responsibility of — and perhaps opportunity for — employers to clearly communicate to their employees about the company’s benefits.
How could the individual mandate affect employers?
The individual mandate is a law requiring that all individuals purchase health care insurance or pay a penalty that will phase in during 2014. The individual mandate, as part of the health care reform legislation, is currently being reviewed by the Supreme Court, and it’s a sticky issue.
Is it constitutional to mandate that all citizens have health insurance? Is it fair to charge a penalty to employers for not offering health care benefits? And because the mandate has been written into the tax code — and the Supreme Court cannot rule on tax code issues unless there has been harm done — will the court be able to rule on the individual mandate before it is set to go into effect in 2014? A key related question is how the upcoming presidential election will impact the legislation.
The health care reform plan could be tossed aside completely, altered or kept fully intact.
What decisions will employers be forced to make regarding health care legislation?
Concerning the individual mandate, employers must determine whether it’s more financially prudent and culturally sensible to offer benefits to employees or to pay the penalty for not doing so. A discussion with an experienced tax professional who is well-versed in health care reform legislation can help employers consider the financial impact of this decision and determine the right course of action.
Meanwhile, companies will need to heighten their monitoring of hourly employees because those who work 130 or more hours per month will be automatically eligible for company health care benefits if the current legislation stands. If employers do not abide by this and exclude those employees, they will pay a steep penalty. This becomes particularly complicated with part-time and shift workers and in situations in which workers are picking up additional shifts, which may push them over 130 hours in a given month. Employers will need to carefully monitor employees time on a real-time basis and manage employees in terms of their monthly/hourly workloads. Currently most systems track data on a pay period basis (weekly, bi-weekly, semi-monthly). Companies will need to ensure they have systems in place to be able to track hours on a monthly basis.
What should business owners be emphasizing in their communications with employees?
According to an ADP HR/Benefits Pulse Survey on Employee Benefit Tools, 40 percent of employees do not understand their current benefits plan. It is critical to drive home to employees the value of the health care benefits that you offer. Communicate often, and reach out to employees in face-to-face meetings, through e-newsletters, mailers that go home to spouses and dependents, and via the company intranet.
Emphasize the importance of wellness and enforce employee accountability, communicating that the healthier they are, the less they could pay for their monthly health insurance premium. Be proactive by implementing wellness programs including incentives for better nutrition or exercise.
What should employers be doing right now in light of the current uncertainty?
Now is the time to get discerning input on the strategic and cost differentials of offering health insurance versus paying a penalty for not doing so. You should explore ways to reduce cost, without sacrificing benefit and identify systems to put in place that will improve real-time reporting.
The keys to success will be having sound knowledge of the current situation and a strong framework in place before you need to make the upcoming changes and decisions you face as health care reform is implemented. With these two essential procedures under your belt, you will be in a position to make wise strategic decisions for the ongoing health of your business.
Ron Present, CALA, CNHA, LNHA, is principal, health care advisory services, at Brown Smith Wallace, St. Louis, Mo. Reach him at (314) 983-1358 or email@example.com.
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Risk management is the process of identifying and assessing risk, then prioritizing resources to minimize the impact of losses. But what is the true cost of risk management?
Jonathan Theders, president of Clark-Theders Insurance Agency, previously addressed the assessment process with the 1-5 rating scale for risk severity and frequency in the April 2012 issue of Smart Business.
“Focusing on a risk management approach can earn better pricing, reduce out-of-pocket costs and provide a more stable environment for your employees and customers,” Theders says. “But most important is that it helps you prepare for things that might happen before they happen.”
Smart Business spoke with Theders about how to minimize losses and monitor your exposures.
What are the components of risk management, and how can a business determine which components to use?
There are four components to risk management: risk avoidance, risk mitigation, risk retention and risk transfer.
Risk avoidance is when something is too risky, so you decide not to do it. You don’t have the right capabilities to handle it, so you avoid that practice entirely. For instance, if you are concerned about hurricanes, locate your business in an area in which hurricanes do not occur — at least not typically. There is no reason to insure against that risk because you’ve avoided it.
Next is risk mitigation, or prevention. Once you know what could potentially happen, determine if there are tools, steps, procedures or policies you can use for prevention, or at least reduce its damages.
Then there is risk retention. Every day you assume some risk that is uninsured but decide you’re OK with bearing it yourself. Sometimes when you implement a mitigation or prevention program, you realize those programs have limited the occurrence of that particular risk to such a minute amount that even if it did happen, you feel comfortable retaining it.
Finally, there is risk transfer, which is sending the risk to somebody else. Insurance is a common tool of risk transfer. If your $5 million building burned down, you do not necessarily want to put that on your company’s balance sheet. So you contract with an insurance company to transfer the $5 million of risk to it and you pay a premium for it to assume that. You paid the premium, it bears the risk.
How can mitigating risk benefit a business?
Different insurance companies look at the transfer of risk differently, and the price can fluctuate. That’s why it’s so important to communicate to the insurance company what you’ve done to minimize risk. If you have implemented a fire suppression system, disaster recovery plan or something else to mitigate risk, explaining those mitigation techniques will give the insurance company underwriter greater comfort.
Many companies and their agents poorly communicate to their insurance company what they do to prevent risk. They offer information about the construction type, geographic location and the value of the building and it may stop there. Those factors result in the computer tabulating a cost. What the computer doesn’t know are the risk management techniques that you have in place. It does not know that you have a policy that prevents employees from smoking on premises, or that all combustibles are stored in UL-approved storage containers.
If you are doing things to prevent a major catastrophe, the underwriter can provide a lower price.
What else can be done to transfer risk?
You can also transfer risk through releases or waivers. We’ve all done something that is risky, whether it’s parachuting, bungee jumping or riding a horse, where you sign a form that releases the company from liability. You are saying, ‘I know I am going to ride a horse. It is risky, and I am assuming all liability if I get hurt.’
What is the true cost of risk, and how is it affected by the components of risk management?
Your true cost of risk is not only the premium you pay but all of the out-of-pocket costs. It’s the downtime of your business if something were to happen, the loss of an employee or the fact that you’re out of business for two months. Maybe you bought insurance to replace your income while your business is out of commission, but your key employees have gone to a competitor because they have to work.
If your $500,000 building burns down, you don’t just lose $500,000. You lose significantly more. In fact, the building may only be 15 to 20 percent of the total loss.
If your business goes down, can your product or service be easily replaced? Your cost of risk is higher if you are easily replaced. However, if you are the only source of a particular product or your competitors are at full capacity and can’t take more work, your cost of risk is lower.
Take, for example, a business that makes its own glass. But glass is only a small component of its overall product. It takes raw materials and heats them, but competitors can make the glass cheaper and more efficiently than it does.
With that operation comes extreme heat and propensity for damage to the building. At the time, it made the glass because it couldn’t get anyone to make the quality it wanted for its product.
Now, the product is readily available, so it decided to transfer the risk by buying that product from someone else. It decided the risk and the reward of having its own glass-making line no longer made sense.
From an insurance standpoint, the benefit is that one of its riskiest propensities for fire is being eliminated. At that point, the policy is re-evaluated and because the overall fire risk is lower, there would be additional savings or credits.
Jonathan Theders is president of Clark-Theders Insurance Agency Inc. Reach him at (513) 779-2800 or firstname.lastname@example.org
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