Congress enacted the Americans with Disabilities Act in 1990 which included the terms "job-related and consistent with business necessity" in Section 703(k) of Title VII as part of a Congressional compromise. The amendment to the act which went into effect in 2008 did not affect the business necessity provision.

Case law regarding business necessity is very limited; however, a recent case in point is Atkins v. Salazar, 2011 U.S. App. LEXIS 25238 (5th Cir., Dec. 12, 2011), in which the Fifth Circuit issued an instructive opinion analyzing the business necessity defense in the context of diabetes.

The Fifth Circuit described the business necessity standard as follows:

For a qualification to be "job-related," "the employer must demonstrate that the qualification standard is necessary and related to 'the specific skills and physical requirements of the sought-after position.'" Similarly, for a qualification standard to be "consistent with business necessity," the employer must show that it "substantially promote[s]" the business' needs.

The court further noted, based on an earlier ruling, that it must "take into account the magnitude of possible harm as well as the probability of occurrence ... the probability of the occurrence is discounted by the magnitude of its consequences."

Under the Americans with Disabilities Act, not only must a medical exam be job-related, it must also be consistent with business necessity. This means that the medical exam must relate to the essential functions of the job. The medical exam must test the ability to perform the primary functions of the job. For example, if you are a cashier at a grocery store, the essential functions of your job would be to ring people up and help them bag their items. Any medical exam your employer required would have to be related to how you perform those functions in order to be consistent with business necessity. It is important to note that as long as the medical exam evaluates some function of the job, it should satisfy the elements of business necessity.

Under the Americans with Disabilities Act, an employer may have the ability to make disability-related inquiries or require medical examination. After the applicant is given a conditional job offer, but before starting work, an employer may make disability-related inquiries and conduct medical examinations, regardless of whether they are related to the job, as long as it does so for all entering employees in the same job category (post-offer). After employment has commenced, an employer may make disability-related inquiries and require medical examinations only if they are job-related and consistent with business necessity.

The Americans with Disabilities Act requires that all medical information obtained during such inquiries or testing be treated as confidential medical information. While this provision covers all employees, only disability-related inquiries and medical examinations are subject to the Americans with Disabilities Act's restrictions. A disability-related inquiry is defined as asking questions or testing that is designed to elicit information about a person's disability. Therefore, questions or testing that is not designed to ask or evaluate information about an individual's disability are not prohibited under the ADA.

A medical test as defined under the Americans with Disabilities Act is a procedure or test that seeks information about an individual's physical or mental impairments or health. Factors that determine if it is a medical test include:

• whether the test is administered by a health care professional;
• whether the test is interpreted by a health care professional;
• whether the test is designed to reveal an impairment or physical or mental health;
• whether the test is invasive;
• whether the test measures an employee's performance of a task or measures his/her physiological responses to performing the task;
• whether the test normally is given in a medical setting; and,
• whether medical equipment is used.

The topic of medical testing, especially functional testing, is a controversial subject. In the fall of 2009 two major case precedents brought to light these very issues — Indergard vs. Georgia Pacific and the class action lawsuit brought against Sears. On September 29, 2009, the U.S. Equal Employment Opportunity Commission (EEOC) announced a record-setting consent decree resolving a class lawsuit against Sears, Roebuck and Co. under the Americans with Disabilities Act for $6.2 million.

These recent rulings bear out that the Functional Capacity Evaluation (FCE) may be a medical exam. Even when classified as medical evaluations, Functional Capacity Evaluations don't physically correlate with true physiological function. The issue becomes whether or not these tests are able to accurately or objectively test for functionality. These rulings illustrate that Functional Capacity Evaluations that contain validity measurements that are subjective observations, do not correlate with effort and are not consistent with affected body parts are not legally defensible.

As we have seen with the Indergad and Sears cases, courts are examining these issues closely and unless there is an objective assessment, the employer or carrier is left virtually unprotected. For ADA compliance, the testing needs to be repeatable, objective, and address functionality.

Under the Americans with Disabilities Act, an employer may not require a current employee to undergo a medical examination unless the examination "is shown to be job-related and consistent with business necessity." 42 U.S.C. § 12112(d) (4) (A). This section applies to all employees, whether or not they are disabled under the Americans with Disabilities Act. The Indergard decision clearly demonstrates the need for an objective measure of performance that must conform with business necessity.

In addition, recent case law — EEOC vs. Celadon Trucking — illustrates that if an individual does not meet the essential functions of the job, an employer needs to enter into the interactive process for the position for which they were applying or for any other open position for which the candidate is qualified.

Given all the legal mandates for the ADA and EEOC, coupled with state workers' compensation laws and Federal Mandatory reporting issues for work-related injuries, why do post-offer pre-placement tests? A better solution is baseline testing or a book end solution.

The Americans with Disabilities Act regulates testing that has the potential to evaluate a disability. So if a baseline test is non-invasive, captures the essential functions of the job with not only a reliable validity measurement but with an objective assessment of the muskuloskeltal system and is not read at the time of testing, it is not only acceptable under ADA but technically outside the scope. Why? Data is not evaluated at the time of the baseline test so no disability is identified and no medical questions are asked. It can be done at post-offer or with existing employees.

The book end solution is completed when there is a work-related incident, another test is performed under the workers' compensation pending case, and the results are compared. In the work-related case, the medical evaluation post loss test is allowed and not a violation of the Americans with Disabilities Act. Appropriate releases are signed prior to conducting the baseline testing, and the data is kept confidential. If no work-related injury occurs, the baseline data is never interpreted.

In summary, according to the Fifth Circuit ruling in the Atkins case, for a qualification standard to be "consistent with business necessity," the employer must show that it "substantially promote[s]" the business' needs. The business needs in the case of baseline tests are to provide better and faster treatment for the injured worker and to accept claims that arise out of the course and scope of employment.

Overview Of The Risk
There were more than 26 million new strains of malware released into circulation in 2011. Such a rate would produce nearly 3,000 new strains of malware an hour! Almost two-thirds of U.S. firms report that they have been the victim of cyber-security incidents or information breaches. The Privacy Rights Clearinghouse reported that since 2005, more than 534 million personal records have been compromised. In 2011, 273 breaches were reported, involving 22 million sensitive personal records. The Ponemon Group, whose Cost of Data Breach Study is widely followed every year, indicated a total cost per record of $214 in 2011, an increase of over 55% ($138) compared to the cost in 2005 when the study began.

Other surveys are consistent. NetDiligence, a company that provides network security services on behalf of insurers, reported in their "2012 Cyber Risk and Privacy Liability Forum" the results of their analysis of 153 data or privacy breach claims paid by insurance companies between 2006 and 2011. On average, the study said, payouts on claims made in the first five years total $3.7 million per breach, compared with an average of $2.4 million for claims made from 2005 through 2010.

And attacks simply don't target large companies. According to Symantec's 2010 SMB Protection report, small busineses:

• Sustained an average loss of $188,000 per breach
• Comprised 73% of total cyber-crime targets/victims
• Lost confidential data in 42% of all breaches
• Suffered direct financial losses in 40% of all breaches

Indeed, according to the 2011 Verizon Data Breach Report, in 2010, 57% of all data breaches were at companies with 11 to 100 employees. Interestingly, it was the Report's opinion that 96% of such breaches could have been prevented with appropriate controls. Bottom line: cyber attacks are here to stay — and in many ways, they are getting worse.

A Look At The Financial Institution Sector
Willy Sutton once infamously remarked that he robs bank because "that's where the money is." According to Professor Udo Helmbrecht, the Executive Director of the European Networking and Information Security Agency, if Willy Sutton was alive today, he would rob banks online.

Criminals today can operate miles, or even oceans, away from the target. "The number and sophistication of malicious incidents have increased dramatically over the past five years and is expected to continue to grow," according to Gordon Snow, Assistant Director of the Cyber Division of the Federal Bureau of Investigation (testifying before the House Financial Services Committee, Subcommittee on Financials Institutions and Consumer Credit). "As businesses and financial institutions continue to adopt Internet-based commerce systems, the opportunity for cybercrime increases at the retail and consumer level." Indeed, according to Snow, the FBI is investigating 400 reported account takeover cases from bank accounts of US businesses. These cases total $255 million in fraudulent transfers and has resulted in $85 million in actual losses.

According to the FBI, there are eight cyber threats that expose both the finances and reputation of financial institutions: account takeovers, third-party payment process breaches, securities and market trading company breaches, ATM skimming breaches, mobile banking breaches, insider access, supply chain infiltration, and telecommunications network disruption.

It was telecommunications network disruption that dominated the news in 2012.

Otherwise known as a distributed denial of service attack, US banks were attacked repeatedly throughout the year by sophisticated cyber "criminals" whose attacks were eventually sourced to the nation of Iran in what would truly be considered a Cyber War attack against this country's infrastructure.

Among the institutions hit were PNC Bank, Wells Fargo, HSBC, and Citibank, among many others. Big or small, it made no difference. At the end of the day, as many as 30 US banking firms are expected to be targeted in this wave of cyber attacks, according to the security firm RSA. And it is likely that we are not at the end of the day. On January 9, 2013, the computer hacking group that has claimed responsibility for cyber attacks on PNC Bank vowed to continue trying to shut down American banking websites for at least the next six months.

That is not to say that financial situations only had to worry about distributed denial of service attacks launched by hostile nation states in 2012.

On December 13, 2012 the Financial Services Information Sharing and Analysis Center, which shares information throughout the financial sector about terrorist threats, warned the US financial services industry that a Russian cyber-gangster is preparing to rob American banks and their customers of millions of dollars. According to the computer security firm, McAfee, the cyber criminal, who calls himself the "Thief-in-Law," already has infected hundreds of computers of unwitting American customers in preparation to steal that bank account data.

Of course not all threats look like they come from the latest 007 flick. On October 12, 2012, the Associated Press reported TD Bank had begun notifying approximately 260,000 customers from Maine to Florida that the company may been affected by a data breach. Company spokeswoman Rebecca Acevedo confirmed to the Associated Press that unencrypted data backup tapes were "misplaced in transport" in March 2012. She said the tapes contained personal information, including account information and security numbers. It is unclear why the bank waited until October to notify customers. Over 46 states now have mandatory notification laws that dictate prompt notification to bank customers of missing or stolen "Personally Identifiable Information." Failure to make timely notification can, and often does, prompt customer lawsuits and regulatory investigations.

The bottom line: you cannot be a financial institution operating in the 21st Century and not have a cyber risk management plan which includes the purchase of cyber insurance.

The Cyber Insurance Market
With these facts, it is not surprising that the cyber insurance market has grown tremendously from its initial beginning in 2000. Starting with what was the brainchild of AIG and Lloyds of London, the market has grown to over 40 insurance providers. A widely accepted statistic is that the market now produces over $1 billion in premium to insurance carriers on a worldwide basis.

Despite the increasing claim activity, informal discussions with the market continue to indicate that cyber risk is a profitable business. Perhaps, it is for this reason, cyber premium rates are flat to down 5% according to industry reports in the market where rates in property-casualty are generally increasing.

Carriers also see this as an area where there are many non-buyers, and statistics seem to back them up. According to the "Chubb 2012 Public Company Risk Survey: Cyber," 65% of public companies surveyed do not purchase cyber insurance, yet 63% of decision-makers are concerned about this cyber risk. A risk area with a high level of concern but little purchase of insurance is an insurance broker's dream. In a recent Zurich survey of 152 organizations, only 19% of those surveyed have bought cyber insurance despite the fact that 76% of companies surveyed expressed concern about their information security and privacy.

It is unclear why there aren't more buyers but most of the industry believes it's a lack of education. For example, previous surveys indicated that over 33% of companies incorrectly believe that cyber risk is covered under their general corporate liability policy.

It is then perhaps not surprising that the Betterley 2012 market report stated "we think this market has nowhere to go but up" Although, they quickly qualified, "as long as carriers can still write at a profit."

Brokers who place School Board and Educators Legal Liability insurance are beginning to notice that the marketplace has gotten more difficult. Layoffs from budget cuts have triggered an increase in Employment Practices Liability (EPL) claims, while the tough job market has led to an increased amount of "failure to educate" claims.

The very public proceedings involving Penn State University have recently reminded us that sexual abuse and molestation are critical claim issues for schools. Any article written about a class of business that touches Personally Identifiable Information (PII) and doesn't mention Cyberliability fails to address another major source of trouble.

Based on these and other factors, insurers are either non-renewing business or re-underwriting their book, which leads to a restriction in terms.

The typical School Board or Educators Legal Liability policy is designed to protect not only teachers, but also school board members, administrators, volunteers, student teachers and various other members of the educational staff. In a standard policy, the definition of "Wrongful Act" includes coverage for an actual or alleged breach of duty, neglect, misleading statement and other errors or omissions of an insured educator in their capacity or scope of employment on behalf of the educational institution. Most policies also include coverage for Employment Practices Liability (EPL) claims, which tend to be the most frequent cause of loss.

Typical allegations found in claims include:

• Failure to educate
• Failure to supervise a classroom
• Loss of accreditation
• Employment-related lawsuits claiming sexual harassment, wrongful termination or discrimination
• Misstatements, misleading statements, breaches of duty, neglect, errors or omissions made by a paid or volunteer board member who assists the school in making critical decisions about operations and economic survival
• Failure to respond to or prevent bullying activities of the students

Market Commentary
Below are examples of the additional claim scenarios that insurers are seeing in this class of business.

"We are seeing the severity of educators' claims increase dramatically." — Stephanie Gardner, RSUI

"The biggest issue that we have seen regarding Educators Legal Liability is on the EPL side. This has historically been a frequency-driven class and we have seen an even larger increase in frequency. We have also seen frequency develop into severity, which we had not seen to this extent before. There doesn't seem to be any new trend in the type of EPL claims, just more of them. I believe a lot of this is just a function of the economy and the pressure on school districts to reduce their budgets." — Matthew Cibulskas, Westchester Specialty

"Bullying claims are being litigated under a 'failure to supervise' accusation. The financial damages to the parents are that they had to pay private school tuition because they had to leave the public school system after nothing was done to stop the bullying. And redistricting claims — many institutions have budget issues and, as a result, are closing schools and consolidating. This has triggered a lot of claims against the school boards." — Steve Krusko, AIG

"I have seen issues with the for-profit educational segment regarding the federal tuition funding (loans/scholarships) as well as issues with dismal graduation rates and failure to educate allegations." — Roy Huelsebusch, Crum & Forster

"Unfair competition and misrepresentation during the admissions process, as well as admissions to programs that don't have full accreditation yet (nursing programs seem to be frequent offenders here). Regulatory interest — a high percentage of tuition comes from Pell Grants so state Attorneys General have been pursuing litigation for unfair/deceptive trade practices." — Rob Faber, AIG

If there was just one area of concern, underwriters could manage that risk with exclusions, sublimits, higher retentions or other means of mitigation. However, with severity increasing and claims coming from many directions, the marketplace has to respond. Underwriters can either withdraw from the marketplace or attempt to work around the hot spots. As mentioned earlier in this article, many insurers have moved away from this class while others are indeed revising their pricing, retentions and coverage terms.

With many schools having renewals on or around July 1, now is the time to formulate your renewal strategy, communicate the conditions of the market to your insured, and begin discussions with your current and prospective insurers.

Workers' compensation insurance, like other employee benefits programs, continue to be a major expense to most employers. Decision makers are always looking for ways to better manage their cost, but sometimes the containment can be out of their influence.

For many years, employers enjoyed lower workers' comp rates as a result of reforms signed by our previous Governor and the competitive nature of the California insurance marketplace. Late last year, the workers' comp market began to change and insurance companies began to raise rates and become more selective about which employers they would keep or consider as new customers. Rising medical costs to treat injuries, increases in the insurance company costs of doing business, as well as lower returns of investment by insurance companies also led to this market shift.

Employers who had a series of injury claims, or even a large claim, also experienced greater increases in their workers' comp premium, because of the way their Workers' Comp Experience Modification Factor calculation was changed.

As a result of these premium increases, there has been a move by employers to seriously consider a Professional Employer Organization (PEO) to take the place of their workers' comp and employee benefits programs. A Professional Employer Organization is an arrangement where an employer essentially transfers their employees to another organization who then "leases" them back to their organization. This may relieve employers of direct involvement in the management of employees, but they still retain responsibilities as a "co-employer."

Professional Employer Organizations have historically been an alternative to employers who have had a history of claims, because the Professional Employer Organization companies seem to offer lower costs. In my experience, most Professional Employer Organizations organizations offered little or no reduction in the number and severity of work injuries and resulted in a continued increase in the employer's Experience Modification Factor.

To obtain up to date marketing information about how the major Professional Employer Organization organization view this changing insurance marketplace and how they are planning to respond to these changes, my firm's specialist contacted the seven Professional Employer Organization organizations that are utilized. The following information was obtained and it is being passed on to you, because this segment of employment and insurance providers is important for employers to know so they can make a more informed decision when considering the use of a Professional Employer Organization:

• Those employers who are unprofitable to a Professional Employer Organization are receiving rate increases in their insurance premiums and/or administrative fees to make them profitable to the Professional Employer Organization
• For those unprofitable employers who are not accepting the rate increases, they are being non-renewed. This action is very rare, but is a sign that the Professional Employer Organization marketplace, like the workers' comp insurance companies, are taking actions to become more profitable.
• Professional Employer Organizations only seem to consider new employers that have at least 10 full time employees
• The annual employees' compensation must average at least $30,000
• Professional Employer Organizations are dropping certain industries where the PEOs have encountered consistent non profitability

This information update causes us to conclude that employers who are historically financial losers to the insurance industry are also losers to the Professional Employer Organization organizations.

It can no longer be assumed that a Professional Employer Organization is always a viable alternative to employers who are not controlling their cost of work injuries.

Claims-prone employers who feel they can just "shop" every year to get the lowest rate will probably have a rude awakening.

What are some of changes that employers need to make to avoid a history of frequent and costly work-related injuries to keep employees from becoming "patients" of the workers' comp medical system?

• Accept that workers' comp is a way to finance claims
• Understand that you, as the employer, are ultimately paying for each work injury — have a claim and you the employer pays it back plus more
• Take the selection of employees and safety in the workplace more seriously — match the characteristics of the job with the characteristics of the candidate being considered
• Take an active role in the claims process
• Train employees in safe work practices and hold them and their supervisors accountable
• Maintain a respectful and positive relationship with employees
• Create an open working relationship with a medical clinic that practices "evidenced based medical treatment"
• If you do not have the resources to make changes, hire the appropriate insurance advisor to help them

The decisions employers make will determine how profitable their enterprise will be and ultimately will influence the financial value of their business. This is one of those times where appropriate decisions need to be made. The organization's financial success and the welfare of those who are employed by the enterprise are in the "hands" of the company's leaders. Let's hope the best decisions are made.

In the past few weeks, we have published two articles by Keith Jentoft, the Partnership Liaison of the nonprofit Partnership for Priority Video Alarm Response, regarding the use of video verified alarms. Recently, David Margulies of the Margulies Communications Group approached us and asked if we would be willing to publish an article which provides a different perspective. David's article appears below.

There is no question today that alarm intrusion systems are often one of the first lines of defense against insured losses from crime. According to the Electronic Security Association, which represents the majority of companies in the alarm industry, the breakdown for intrusion alarms shows them protecting virtually every type of insured business enterprise:

• residential: 40%
• commercial (office buildings, retail, banks, etc.): 30%
• institutional (schools, hospitals, churches, etc.): 11%
• industrial (factories, warehouses, utilities, etc.): 12%
• government (local, state, federal Facilities): 7%

In a national survey of police chiefs, 90 percent acknowledged that alarms both deter burglary attempts and increase the probability of a burglar being apprehended. Of the nation's approximately 18,000 public safety agencies, only a handful require confirmation from a business owner, witnesses or security guard before police are dispatched to an alarm site.

One of the most in-depth and comprehensive studies of the effectiveness of alarm systems in preventing losses was conducted by the Rutgers University School of Criminal Justice (SCJ). The study found that in Newark, New Jersey, residential burglar alarm systems decreased crime. While other studies have concluded that most burglars avoid alarm systems, this is the first study to focus on alarm systems while scientifically ruling out other factors that could have impacted the crime rate.

Researchers concentrated on analyzing crime data provided by the Newark Police Department. "Data showed that a steady decrease in burglaries in Newark between 2001 and 2005 coincided with an increase in the number of registered home burglar alarms," said study author Dr. Seungmug (a.k.a. Zech) Lee. "The study credits the alarms with the decrease in burglaries and the city's overall crime rate."

In short, the study found that an installed burglar alarm makes a dwelling less attractive to the would-be and active intruders, and protects the home without displacing burglaries to nearby homes.

The study also concluded that the deterrent effect of alarms is felt in the community at large. "Neighborhoods in which burglar alarms were densely installed have fewer incidents of residential burglaries than in neighborhoods with fewer burglar alarms," the study noted.

The alarm industry has aggressively addressed the issue of false alarms because of concerns that they were putting a strain on police resources. In 2003, industry leaders created the Security Industry Alarm Coalition (SIAC) which is comprised of four major North American security associations — Canadian Security Association (CANASA), Security Industry Association (SIA), Central Station Alarm Association (CSAA) and the Electronic Security Association (ESA) — representing one voice for the alarm industry on alarm management issues. The Security Industry Alarm Coalition's primary charter is to significantly reduce calls for service while strengthening the lines of communication with law enforcement professionals and end users.

"Eighty-five percent of the nation's alarm systems generate no calls to the police in any given year," said Stan Martin, Executive Director of the Security Industry Alarm Coalition. "People who say that 98 percent of reported burglar alarms are false are trying to justify ending police response to alarms without human verification of a crime (verified response). These people have failed to perform their due diligence on public safety and industry best practices."

Working in a partnership with law enforcement, the Security Industry Alarm Coalition has helped communities significantly reduce the number of alarm calls made to police by promoting industry and law enforcements best practices including:

• The model ordinance requires registration of all alarm systems.
• Two phone calls by alarm companies to alarm owners prior to calling police.
• Technology designed into systems to avoid accidental triggering.
• Fines for alarm owners who create unnecessary dispatches.
• Suspending response to the chronic abusers.

According to a study just released by the Urban Institute, these steps allow communities to maintain police response while conserving law enforcement resources. The study notes that Montgomery County, Maryland was able to save $6 million in costs and reduce alarm calls by 60 percent. The reduction in alarm calls from 44,000 to 16,000 came despite a significant increase in the number of alarm systems.

According to Glen Mowrey, the National Enforcement Liaison of the Security Industry Alarm Coalition:

• Marietta, Georgia reduced alarm calls 65 percent in two years with annual revenues of $223,050 in 2008 and $94,800 in 2009;
• Johnson City, Tennessee reduced alarm calls 50.1 percent over a four-year period;
• Union City, Tennessee showed a reduction of 55.4 percent over a four-year period; and,
• during a 14-year period, the police department in Charlotte-Mecklenburg, North Carolina brought down its percentage of alarm calls, out of total calls for service, from 20.1 percent to 2.4 percent annually, netting 13.5 police officers and an annual revenue in 2009 of $334,470, which includes a reimbursement for 2.5 full-time employees from an outsource company contracted to administer the billing and tracking component.

As new technology emerges, the Security Industry Alarm Coalition is at the forefront of helping develop standards and policies with its partners in the law enforcement community. "Alarm systems and technology are constantly changing and improving," said Stan Martin, SIAC Executive Director. "Our major and long established trade and professional associations that support SIAC are constantly working to make sure there are standards in place to properly apply this technology."

"The working relationship between public safety agencies and the alarm industry has never been stronger," said Mowrey, not only the National Enforcement Liaison of SIAC, but also the former Deputy Chief of Police in Charlotte/Mecklenburg, North Carolina. "Eleven states have created state-wide committees to work with the industry on alarm issues and they all have adopted some form of SIAC's model alarm ordinance."

The Security Industry Alarm Coalition also serves as the industry's voice working with national law enforcement organizations such as the International Association of Chiefs of Police and the National Sheriffs Association.

Through the Security Industry Alarm Coalition, the alarm industry is always available as a resource to the insurance industry for questions, concerns, or more information on how the alarm industry can continue to protect the insured from unnecessary losses.

What health plans and brokers don't want you to know....

Sometimes it's humbling to admit what you don't know. It's even worse to realize that you don't know what you don't know (YDKWYDK - pronounced, yidick-widick). Well, last fall I was hit square in the face with an embarrassing case of YDKWYDK. Silly me, I presumed that within certain boundaries, actuarial science is, well, a science. Based on the experience/characteristics of a population, and the design of a plan, there was a narrow range within which premiums would be assessed. Not exactly.

Informed Purchasers Can Get Better Coverage And A Lower Cost
I advise employers about how to manage health care costs. That's what I do for a living. Well, I discovered there is a process for uncovering available savings of which I've been unaware. Let's call it the informed purchaser discount. It turns out if you:

• Learn more about how rates get set (not necessarily based on actual claims risk), and
• Discover where fees might be hidden (many places), and
• Inform yourself on calculations health plans use to forecast cost and protect themselves from exposure (quite conservatively), and
• Partner with someone who has the data platform and predictable process to uncover available savings, and
• Design a new plan that aligns patient and provider interests,

You can pay a lot less for coverage.

Why Don't You Already Know About This?
Well, it turns out there are incentives built into the system such that:

• Most brokers — who are paid by the plans — are reluctant to push back on plans for better prices, and
• Brokers who do push back may get penalized by the plans with worse quotes or slower service, and
• The timing of quotes are manipulated to rush decisions and leave less time for deliberations, and
• Because it's a hassle to price many different designs, the plans and brokers often choose a favorite and don't bother to tailor it to specific client needs, and
• All plans tend to operate this way, so you won't detect over-charging by simply comparing among them.
• Thus, benefits managers are left reporting to the executive team, honestly: "This is the best I could find."

Sigh. In other words, circumstances are stacked against the individual employer, especially small ones that are fully-insured. The traditional industry process is meant to keep us in the dark.

Worse yet, as traditional benefit professionals, we don't know what we don't know. There are many reasons not to rock the boat. Perhaps there is a long-term, trusted relationship with the broker; they've become our friends. Brokers won't tell you that they think you can get a better deal — otherwise you would question why they aren't getting it. Perhaps there is fear that getting a different broker or an outside advisor will be looked upon as a sign that we have made poor choices in the past. Perhaps it is simply easier to do what we always do. Perhaps we assume we will get the best deal through the competitive bidding process. Perhaps we assume that because we are smart and capable in other areas, the same approach applies in health coverage. Whatever the reason, the vast majority of businesses don't have the insight to demand and get the informed purchaser discount.

So, you ask, how much can that discount be? (Are you sitting down?) $1,000 to $3,000 per employee, every year. For a 500 person company, that equates to overpaying between a half a million and 1.5M dollars on health care over the past five years. It's shocking, it's appalling, it's something I would not have believed ... but folks, it's real. And you can do something about it.

I have spent my professional benefit career advising employers about plan design, corporate policy, health care quality, and health interventions. All the while, I should have been encouraging them to partner with an experienced purchaser who knows the process and can share understandings of risks and incentives.

Stop Paying A Penalty Simply For NOT Being Informed
The only way to get an informed purchaser discount is to make the process transparent and work with someone who only has a financial incentive to save you money. This doesn't mean you fire your broker (unless you want to), only that you insist on having a broker who will partner with an independent plan reviewer/designer. You want someone who is not threatened by complete transparency — something you will learn is not welcomed by plans or most brokers. (If your broker resists, I can recommend a few who do advocate transparency and are open-minded).

What should the independent party do?

1. Review your current plan and experience at no charge.

2. Assess the savings opportunity at no charge.
   Explain your design options and confirm you are comfortable with specific types of changes. The savings should not be solely derived from making the plan less desirable, such as:

   • restricting access to providers
   • shifting large increases in cost to employees
   • design changes that discourage employees from choosing coverage
3. If savings are not likely, state that fact, shake hands and part ways.
4. Charge a reasonable fee, most of which is contingent upon meeting a minimum savings (e.g. $1000 per employee).

In other words, there should be no cost or risk to assess your opportunity, and the group who guarantees savings should get paid after the savings are achieved.

Does such an organization exist? Yes. It's not a brokerage, but a small, independent consulting group called Incenta, that is saving its clients a lot of money. Do I work for them? No, but I am introducing them to my clients because it feels bad not to. Will I be partnering with them in the future to bring this solution to more employers? Absolutely.

What Now?
This article is a stark departure from my usual analytical or policy-oriented discussion. Readers who know me know that I investigate topics thoroughly and thoughtfully. Despite this, all of us encounter situations where yidick-widick, and we discover new solutions to old problems. It's not a sin to find out we didn't know — but I've decided it's inexcusable to ignore it now that I do know.

Never have I been more convinced that a different sort of expert is needed. Plus, in this case it happens to be very low risk — no cost to assess potential savings, and the vast majority of fees contingent upon achieving $1000 to $3000 of savings per employee.

So, I encourage every benefits manager to become one of the (few) informed purchasers. Don't wait until your renewal is approaching. And don't be afraid to admit YDKWYDK — better to learn this now than continue paying the penalty for remaining uninformed. Call or email me or the others listed at the bottom of this article. Become informed. Your bottom line, and your company executives will thank you.

For those interested in following up, talking it though, or getting started toward a better process of getting health care coverage, feel free to contact:

Wendy Lynch
Send Email to Wendy

Dennis Kelly
Send Email to Dennis

Dave Dias (one of the transparency-advocating brokers I know)
Send Email to Dave

• Refusal to hire an otherwise qualified job applicant because of the protected characteristic;
• Disciplinary action that leads to suspension, loss of pay or benefits, or job status change;
• Demotion or an unfavorable transfer to a materially different position;
• Denial of promotion or advancement;
• Failure to engage in an interactive process to evaluate reasonable accommodations;
• Failure to make a reasonable accommodation; and
• Termination or discharge.

1. S/he has a physical or mental disability or medical condition, as those terms are defined in the law (and the new regulations);
2. S/he is qualified for the position she seeks or holds, meaning that s/he is able to perform the essential job functions with or without reasonable accommodation;
3. The district denied an equal employment opportunity by taking an adverse action against him/her; and,
4. A "causal connection" between the individual's disability or perceived disability and the denial of an employment opportunity. In other words, the decision was based, at least in part, on the disability, medical condition or perceived disability.

• Employee can no longer perform essential job functions, even with accommodation;
• Accommodation of the essential functions of own job creates an undue hardship; and
• Agreement with employee that reassignment is preferable to accommodation in U&C.

Is that guy you have doing that work you need done an independent contractor or an employee? Why does it matter? Well, aside from a whole host of other issues, liability for industrial injuries may hinge on whether that worker was an employee or an independent contractor.

Your humble author recently had occasion to visit his uncle Olaf. For those familiar with the exciting sport of competitive clam-breeding, you'll no-doubt have heard of Olaf the Clamtastic, world-famous for his exceedingly rare clam-breeding abilities. He also has a business which sells the Giant Clams he raises, "Olaf's World of Clams." "Uncle Olaf," I said, "who is that nice young man cleaning your prize-winning clams?" Uncle Olaf looked up from his magazine, Clams and Claims, and peered at his Olympic-sized swimming pool, the one where his giant clams ruled and all others feared to tread.

There, scrubbing the giant clams, was a young gentleman with a nervous look concealed by goggles and a breath mask.

"Oh," said Uncle Olaf, "That's Jim — he's my independent contractor helping me keep the Clams clean." As Uncle Olaf turned the page with one of his two hook-hands, I remarked "it's a good thing he's a contract worker and not an employee, those clams can be vicious!" But, the workers' compensation defense attorney in me felt something was amiss. So, being the good nephew that I am, I asked Uncle Olaf, "how do you know he's a contractor and not an employee?"

Uncle Olaf smiled, as if his silly nephew couldn't be any sillier, and said "because I didn't buy workers' compensation insurance for him, of course!"

Poor Uncle Olaf ...

The State of California does not require independent contractors to be covered by workers' compensation insurance. In theory, one could have a thriving business using nothing but independent contractors and saving untold fortunes on workers' compensation policy payments.

But, the law requires employers to either self-insure or obtain workers' compensation insurance for their employees. And, much to Uncle Olaf's surprise, the nature of a relationship, with respect to employer or contractor, is not determined by the possible employer's purchase or failure to purchase workers' compensation insurance. There is another test out there ...

But, let's start with the basics.

California Labor Code section 3353 defines an independent contractor as "any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished." Section 3353 was enacted in 1930, codifying the common law distinction between employees and independent contractors. But, this distinction wasn't concerned with workers' compensation, but rather with tort law. Whereas an employee could make his employer liable for injuries caused to third parties (imagine an employee-bartender accidentally dropping a crate of fine whiskey on a poor bar patron — an unbearably cruel thought, I know, but one necessary to shock and make the point), the liability buck stopped with an independent contractor.

But, as California Labor Code section 3357 specifically excludes independent contractors from the presumption of employment (and therefore the presumed requirement for the employer to insure or self-insure against those workers' industrial injuries), the issue is an important one — and case-law expanded the test. So, poor Uncle Olaf can't put his checkbook away just because he never took it out to insure against a worker's injuries. Uncle Olaf can't even put his checkbook away just because he doesn't micromanage the work or "control the means by which such result is accomplished."

After all, Uncle Olaf thought that, so long as he doesn't stand over the young gentleman's shoulder ... hovering ... judging ... making little comments and directing his every move ("you missed a spot, scrub that clam harder, put your hand inside the clam to get a better grip ...") the young gentleman could remain an independent contractor and Uncle Olaf could laugh at the competitor Clam stores paying insurance premiums every month.

So, dear readers, there I sat in my beloved Uncle Olaf's kitchen as he ground his hooks into his wooden table, nervously watching the man he hired to clean his prize-winning clams for his Clam sale business, who he thought was his independent contractor but was actually allegedly (your humble author is a zealous defense attorney, after all) an employee, place his hands inside the snappiest of Uncle Olaf's prize-winning clams. "Scrub from the outside!" he shouted, but the young gentleman cleaning the clams couldn't hear him ...

The California Supreme Court issued its opinion in the case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989), outlining the proper analysis for determination of the question of employment or independent contractor status. S. G. Borello & Sons owned farmland near Gilroy (a place with a wonderful Garlic Festival). Although they kept regular employees for the various crops grown on these farms, for cucumbers, the nature of the market dictated another approach. Cucumber harvesting was contracted out to various migrant farm-worker families.

The families were provided with the opportunity to lay claim to a certain amount of plots of cucumbers, were provided with crates into which to harvest the cucumbers, but were otherwise left to their own devices. The cucumbers were sold to a pickle company in the area, and the profits were shared between the land-owners and the harvesters.

For the multi-week cucumber harvesting season, the harvesters were responsible for taking care of the cucumbers, picking only those ripe and ready for picking, and generally seeing about maximizing profits. The most aggressive task-masters in S.G. Borello & Sons employ found themselves absolutely powerless at the edge of the cucumber plots, for no employees dwelt there — only independent contractors.

That is, until, the Department of Industrial Relations issued a stop-work order. Finding that the independent-contractors were actually employees, and uninsured employees at that, the Department of Industrial Relations went on the war path against poor Mr. Borello and his sons (as well, effectively, against all other farmers in the Gilroy area that adopted the same practices).

Borello's argument before the Supreme Court was simple — unlike other crops, cucumbers required a degree of knowledge and skill for harvesting, and the harvest workers were compensated for the final product and not the means of rendering service. But the Supreme Court found that other factors, primarily found in the Restatement Second of Agency, play into the analysis as well, among them:

1. The right to discharge at will, without cause;
2. Whether the worker is engaged in a distinct occupation or business;
3. Whether the occupation, in that locality, is typically performed by a specialist without supervision;
4. The skill required in the particular occupation;
5. Whether the worker supplies the instrumentalities, tools, and the place for doing the work;
6. The length of time for which services are performed;
7. The method of payment (hourly or by task);
8. Whether the work is part of the regular business of the principal; and
9. The intent of the parties.

The Borello Court noted that "under the [Workers' Compensation] Act, the "control-of-work-details" test for determining whether a person rendering service to another is an 'employee' or an excluded 'independent contractor' must be applied with deference to the purposes of the protective legislation."

The Court also noted that the workers made minimal investment in their work — no heavy equipment but just basic tools.

Other cases followed too.

In the case of Jose Luis Lara v. Workers' Compensation Appeals Board (2010), for example, the Court of Appeal examined whether a garden-variety handy-man could be an independent contractor. Lara sustained a pretty serious injury while doing work for a small shop called Metro Diner. Metro Diner didn't have Lara covered by its workers' compensation policy because he had no regular employment — he was called up to do odd work such as trimming bushes along Metro Diner's roofline.

Lara provided his own equipment, paid his own taxes, and, although he was paid by the hour, was hired by the job rather than on a general basis. Nor did Metro Diner set Lara's hours — he was just told to come early or late to avoid interfering with the operation of the Diner.

The workers' compensation Judge found that Lara was an employee, and the Workers' Compensation Appeals Board reversed. In affirming the Workers' Compensation Appeals Board's finding that Lara was a contract employee, the Court of Appeal cited Borello. Specifically, the Court noted that gardening was Lara's line of work (and not the Diner's), that Diner could not control the manner of Lara's work, Lara had his own clients (other than Diner), and Lara had a substantial investment in his business (lots of tools, equipment, etc.).

As Uncle Olaf scratched his head (very carefully, mind you, as those razor sharp hooks hurt!), I could see that he wasn't convinced. His prize-winning, hand-eating, giant-clam-raising mind was working. What else did Uncle Olaf think he had up his sleeve?

Uncle Olaf was beginning to get worried — what if his upstart nephew was right and, even though Uncle Olaf didn't get insurance for the Clam Cleaner, an employment relationship was formed. After all, if Mr. Clam Cleaner was an employee, Uncle Olaf would be liable for any injuries sustained by Mr. Clam Cleaner, and, having lost both hands to giant Clam Bites before, was very much aware of the risks involved.

"I'm pretty sure he is an independent contractor," said Olaf. Just then we heard a loud *SNAP* as a clam slapped shut, and the young gentleman in the Clam tank yanked his hand away just in time. Uncle Olaf breathed a sigh of relief and said "but he signed a contract ... the contract says 'I am not an employee; I am an independent contractor. I will clean Olaf's clams. And if I should lose a hand or two, I will only sue the clam or clams that got me, and not poor Uncle Olaf.'"

I shook my head and told poor Uncle Olaf of the panel decision in the case of Leonard Key v. Los Angeles County Office Education. Leonard Key had signed a contract stating that he was an independent contractor paid to teach music lessons at one of the Los Angeles County schools. However, the Workers' Compensation Judge found that Mr. Key was, in fact an employee, and his injury was compensable. Workers' Compensation in California is compulsory, after all, and Mr. Key was simply an employee by any other name. And, after all, the farmers in the Borello case had signed a contract as well.

The most important thing for Uncle Olaf to remember is the guiding policy of workers' compensation — to shift the costs of industrial injuries to the producers and not the consumers/public. Even the Legislature might make efforts to amend the law, defining a contractor vs. an employee based on a long list of factors.

So, dear readers, what should Uncle Olaf do? Before the young gentleman sticks his hand into another one of Uncle Olaf's clams, should Olaf pull him out of the tank and cease operations until he can get a workers' compensation policy?

Movies about space missions that result in catastrophe can teach us a lot about how not to manage a project (the "successful failure" of Apollo 13 comes to mind). Yet there are actual space mission catastrophes — the loss of the 1999 Mars Climate Orbiter (MCO), for example — that also offer valuable lessons in preventing fundamental mistakes.

The MCO was the major part of a $328 million NASA project intended to study the Martian atmosphere as well as act as a communications relay station for the Mars Polar Lander. Famously, after a nine-month journey to Mars, the MCO was lost on its attempt to enter planetary orbit. The spacecraft approached Mars on an incorrect trajectory and was believed to have been either destroyed or to have skipped off the atmosphere into space. The big question naturally was: What caused the loss of the spacecraft?

After months of investigation, the primary cause came down to the difference between the units of output from one software program and the units of input required by another. How, the media asked, could one part of the project produce output data in English measurements when the spacecraft navigation software was expecting to consume data in metric?

Those of us involved in expensive and high-risk projects would ask the similar question: How could this happen? What follows are a few findings from the Executive Summary of the Mars Climate Orbiter Mishap Investigation Board (MCO MIB), with lessons for us all.

• The root cause of the loss of the MCO spacecraft was the failure to use metric units in the coding of a ground software file used in trajectory models. Specifically, thruster performance data in English units were used instead of metric units in the software application code.
• An erroneous trajectory was subsequently computed using this incorrect data. This resulted in small errors being introduced in the trajectory estimate over the course of the nine-month journey.

That erroneous trajectory was the difference between a successful mission and failure. Lockheed Martin Astronautics, the prime contractor for the Mars craft, claimed some responsibility, stating that it was up to its company's engineers to assure that the metric systems used in one computer program were compatible with the English system used in another program. The simple conversion check was not done. "It was, frankly, just overlooked," said their spokesman.

Just overlooked? Those of us in project management know that large-scale projects require the ability to see not only the big picture — the goals and objectives of the project — but also the details.

While not as prominent as space exploration, insurance software development also has millions of dollars at stake. Insurance products can be very complex, and the interactions required in business systems along with the calculations involved are all critical to producing accurate results.

Errors in the way in which calculations are derived can produce problems ranging from failure to comply with the company's obligations under its filings to loss of revenue. Even apparently simple matters such as whether to round up or down on a calculation can have profound impacts on a company's bottom line.

Although the failure to address the difference between English and metric measurements was identified as the root cause of the problem with the MCO, the real issue at hand is what caused that failure. How was it missed?

Taking a project management perspective requires asking the question, "Why?" Why was a key element overlooked? What led an experienced team to miss a crucial detail?

In the search for answers, it's interesting to look deeper inside the report by the Mars Climate Orbiter Mishap Investigation Board (MCO MIB). In addition to the root cause of failure to use standard units of measurement across the entire project, the report found a series of other issues that also contributed to the catastrophe. The following are other lessons of the MCO mission and how they can be applied more widely to project management.

• Lack of shared knowledge. The operations navigation team was not familiar enough with the attitude controls systems on the spacecraft and did not fully understand the significance of errors in orbit determination. This made it more difficult for the team to diagnose the actual problem they were facing.

  It is likewise common for insurance software projects to have mutually dependent complex areas — for example, between the policy administration system and the billing system. If one team does not fully understand the needs of the other, there can be costly gaps in understanding.

  The MCO MIB recommended comprehensive training on the attitude systems, face-to-face meetings between the development and operations team, and attitude control experts being brought onto the operation's navigation team. Similarly, face-to-face meetings between the policy experts and the billing experts, between the business side and the technology side, will go a long way toward a successful project. In the world of e-mail and instant messaging, I think all of us spend less face-to-face time. Nonverbal communication is 60% of our communication and is often very helpful; there's zero face time when we rely on electronic communication.

• Lack of contingency planning. The team did not take advantage of an existing Trajectory Correction Maneuver (TCM) that might have saved the spacecraft, since they were not prepared for it. The MCO MIB recommended that there be proper contingency planning for the use of the TCM, along with training on execution and specific criteria for making the decision to employ the TCM.

  The need for contingencies in insurance software development is important too. Strong project management will consider project risks and therefore contingencies. And contingency plans are important at every stage — development, implementation, and once the system is live. Issues must be dealt with rapidly and effectively since they have an impact on the entire business. Regular reviews of the contingency plans are also useful.

• Inadequate handoffs between teams. Poor transition of the systems' engineering process from development to operations meant that the navigation team was not fully aware of some important spacecraft design characteristics.

  In complex insurance software projects, there are frequent handoffs to other teams, and the transition of knowledge is a critical piece of this process. These large, complex projects should have a whole team dedicated to ensuring knowledge transfer occurs. No matter how good the specifications, once again, it's vital to get face to face.

• Poor communication among project teams. The report stated there was poor communication across the entire project. This lack of communication between project elements included the isolation of the operations navigation team (including lack of peer review), insufficient knowledge transfer, and failures to adequately resolve problems using cross-team discussion. As the report further notes:

  "When conflicts in the data were uncovered, the team relied on e mail to solve problems instead of formal problem resolution processes. Failing to adequately employ the problem-tracking system contributed to this problem slipping through the cracks."

  This area had one of the largest set of recommendations from the MCO MIB, including formal and informal face-to-face meetings, internal communication forums, independent peer review, elevation of issues, and a mission systems engineer (aka really strong program or project manager) to bridge all key areas. Needless to say, this kind of communication is a critical part of any insurance software project, and these lessons are easily applied. Zealously hold project reviews (walk-throughs). Do them early and often. The time spent will pay you back with success.

• The Operations Navigation Team was inadequately staffed. The project team was running three missions simultaneously — all of them part of the overall Mars project — and this diluted their attention to any specific part of the project. The result was an inability of the team to effectively monitor everything that required their attention.

  Sound familiar? We just experienced this on a software implementation project where the software vendor outsold its capacity to be successful. Projects are expected to run lean because of cost considerations, but it's always important to ensure that staff is not stretched to the point of compromising the project.

• There was a failure in the verification and validation process, including the application of the software standards that were supposed to apply. As the MCO MIB noted:

  "The Software Interface Specification (SIS) was developed but not properly used in the small forces ground software development and testing. End-to-end testing to validate the small forces ground software performance and its applicability to the specification did not appear to be accomplished."

Every project manager will recognize the need to stick to protocol and agreed-upon processes during a software project. Ensuring that project team members know the project/system specifications and standards is essential to successful project delivery.

And so, the devil is in the details. My career in and around insurance technology has spanned three decades now. While I have learned much, two things are abundantly clear:

• There is no substitute for really good project management.
• There is no substitute for great business analysts.
• There is no substitute for great communication.

Okay, make that three things! It's bonus day.

The full MCO report is available here.