Matt McClellan

Over the past year, the Ohio Bureau of Workers’ Compensation (BWC) has focused its attention on creating more program options for employers that encourage the correct behaviors and rewards them for achieving performance outcomes that reduce lost work days for injured employees while controlling costs.

“We highly recommend that, regardless of size, each employer in Ohio examines the many program options available today to assist them in lowering their premium expense, as many may fit right into their overall risk management plan,” says Mark MaGinn, vice president for CompManagement, Inc.

Smart Business spoke with MaGinn about the options available for your business.

Are there any discount programs an employer can participate in without having to wait until the next policy period?

In October, the BWC created a new program called Grow Ohio, which provides new employers the option of participating in a group rating program or receiving a 25 percent discount on their workers’ compensation premiums immediately. A new employer (defined as a new business entity or an out-of-state business that creates one or more jobs in Ohio on or after July 1, 2011) has 30 days from filing an initial application for workers’ compensation coverage to select an option. If it selects the group rating option, the employer receives an additional 30 days to enroll in a group program. In the past, it would have to wait until the next policy period to participate in group rating, losing the ability to save immediately on premiums. Any new employer entering the state between July 1, 2011, and June 30, 2012, may be eligible to receive up to a maximum discount of 51 percent for the 2011 policy year through the group option.

 

Will there be any new programs in 2012?

The BWC has several new programs available in 2012 that focus on improving return-to-work and management of associated claim costs. All fall under the Destination: Excellence program:

Industry Specific Safety Discount — establishes prevention strategies based on the unique nature of individual industries; employers can earn a 3 percent upfront discount for engaging in specific safety strategies like completing a risk assessment, providing data to BWC and completing safety activities that are intended to reduce accidents.

Transitional Work Grants — prepares employers to bring injured workers back in a modified capacity while allowing them to recover from injury; the program will allow employers to apply for grant money to implement a transitional work program, as well as earn up to a 10 percent bonus for utilizing the program in claims with lost-time.

Go Green Discount — program will provide employers with a 1 percent upfront premium discount (up to $1,000 every six months) for managing their account online.

Lapse-Free Discount — program is designed to encourage employers to pay premium in a timely manner and will provide a 1 percent upfront premium discount (up to $1,000 every six months) if an employer has not incurred a lapse in premium in the past 60 months; a one-time forgiveness to stay current can be utilized.

Private employers will be able to enroll in these programs until the last business day of April 2012 for the July 1, 2012, policy year. Public employers will need to enroll by the last business day in October 2012 for the      Jan. 1, 2013, policy year.

Are there any changes to be made to existing programs in 2012?

BWC has made several productive changes to existing programs for the July 1, 2012, private rate year and the Jan. 1, 2013, public rate year.

100 percent EM Cap — Participation has been expanded to allow credit-rated employers (employers with better-than-average loss experience paying a rate lower than the base rate); the 10-Step Business Safety plan requirements have also been replaced with a half-day industry-specific training session that needs to be completed in the first year and online training for subsequent years.

Small Deductible — Payments made under the deductible program will now be excluded from an employer’s experience calculation.

Group Retrospective Rating — Participants are now eligible to earn a 2 percent upfront discount for participating in a Safety Council program.

One Claim Program — The discount is reduced from 40 percent off of the base rate for four years to 20 percent year one, 15 percent year two, 10 percent year three and 5 percent year four.

Salary Continuation — is now compatible with all programs.

Can an employer participate in multiple programs?

Yes, many programs are compatible with each other, giving an employer the ability to ‘stack’ discounts together beyond the maximum credibility table discount (currently 53 percent for the private employer July 1, 2012, policy year). However, only programs that encourage best practices and are not cost-based are compatible. Employers should be aware that there are different eligibility requirements for each program, as well as expectations that must be met to obtain eligibility.

How does an employer know which programs to participate in to maximize its discount?

An employer should contact its workers’ compensation third-party administrator to request a ‘feasibility study.’ A feasibility study is a tremendous tool for an employer to evaluate the many different rating/discount programs in order to see how they can impact the costs associated with their workers’ compensation program. In addition, a feasibility study should include which rating programs can be ‘stacked’ together for greater discount potential if qualifications are met.

Mark MaGinn is the vice president of Ohio state fund program management and business development for CompManagement, Inc. Reach him at (800) 825-6755, ext 8168, or Mark.MaGinn@sedgwickcms.com.

Ohio ranked 45th out of 50 states in the 2010 Gallup-Healthways Well-Being Index, which assesses the overall health of U.S. residents based on several qualifiers including emotional health, physical health, work environment and basic access to health care. Many employers are turning to preventive measures like wellness programs to improve their employees’ health and, in turn, reduce health care, disability and workers’ compensation costs.

“This is a big issue in workers’ compensation because we mostly deal with injury management, but if we don’t understand the preventive side and how it affects someone’s overall health, it will certainly delay recovery, impact disability and increase health care costs to employers,” says David D. Kessler, DC, MHA, CHCQM, vice president and MCO medical director — OH for CompManagement Health Systems, Inc., a workers’ compensation managed care organization (MCO).

“Wellness programs offer the ability to monitor physical or mental health issues, but they require the employer to be fully engaged in its work force. Senior leadership must understand the current status of its work force and, as that changes, be prepared to change course if needed.” Smart Business spoke with Kessler about how wellness initiatives are helping employers control costs.

Why are many employers focusing on wellness as an important part of their health care plans?

The biggest reason is today’s escalating health care costs. Wellness is seen as preventive care, used to reduce the severity, frequency or disability associated with illnesses and/or injuries. To see how preventive or wellness measures can control costs, consider the aging population. As employees age, they have more chronic conditions. That process can be time-consuming, with more frequent doctor visits and trips to the ER. Employers need to be aware of this and have a plan in place to address those issues.

Small employers may be at a disadvantage, because they don’t have the resources a large employer does. But they still have access to certain plans, or can group with other small employers. These employers can reach out to their insurance agent or MCO for guidance.

How can wellness and preventive health programs help companies reduce workers’ comp costs?

Studies show that health promotion programs have average absenteeism reductions of 28 percent, health care cost reductions of 26 percent and workers’ comp and disability reductions of 30 percent. It works because health management and risk management go together. Wellness and safety are two concepts most employers understand.

From a workers’ comp or MCO perspective, we need to have an injury management focus with disease management collaboration. We can’t do it all, but we need the ability to help an injured worker get back to work as soon as possible in a safe manner and understand the benefits of being engaged at work without risk to themselves or their coworkers.

How are health plans addressing wellness?

Traditionally you’ll have a health risk assessment (HRA) performed. That process accumulates aggregate data, not individual data, which would be a violation of HIPAA. So we have to make sure we look at the entire population, not just individuals. Looking at analytics through the HRAs is only the first step. Ongoing engagement and participation is critical to the success of any wellness program.

What are the keys to creating and implementing a successful wellness program?

Senior leadership has to be part of the process. They have to take a stand that this is what’s good for the organization. But to be successful, it also has to focus on what it can do for individuals both inside and outside the workplace. Maybe they want to play better golf, or be able to enjoy playing with grandchildren, or maybe they like to garden.

To that end, you have to know your audience. Some people value monetary incentives, some value paid time off to participate in a health program.

How can an employer ensure a program is a good fit for their company?

You have to have benchmarks. When you look at wellness programs, two factors are assessed: direct costs and indirect costs. Direct costs are easy to measure: simply look at medical costs and how the program impacted those costs. For example, if you ran a smoking cessation program, review how it decreased instances of pulmonary or cardiovascular disease.

Indirect costs include productivity, absenteeism and presenteeism. Measuring indirect costs requires defined and established parameters because senior management will want to track results related to the invested resources. Most studies show ROI anywhere from two-to-one to six-to-one. However, the length of time is anywhere from two to five years, which shows that wellness is not a short-term fix.

What types of issues should a wellness program focus on?

The three big issues are tobacco cessation, stress management and weight management. The good news is tobacco use is declining; the bad news is obesity is increasing.

Employers can research local health clubs and negotiate favorable rates. Some employers consider partial reimbursement of services, as long as there is a plan in place and some way to measure the outcome.

Some program components could be as simple as employee education. You could bring in an expert to do a presentation on yoga and other relaxation methods to reduce stress in the workplace. From a workers’ comp perspective, a heightened level of stress is a barrier to an employee’s recovery from injury or illness.

David D. Kessler, DC, MHA, CHCQM, is vice president and MCO medical director - OH for CompManagement Health Systems, Inc. He can be reeached at (614)760-1788 or kesslerd@chsmco.com.

Many businesses feel a responsibility to the community that surrounds them, but not all act on the desire to be good corporate citizens.

“Regardless of your business structure, I believe it is our duty as business owners to give back to the community,” says Jonathan Theders, president of Clark-Theders Insurance Agency Inc. “We are all busy with work and family, but we have to examine our social responsibilities and determine how we can personally or corporately get involved and serve the community.”

Smart Business spoke with Theders about establishing a community outreach program for your business and how to maximize its effectiveness.

How can a company create a successful community outreach program?

Successful community outreach programs start with the leadership of the company. If the company’s leaders don’t believe in the value and impact of charitable work, the program will fizzle out in a few months.

Before we formalized our program, our approach was to support the community, but we executed with no real strategy. In 2007, we identified a goal, which was, ‘Increase CTIA’s commitment and effectiveness in philanthropy in Greater Cincinnati.’

The management team talked about it, and the result was the CTIA Cares program, which gives employees 30 hours a year to donate to a charity of their choice. This year, the program has accounted for about 1,000 hours of donated labor and 100 percent employee participation.

If an employee has not been involved in volunteering before, they may not know which organization to choose. Based on the employees’ interests, the program may be able to help match them with a charity they would enjoy working with. Whether they have a passion for the arts or helping animals, once they find their interest, the company should encourage them along that path. The only criterion is that it has to be a 501(c)(3) charitable organization.

What are the first steps in developing a community outreach program?

There are a couple questions companies should ask to determine if some form of a community outreach program is right for them. First, you need to figure out which type of community outreach program is the right fit for your company. The first step is determining whether you want your program to make a business impact, a personal impact or both.

Then decide whether your organization is going to focus its efforts on a specific organization, such as supporting United Way, the American Heart Association or another worthy cause. This option is essentially grabbing onto one charity or group and putting all of your company’s efforts into that one cause. The second option is a more open program. It might not have as large of a financial impact, but it allows employees to give to an organization that is near and dear to their hearts. The business needs to ask if it wants its program to be employer or employee-directed. Often, the personality of the company dictates that decision.

For our company, I found it is very hard to get full engagement if you are focusing all charitable efforts toward one common cause. If I’m passionate about something, I want to focus my time and effort in that direction, so I prefer a program modeled after the second option because each employee can find a charitable organization or cause he or she cares about.

How does community service benefit employees?

From a personal perspective, there are many advantages for employees who choose to participate in community outreach. Employees can gain improved interpersonal skills and better communication with others, as well as an increased knowledge of issues. Whether it’s health issues, women’s issues, the environment or the arts, any time you are engaging in something in the community, you’re able to learn more about it and share more about it. So from an HR perspective, there are side benefits to giving, not just the good feeling you get.

Another benefit is you make new friends. By engaging with others with similar passions and interests, you form a whole new center of influence.

Self-esteem is another benefit. You are doing something that feels good, something you are passionate about. It’s amazing when you give money or time, how much better the giver feels. You often find yourself saying, ‘I got more from that than I gave.’

How does community service benefit a business?

From a business perspective, healthier, more active communities attract new business and new employees. When an active community brings itself together, there tends to be more economic development.

Also, active outreach programs often equal increased revenue and customer loyalty. I’m a huge believer that people want to do business with companies that give back to the community, or that they see as stewards in the community, doing good work. It makes them feel good about their decision to do business with you. It has nothing to do with your service or product, but is a nonmonetary feeling that a client gets that makes them more loyal to you.

A strong community outreach enhances your reputation and brand, as well. People get to know who you are internally, what makes you tick. It can be great advertising. When you go out in the community, people see you in a better light, so they are more likely to listen to what you have to say.

Attitude and morale improvement are another huge benefit from a company standpoint. Encouraging and enabling employees to volunteer also creates a cooperative corporate culture that benefits the company.

Jonathan Theders is president of Clark-Theders Insurance Agency Inc. Reach him at (513) 779-2800 or jtheders@ctia.com.

The Patient Protection and Affordable Care Act is well named, as its aim is to make health care providers accountable for delivering better care. As a result, the reforms make skilled health care risk management even more vital.

“The Patient Protection and Affordable Care Act has initiated a fundamental shift in the manner in which health care providers are going to be paid,” says Ron Calhoun, managing director and national health care practice leader with Aon Risk Solutions. “We are beginning a transition from volume-based methodologies to outcome-based methodologies. Prior to this, we have been on a fee-for-service model, as health care providers were compensated for volume.”

Smart Business spoke with Calhoun about how risk management integrates with health care in an age of reform.

What effect is health care reform having on the health care delivery system?

One of the consequences is that reform is creating the need for delivery systems to more fully integrate and provide a broader continuum of services. To take a bundled reimbursement, as opposed to the old pay-for-volume model, health care providers will be compensated based on outcomes. That creates a need for them to more fully integrate. On the front end, they will need to build out their ambulatory capabilities, and on the back end, they will need to improve post-acute capabilities.

How will the shift to outcome-based compensation affect providers?

The Centers for Medicare and Medicaid Services has implemented a compensation mechanism called the value-based purchasing program for providers to measure quality. There are 12 clinical process measures and nine patient experience measures. This program, which takes effect in fiscal year 2013, is about 70 percent weighed toward the 12 clinical processes and about 30 percent weighed toward the nine patient experience measures.

If health care providers have Medicare or Medicaid reimbursements in 2013, they can participate in this program. Then, those measures will have a real impact on their reimbursement thresholds. The measurements, plus the overall shift away from volume toward getting paid for outcomes, makes risk management programs even more critical than their historical place in patient safety.

How can a risk management program help with those measures?

Nationally, our health care delivery system does not have a standardized, systemic quality measuring process. When The Institute of Medicine issued its 1999 report, ‘To Err is Human,’ it started the patient safety movement.

Risk management has been proactive in patient safety since 1999, but we still have negative outcomes in our health care delivery service. After a six-year decline, we are starting to see an increase in the frequency of health care professional liability claims.

What factors affect the frequency and severity of health care liability claims?

From 2000 to 2006, there was a decrease in the frequency of health care professional liability claims, driven by three factors. One was the proliferation of tort reform. Second, there was an investment in patient safety systems at the provider level. Third, the provider community did a good job managing the perception of there being an availability-of-care crisis because of malpractice costs. Those have contributed to a downward pressure on health care professional liability claims.

From 2007 to the present day, there have been continued investments in patient safety initiatives, but we are seeing an increase in claims because of two factors. The first is tort reform erosion. In some states, tort reform bills have been either reformed or weakened. The second factor is economic stress.

There is an interesting correlation between the unemployment rate and an increase in health care professional liability and medical malpractice claims frequency. For every 1 percent increase in the unemployment rate, there is a corresponding 0.3 percent increase in health care professional liability and medical malpractice claims frequency, with a three-year lag. We are starting to see the post-2007 unemployment rate as a contributing factor to increasing claims frequency.

Unlike claims frequency, claim severity has increased at a steady rate, 4 percent over the past six years. That is cause for concern.

What can be done to improve outcomes and reduce medical claims?

One of the biggest barriers to improving risk management and patient safety is the ability to measure outcomes and the speed with which outcomes can be measured. One feature of the Patient Protection and Affordable Care Act is providing financial incentives to hospitals and physicians to further the meaningful use of electronic medical records (EMRs). The proliferation is dramatic, but it is still a fractured business.

There are three levels of sophistication in EMRs. The first level is simply making a paper file electronic. The second is computerized physician order entry, or CPOE. The third and most complex level is platforms with clinical decision support data. That third level will be necessary going forward to drive down the incidence of preventable medical errors.

More sophisticated EMRs will improve outcomes because physicians will have clinical decision support to help them adhere to clinical protocols at their fingertips. This is important because one of the biggest variables for integrated delivery systems to manage as they make the shift from volume-based to outcome-based methodologies is their ability to narrow physician practice pattern variation.

This technology comes with liabilities. If physicians have clinical decision support at their fingertips and depart from protocols, and an adverse event occurs, these errors could have a greater financial consequence than in the absence of such technology.

Ron Calhoun is managing director and national health care practice leader with Aon Risk Solutions. Reach him at (704) 343-4128 or ron.calhoun@aon.com.

If your company’s computers are still using the last generation of network technology, it might be time to consider an upgrade — especially if you are planning to virtualize any of your processes or data.

“The previous standard for most companies has been traditional T1 lines, which were not cost effective and had limited bandwidth,” says Carlos F. Olortegui, manager of the Enterprise Metro Ethernet Division with Comcast Business Services. “Metro Ethernet technology is more cost effective, reliable, robust and scalable, and it allows you to adjust bandwidth measurements with ease.”

Smart Business spoke with Olortegui about how this technology could benefit businesses and what kind of return companies should expect on their investment.

Why is Metro E technology important and how can it impact a business?

Today, everyone from small, medium to enterprise-level and multi-national corporations can use Metro E technology to improve their telecommunications.

For instance, a franchise using point of sale (POS) transactions and replicating that data could use the Metro E technology to have the option to measure and adjust its bandwidth as necessary.

One major benefit of Metro E is that the connectivity from the customer to the service provider is simplified. It’s just router to router. The main focus of Metro E is the Ethernet connectivity. It’s called Metro E because you are literally plugging in an Ethernet connection. The handoff from service provider to the customer is just an Ethernet plug — pure simplicity.

In the past, companies needed a lot of capital expenses and operating expenses for databases, hardware, larger UNIX servers, even your exchange servers for e-mail. Today, everyone uses e-mail, so the need for archiving and data warehousing is huge.

What is virtualization and how can it benefit businesses?

Virtualization is the process of contracting an amount of space on a large server that is housed by a provider and storing your data there. If you virtualize, you do not have to purchase all the computer hardware and manpower to handle your data and processes. You don’t have the large operating expense and headcount necessary to maintain the high-cost hardware and ensure uptime.

There are two scenarios in which companies can benefit from virtualization. First is disaster recovery. Second is by making a virtual version of your databases or e-mail, which are utilized on a daily basis  — you have the ease of connectivity for the transport of all that information to a virtualization footprint via Metro Ethernet.

Here is where your ROI comes into play. You get a bigger bang for your business dollar and the products and services you sell, other than payroll and real estate, the IT budget is the largest budget for most enterprise customers. If you can drop those operating and capital expenses, your ROI and profitability increase.

How can Metro E technology improve the virtualization process?

You need connectivity to that virtualization footprint .That’s where Metro E comes into play, because of its service ability, and the ability to have bandwidth on demand. Companies can consult 30-, 60-, or 90-day bandwidth utilization reports. If you need more bandwidth, it’s just a turn of the dial.

Virtualization provides much more bandwidth than traditional T1 lines can. If you are virtualizing your back-office environment, it is critical that you have no downtime as these applications are considered ‘high availability.’ That is another advantage of Metro E — it is very stable.

How does the ability to adjust bandwidth impact businesses?

Let’s say you are a corporate entity that owns a chain of retail stores. You have peak seasons: different times of the year where you have huge mail distributions or promotions. Your business is very seasonal, so November and December are the peak sales months. There are a lot of promotions, and your website gets hit more at those times. With Metro E, you can adjust your bandwidth to be higher during those peak times, because you want to make sure people can access the website and that all their transactions are being replicated and archived correctly, hence making the customer experience a positive one.

When there is greater demand, the company simply notifies its provider, which increases the bandwidth. They can watch bandwidth utilization reports to see trends, so they can monitor their expenses. Business owners can see that they’re utilizing X amount at a certain time of the year and budget accordingly.

It also ties into virtualization, because one of the main components of virtualization is on-demand storage.

What kind of cost reduction or ROI can businesses expect from using this technology?

First, businesses can expect lower capital expenses from not having to purchase all that computer hardware or enterprise server hardware for their back office databases and e-mail. Second, less manpower is needed because you have that virtual environment, so you have the reduction of overhead payroll. Third is the stability of Ethernet technology. You don’t have to utilize T1 lines or ‘leased-lines,’ those clear-channel point-to-point lines, which are very high in cost because you have to have a certain type of hardware that resides at the customer’s site. With Metro E, you have a simplified device on the back end of the service provider, which is lower cost equipment because it is plug-and-play Ethernet. Together, those three components can reduce expenses 20 to 40 percent.

Carlos F. Olortegui is manager of the Enterprise Metro Ethernet Division with Comcast Business Services. Reach him at (305) 770-5941 or carlos_olortegui@cable.comcast.com.

The Patient Protection and Affordable Care Act is well named, as its aim is to make health care providers accountable for delivering better care. As a result, the reforms make skilled health care risk management even more vital.

“The Patient Protection and Affordable Care Act has initiated a fundamental shift in the manner in which health care providers are going to be paid,” says Ron Calhoun, managing director and national health care practice leader with Aon Risk Solutions. “We are beginning a transition from volume-based methodologies to outcome-based methodologies. Prior to this, we have been on a fee-for-service model, as health care providers were compensated for volume.”

Smart Business spoke with Calhoun about how risk management integrates with health care in an age of reform.

What effect is health care reform having on the health care delivery system?

One of the consequences is that reform is creating the need for delivery systems to more fully integrate and provide a broader continuum of services. To take a bundled reimbursement, as opposed to the old pay-for-volume model, health care providers will be compensated based on outcomes. That creates a need for them to more fully integrate. On the front end, they will need to build out their ambulatory capabilities, and on the back end, they will need to improve post-acute capabilities.

How will the shift to outcome-based compensation affect providers?

The Centers for Medicare and Medicaid Services has implemented a compensation mechanism called the value-based purchasing program for providers to measure quality. There are 12 clinical process measures and nine patient experience measures. This program, which takes effect in fiscal year 2013, is about 70 percent weighed toward the 12 clinical processes and about 30 percent weighed toward the nine patient experience measures.

If health care providers have Medicare or Medicaid reimbursements in 2013, they can participate in this program. Then, those measures will have a real impact on their reimbursement thresholds. The measurements, plus the overall shift away from volume toward getting paid for outcomes, makes risk management programs even more critical than their historical place in patient safety.

How can a risk management program help with those measures?

Nationally, our health care delivery system does not have a standardized, systemic quality measuring process. When The Institute of Medicine issued its 1999 report, ‘To Err is Human,’ it started the patient safety movement.

Risk management has been proactive in patient safety since 1999, but we still have negative outcomes in our health care delivery service. After a six-year decline, we are starting to see an increase in the frequency of health care professional liability claims.

What factors affect the frequency and severity of health care liability claims?

From 2000 to 2006, there was a decrease in the frequency of health care professional liability claims, driven by three factors. One was the proliferation of tort reform. Second, there was an investment in patient safety systems at the provider level. Third, the provider community did a good job managing the perception of there being an availability-of-care crisis because of malpractice costs. Those have contributed to a downward pressure on health care professional liability claims.

From 2007 to the present day, there have been continued investments in patient safety initiatives, but we are seeing an increase in claims because of two factors. The first is tort reform erosion. In some states, tort reform bills have been either reformed or weakened. The second factor is economic stress.

There is an interesting correlation between the unemployment rate and an increase in health care professional liability and medical malpractice claims frequency. For every 1 percent increase in the unemployment rate, there is a corresponding 0.3 percent increase in health care professional liability and medical malpractice claims frequency, with a three-year lag. We are starting to see the post-2007 unemployment rate as a contributing factor to increasing claims frequency.

Unlike claims frequency, claim severity has increased at a steady rate, 4 percent over the past six years. That is cause for concern.

What can be done to improve outcomes and reduce medical claims?

One of the biggest barriers to improving risk management and patient safety is the ability to measure outcomes and the speed with which outcomes can be measured. One feature of the Patient Protection and Affordable Care Act is providing financial incentives to hospitals and physicians to further the meaningful use of electronic medical records (EMRs). The proliferation is dramatic, but it is still a fractured business.

There are three levels of sophistication in EMRs. The first level is simply making a paper file electronic. The second is computerized physician order entry, or CPOE. The third and most complex level is platforms with clinical decision support data. That third level will be necessary going forward to drive down the incidence of preventable medical errors.

More sophisticated EMRs will improve outcomes because physicians will have clinical decision support to help them adhere to clinical protocols at their fingertips. This is important because one of the biggest variables for integrated delivery systems to manage as they make the shift from volume-based to outcome-based methodologies is their ability to narrow physician practice pattern variation.

This technology comes with liabilities. If physicians have clinical decision support at their fingertips and depart from protocols, and an adverse event occurs, these errors could have a greater financial consequence than in the absence of such technology.

Ron Calhoun is managing director and national health care practice leader with Aon Risk Solutions. Reach him at (704) 343-4128 or ron.calhoun@aon.com.

U.S. companies that export goods can significantly reduce their taxes through use of a federal tax incentive known as the “Interest Charge — Domestic International Sales Corporation” or “IC-DISC.”

IC-DISC provides an incentive to promote the exporting of U.S.-sourced products to customers outside of the United States, says Henry J. Grzes, CPA, director in tax at SS&G.

“Generally, it provides a tax benefit on export-related income,” says Grzes. “There can be two benefits associated with such an entity, one is a permanent tax savings in the sense that income earned by the IC-DISC can be potentially taxed at a lower federal rate than it would have been had it  been earned by  the operating company. Or, you can use this as a method to defer the payment of taxes, so you can accumulate income in this separate entity without having to immediately pay the taxes due on this particular income.”

Smart Business spoke with Grzes about how an IC-DISC can significantly reduce the amount of taxes your business pays on income earned from exported products.

What types of companies can create an IC-DISC?

The company has to be selling outside the U.S. It can be a manufacturer of goods in the U.S. that is selling overseas, or a distributor that acquires goods from a third party, then resells them to customers outside the U.S.

To qualify, more than 50 percent of the value of your product has to be from goods sourced to the U.S. For example, if a manufacturer’s product sells for $1,000 outside the U.S., and $300 of the cost is related to products imported from outside the U.S.,  this sale can qualify for IC-DISC benefits because it’s under the 50 percent threshold. This affords you the opportunity to make qualifying sales using some level of imported products.

However, if you are a U.S. distributor with a wholly owned subsidiary in China, you can’t buy items from that related company, then sell them in other countries and still qualify for IC-DISC treatment on these sales.

Also, if your U.S. company sells to an independent third party that uses your product in its products, which are then resold outside the U.S., you may be able to treat these sales as  revenue eligible for  IC-DISC benefits.

How does an IC-DISC work?

Ordinarily, there is an expense reported by the operating company that can take the form of a commission or a factoring charge on accounts receivable. That amount of expense is reported by the IC-DISC as revenue.

Say your company is taxed at the 35 percent federal corporate rate. If it generates $200,000 of net taxable income, its tax bill would be $70,000. Ordinarily, if this income is kept in that operating company and reported as income, you’d give up $70,000 in cash for taxes. But with the IC-DISC, you get the benefit of $70,000 in tax savings in the company by paying $200,000 in deductible commissions to the IC-DISC, thereby reducing taxable income to zero and completely eliminating the tax that would be due. Taxes don’t have to be paid  on revenue earned  by the IC-DISC until it is distributed to its owners. Depending on who owns the IC-DISC (often the same individuals who own the operating company), they may be able to take advantage of the 15 percent rate afforded to recipients of qualified dividend income. Even if the operating entity is in a lower tax bracket, individual owners would only owe taxes on distributions from the IC-DISC at a maximum federal rate of 15 percent. However, state taxes are assessed on this income when received by the IC-DISC as well as when the distributions are received by the owners of the IC-DISC.

So if the operating company owes $70,000 in tax on $200,000 of net taxable income, but that revenue goes into the IC-DISC and is distributed to the owners of the IC-DISC, that income would instead be reported on the individual’s tax return. And because it is qualified dividend income, it would be taxed at a maximum rate of 15 percent, or $30,000. You’ve achieved a $70,000 tax savings in the operating company and it has only cost $30,000 to do so, resulting in a net tax benefit of $40,000.

If you use it as a deferral mechanism and choose to leave profits to accumulate in the IC-DISC, you would compute an interest charge on what the tax would be on this revenue, as if the IC-DISC was a taxable entity.

Current IRS interest rates are very low (less than 1 percent per year), so a 1 percent interest rate on $70,000 would be $700 — a very inexpensive way to keep cash in the business.

You only have to pay the interest charge on profits that are not distributed to owners of the IC-DISC. If the profits are all distributed, you are not going to incur that interest charge.

How can a company establish an IC-DISC?

The owners of an IC-DISC must form a regular (Subchapter C) corporation and that entity must make an election to be treated as  an IC-DISC on IRS form 4876-A. Next, set up a bank account with a minimum capitalization of $2,500 and issue stock. It is wise to form the corporation in a state with no state corporate income taxes (i.e., Nevada), to maximize tax savings. However, the corporation must be formed and the IC-DISC election must be made before benefits can begin to accrue in the IC-DISC. So unlike other tax benefits, this one is not retroactive to the beginning of the year the IC-DISC was formed. The benefits only start when the entity is in place and the proper paperwork has been filed.

What is the future of IC-DISCs?

With the current economy, IC-DISCs are an incentive for U.S. taxpayers to export products. Anything the U.S. can do to improve its balance of trade and the trade deficit is a positive result. Under the extension of the Bush tax cuts, the 15 percent rate on qualified dividends will last through 2012. No one knows what will happen with that rate after that, or whether IC-DISC dividends will still be considered qualified dividends.

Most experts think that IC-DISC distributions will continue to be treated as qualified dividend income, but the preferential rate may increase. But even with a reduced benefit, IC-DISC owners would still pay tax at lower than the 35 percent corporate rate.

Henry J. Grzes, CPA, is director in tax at SS&G. Reach him at (330) 668-9696 or HGrzes@SSandG.com.

Chalk it up to simple economic realities, but a capital expenditure requires quite a bit of forethought these days. This makes finding the best equipment financing for your business more important than ever, says Tim Evans, president of FirstMerit Equipment Finance.

“We tend to keep equipment around a lot longer than we have in the past,” Evans says. “It’s important that when you get that initial piece of equipment and you make your decision on financing that you are thinking long term, not just short term, and that you understand the value of that equipment to your business.”

Smart Business spoke with Evans about how to set up the best equipment finance agreement for your business, and what not to do when structuring the agreement.

What are some issues companies should consider when financing equipment?

Companies should think through the true economic life of the equipment. How long will you be able to use it in its current application? Can it be converted to some other capacity to lengthen the life of the equipment longer than it would normally be? Are there upgrades or refurbishments that could extend the life of the equipment?

How can companies determine whether financing or purchasing a piece of equipment is the right choice?

You can’t be short-sighted in how you use your capital today. We’re coming out of a recession, and many customers are asking for sale leasebacks because, prior to the economic slowdown, they tied up their capital in their equipment purchases. When you run into a down cycle like we’re in today, you need working capital to run your business. But when you’ve tied it up in your equipment, you’re out of luck.

Equipment financing and leasing is the way to go to avoid a shortage in working capital. If you have the ability to finance your equipment and keep working capital in your business, that gives you more flexibility. It’s very difficult to structure a sale leaseback 12 to 18 months after you paid cash for the equipment, because the equipment depreciates and its value will be a lot less at that point in time.

What should business owners look for when setting up financing agreements for leased or purchased equipment?

One of the biggest misnomers in the industry is to look for the absolute lowest rate for your equipment financing. Money is money, but when you are looking for equipment financing, you want to work with a partner who understands your business, and who understands the necessity of being able to do something different down the road if your situation changes. You need flexibility.

Often, companies get offered a below-market rate that looks great at the time they signed the deal. But what if they are two years into their five-year deal and they need to make a modification? When you go into that low of a rate structure, many times the flexibility just isn’t there because of the tight requirements in order to achieve the goals that the lessor established in the deal.

At FirstMerit, we look at it as an overall relationship. Our goal is to give you the ability to work within your business frame to make any necessary changes in how you are doing business if your situation changes.

You should look to work with a lessor that is flexible. If you just go with whoever is offering the lowest rate on the street, you’ll find that service and price don’t always go hand in hand. We will always be competitive, but we also pride ourselves on being a good service partner.

What are some typical equipment financing mistakes that companies make, and how can they be avoided?

The biggest mistake companies make is they aim for the lowest possible payment. Typically, that means you get the longest possible term, which can create a lot of issues down the road.

You might have an asset that won’t be of any use to you after five years. But you have a targeted payment in mind, and because of that you need an seven-year term. The structure of the lease, the potential buyout on the back end of the lease, whether it is a fair market value lease or a conditional sale — those are all issues you want to be aware of, because they are going to impact what happens down the road when you decide whether you want to buy that equipment or return it.

Another key point: make sure you understand the tax ramifications of your transaction. It may be beneficial to your company to pass any bonus depreciation on to the lessor (the bank) and do a true lease, because you could receive a lower payment structure. In this case, the lessor would take the depreciation benefits and then pass those benefits back to you in the form of a lower rate.

Always ask questions and make sure you read your documentation — especially the fine print. You don’t want any surprises down the road so make sure you read your documents thoroughly.

How can business owners determine whether an equipment lease being offered by their bank is a good one for their business?

There are three major components to consider. First, how long are you keeping the equipment? Can you utilize the tax benefits? If cash flow is an issue, is 100 percent financing more attractive than a conventional term loan where a 20 percent down payment may be required?

Tim Evans is president of FirstMerit Equipment Finance. Reach him at (330) 384-7429 or Tim.Evans@firstmerit.com.

In today’s global marketplace, many U.S. companies have the desire to claim a position at the forefront of innovation. However, if your company is developing innovative ideas, it also has a higher level of exposure to the risk of patent or copyright infringement.

“A lot of companies think they have the coverage for this exposure, but they really don’t,” says Phil Coyne, a vice president with ECBM Insurance Brokers and Consultants. “Copyright and patent infringement coverage is usually limited in a standard commercial general liability policy, if it is included at all.”

By taking steps to protect your intellectual property, you can achieve an offensive position within your market, and use those protections defensively to keep others from encroaching on your market.

Smart Business spoke with Coyne about how to protect your patents and copyrights.

Why is patent and copyright infringement important?

With the increasing use of the Internet, e-commerce, technology and a global marketplace, and with many companies using these tools for their advertising and sales, there is a higher exposure to patent and copyright infringement claims.

Companies need to protect themselves from these exposures because infringement claims can have several negative consequences for a business. First, costly lawsuits can be avoided and, second, a copyright infringement claim can do irreparable damage to a company’s brand and its reputation with customers.

Is there coverage available for patents and copyright?

The simple answer is yes, but it is a little more complicated than that. While many companies may believe that they have coverage under their standard commercial general liability policies, that coverage is very limited in nature.

To trigger coverage for copyright infringement, an insured must first demonstrate that the injury occurred during the policy period and that it arose in conjunction with its advertising activities. The typical policy has an intellectual property exclusion, and there is not coverage for patent infringement.

In response to the exposure and gap in coverage in this area, the insurance industry has developed various policies. There are specialized policies available for coverage of copyright infringement outside of your advertising activities. There are also specialized policies available for patent infringement.

Examples of these policies are:

* A defense and indemnity policy that is designed to cover claims brought against an insured for its activities regarding use, distribution, advertising and/or sale of its product. This type of policy usually covers the insured’s liability for defense costs, damage awards and settlement payments. Defense costs typically erode the limits of coverage.

* Infringement abatement coverage. This type of policy covers the insured’s costs in bringing and prosecuting litigation against alleged patent infringers. Infringement abatement policies typically cover 75 to 80 percent of the litigation costs but do not cover liability for judgments or damages. Also, the insurer will share in any recovery achieved.

* Patent defense only, or patent infringement defense costs reimbursement, is a type of policy that provides coverage for an insured’s defense costs in patent litigation but does not provide for damage awards against the insured.

How can a company ensure that its patents and copyrights are protected?

There are two main steps companies must take. First, analyze this additional risk and exposure. Second, have an internal companywide intellectual property compliance program. If you do not have one already set up, begin developing one immediately. These programs will enable companies to do two very important and necessary jobs in the risk prevention process — both safeguard their intellectual property and help ensure that they do not infringe on the intellectual property rights of others.

What do companies need to know about an intellectual property compliance program?

There are four aspects of an intellectual property compliance program that companies should strive to understand and implement.

First, it should consist of a clear statement of the company’s policies and procedures regarding intellectual property and its use and development.

Second, it is necessary for personnel to have a clear understanding of their responsibilities and duties.

Third, a successful property compliance program needs a formal training portion to help employees learn about these issues.

And finally, the company must continue to monitor and update its program and all related procedures.

Are there any legal changes businesses should be aware of?

Congress just passed the America Invents Act effective Sept. 16 that is supposed to speed up the U.S. Patent and Trademark office so that the U.S. will be more aligned with the international marketplace regarding patent applications. Even though the process has been streamlined and this law is designed to try to eliminate cases of litigation and patent law, it could cause a potential increase in the number of claims as companies rush to file claims to either take advantage of the old law or the new law.

Phil Coyne is a vice president with ECBM Insurance Brokers and Consultants. Reach him at (610) 668-7100 or pcoyne@ecbm.com.

Companies everywhere are going over their budgets with a fine-toothed comb. So where does intellectual property fit in?

Your IP assets are one of the most valuable parts of your business and you should treat them as such, says Steven M. Haas, a partner with Fay Sharpe LLP.

“The overriding factor to keep in mind is that your intellectual property budget should not be considered overhead,” Haas says. “It should be considered part of your overall strategic plan, generating assets for the company.”

Smart Business spoke with Haas about how companies should evaluate the budget for their intellectual property.

What should companies keep in mind when developing an IP budget?

Your IP assets can slow down your competitors and increase their cost and uncertainty, and hopefully provide you with a proprietary market position. Another thing to consider is that banks and financial institutions love to see IP assets for financing, and for mergers and acquisitions. Patents, trademarks and copyrights are all critical assets. Also, by being proactive with your IP you can prevent problems down the road.

Your IP assets can be not only a sword but a shield for you, relative to your competitors.

How should companies determine how much should be allotted to their IP budget?

As your company develops new products and as you work with an outside counsel, it’s important to develop a plan to protect those innovations within whatever budget you can afford. Your outside counsel can certainly help you prioritize. There is no rule of thumb for how much you should be spending on your IP, like a certain percentage of total sales or something similar.

Businesses should keep in mind that these costs are often cyclical. For small and medium-size companies, it’s common for IP costs to ramp up when new products come out. But over time, things even out. There will be a cycle with fewer fees. The costs follow your product innovation cycle.

There are trends in industries where technological advances and customer-driven improvements contribute to a cycle with more fees. The budget for patents in particular is very cyclical for small and medium-size businesses.

What are some tips for controlling your IP budget?

There are several strategies companies can use. First, it's important to have a patent committee or person at your company responsible for interfacing with outside counsel to make sure that you are protecting what you need to protect and not wasting money on things that are no longer important. Depending on the size of the company, most companies have a person or committee that will interface between inventors, engineers and the business units on one hand and outside counsel on the other. That way you have a single point of contact with the firm, preventing mistakes, duplication of effort, and funds being spent where they shouldn't be.

With high turnover at today's companies, it's not uncommon for the patent lawyer/outside counsel to have been there longer than many others at the company, as a constant presence over many years and stages of the company. Rely on that experience.

Another tip: maintaining old patents is very costly. Once you receive a patent you have to pay maintenance fees four, eight, and 12 years after the patent is granted. The fees increase each time, so if a patent is no longer relevant to your product mix, you should cull your portfolio and make sure you are not spending your budget on these items.

Small companies — defined as companies with fewer than 500 employees — can receive a small entity discount from the U.S. Patent and Trademark Office.

What should companies do about international patents?

Foreign patent costs are very expensive. You have to be rigorous in terms of deciding to pursue patents and other intellectual property in other countries. The decision has to be justified by your sales or distribution in that country. You also must have a realistic ability to enforce the patent in that country, because the maintenance costs are so huge.

Most foreign patents require yearly fees, known as annuities, to keep them in effect. Many companies spend too much on foreign protection and ignore new projects, a decision that rarely makes the most business sense.

What are some other tips for patent budgeting?

Try to eliminate layers. Work with the lawyer at your outside counsel who is directly responsible for your matters. If you eliminate layers, you eliminate cost.

For some companies, using the provisional patent application can reduce costs. It is a less formal patent application, with a lower expense, but it can preserve patent rights — temporarily at least.

It's important to be proactive and avoid litigation, which can be extremely expensive from a direct cost aspect and because of the time involved. Work with patent counsel to avoid IP conflicts with your competitors. It can save you tons of money and headaches down the road. The earlier we see these issues, the more we can do to help you design around someone else's patent, invalidate the patent or come up with an alternative way forward.

All companies are very focused on budget right now. Outside firms are very willing to work within a set budget and to provide and build target billing estimates or fixed fees. We are very flexible about working with company's budgets, because that is what companies demand now. So don't be afraid to discuss budget issues with your outside counsel. There is always a plan that works for both the client and the lawyers.

Steven M. Haas is a partner with Fay Sharpe LLP. Reach him at (216) 363-9149 or shaas@faysharpe.com.