Chelan David

Monday, 31 July 2006 09:19

World Wide Web risks

Every company conducts business over the Internet. And whether it’s selling products, sending information via e-mail or simply hosting a Web site, there are risks involved.

Hackers can break into a company’s network and obtain confidential documents or post false information. Spammers can shut down an organizations’ Web site, while viruses can destroy critical data as well as be passed on to other entities.

To combat such activities, many businesses are turning to Internet liability insurance and are re-evaluating their previous policies. “We’re seeing broader exclusions that encompass the Internet because of potential claims that weren’t contemplated in the original coverage forms,” says Julia Murakami, vice president of Sander A. Kessler & Associates Inc.

Smart Business spoke with Murakami about how Internet liability insurance can help protect a company, what aspects should be considered when putting together such a policy and how Internet risks can be minimized.

What types of cyber risks do companies face?
Companies face a lot more cyber risks than you might think. Technology has changed so quickly over the 20 years. Our communication used to be primarily by mail or memos, and now it’s primarily by e-mail. Just the fact that we’ve changed from paper to an electronic form of communication has increased our cyber risks.

Advertising for businesses has changed. Before it was common to hand out brochures or flyers about the business, but now the common question is, ‘Do you have a Web site?’ That has completely changed how we do business. If you’re an e-commerce entity, you think about the cyber risks, but Main Street businesses have exposures that they don’t even think about.

Do traditional insurance products like fidelity bonds or property policies protect a business in the case of Internet attacks?
Some do and some don’t. In the late ‘90s, Y2K exclusions were included on policies because of the fear of what would happen with computers and how bugs could damage not just your computers, but also potentially send out something that would damage other computers. That ended up not just on the property side for your own computers, but also the liability side because of potential damage to others. This has remained on the policies, but now it’s a lot broader than just the Y2K exposure.

How can Internet liability insurance help protect a company?
It fills the gaps in your insurance policy. As a business owner, you think about your own computer equipment, but you might not think about how the virtue of having that equipment could damage someone else’s equipment: Web sites, e-mail viruses, etc. Those are all excluded under regular polices, but the Internet liability polices would fill that gap.

Should a business that does not conduct electronic transactions, but does host an informational Web site, consider purchasing Internet liability insurance?
Absolutely. That’s the hidden exposure that businesses face. The Internet is considered to be like the Wild West. It’s a new technology, and everyone else is doing it, so in order to maintain your competitive edge you need to post a Web site too. It’s the same thing with e-mail. The first thing you ask when you meet a new business associate is, ‘Can I get your e-mail address so I can e-mail you some information about our company?’

What are some issues for a business to consider when putting together an Internet liability insurance policy?
First, you should look at your existing general liability policy to see if it does or doesn’t cover your Internet exposures. One of the things that we are starting to see with greater frequency is the emergence of Internet extension endorsements. This moves the liability from your brick-and-mortar exposure into the cyber world by extending or changing the definitions of your liability policy. Such an extension makes it clear that damage doesn’t have to happen in a specific location or on your premises. Ultimately, anything that derives from a Web site injury or an injury caused by your Web site would be covered.

How can a business minimize its Internet risks?
You have to look at not just the insurance side, but also the risk management side by controlling what you do on the Internet and having an e-mail use policy.

Minimizing exposure on your Web site is very important. Because it’s a new technology and a new environment, people are freely linking to sites they think would be useful for their clients, but it could also expose you to some liabilities. Perhaps you are infringing upon the other Web site owner’s business rights and they might not welcome the association. It’s always safest to get permission before you link.

JULIA MURAKAMI is vice president of Sander A. Kessler & Associates Inc. Reach her at (310) 309-2231 or Julia@sanderkessler.com.

Monday, 31 July 2006 08:46

A pain in the back

Back troubles can cause pain to individuals and businesses alike. In fact, approximately four out of five adults have had at least one bout of back pain sometime during their lives, and it is one of the most common reasons for health care visits and missed workdays.

Consisting of bone, muscles, nerves and other soft tissues, the back is an intricate structure with many components that can break down. “The back is an extremely complex organ,” says Dr. Michael Ferrante, director of the UCLA Pain Management Center and a professor of anesthesiology and medicine. “Arguably, the spine is the next-most complex organ outside of the central nervous system.”

Ferrante spoke with Smart Business about what causes back pain, how it can be avoided and how to select quality health care professionals when dealing with back ailments.

What are some common causes of back pain?
I would divide back pain into three large groups. No. 1 would be disorders of muscle. This can occur if you’re out of shape, if you spend a lot of time in a poor posture or if you overuse your back. No. 2 would be disorders of the spine itself and, by spine, I mean the bony structure of the spine. No. 3 is a grouping that includes nervous disorders of the spine. This is usually leg pain where either you have an irritation or compression of a nerve root and it manifests itself as leg pain.

How can back pain be treated?
Sometimes you can do nothing. A classic example of this would be a lower back sprain. You just take it easy and within a few weeks it’s going to get better. The next level up would be getting physical therapy. If something is lasting six months or longer you need to see some physician outside of a primary care doctor who is going to be able to give you a sophisticated diagnosis and sophisticated workup. Acupuncture is another option at any stage because it certainly does no harm and it could very well help. You should be careful, however, that herbal medicines don’t have a side effect with other forms of medications that you may be taking.

How can back injuries be avoided?
First, you have to stay aerobically active, particularly for the low back. People who already have disc disease or knee problems do very well with elliptical systems. Instead of the pounding on the spine and knees that occur with running, elliptical systems take the kinetics and move them forward and backward. Also, back injuries can be avoided by improving posture at work. It sounds like what your mother always told you about having good posture, but it really is a truism. Bad posture puts repetitive strain on ligaments, joints and muscles.

What steps can a business owner take to safeguard against back injuries at the workplace?
Have someone do an ergonomic evaluation. Just by changing some very simple things like how keyboards are placed and how employees sit can prevent injuries. Also, if you get health club memberships for your employees, it not only encourages them to get aerobic activity, but it might also be financially beneficial because employers may get a reduction on the premium of their health insurance.

How can someone with back pain identify a good physical therapist?
You have to tailor the physical therapy to the particular mechanism that is causing the pain. If people are not getting some type of physical therapy that is attempting to eradicate or solve their particular problem, then I would suggest that they look elsewhere for physical therapy. There’s nothing wrong with feel-good maneuvers, but they have to be coupled with things that are going to strengthen the weak muscles and cause postural realignment.

What are some characteristics that one should look for when seeking a back-pain specialist?
Find a doctor who is going to be able to ferret through the vast different diagnoses. Find someone who asks the question, ‘Can I explain this pain and on what basis?’ A lot of practitioners of spine medicine practice template medicine — everybody gets one type of treatment. I don’t advise that, because it doesn’t seek to answer the question of what’s causing the pain. Also, it is important that the doctor start off with the least invasive and least complex treatment and then work their way up.

It’s a matter of finding a doctor who is insightful, finding a doctor who doesn’t immediately jump into the most invasive and financially rewarding option for him- or herself, and finding someone who really acts as an advocate for you.

MICHAEL FERRANTE is director of the UCLA Pain Management Center and a professor of anesthesiology and medicine. Reach the Pain Management Center at (310) 794-1841.

Friday, 30 June 2006 09:46

Medicare Part D

On Jan. 1, Medicare rolled out a new program designed to help seniors pay for prescription drugs. The rules for the new program are complex. While all businesses may not be directly faced with navigating the complexities of Part D, certain legal issues will have an impact on everyone, specifically physicians groups.

“The implementation of Part D is complicated, whether one is advising a physicians group regarding the effect of Part D on its contracting, or simply attempting to advise one’s friends and relatives regarding the choice of an appropriate Part D plan,” says Jonathan Gluck, a health care specialist and partner in Alschuler Grossman Stein & Kahan’s Business Litigation Department.

Smart Business spoke with Gluck about the evolution of Medicare Part D and the legal issues that have arisen since its implementation.

What led to the enactment of Medicare Part D?
The Medicare program, which was signed into law in 1965, was originally designed to cover institutional (hospitalization) and professional medical services for seniors, which are known as Parts A and B respectively. Later, the government decided to allow private health plans to offer Medicare plans (Part C). They may now offer Medicare benefits that include medical savings accounts, managed care plans and private fee-for-service plans. While traditionally some of the private plans offered prescription drug coverage, it was not universal. This led to the creation of Medicare Part D as part of the 2003 Medicare Modernization Act. Part D, for the first time, provides prescription drug coverage for seniors.

What are some of the issues that have arisen during the implementation of Medicare Part D?
The most crucial issue is simply the logistical nightmare of having more than 40 million Medicare members understand and sign up for a plan that offers them the benefits they need.

This problem is exacerbated by the fact that the government expected seniors to do most of their research regarding available plans over the Internet, and many seniors are not computer literate. The number of seniors who did not sign up for a plan is still the subject of debate, and no one now knows, or will know for a while, how many seniors signed up for plans that do not provide them the benefits they need.

In addition, the implementation of Part D has changed the method by which the government calculates its payments to the private health plans, which has an impact on how the health plans in turn pay their capitated physicians groups.

How has Part D affected physicians groups?
Many physicians groups contract with health plans to provide all required care for a plans’ members for a set dollar figure every month. This is known as ‘capitation.’ In many of these agreements, the physicians groups agree to accept as payment a percentage of the premium dollars paid by the government for each member.

Prior to the implementation of Part D, it was simply a matter of calculating the percentage from the total amount paid by the government. Because of the way that the government now calculates the dollars paid to the health plan, however, many health plans are attempting to force their capitated physicians groups to accept their percentage from a smaller portion of the total amount paid by the government. This results in less real dollars for the physicians, even though the health plans will actually receive more total dollars because of Part D.

What is the possible impact of less dollars making their way to physicians groups?
Many physicians groups likely do not realize how these changes will affect their bottom line — and may not until the end of the year when they will suddenly find themselves running a deficit and losing money. For anyone who remembers the failures of physicians groups such as MedPartners and KPC Medical Management, and the resulting upheaval and displacement they caused, this should be a cause for concern.

Are there any other legal issues that have arisen?
Many drug companies previously provided some of the more expensive prescription drugs at very lost cost to low-income seniors. Part D, however, has anti-kickback rules which prohibit a drug company from providing a financial incentive to induce someone to use their drugs. Because of this, drug companies claim they can no longer provide drug subsidies without violating the law. This will result in numerous seniors no longer being able to afford some of the more expensive drugs.

While the government is attempting to resolve this issue with the drug companies, so far there has been no resolution.

JONATHAN GLUCK is a partner in Alschuler Grossman Stein & Kahan’s Business Litigation Department specializing in health care law. Reach him at (310) 255-9150 or jgluck@agsk.com.

Friday, 30 June 2006 08:40

Intranet — not Internet

In this digital age, it can be frustrating for employees to have to root through paper files to locate the contact information of their insurance provider. Ditto for having to look through earmarked pages of an employee handbook to determine the correct procedure for a certain task.

Developing a custom intranet site not only alleviates the need for employees to thumb through cumbersome paperwork, it can also help in relaying important information such as revised sales quotas. Of course, only members within the organization are privy to such information.

It is important to note that an intranet differs from the Internet.

“An intranet is a Web site that is inside your network,” explains Hormazd Dalal, president of Castellan Inc. “It functions the same way as the Internet, but is available only to people from inside your network.”

There is no magic formula that makes an intranet desirable for employees to peruse. To make it a part of their daily routine, it is important to provide relevant information that is pertinent to their job description. When managed effectively, it can be a strategic asset that provides a competitive advantage.

Smart Business spoke with Dalal about the benefits that companies can receive from having a custom intranet site, how its applications differ from groupware software packages and what factors to consider when outsourcing the development of an intranet.

How can a business benefit from having a custom intranet site?
There are many uses for an intranet site. It is, in effect, a bulletin board: a place where up-to-date sales figures can be put and where you can post documents for immediate download. It’s a central location where private, personal information that is only available for either certain work groups or the internal company is available. Examples would be a copy of the employee handbook and a calendar of company-related events like paydays, people’s birthdays, important how-to documents and information about the tasks that they perform. Of course, it varies from industry to industry what an intranet is used for.

How does an intranet differ from groupware software packages?
Groupware software packages are based on the user. A user, as a member of a group, can interact with other members in the group. Groupware software packages such as Outlook, with Exchange in the back end, allow you to perform such functions as maintaining public folders and tracking tasks.

An intranet is a Web site, so it typically doesn’t actively prompt a user to do a task. A user can go to an intranet, however, and look at a list of tasks or information.

One of the biggest differences between an intranet and groupware software packages is that an intranet is more passive, although more sophisticated portal products such as Microsoft’s SharePoint are more active.

How secure are intranets?
Intranets are very secure. In fact, they are as secure as any other file on your internal network. They get backed up inside your network, and typically, they are not accessible from the outside. They shouldn’t be, and that is what defines them as opposed to the Internet.

What factors should a company consider when outsourcing the development of an intranet?
Development of an intranet is no different than development of a Web site, so it can be done internally. The one difference between an intranet and the Web page on your external Web site is that the intranet is far more dynamic — changes are made to it readily. For example, we have a customer who maintains their entire force’s sales figures on a monthly basis. Someone internally typically needs to have the ability to upload this easily.

The intranet needs to be developed such that it can thereafter be managed by an internal person. Posting information on the bulletin board should not be outsourced; that needs to be done on the inside.

Once up and running, how should an intranet be managed?
Once up and running, you should have one person who is responsible for the integrity of the information on the intranet. It is their responsibility to make sure that is updated and has all of the latest and greatest information such as new hires, birthdays, changes to documents, etc.

What are some of the initial costs of setting up an intranet? In other words, what types of software and hardware components are needed?
If you have any Windows server running in your organization — which most businesses do — you already have the software and the hardware to run your intranet. The costs of setting it up are just the labor and the service cost of having someone actually build and develop the Web site.

HORMAZD DALAL is president of Castellan Inc. Reach him at (818) 789-0088, ext. 202, or hormazd@castellan.net.

Wednesday, 17 May 2006 12:51

Protecting your own

In light of the recent wave of corporate scandals, directors and officers have come under increased scrutiny. Meanwhile, increased corporate governance, in the form of the Sarbanes-Oxley Act, has had a major impact on their liability. That’s where directors’ and officers’ liability insurance comes into play.

This type of insurance is a wise investment for businesses of all sizes, says Marc L. Seror, vice president of Sander A. Kessler & Associates Inc. “It doesn’t just apply to public companies, but also for many privately-held companies, as well as nonprofits.”

Smart Business spoke with Seror about what types of claims can be made against directors and officers, how companies can benefit from having liability insurance and what types of coverage should be included when purchasing a policy.

What is directors’ and officers’ liability insurance?
It’s insurance to protect the individuals who serve as directors and officers of a company. The duties of a director and officer really include the duty of loyalty, the duty of care and the duty of obedience. A breach of those duties is what leads to a variety of claims. Many times, this type of insurance can also protect the company itself from a variety of lawsuits.

Who can make a claim against a director or an officer?
Most people think only stockholders can file a claim, but actually, any stakeholder can do so. A stakeholder can be a customer, competitor, vendor, fellow board member and even employee. The Tillinghast 2003 Directors’ and Officers’ Liability Survey states that half of all claims made against directors and officers are made by shareholders while a third of all claims are made by employees. Directors and officers of companies experiencing mergers and acquisitions or divestiture activities are more exposed to claim potential.

What kinds of claims are covered by directors’ and officers’ liability insurance?
The claims can include employee discrimination, unfair employment practices, wrongful termination, disposal of corporate assets without regard to the firm’s ability to pay for or secure the company’s debt, violation of antitrust laws, unfair competition and even improper loans made to directors and officers.

How can a company benefit from having this type of insurance?
It gives an organization the ability to attract a director or officer to serve on their board. Without directors’ and officers’ liability insurance, no one in their right mind would accept a position because their personal assets are at risk for the decisions they make as board members. With the new Sarbanes-Oxley Act of 2002, the cost to the individual may actually be higher.

How has the Sarbanes-Oxley Act affected the liabilities that company leaders are faced with?
The Sarbanes-Oxley Act is the legislative response to the financial collapse of Enron, WorldCom and Global Crossing. This [federal] act targets corporate disclosures and it establishes criminal liability for their misrepresentations. The goal is to eliminate the expense abuses, off-balance sheet investing and other corporate misdeeds. It does this by requiring companies to file reports with the SEC which include reports on corporate governance, financial disclosure, auditor independence and even corporate fraud.

Although the law only applies to public companies, some recent judicial rulings suggest the trend toward greater accountability will apply to privately-held companies as well. For example, a recent Delaware court ruling indicated that independent directors could be held liable for deliberate indifference as well as active negligence.

What basic coverage should be included?
When someone is looking to buy directors’ and officers’ liability insurance, the first thing they should look for is coverage that is ‘pay-on-behalf-of’ rather than coverage that indemnifies. Obviously, one would rather have an insurance company pay on their behalf rather than reimburse them for expenses or claims.

A second item is the limit should be sufficient to protect the company’s assets. There should be full coverage for prior acts, and it should go as far back in time as possible. There should be a broad definition of claim, and they should include coverage for the entity whenever it is available. Punitive damages should be included where they are insurable, though not all states allow it. Also, they should have the most favorable venue wording.

What factors are considered when setting a premium for directors’ and officers’ liability insurance?
The premium is a function of several underwriting factors that include the assets of the company, the company’s prior claim experience, any recent activity like mergers and acquisitions, reorganizations or layoffs. Also, the limit of coverage that is selected and the financial strength of the company are factors that are taken into consideration.

MARC L. SEROR is vice president of Sander A. Kessler & Associates Inc. Reach him at (310) 309-2269 or marc@sanderkessler.com.

Monday, 01 May 2006 09:40

Exchanging ideas

Communication is central to our everyday lives. From dawn to dusk we correspond, converse and cajole. Without it, managing, leading and inspiring would be impossible. At the corporate level, having an effective strategic communication plan can make the difference between a thriving business with superb employee and customer relations versus a disjointed operation with no clear mission.

An integral piece of any strategic communication plan is distributing an unambiguous message — both internally and externally — that clearly defines a company’s identity.

“The principle danger of not aligning internal messages with external messages is that the corporation will eventually lose its focus and not operate as efficiently as it should,” says Edward Clift, assistant professor and chair of communication at Woodbury University. “If your messages are not aligned, then your company will be pulled apart by two different visions of itself.”

Smart Business spoke with Clift about how to effectively deploy strategic communication, the importance of valuing employees’ input and how the Information Age has changed avenues of communication.

How can CEOs or business owners effectively use strategic communication to improve the exchange of ideas within their companies?
Strategic communication involves meta-level discourse, or talk about the nature of talk. It is the outcome of a certain way of thinking about communication in an organization; one that sponsors creativity and engagement as opposed to managerial control. I believe business leaders should model strategic communication by actively experimenting with communication processes in the workplace. They should work to enhance the flow of information and learn from obstacles they encounter or frictions they cause along the way.

What are the benefits of having an organizational structure where the input of all employees is valued?
The fuel of a cutting-edge business today, no matter what it sells, is the modern employee who is always on and always mobile. In the search for opportunistic risk, business owners experience the greatest returns when they successfully urge their employees to imagine new possibilities for the world around us. To remain nimble, a firm must encourage a diversity of perspectives, avoid assumptions about its own actions, and take chances on the people it hires. One example of innovative planning along these lines is the use of “unfocus” groups designed to elicit outlying perspectives and possibilities. Methods like this are a testament to the fact that it is really the people within an organization that keep it viable.

How important is it to align internal messages with those that are distributed to the public?
Transparency builds confidence and trust, plain and simple. There is no substitute for the alignment of internal messages with those that are distributed to the public. Cultures are formed as clusters of coherent messages so that a business, like a family, constitutes a miniculture of sorts. Maintaining separate public and private “faces” produces closed cultures that make it difficult to realize one’s maximum potential in the marketplace.

How has the dawn of the Information Age changed communication methods?
Words are falling out of favor, and simple redundancy is no longer enough to capture and hold people’s attention. I recently met a political operative who told me that he must relay political platforms seven different times in seven different ways before people start to listen. Ideas increasingly have to be communicated much more instantaneously and comprehensively through multiple channels and domains of discourse. Internet blogging, political cartoons, and personalized methods of distribution like the iPod all come to mind as stark reminders of how fast the world can change the way it communicates. The Information Age speeds up this process of change by leaps and bounds. However, CEOs seeking to develop usable and stable methods of strategic communication should not rely solely on technological solutions. They should cultivate instead a fluency in communication that will allow them to better manage the sociocultural roles enacted through such technologies.

When a company is reorganized, or if there is a merger, what steps can be taken to ensure that everyone is still on the same page?
It is true that many reorganizations and mergers look good on paper but fall apart in the real world. Changing business culture from the top down is an extremely difficult task. In fact, organizational culture was initially considered to be an obstacle to productivity after a series of controlled laboratory experiments known as the Hawthorne Studies (1931), which simulated a banking workplace environment. It was determined that employees quickly discover a multitude of ways to resist mandates that may be rational, but still negatively affect their deeper sociocultural selves. Leaders of companies going through such changes need to consider how their internal strategic communication decisions impact the invisible social and cultural selves that must also be integrated into the new business form.

EDWARD CLIFT is an assistant professor and chairperson of communication at Woodbury University. Reach him at (818) 252-5197 or edward.clift@woodbury.edu.

Friday, 31 March 2006 04:30

Outsourcing IT

Reducing the amount of fixed costs can work wonders on the bottom line. Usually, however, reducing a fixed cost is a dicey proposition. For example, if you cut payroll expenses, your output might decline. That’s where outsourcing comes into play. With human resource expenses typically consuming the majority of IT budgets, outsourcing some of your network needs might be a smart decision.

“When you outsource, you have a business that charges you only for the work that they do. You don’t have to worry about additional payroll overhead,” explains Hormazd Dalal, president of Castellan, Inc.

Smart Business spoke with Dalal about how to best leverage IT budgets, the benefits and drawbacks of outsourcing, and how to find a qualified technology partner.

Where is the bulk of IT budget spent in a small to medium-sized business?

Clearly, the largest expense is human resources: the cost of the engineers and network administrators that support an IT infrastructure.

In what ways do you think these costs can be mitigated?

There are several skill sets that are required to manage your IT infrastructure, which includes employees ranging from a $90,000-a-year highly experienced engineer down to the desktop-level engineer who may be earning $40,000 a year.

What business owners and chief information officers need to carefully manage is where these resources are spending their time. You don’t want your high-level person running around taking care of small desktop issues. On the other hand, you don’t want your low-level desktop engineers trying to fix complex issues that are related to your server and the basic core of the network. One of the better ways to mitigate this is by deciding what you need in-house and outsourcing the other part. If you are very satisfied with one high-level engineer’s strong skill set, you should outsource the desktop support. Or if you have lower-level engineers who are handling the desktops of a larger organization, you should outsource the core engineering.

How would you define outsourcing, and what are some of the benefits of using this approach?

By outsourcing, I mean hiring a consultant or service company that can come in and handle either your desktop or higher-level support needs. One benefit is that it can be extremely lucrative. When you outsource, you only pay for the actual hours that your support is required for. Another benefit is that there is no risk of network engineers leaving the job and taking all of your intellectual property with them. When you outsource, you are working with a company whose engineers are cross-trained.

When outsourcing, what specific items should be included in a contract?

I don’t think that you should be forced into a long-term agreement. Make sure that your contract is short-term or month-to-month. If you’re unhappy with the company you hired, you should be able to fire them on the spot. Make sure that there is a guaranteed response time to your needs. A contract is just a piece of paper, so I think that the more important thing is checking references. When you’re looking for an outsourcing partner, call companies that they are currently working with and find out if they are happy or not.

What are the drawbacks of outsourcing?

One drawback of outsourcing is that you need to match the company that is coming in and taking over with your culture and application needs. If you’re strongly into ERP (enterprise resource planning) or if CRM (customer relationship management) is one of your major applications, then you want to make sure the company you hire has that expertise.

The other concern is that many business owners feel that they lose control and that their intellectual property can be accessed by outside employees. That’s a distinct risk. You need to trust your network outsourcing company.

How should you choose the right company for your IT needs?

You need to match them with your applications. For example, if you have a wide-area network that’s connected with Cisco routers, then you need to make sure that they have that skill set. If you are a Microsoft shop and your primary servers are running Microsoft Exchange, Microsoft CRM and Microsoft SQL, then hire a Microsoft Gold Partner or someone who has the backing of the software manufacturer and is authorized, trained and skilled in working with these applications.

How important is it to have the support of the manufacturers when you outsource?

It is important to outsource to a company that has access to the support of the software manufacturers. A Microsoft Gold Partner has direct access to top-tier support at Microsoft for mission-critical troubleshooting.

HORMAZD DALAL is president of Castellan, Inc. Reach him at (818) 789-0088, x202 or hormazd@castellan.net.

Tuesday, 28 February 2006 12:12

Caring for health care benefits

Health care costs have been rising at double-figure rates for a number of years. There are a host of factors involved, but so far, few solutions. As a result, many businesses have had to scale back their health care benefits or eliminate them entirely.

Kathy Holmes, vice president and manager in employee benefits for Sander A. Kessler & Associates Inc., is keenly aware of the burden employees face. “The inflation factor is three times higher for health care than earnings over the past 15 years,” she says. “It’s a huge concern and will take a complicated solution to fix the problem.”

Holmes spoke with Smart Business about why health care costs have risen, the best practice to safeguard against higher insurance costs and how changes to an existing plan should be handled with employees.

What are the reasons behind the rising costs of health care?
We’ve summarized what we consider to be the top 10 reasons for the premium increases and rising cost of health care.

  • Increased utilization. There has been a dramatic increase in the use of health care services.

  • Pricing catch-up. Insurers are seeing pent-up demand by providers for increased payments to compensate for past shortfalls in their budget.

  • Expensive disease treatments. People are living longer with chronic diseases.

  • Consumer demands. Many Americans feel entitled to unlimited, unrestricted access to any doctor, technology or treatment available.

  • Pharmacy advertising campaigns. These raise demand for prescriptions that may be medically unnecessary.

  • New technologies. America leads the world in expensive diagnostic and therapeutic procedures.

  • New laws and regulations. State and federal governments are increasingly intervening in health care requiring HMO’s and other managed-care carriers to provide specific specialty and ancillary services.

  • Overcapacity. Research shows that growth in hospitals and medical specialists lead to an increase in medical services provided.

  • Increased lawsuits. Malpractice lawsuits have skyrocketed during the past 20 years.

  • Persistent variation. There is a variation in the type of medical services provided in any given region.

What best practices can businesses use to help control health insurance costs?
The best tool is employee education — teaching them how to utilize their programs better. Although the insurance companies are paying for the services, it is important to be sensitive that there is a cost related to the services. When those costs go up, or if utilization goes up, then the premium is also going to go up. So primary employee education is the best practice.

What advice would you give to businesses struggling to provide insurance benefits for their employees?
The employer needs to look at benefits and payroll as a total compensation package. They should be projecting into their budget what those costs are going to be and integrating those costs into their future business plans in terms of what they may need to do to increase their income to cover these costs and still remain competitive with like businesses.

How should changes to an existing health plan be conveyed to employees?
We find it very effective to do employee announcement pieces. Typically, these show what the previous program covered, and then side-by-side to that, what the changes are so they have a true understanding of what exactly changed.

Also, have group meetings with employees, as well as one-on-one sessions, so it gives them a better understanding of the plan and how the changes personally affect them. With the group meeting, a representative of the health care provider should be present for legal purposes and to make sure that the benefits are represented accurately.

What are some of the pros and cons of managed care versus fee-for-service?
The pro for managed care is cost containment. This doesn’t sound logical when you look at the costs continuing to increase; however, without managed care there would be much higher increases.

For fee-for-service there is a much greater freedom of choice for the employee to go out and receive care from whichever provider that they please. But there is a higher cost affiliated with it.

Kathy Holmes is vice president and manager in employee benefits for Sander A. Kessler & Associates Inc. Reach her at (310) 309-2276 or kholmes@sanderkessler.com.

Tuesday, 31 January 2006 08:15

Buying in

With interest rates still hovering near historical lows, it could be an opportune time for businesses to purchase the space they occupy. Not only does owner-occupied commercial real estate safeguard against dramatic rent increases, but it also provides a tax advantage.

“The key benefit is the depreciation. That’s the depreciation you don’t get when you lease, but you do receive when you buy,” explains Joe Yurosek, senior vice president and regional group manager at Comerica Bank.

Yurosek spoke to Smart Business about commonly overlooked real estate financing options, the pros and cons of fixed and variable rates, and why a business that already owns property might want to consider refinancing.

What factors should a CEO or business owner consider when looking at commercial real estate?
No. 1, does the CEO or business owner want to participate in any appreciation of a building which they wouldn’t participate in if they leased it? That’s a principal advantage that should be taken into consideration when deciding whether to lease or buy.

The second consideration is there are some tax advantages, as the building itself is depreciable over the useful life of the asset. The owner gets to depreciate the building and the improvements over the useful life of the building, but they don’t get to depreciate the land. Sometimes it’s critical for an owner to make sure that they secure a location.

When you own a property, you guarantee yourself the security of long-time location. This can be important in certain industries if you are near a port or close to a freeway. Or you might have [invested] excessive costs into a building so you would rather own where you already are than lease somewhere else.

On the other side of that there is the possibility, although in California it hasn’t been too prevalent lately, of price depreciation.

What are some methods that businesses can use to finance real estate?
The most active method used today is where the buyer is required to put down up to 25 percent and then they retain long-term financing for the remaining 75 percent. An alternative product that is really attractive when it comes to current interest rates would be industrial revenue bond financing.

There are also Small Business Administration products that offer benefits as well, including programs that require as little as 10 percent down. Also, everyone should contact their local municipalities, because often they have economic development programs and are willing to pass on financing support by way of low-cost money or loan-guarantee programs.

You mentioned industrial development revenue bonds. What types of businesses can benefit from this financing method?
There are some limitations on eligibility. Usually you have to be a manufacturer, but you can also be a nonprofit organization.

The buyer will be utilizing the credit strength of the bank or financial institution that issues the letter of credit support for the bonds. The bank then takes a deed of trust of the subject real property.

What are some factors that a business should consider when deciding whether to use a fixed or variable rate?
The buyer’s tolerance for risk is the key. When you choose a fixed rate versus a variable rate, you are hedging against increasing rates. If they don’t go up, you may be better off with a variable rate.

If you are inclined not to take risks, or if your business doesn’t support potential interest rate risk in the future, most people choose to lock in and know what their rates are.

Alternatively, variable rates allow for repayment flexibility. Some people like to pay off their loans early. By not locking in, it gives you flexibility to make early repayments.

What advice would you give to a business that wants to refinance the property that it already owns?
Today’s rates are at historically low levels, so a business with a variable rate might want to lock in and reduce future interest rate risks. It’s a very good time to lock in and move from variable to fixed.

Some owners are looking for additional funds. If they already own the property, this could be a good time to cash out by refinancing the building and using the cash proceeds to reinvest in the business. Refinancing is an alternative to selling a building if you need capital.

Joe Yurosek is a senior vice president and regional group manager at Comerica Bank. For more information, visit www.comerica.com.

Tuesday, 27 December 2005 11:35

Protecting your insurance

Legislation was enacted that required workers’ compensation for employers for several reasons. Two significant reasons are as follows.

  • For employees, the law provides a no-fault system requiring a safe workplace environment and financial compensation in case of injury.

  • For employers, it provides a system whereby an employer can fulfill their requirement to provide protection for employees and have a better way to budget a cost for workers’ compensation injuries.

However, due to increased litigation, costs for employers have skyrocketed in recent years in California. The key to avoiding exorbitant costs, says Ken Kessler, president of Sander A. Kessler & Associates Inc., is to create a safe environment.

“If an employer subscribes to running a safe organization, no matter what type of market we have in California, they will be able to obtain the best rates that are available. Creating a safe environment should be the guiding light for all employers,” Kessler says.

Kessler spoke to Smart Business about the effects that litigation has had on workers’ compensation rates and steps that a business can take to minimize this outlay.

What are some of the factors that are pushing up workers’ compensation costs?
First, realize in California today prices are going down. For the last year and a half, the California market has been adjusting. Previously, the cost of workers’ compensation rose substantially. The days of open rating (1995) and rate slashing brought workers’ compensation premiums below the cost of the workers’ compensation claims.

Carriers did not anticipate the expansion of what was considered a claim in the scope of employment. Costs rose and carriers in turn tried to pass the increase cost to employers.

What part did litigation play in the rising costs?
Litigation was a key factor in the rise of premiums.

Litigation helped drive a disability claim from an average cost in the State of California from $17,000 to $55,000. This, as well as other factors, caught several carriers off guard and as a result several carriers folded or severely restricted their writings in California.

Prices rose to cover costs and California became a difficult state for insurance carriers as well as employers who had to pay the rising cost of the workers’ compensation.

What are some steps that a business can take to minimize workers’ compensation costs?
Workers’ compensation costs are driven by claims. The higher the cost of claims, the higher the premium. To minimize the cost, I would suggest the following.

  • Top management must become committed to creating a safe place in the work environment. This should become the culture of the organization.

  • Appoint a safety organization with accountability and authority that can implement ideas and actions to create a safe environment.

  • Look to identify hazards or conditions that may lead to unsafe acts, and correct them.

  • Monitor results to be sure that the organization is moving in the right direction.

In addition, there are several financial alternatives available today that could minimize the cost of workers’ compensation, including deductible programs (partially self-insured), retro programs and group self-insurance

These are three considerations that, if your company is qualified, can substantially reduce the cost of workers’ compensation.

What is your forecast for workers’ compensation costs in 2006?
On January 1st, 2006, an additional 15 percent rate decrease was suggested both by the California Commission and the Workers’ Compensation Bureau.

Premiums will continue to go down for much of the 2006 year.

However, a word of caution: As the result of the losses of Katrina and Rita, the reinsurance market has begun to raise prices. Some of the reinsurance carriers also reinsure workers’ compensation carriers and we may see some pressure to increase prices.

More probable is the fact that the reforms provided in the recent legislation for workers’ compensation are under attack by applicant attorneys. Should they win some of their arguments, claims costs will increase leading to a rise in premiums.

The best safeguard for controlling workers’ compensation costs continues to be creating an organization that has minimal losses. That way, you can prevent human loss as well as take advantage of the insurance marketplace, regardless of the fluctuations in the insurance market.

Ken Kessler is president of Sander A. Kessler & Associates Inc. He functions as the leadership liaison in charge of the Commercial, Personal Lines and Claims departments, and actively participates on advisory councils for several major carriers as well as professional organizations. Reach Kessler at (310) 309-2225 or ken@sanderkessler.com.