The employee benefit procurement process, sometimes called marketing, has changed little over the past 25 years. This continues to frustrate many organizations looking for transparency, and potential cost savings, when procuring life, disability stop loss, dental, vision or pharmacy benefit management coverage.
Formal Requests for Proposals (RFP) may travel by email, but the underlying process is the same; insurance carriers simply send an image of the paper proposal that they would have dropped off years prior. The interpretation, presentation and, most importantly, negotiations haven’t changed, says Matthew R. Huttlin, vice president in the Employee Benefits Division at ECBM.
Almost a decade ago, a major insurance scandal in New York uncovered bid-rigging and anti-competitive activity within the opaque procurement process.
“The industry agreed to reform and become more transparent, which they did to some extent, but procurement activity remains a bit of a ‘black box’ process that continues today,” Huttlin says.
Smart Business spoke with Huttlin about the future of employee benefits procurement — a reverse auction.
What problems still exist today?
The process is clearly still antiquated and fraught with opportunities for mistakes. Business owners often negotiate without solid documentation. Broker/consultants, as well as their clients, continue to see proposal mistakes, missed deadlines, inaccurate proposals and presentation revisions.
Also, insurance carriers market to their strengths, as opposed to conforming to client requirements, which may lead to misinformation, more work, mistakes and increased costs.
How can business owners better obtain employee benefit coverage lines?
An online version of a reverse auction, or Dutch auction, cuts to the heart of the problem by introducing technology to the process while maintaining the business owner’s control of the outcome. This type of auction works opposite of a normal auction — instead of bidding up the price of an item, the auction bids the price down.
What are the benefits of this method?
This process is:
- Prescriptive — RFPs are standardized, specifying the client requirements. Carriers respond using pre-determined plan specifications.
- Efficient — Carriers get complete, consistent data on which to act with agreed upon timelines.
- Transparent — Clients receive documentation on every step from the initial offers to the final pricing.
- Effective — The online system delivers the RFP to more markets, garnering more accurate quotes that are immediately posted for analysis.
How exactly does this reverse auction work?
There are four phases to the procurement. In the RFP development/submission phase, the RFP is placed on a secure website under a standardized format and peer reviewed to ensure accuracy. Once released, carriers are notified to go to the website to obtain all of the relevant information to prepare their proposal.
During the technical evaluation/initialpricing phase, carriers post proposals into the system for evaluation. The broker/consultant reviews the vendor confirmations and deviations to the requested scope of services, confirming plan design features, alternatives and administrative capabilities. The carrier also posts its initial pricing.
Then, all carriers receive feedback as to their ranking by their initial pricing in the financial evaluation/secondary-pricing phase. Actual rates aren’t shared. Over the course of a set period, usually two days, carriers can revise their pricing offers. Every time a new offer is submitted, all carriers are notified of the new ranking order.
Once the financial evaluation is complete, clients review the detailed results in the evaluation/selection phase. This review can include finalist presentations, site visits, etc. The client maintains full control over the selection process. Business owners aren’t required to select the lowest bid, but rather the carrier that best fits their requirements.
This high-tech approach is an efficient and effective way to handle procurement that provides accurate, transparent and documented results while driving prices down in a timely fashion. ●
Insights Risk Management is brought to you by ECBM
To provide or not to provide? That is the most pressing health insurance question facing companies across the country this year. As implementation of the Affordable Care Act moves forward, many businesses are making strategic decisions regarding health care benefits. Those that have sponsored health insurance for years are now considering dropping coverage and reallocating resources.
But what are the true costs of dropping coverage? While the questions may be simple, the analysis can get fairly complex and extend beyond easily identifiable costs.
Smart Business spoke with Sholly Nicholson, human resources manager at Sensiba San Filippo LLP, to examine some of the most important health care questions businesses face this year.
How should businesses approach their health care coverage decisions?
It is critical for any company to evaluate health care coverage based on the anticipated impact it will have on the entire organization. That means considering both easily recognizable and potentially hidden costs associated with sponsoring or dropping coverage. Will dropping coverage negatively affect your ability to attract and retain talent? Will it result in a loss of valuable personnel, and if so, to what degree?
What are the benefits to providing health care coverage?
Depending on the nature of your business, employer-sponsored health care plans might already be expected. It’s possible to drop coverage and increase employee pay to allow them to choose their own plans on the health care exchange networks. However, continuing coverage can be a critical part of strategic planning.
Employer-sponsored plans provide control over the plan’s design and benefits available to employees. If you operate in an industry with heated competition for a limited talent pool, selecting and managing your plan could provide a competitive advantage. With current uncertainty regarding exchange health plans, employees may feel more comfortable knowing that your organization is selecting a plan that allows them access to the doctors and hospitals they want.
What can companies do to control rates?
If you decide to offer health care benefits, managing costs will be critical moving forward. Get as many quotes as possible. Insurance providers are always offering new plan designs and premium pricing.
Incentives can be offered to employees who participate in annual health risk assessments, biometric screenings or other wellness initiatives. Promoting health and well-being through education, exercise facilities and nutrition initiatives can have a long-term effect on the number of claims incurred, which will have a significant effect on your group rates.
What should a company consider when designing its plan?
Not all plans are created equal, and the organizational benefits of a well-designed and well-managed plan can be substantial. It’s important to look closely at the provider network.
Will your employees be covered by the primary care physicians they want? Will they have access to the best hospital facilities? Smart companies review residential locations and current providers of their employees before making any changes.
The structure of the plan can also be important. To balance costs and benefits, many companies are moving toward high deductible plans combined with health savings accounts (HSAs). The high deductible plans keep premiums under control, while HSAs allow employees to set aside money pretax to offset deductibles.
What’s the best advice you can provide regarding health care coverage decisions?
The health care decisions you make today will have a profound effect on the future of your organization. A happy and healthy workplace will be productive and profitable.
The right answer is unique to every company, but the best approach to finding that answer is consistent: Expand the scope of your analysis and conduct a broad investigation in order to discover how your health care decisions will affect your company moving forward. If you consider all of the ramifications of your decisions and align your strategy with your desired outcome, you will find the best solution for your employees and organization. ●
Insights Accounting is brought to you by Sensiba San Filippo LLP
The performance of the average mutual fund, exchange-traded fund (ETF) and hedge fund investor lags the performance of their funds.
“The average fund investor loses money by engaging in active investment timing,” says Marco Pagani, Ph.D., Associate Professor of Finance and Interim MBA Director of the Lucas College and Graduate School of Business at San José State University.
Smart Business spoke with Pagani to learn more about the ability of fund investors to time the market.
How is the timing ability of fund investors measured?
Fund performance is computed using time-weighted returns — the geometric mean — which measure the return of a buy-and-hold strategy. This is a strategy that holds a fixed quantity of fund shares without any contribution, known as shares purchase, or withdrawal, called shares sale, during the investment horizon. Such measure is ideal to compare the performance of similar funds over a common time period. The return realized by an investor depends on the performance of the investment selected and the ability to purchase or redeem shares at the most advantageous time during an investment period.
An investor’s performance is measured by dollar-weighted returns, referred to as an internal rate of return, which account for both the investment performance and the investor’s timing ability. By calculating the difference between the time-weighted return and the dollar-weighted return, one can isolate the portion of the overall return solely due to the ability to time investments.
To what extent are returns reduced by poor investment timing skills?
Financial research has shown that the penalty associated with poor timing decisions is significant and present among many categories of investors. Professors Geoffrey Friesen and Travis Sapp in their 2007 article published in the Journal of Banking and Finance show that the average equity mutual fund investment underperforms by 1.6 percent on an annual basis. Similarly, studies performed by Morningstar estimate the timing penalty at around 1.5 percent per year.
Consistent evidence has been found by studying the ETF universe. In a 2013 working paper I co-authored with Dr. Stoyu Ivanov, we estimate that ETF investors lag the performance of their investment by 2.4 percent per year.
In a 2011 article in the Journal of Financial Economics, Professors Ilia Dichev and Gwen Yu found that the average hedge fund investor displays a timing penalty in the order of 3.5 percent per year. The significant penalty associated with the timing decisions of hedge fund investors imply that, even though hedge funds have produced returns higher than the equity market, the returns of hedge fund investors have lagged the performance of the S&P 500 and have only fared marginally better than short-term Treasury securities.
What are the investor or fund characteristics associated with poor timing ability?
It does not appear that the performance of more sophisticated investors displays lower timing penalties. Hedge fund investors, comprising sophisticated individual investors or institutional investors, somehow display the worse timing ability.
With both mutual and hedge funds it seems that negative timing skills are especially concentrated in large funds where more dollars are at stake. Active fund investors show worse timing performance than index mutual funds. In a 2013 working paper I co-authored with Dr. Marco Navone, we found that load mutual funds are associated with larger timing penalties than no-load funds. This is particularly interesting since load funds are often bought or sold through investment professional and brokerage channels.
What should fund investors know?
Investors should not attempt to time the market because it is hazardous to their financial health. To avoid engaging in pernicious investment behavior, investors should follow a predetermined schedule of share purchases or sales motivated by cash flow availability and target portfolio allocation. Trades motivated by market forecasts or emotional reactions should be avoided at all costs. ●
Marco Pagani, Ph.D., is an Associate Professor of Finance and Interim MBA Director of the Lucas College and Graduate School of Business at San José State University. Reach him at (408) 924-3477 or email@example.com.
Insights Executive Education is brought to you by San José State University
Q: The U.S. economic expansion appears to be continuing at a moderate pace into 2014. Are you surprised?
A: Not at all. We switched from negative to positive on the economy back in the Spring of 2009 and have not wavered since then. The key to our confidence has been the message from our proprietary Recession Signals Checklist (the RSC).
Q: That doesn’t sound like the name of a “quantitative econometric model”!
A: That’s correct – however, each factor on the RSC does have a quantifiable level that causes it to toggle on/off. We tested dozens of economic data series and chose 10 that represent major economic sectors and interest rates. Our “back-test” period for the RSC covered 1980-2006, which included recessions in 1980, 1982, 1991 and 2001. In each of those instances, 9 or 10 of the RSC data series reached the quantified levels that signaled a high risk of recession. Equally importantly, we did not want “false positives” every time the economy slowed significantly, so we focused on the 1985 and 1995 mid-cycle slowdowns when many economists feared a recession was imminent. No more than 3 signals toggled on in those instances.
Q: How has it worked in real time since then?
A: To paraphrase the golf adage, “Back-tests are for show, but real-time is for dough!” Thus far, the RSC has been very helpful to us as it strongly signaled recession as the Great Recession developed in 2008. Per the title of this interview, many economists were surprised when the economy avoided falling into a double-dip recession in 2010, 2011 and again in 2012. The RSC held at 2 or 3 signals most of that stretch, but hit a rather nerve-wracking 4 of 10 in 2011. Overall, these low RSC readings gave us confidence in the economic expansion. While it’s nice to make accurate forecasts, the payoff was the support the forecast gave to our bullish investment strategies.
Q: What is the RSC telling you now?
A: Currently, NO signals are toggled on which supports our sanguine economic outlook for 2014.
Q: Are there additional factors that encourage optimism on the economy?
A: Absolutely. We see several factors that could lead to better growth, including: 1) reduced drag from Government spending cuts (state & local spending is already growing and the year/year impact of Federal sequester spending cuts has dropped), 2) an improving global economy helps export demand (Europe and Japan are coming out of recessions and emerging economies continue to outgrow developed), 3) low U.S. energy costs (fracking means North American natural gas costs are fractions of global levels), 4) consumers and businesses alike will benefit from improved balance sheets and renewed credit growth, 5) steady jobs growth (finally, a new high in jobs in 2014) will help consumer confidence and incomes, and 6) the U.S. “manufacturing renaissance” .
Q: That last factor sounds meaningful for our region –can you elaborate on it?
A: The era of “offshoring” of production seems to be reversing into re-shoring as the U.S. holds its position as the #1 or #2 country in the world in terms of manufacturing output. Shifting dynamics of global labor markets are playing a role in this, as is the advantage of lower domestic energy costs, but technology is a huge factor. Digitization and robotics have played a significant role in the massive productivity edge U.S. manufacturers hold over emerging market competitors. That advantage is a two-edged sword in terms of jobs in our region, as the automation-related jobs pay better. However, they require more education and technical training and are less numerous than the repetitive tasks of days gone by.
So to conclude, we have not been surprised by the growth of the U.S. economy and we remain optimistic that the pace of GDP growth is finally escaping the “terrible twos” and headed toward the more “pleasant threes!”
Disclosure: This message does not constitute individual investment, legal or tax advice. All opinions are reflective of judgments made on the original date of publication and do not constitute a guarantee of present or future financial market conditions.
In recent years there has been an increase in the number of claims filed against employers arising out of employment practice disputes. Many claims have no legal basis, but employers are still forced to defend themselves — spending time and money.
“Businesses are more likely to have an employment practices claim than a property claim,” says Shelley White, assistant vice president at SeibertKeck. “There are over 100,000 charges filed annually against employers under statutes imposed by the Equal Employment Opportunity Commission (EEOC). The majority of these claims target smaller businesses. However, no business is exempt.”
Smart Business spoke with White about understanding employment practices liability coverage.
What’s important to know about employment practice claims?
Employment law has grown at an incredible pace since passage of the Civil Rights Act of 1991 and the Age Discrimination in Employment Act, among others. Ambiguities in these laws allow the widest possible interpretation, which in turn opens the door for litigation.
The most frequent types of claims made against an employer are discrimination, sexual harassment, wrongful termination and retaliation. There’s also been an uptick in wage and hour lawsuits. Claims can come from potential hires, former and current employees, clients, suppliers or vendors.
Discrimination can be defined as the termination of an employee, demotion, refusal to hire or promote due to race, color, religion, age, sex, physical or mental disabilities or handicaps, pregnancy or national origin. Think about the times you or someone in the office told an off-color or racy joke to a new employee or client. It’s only a matter of time until this comes back as a claim.
The average claim costs an employer $50,000, and defense costs represent about two-thirds of the total settlement. Without a mechanism to transfer risk, these costs could cripple smaller businesses, or at least damage their reputation. For larger businesses, one uninsured claim can lead to potential shareholder lawsuits.
How does employment practices liability coverage mitigate this risk?
Businesses can purchase a policy that provides coverage for a wide spectrum of employment-related claims and offers risk management services to help minimize the risk of getting sued. This policy protects the corporation, directors and officers, employees (including leased and temporary), volunteers, and in some cases can be endorsed to include independent contractors (when working for the employer).
The definition of a claim includes arbitration, regulatory and administrative proceedings, and EEOC and Department of Labor investigations.
Limits can range from $500,000 up to $10 million or higher. As your business assets grow, so should your limits. Settlement costs and legal fees are typically included in the policy limits. However, some carriers will provide separate limits for these costs.
It’s important, however, to be aware of the varying contracts and differences in coverage and exclusions from one policy to another. There is no standard form. Sitting down with your trusted insurance adviser will help with this process.
Beyond buying insurance, what preventive measures lower claim risk?
Minimize the possibility of costly claims by:
- Creating an employee handbook detailing company policies and procedures.
- Educating employees on sexual harassment and discrimination, and offering sensitivity training.
- Establishing a procedure for handling employee complaints.
- Developing job descriptions with clear expectations of skills and performance.
- Conducting periodic performance reviews.
- Creating an effective record-keeping system to document employee issues, and what was done to resolve them.
- Instituting at-will employment.
- Implementing procedures for hiring, firing and disciplining employees.
Many carriers offer free risk management services. Online resources provide best practices training modules for addressing sexual harassment, discrimination, investigations and termination, while providing links to HR websites. ●
Shelley White is assistant vice president at SeibertKeck. Reach her at (330) 865-6582 or firstname.lastname@example.org.
Insights Business Insurance is brought to you by SeibertKeck
In continuation of the “Billion Back” campaign from the summer of 2013, the Ohio Bureau of Workers’ Compensation (BWC) has announced additional changes to come this year and in 2015.
“As we begin 2014, it is important for employers to be aware of impending changes and understand how they can further impact the protection of their workers as well as their bottom line,” says Randy Jones, senior vice president of Ohio TPA Operations at CompManagement, Inc.
Smart Business spoke with Jones about the upcoming changes and their potential benefits to the employers of Ohio.
What is ‘A Billion Back?’
‘A Billion Back’ is a one-time dividend equating to $1 billion for private employers and public taxing districts. It was made possible because the financially strong Ohio State Insurance Fund exceeded the target funding ratio of assets to liabilities established by the BWC Board in 2008.
Checks were released to eligible organizations in June 2013. For private employers that participated in a group retrospective rating program for the July 1, 2011, policy year, dividends were calculated and paid following the 12-month retrospective refund calculation that occurred in October 2013.
What other program benefits may employers utilize this year?
The BWC has also expanded its safety grant program from $5 million to $15 million to further promote workplace safety, workplace wellness and encourage investment in protecting Ohio’s workers. It has modified the program to be a 3-to-1 match with a maximum grant of $40,000 per employer. The BWC has also expanded the program to allow for various types of previously excluded equipment.
Now is the time to minimize your out-of-pocket expense for new equipment that may be eligible under the safety grant program. For example, your out-of-pocket cost of $13,333 would be matched with the BWC’s $40,000, which equates to a 300 percent return on your investment in safety.
According to BWC statistics, every dollar spent on safety equipment equates to a $3 reduction in claims costs.
What can employers expect in 2015?
The BWC will be transitioning to a billing system that will align it with a standard industry practice, enabling them to collect premiums before extending coverage. The transition will become effective July 1, 2015, for private employers and Jan. 1, 2016, for public employers. The BWC has indicated that a change to a prospective billing system could have an overall base rate reduction of 2 percent for private employers and 4 percent for public employers, and provide an opportunity for more flexible payment options of up to 12 installments.
The BWC envisions a few changes as it implements prospective billing, including:
- Earlier deadlines to sign up for incentive/discount programs. Beginning in the fall of 2014, employers wishing to participate in programs such as group rating, group retrospective rating or other discount programs will have to make those selections sooner.
- One-time credit. A one-time premium credit will be given in July 2015 to the average private employer to cover its August payroll report, which includes the January to June 2015 premium as well as the July and August prospective premium. Public employers will receive a 50 percent credit for 2015 and a 50 percent credit for 2016 within the March 2016 invoice.
- A new payment schedule. Private employers will receive their invoices in June and begin paying premiums before July 1. While that’s earlier than in the past, employers will be able to make quarterly payments, with some employers able to choose as many as 12 installments. Public employers will need to pay at least 50 percent of their annual premium for both 2015 and 2016 by May 2016.
- A true-up process. Since the BWC will be providing workers’ compensation coverage based on estimated payroll, it will ask employers to report their actual payroll for the prior policy year and pay any shortage, or receive a refund for any overage in premium. This begins in August 2016.
- Employers should contact their third-party administrator for workers’ compensation to discuss the transition process. ●
Randy Jones is senior vice president of Ohio TPA Operations at CompManagement, Inc. Reach him at (800) 825-6755, ext. 65466 or email@example.com.
Insights Workers’ Compensation is brought to you by CompManagement, Inc.
Many business operators know that the federal privacy rules under the Health Insurance Portability Act (HIPAA) apply to health information maintained by “covered entities,” such as health care providers and health plans. Fewer know that new regulations, effective September 2013, expand the scope of direct responsibility for compliance.
Now, HIPAA rules directly apply to “business associates” of covered entities. Business associates, like covered entities, are subject to penalties of $100 to more than $50,000 per HIPAA violation, says Jules S. Henshell, of counsel at Semanoff Ormsby Greenberg & Torchia, LLC. If the violation resulted from willful neglect, the Department of Human Services’ Office of Civil Rights (OCR) must impose a penalty of at least $10,000 per violation, which increases to at least $50,000 if the violation isn’t corrected within 30 days.
“As recently as December 2013, a dermatology physician practice was required to pay a $150,000 fine arising from the a report of the theft of an unencrypted ‘thumb drive’ from a vehicle,” Henshell says. “That settlement with OCR is a clear signal that covered entities and their business associates are potential targets of HIPAA enforcement actions regardless of their size.”
Smart Business spoke with Henshell about managing HIPAA risk in your company.
Who qualifies as a business associate?
A business associate is any entity that creates, receives, maintains or transmits protected health information (PHI) in the course of performing services on behalf of a covered entity. Any business that handles PHI, such as billing and coding companies, information technology contractors, document storage or destruction companies, accountants and lawyers, may be subject to the new regulations. If a business associate uses a subcontractor to perform services that involve handling PHI, the subcontractor must also comply.
Where do companies routinely fail to take adequate action?
Health care providers and their business associates increasingly rely upon technology to record, store and manage data. That data may include PHI.
It is not uncommon for personnel to work remotely or take work home. Employees routinely use personal smartphones or home computers to access business email and documents. Such conduct can promote efficiencies, but it also gives rise to the risk of privacy or security breaches in the absence of adequate technical and physical safeguards.
What preventive actions do you recommend?
Benjamin Franklin got it right when he said, ‘An ounce of prevention is worth a pound of cure.’ It is not enough to adopt policies and procedures for protecting patient privacy. As in the case of the stolen thumb drive, security breaches may be avoidable if a company establishes, monitors and enforces appropriate safeguards.
Businesses that handle PHI should review and update policies governing patient privacy and evaluate whether they have adequate administrative, technical and physical safeguards to protect the integrity, confidentiality and availability of electronic PHI. They should establish computer access controls, use firewalls, virus protections and encryption; back up data; and implement security policies and procedures to meet HIPAA’s expanded scope.
They also need written agreements with business associates and/or subcontractors to protect and secure patient information.
Do you have any other advice?
The new regulations impose significant requirements on business associates to:
- Perform and document a risk assessment of computer systems and portable devices.
- Implement administrative, technical and physical safeguards to protect the integrity, confidentiality and availability of PHI.
- Enter into and perform in accord with a written business associate agreement with covered entities to protect privacy and security of PHI.
- Report privacy breaches and security incidents to the covered entity. Health care providers routinely require contractors to sign business associate agreements containing indemnification provisions that increase responsibilities and risks. Before signing, determine whether your business really is a business associate. ●
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC
What are the essential terms that you would require as part of any settlement? Communicate your goals and ask your counsel whether he or she believes your expectations are realistic. Insist that your counsel formulate a strategy to achieve your goals and estimate the time frame, legal fees and costs to execute the strategy to secure those goals. You may be surprised by the plan and the estimates, and this, in turn, may change your perspective about acceptable outcomes.
Have your counsel try to negotiate with the other side to reduce these costs by agreeing to limit the searches for relevant documents by date ranges and particular employees, and by limiting the number of depositions each side will take. In addition, when you produce your own documents to your attorney, it is helpful, and saves money, if you identify the source of the documents — i.e., Employee John Doe’s files — and provide a general index of the documents, for example, ‘correspondence with vendors,’ ‘financial projections,’ ‘Employee Jane Doe’s personnel file,’ etc.
Are attorney’s fees tax deductible?
Smart Business spoke with James Martin, managing director at Cendrowski Corporate Advisors LLC, about the finer points of a CRP.
Setting up a CRP is an extension of the risk management process. It involves deep planning around what tools will be needed for specific threat types and proactively ensuring they will be available. When a risk actually occurs there will be no time for planning and coordination, so it needs to be done upfront. Consider who should be involved, both from a company perspective and any outside experts who would be required. Identify the information that’s essential to evaluate the extent of the threat and analyze an appropriate course of information. Also, consider procedures to ensure that data and information are adequately preserved and available for the CRP.
The highest ratio was at the J.C. Penney Co., where the CEO’s annual compensation was $53 million. His workers’ pay, on average, was $29,700 — a ratio of 1,795-to-1. He was fired shortly thereafter because he had spent too much money on marketing and made too many changes. The company was improving and doing well; his compensation wasn’t what cost him his job.
What workers care about is internal equity; how their pay compares to other workers. If the person who’s sitting in the next office, doing the same thing, is making 20 percent more, that’s upsetting. But as far as the CEO, who is levels above rank-and-file workers, as long as he or she is making the company work, employees don’t really care. Employees have a stake, if not a say, in executive compensation, but they really have a stake in executive performance.
Is CEO compensation out of control? Certainly, if the issue is that there’s no overarching system to govern executive pay. But in the long run, the law of supply