Introduction
Now that health care reform is gradually rolling out into the market, the concept of the "actuarial value" of a specific set of benefits is increasingly important. The Patient Protection and Affordable Care Act of 2010 defines four metallic categories of benefit plans ranging from Bronze to Platinum. The actuarial value of these categories range from 60% for Bronze increasing by 10% for Silver, Gold and capping out at Platinum at 90%. The benefit plans offered through the public exchanges will be required to offer benefit plans that are valued within ±2% of each of the metallic levels. This limitation is critical to benefit plan sponsors as they evaluate their current benefit plans.

Actuarial Value Defined
The actuarial value of a specific health plan is the ratio of net value of the actual benefits to the value of these same benefits without copays, deductibles, limits, and/or coinsurance or other items paid for by the individual covered under that plan. For example, in the case of a plan with an actuarial value of 70% (i.e., the Silver plan), this suggests that 30% of the cost is the responsibility of the individual and 70% is paid for by the health plan or carrier involved. Similarly a Gold plan (i.e., 80%) would cover 80% of the cost with the individual responsible for 20%.

As long as the plan has an actuarial value within 2% of the metallic target it would qualify for that metallic level. For example, a plan with an actuarial value in the range of 68% to 72% would qualify as a Silver Plan. A plan with a value outside of the 2% range would not quality as a specific metallic plan and could not be offered. As a result, it is critical to be sure you know the actuarial value of your plan and what metallic plan it qualifies for.

Actuarial Cost Model
The primary tool used to derive the actuarial value of a specific set of benefits is the actuarial cost model. This is a tool used by actuaries which presents detailed utilization, unit cost information, Per Member Per Month cost information, value of copays/ deductibles/ coinsurance, etc. The actuarial cost model typically includes assumptions for each of the major service types which could include as many as 50 or 60 categories of service. The standard definition used by our company includes the following categories:

Categories are often modified based upon the needs of the actual situation. However, for each of the specific categories of service, the critical assumptions are presented. These assumptions are for a specific population, managed in a specific way, with specific demographics, assumed charge levels, assumed health status, and assumed benefits.

An example of a specific set of utilization and cost assumptions is shown in the following table:

Illustrative Cost Model For Hospital Patient Services

The utilization is shown on a "Per 1,000" basis and the claims cost is shown on a PMPM basis. PMPM stands for per member per month. The total shown above for Hospital Inpatient suggests that the overall inpatient hospital cost per covered life would be $151.66 per month prior to any offsets for deductibles, copays, coinsurance, provider discounts, medical management, demographic adjustments, etc. Similar assumptions are available for the rest of the categories previously shown. This information was developed for a typical commercially insured under age 65 population.

Developing Actuarial Values
Once the benefit design is determined, the information from the actuarial cost model is adjusted for variation in benefit design with the overall value of the benefits determined. The ratio of the value of the benefits to the overall value of covered services is the actuarial value of the benefit plan.

This is a fairly complex process. The government has developed their version of this process and has published a Federal AV Calculator. The final version of this was released on February 20, 2013. Most consulting firms have developed their own calculator to help their clients understand the process prior to the release of the Federal AV Calculator. Since the final calculator was released, there continues to be some serious concern by health actuaries as to the reasonableness of the federal calculator. We continue to use our own AV Calculator in addition to the Federal AV Calculator to better help our clients understand what variations in benefits lead to various AV values. This is a dynamic process with varying opinions depending upon the various plan designs and resulting AVs.

The following chart shows an illustrative result using our firm's AV calculator. This was prepared for a specific plan design in a specific geographic region. It is illustrative only to show the various components of cost variation.

View Chart

The above table shows each of the key variables affecting the actuarial value. Each is important to appropriately incorporate into the calculation. The starting Claim Cost in the first column is determined from the actuarial cost model previously discussed and will be adjusted for:

• Geographic region
• Health status
• Smoking/non-smoking
• Medical management
• Utilization and cost inflation trend
• Demographics

The first adjustment reflects the overall nature of the health benefit plan. A richer plan is associated with higher utilization, a lesser benefit plan is associated with lower utilization. The copay/deductible adjustment either raises or lowers the starting claims cost. The next step eliminates any costs that are excluded from the eligible expenses.

This particular example excluded brand drugs.

The next step evaluates the value of various copays (i.e., office visit copays, pharmacy copays, etc.). These are deleted from the value of the benefit costs since they are paid by the individual. Next coinsurance and deductible values are deducted. This example was developed for a $1,750 deductible 80% coinsurance plan. The last two adjustments are for the value of a family deductible limit and the out-of-pocket limit yielding the final cost. In this situation the final cost was $218.30. This was compared to the net value of benefits after excluded benefits (i.e., $309.85) with a ratio of 70.45% or a "silver" plan per our model.

Assuming this was consistent with the "authorized AV calculator" this plan could become a qualified plan under the Patient Protection and Affordable Care Act.

Complications
As you can see there are many different steps in the process to determine the actuarial value of a benefit plan. There are even more assumptions that have to be made to obtain these estimates of value. Armed with this information the plan sponsor can make informed decisions as to what benefit plan is appropriate and what they want to offer, if any.

These calculations are frequently based upon considerable amounts of professional judgment. Not all actuaries think alike so there oftentimes can be professional differences of opinion. It is critical that the plan sponsor obtain professional input they can trust and rely upon.

The American Academy of Actuaries is the primary organization granting credentials that are relied upon in the industry. One approach to obtaining relevant and reliable input is to insist that your advisor is a qualified health actuary with credentials from the Academy. In most situations, this individual would have both an FSA and MAAA credential and be a recognized member of the Society of Actuaries Health Section. Others are qualified to provide this type of input but valid actuarial credentials provide increased assurance that good input is being offered.

A report published by the Institute of Medicine (IOM) on high-value health care attracted attention when it was issued last June. Authored by a group of eleven leading hospital executives, A CEO Checklist for High-Value Health Care describes programs at various hospitals that resulted in quality improvements and lowered costs. The report has a section called "Yield," quantifying the extent of these improvements. These programs sound notable, and in fact I know some of the executives and hospitals involved, and would vouch that many significantly improved patient care.

But the report is less impressive when it tackles the cost side of the value equation, especially when it names cost control outcomes like: "days cash on hand increased from 180 to 202," and "multiple years of 4-5 percent [hospital] margin." Clearly, the hospitals improved their own bottom lines, but by how much did patient bills decrease? The hospital executives don't account for that in the "yield."

It seems this report defines "high-value" to mean highly valuable to hospital CEOs. Strikingly, though, the authors do not find it necessary to explicitly say so anywhere within the report. Perhaps they simply assume that a high-value checklist for hospital CEOs is automatically high-value to CEOs in other industries that are paying for services from hospitals. No offense to these well-meaning and highly accomplished hospital executives, but that is not always the case. Purchasers don't see high-value health care in hospital cash flow or profit margins. They see value when they get the best service at the best price.

Involving Employees
The contrast between value as seen by hospital executives and value as seen by purchasers is evident when you compare this report with a 2010 book ("The Company That Solved Health Care: How Serigraph Dramatically Reduced Skyrocketing Costs While Providing Better Care, and How Every Company Can Do the Same") by John Torinus, CEO of a company called Serigraph, a manufacturer of parts used to make vehicle instrument panels. He became interested in health care value when his health benefits expense started to eclipse his profits. Torinus might as well have written his book in a different language than the hospital executives in their report. For instance, the only "yield" Torinus notices from hospitals are the painfully obtuse bills they generate. He paid his employees to find mistakes in their hospital bills — and that alone saved him a lot of money. The hospital executives never mention such mundane things as hospital bills, but Torinus sure found opportunities to improve value there.

Torinus describes how he saved money by offering his employees a high-deductible health plan combined with a tax-protected health savings account. He is not alone; today this type of plan is among the fastest growing of all forms of commercial coverage. It means employees use their own money to pay hundreds if not thousands of the first dollars of their health spending every year, which motivates them to consider price when selecting a doctor or hospital. When you are using your own money, suddenly it matters that the MRI your doctor ordered costs $2,500 at one hospital and $750 at another. As Torinus saw it, when employees look for both quality and price, both improve.

A Need For Transparency
The last — and important — difference between the two publications is the issue of transparency. The hospital executives include transparency on their checklist for high-value, but they call it "internal transparency" — meaning information on performance should be fully available to the people working at the hospital. Torinus wants a different kind of transparency, market transparency — for information on quality and pricing to be fully available to employees, patients, and all consumers. Today, purchasers see transparency as critical to getting value, and they want disclosure of both quality and pricing. Two purchaser-led campaigns for this include The Leapfrog Group and Catalyst for Payment Reform.

In his new book, "Catastrophic Care: How American Health Care Killed My Father--and How We Can Fix It," David Goldhill argues that this confusion between costs and prices — and the lack of market transparency — are at the center of the nation's very serious economic problems. Because nobody agrees on who the customer really is in health care, and prices are never discussed in polite company, the invisible hand of the market can't perform surgery when quality and cost-effectiveness lag. Goldhill points out that the implications of this are potentially catastrophic, hence the title of his book. The escalation in health spending displaces wage and job growth throughout the economy and threatens to balloon the federal deficit even further.

Employers can't afford to wait for politicians or health care executives to solve this problem. Now is the time to define what they mean by value and purchase accordingly. Instead of worrying about somebody else's health care costs, start worrying about your health care prices. After all, the most unaffordable price of all is the price of inaction.

This article first appeared on Forbes.com.

In September of 2012, the City of Pittsburgh hosted the 35th annual Great Race, a charity run that raises money for the Richard S. Caliguiri Amyloidosis Research Fund. Caliguiri, a former Pittsburgh mayor, died of this rare protein disorder, and a portion of the race proceeds are used to help find a cure.

It should have been an uplifting event. Yet the Pittsburgh Post-Gazette reported that "despite the rally of support ... the research fund created in Caliguiri's name has had little impact on the effort to find a cure."

Those familiar with the challenges of treating rare conditions like amyloidosis won't be surprised by this news. The sad truth is that the economic incentives for developing life-saving treatments for rare disorders are less than optimal.

But that doesn't mean that we're powerless to fight rare diseases. Policymakers can dramatically improve incentives for researchers and biopharmaceutical firms to create drugs that treat rare conditions — treatments known as "orphan drugs." And they should. Rare diseases collectively represent a major public-health threat.

Rare diseases — conditions like Huntington disease and Burkitt lymphoma which afflict fewer than 200,000 people — cost Americans more than $474 billion a year.

Over 7 percent of Americans — or more than 25 million people — suffer from the roughly 7,000 illnesses that fall into this category.

So the overall market for treatments for rare diseases is large. Indeed, total global spending on orphan drugs runs between $50 billion and $85 billion — or between 5.7 percent and 9.7 percent of what the world spends on pharmaceuticals, according to "A Primer on the Orphan Drug Market: Addressing the Needs of Patients with Rare Diseases," a new paper by economist Dr. Wayne Winegarden, senior fellow at the Pacific Research Institute.

But the potential number of beneficiaries for each individual orphan treatment is relatively small. A narrow market of potential buyers can make investing in orphan drugs perilous.

Part of the problem is that developing a treatment for any illness is a long and expensive process. It takes anywhere from 10 to 15 years to usher a treatment from the research phase, through the Food and Drug Administration (FDA) approval process, and into patients' hands.

At every step of the process, drug firms must spend more money — and face the distinct possibility that their research will fail. According to the best estimates, a single successful drug costs well over $1 billion to develop.

And once a drug goes generic, the firm that created the medicine must deal with fierce competition from other manufacturers.

It's hardly surprising, then, that pharmaceutical firms tend to bet on treatments that will be useful to the largest number of patients. This state of affairs often leaves those suffering from rare diseases with few treatment options.

Fortunately, policymakers have found ways to improve the incentives for pharmaceutical firms to invest in orphan drug research.

Consider the Orphan Drug Act, passed in 1983. It provided drug developers seven years of market exclusivity for their inventions, ensuring that they would have a reasonable amount of time in which to make back their hefty investment, free of competition from other pharmaceutical firms.

The law also lessened the economic burden of drug development by offering a 50-percent tax credit for the costs incurred during the clinical trial phase. On top of that, the Act waived the fees associated with applying for FDA approval.

The results? In the past decade, the number of new drugs — or New Molecular Entities (NME), as they are called in the trade — released in the United States for the treatment of rare diseases has increased dramatically. In fact, more new NMEs were launched in 2011 than in any of the last ten years.

This is encouraging evidence that those who suffer from rare illnesses shouldn't give up hope.

It's now up to our leaders to find new ways to lower the barriers to developing these valuable treatments. They should start by taking the Orphan Drug Act — already over a quarter-century old — and using it as a model.

Drug companies should be rewarded for developing orphan drugs. It's the only way to guarantee that, no matter how uncommon an illness, there will be somebody, somewhere working to find a cure for it.

For the past several years, up to three of the top five concerns expressed by respondents to CFMA's Construction Industry Annual Financial Survey have been insurance-related. And, contractors continue to seek how to leverage their investment in safety and risk management.

The traditional view of safety has been as a line item expense calculated within administrative overhead or as a cost center. Construction Financial Managers use a variety of techniques to evaluate the cost effectiveness of recommended safety and risk reduction investments. These include: ROI, ROE, and/or ROC calculations; cost benefit analyses; and breakeven analyses.

However, some forward-thinking contractors have gone beyond seeing the direct link of profitability from safety and risk management to establishing safety as a profit center. A select few have captured even greater value by making safety part of their brand image.

Either way, a program that measures safety — and risk-related leading indicators, loss analysis rates, and indirect costs can provide contractors with a competitive advantage that goes far beyond lower insurance rates.

Leading Indicators

Some companies understand that the fixed cost of insurance, the premium, is the smallest piece of the insurance pie. They recognize that true savings more often result from decreasing the variable costs of their insurance program — the loss dollars from claims.

These companies have learned that proactive safety and risk management programs increase profitability — they reduce risk, prevent claims, and contain costs through aggressive claims management.

What is their secret? Through the ongoing measurement of risk indicators, these contractors establish goals for improvement and continuously monitor their company's performance. Some traditional measures include such frequency and severity incidence rates as:

• Total OSHA recordable cases
• Total lost workday cases
• Total lost workdays
• Number of fatalities¹

Called lagging indicators, these measures are passive metrics of prior results without consideration of the activities that influence the results. Also called downstream measures or trailing indicators, lagging indicators provide feedback on data collected and analyzed "after-the-fact." These metrics are diagnostic and sometimes prescriptive; they reveal past performance and highlight improvement opportunities.

In contrast, current and leading indicators provide different views of safety and risk performance. Designed to influence real-time outcomes, current indicators provide almost immediate feedback on present activities. Current indicators include a supervisor's same-day completion of an incident report or the number of job safety observations completed on a project each day vs. an established goal.

Leading indicators are proactive measures of focused activities to prevent incidents of a general or specific nature. Also called upstream measures, these metrics are "beforethe-fact"² and can predict future performance.

For example, a high number of safety orientations should help decrease the frequency and severity of onsite accidents. (The first table below compares lagging, current, and leading indicators for safety performance. The second table lists examples of emerging leading indicators for productivity, quality control, and risk management.)

Loss Analysis

While many contractors know their basic loss picture, fewer understand the factors that cause or contribute to accidents and claims. To leverage safety and risk management, contractors need to identify where to invest time, staff, and other resources. An analysis of historical claims and loss experience provides an excellent starting point.

There are many methods of analyzing claim and loss data, but it's important to conduct both macro- and micro-level analyses, which provide the clearest perspective on what types of accidents are loss leaders, in addition to clues about necessary prevention activities. Trend, type, causal, and lost workday case analyses are four basic and reliable methods.

Trend Analysis
A trend analysis determines the number of claims and the total incurred losses (the dollars paid plus the dollars reserved to pay for the future cost development of the claims) for each line of insurance coverage over a period of time. This provides a quick "big picture” view of claim count and loss experience by policy year.

Type Analysis
A type analysis summarizes the frequency of claims and the resulting incurred claim costs by type of loss. This method uncovers the leading types of loss for your company. For example, you may learn that two or three leading types of loss account for greater than 70% of your loss dollars.

By highlighting the areas that have the greatest impact on risk management performance, this analysis helps focus prevention efforts.

Causal Analysis
A causal analysis determines the reasons for accidents and resulting claims by evaluating various causal factors for each leading type of claim. It indicates areas for possible incident prevention activities and safety management controls.

Ideally, you'll be able to determine the job classification with the greatest number of claims and highest claim costs. For example, you might learn that "falls" are your company's leading type of workers' comp claim, making up 20% of your total claim count and 65% of your total incurred losses.

By evaluating the causes of your company's losses, you may discover that 60% of the falls were the result of a fall from an elevated surface — with 40% resulting from slips, trips, and falls on the same level. You might also learn that 10% of the total falls from elevation claims occurred from a scaffold or ladder, but that the other 90% resulted from getting into or out of vehicles or heavy equipment.

The safety and risk management controls for each of these causes are different. Depending upon the findings in the causal analysis, additional drill-downs should provide even better clues.

The success of this analysis hinges on the depth of your company's accident reporting and investigation process, as well as the quality of the claim coding information. Some of the best factors to evaluate include:

• Day of week
• Time of day
• Date of loss vs. the date of hire
• Objects and materials involved in the loss

Lost Workday Case Analysis
Why focus on lost workday cases? After fatalities, lost workday cases are among the most serious type of workers' comp claims.

Greater than a third of all workplace injuries result in lost workdays. According to the National Safety Council, the average cost of lost workday cases across all industries in 2005 was $38,000, an increase from $28,000 in the year 2000.³

The average for the construction industry is not calculated separately. However, the construction industry figure should be significantly higher for three reasons:

1. The median number of days for each lost workday case is higher for construction than across all industries. The Bureau of Labor Statistics (BLS) reports seven days as the median number of lost workdays per case for all private industries in 2005.

   In contrast, the median is eight days on average for specialty trade contractors, nine days for general building contractors, and 11 days for heavy and civil contractors.

2. The construction industry has some of the highest average labor wage costs among major industry groups.

3. Modified or restricted duty assignments in formal return-to-work programs appear to be increasing throughout the construction industry.

   Yet, pockets of resistance still exist among some employers, employees, labor groups, and medical practitioners — even though such resistance results in longer absences and higher costs per case.

A lost workday case analysis determines the number, type, and severity of lost workday cases by occupation and body part. The most important portion of this analysis is the comparison of minor and major lost time cases.

"Runaway claims" can be identified by comparing the average length of cases greater than nine days (the overall median for the construction industry) vs. the average for cases less than nine days.

The distribution of lost workday cases by duration metric helps underscore the need to evaluate policies, procedures, and administrative controls to improve accident prevention and claim management.

Here's how it works: The chart below summarizes one contractor's average duration of lost workday cases. The contractor's totals were benchmarked against the average Bureau of Labor Statistics totals for the construction industry. In this case, 54% of lost workday cases exceeded 31 days of lost time, slightly more than double the construction industry average.

Further analysis revealed that the median number of lost workdays for each case was 37 days (four times higher than the figure for the construction industry). The average length of cases less than nine days was only three days each; however, the average for cases longer than nine days was 90 days.

This meant that, on average, this contractor incurred a "runaway" claim after the fourth day of lost time for every injured worker. In effect, excessive days of lost work time unnecessarily increased this contractor's total loss costs.

From the contractor's point of view, this analysis helped demonstrate the importance of injury prevention. Severity reduction of lost workdays was identified as the goal and the contractor decided to partner aggressively with the claim service team on:

• prompt reporting and thorough investigation of all injuries;
• coordinated identification of modified duty assignments; and
• better nurse case management to help injured employees return to work sooner.

Indirect Cost Assessments

New, sophisticated tools are now available to help contractors measure, monitor, and align safety and risk goals with overall financial performance.

As already mentioned, risk performance metrics provide useful information about the following key performance indicators:

• leading types of losses,
• their causal factors, and
• possible corrective actions.

The next factor plays to the Construction Financial Manager's expertise: demonstrating the financial impact of insurance claims.

Not only does this metric show the financial benefits of safety, but it also creates a compelling business case for proactive safety and risk management.

Direct vs. Indirect Costs
Like other areas of construction financial management, insurance claims have both direct and indirect costs. For our purposes, the insured loss costs are considered direct costs, and the uninsured loss costs are indirect costs.

The indirect costs are the "hidden" costs and share three key characteristics:

1. They act as a multiplier upon direct (insured) costs that increases the total cost of insurance claims.
2. They are often not captured or calculated and, therefore, are not consistently charged-back or recovered in job costing systems.
3. The net effect of factors one and two is a drain on contractor profitability.

There are many different estimates used by safety and risk management professionals for calculating the impact of indirect costs. Safety industry sources indicate an average ratio of indirect to direct accident costs from 2:1 to 4:1.

One conservative method is available at the OSHA Web site, where a sliding scale multiplier is provided that depends on the total direct cost. Note that the indirect cost multiplier decreases as direct costs increase. To calculate your company's ratio using this method, go to www.osha.gov/Region7/fallprotection/safetypays.html.

Required Revenue Replacement
Achieving buy-in for safety and risk management programs from other construction executives and operational managers can be a challenge. However, the revenue replacement tool is a convincing way to show the additional sales needed to offset the cost of insurance claims.

This number varies based upon total cost of losses and the company's profit margin expressed as a percentage:

Annual Losses (in dollars) ÷ Company's Profit Margin

With this metric, it's simple to see the total additional sales required to offset the cost of claims. Once upper management appreciates how substantial claim costs can be, it's much easier to obtain buy-in for proactive safety and risk management practices.

Conclusion

The most important outcome of risk performance metrics is the focus on continuous risk improvement initiatives. Incident prevention and claim management initiatives can significantly improve a contractor's jobsite productivity, quality control, risk management, and safety programs.

The net effect of this investment is a potentially significant increase in profitability, not to mention a bidding advantage for contractors.

More Resources

1. National Safety Council
2. BLS Table R65: Number of nonfatal occupational injuries and illnesses involving days away from work by industry and number of days away from work, 2005
3. BLS Table R66: Number and percent distribution of nonfatal occupational injuries and illnesses involving days away from work by occupation and number of days away from work, 2005
4. Harvard Business Review: "Competing on Analytics" by Thomas H. Davenport (January 2006)

Endnotes

¹ Petersen, Dan, "Setting Goals, Measuring Performance: Frequency Versus Severity," Professional Safety, Vol. 50, No. 12. December 2005, pp. 43-48.

² Janicak, Christopher A., Safety Metrics: Tools and Techniques for Measuring Safety Performance, Government Institutes/ABS Consulting, Rockville, 2003.

³ National Safety Council. (2006). Injury Facts®, 2006 Edition. Itasca, IL.

In 2012, Illinois Governor Pat Quinn decided to cut $1.6 billion from the state's Medicaid program to help get the state's finances under control. Among the benefits slashed was dental coverage for adults.

The Land of Lincoln was only the latest cash-strapped state to scrap dental coverage under Medicaid, joining the likes of Pennsylvania, Massachusetts, California, and Washington.

States must do something to prevent Medicaid from taking over their budgets entirely. But these cuts in dental benefits may only deliver temporary fiscal relief — and end up costing states more in the long run.

Fortunately, there's a way out of this conundrum. It's called a "dental service organization" (DSO). The Pacific Research Institute recently released a study by Wayne Winegarden and Donna Arduin entitled "The Benefits Created by Dental Service Organizations" that illustrates how dental service organizations are leveraging the power of market competition to deliver dental benefits cost-effectively now — with an eye on avoiding even more expensive dental and medical procedures later.

In most states, low-income Americans have little to no access to dental care. Only about half of state Medicaid programs cover anything beyond treatment of dental pain and emergency room visits for their poor.

In states where Medicaid does cover trips to the dentist, many beneficiaries can't find a doctor who will see them, thanks to the program's absurdly low reimbursement rates.

According to a Pew Research Center study, Medicaid pays dentists around 60 cents on the dollar in 26 states. Just one state paid dentists 100 percent of their normal fees, while 14 paid less than half.

As a result, only a third of dentists will treat Medicaid patients. A Government Accountability Office (GAO) report found that in many states, most dentists "treat few or no Medicaid patients."

So the poor don't get many check-ups. According to the Agency for Healthcare Research and Quality, only one-third of poor children saw a dentist in 2008. In contrast, nearly two-thirds of those from high-income families did so. A Pew Center study found that one in five poor children — 17 million in total — go without dental care each year.

This has serious long-term consequences. The GAO found that one in three children had untreated tooth decay — twice the rate of those covered by private insurance — and one in nine had untreated decay in three or more teeth.

"Dental disease remains a significant problem for children aged 2 through 18 in Medicaid," it concluded.

The Pew study notes that "a 'simple cavity' can escalate through their childhoods and well into their adult lives, from missing significant numbers of school days to risk of serious health problems and difficulty finding a job."

And it's these significant health problems that can quickly erase any savings a state thinks it generates by eliminating dental coverage under Medicaid.

As the Children's Dental Health Project explains, when the poor go without routine dental care, they often end up in emergency rooms. A three-year comparison found that treating dental problems in emergency rooms cost 10 times more than preventive treatment provided in a dentist's office.

States could simply pay dentists more. One study found that dentists' participation increased by at least a third, and sometimes more than doubled, in states that boosted Medicaid payments.

But the reality is that they can't afford to do so — as their strained budgets have caused them to cut dental coverage in the first place.

Enter the dental service organization. Starting in the late 1990s, dentists began banding together under dental service organizations, taking advantage of economies of scale in order to cut overhead costs and provide quality service at much lower prices. The dental service organization handles marketing, human resource support, accounting and billing, spreading costs efficiently across several practices.

Today there are more than 3,500 dental service organizations in operation, according to the Dental Group Practice Association. And according to a 2012 study by Laffer Associates, the cost per patient among dental service organizations operating in Texas was almost half that of traditional dental offices — $484, versus $712. At one dental service organization, Kool Smiles, the per-patient cost was just $345.

Because dental service organizations can operate more efficiently than a single dentist office, they can cope with Medicaid's low reimbursement rates and heavy paperwork requirements, providing care for the poor without losing money on each patient they see.

And they're starting to make an impact. The Children's Dental Health Project has found that over the past decade, the share of poor children who've seen a dentist has climbed, and it attributed 20 percent of that increase to the expansion of dental service organizations.

Dental service organizations stand out as an excellent example of private-sector innovation that can help solve a serious public health problem — while saving taxpayers money.

That's something to smile about.

In almost 25 years in this industry, I have never seen such desperation. One of the unfortunate results is that many good agencies that have worked hard, done things well, and are not grasping at straws, are still at a competitive disadvantage. It is much like the situation faced by the most responsible citizens bailing out the most irresponsible or incompetent (take your pick) individuals and companies.

The categories in which this is occurring are widespread. Here are some important examples:

1. Certificates of Insurance. The changes to certificates have caused widespread carnage, frustration, anger, and virtually every other negative emotion imaginable. One item that is not being discussed much publicly is the difference between agencies following the rules versus agencies that are not following the rules. In particular, the question is whether to issue certificates that violate contracts, copyrights, and regulations. There is no question some agencies are doing so knowingly or, if ignorant, they are living in a deep, dark hole.

Neither companies nor associations nor many regulators (the Wisconsin Department of Insurance is a notable exception and there may be others of which I am not aware) have done much to correct the abusers. The result is that sometimes the agency willing to violate the rules, contracts, and copyrights make sales they would not otherwise make. By being silent on this issue, companies, associations, and some regulators are assisting the irresponsible — and the responsible are paying the price.

2. Premiums payable. An even more verboten subject is whether all companies and brokers are truly requiring all agencies to pay premiums on time. My theory, based on my experience, is they are not. I understand that many companies are so desperate to hang onto whatever premium they can that they would prefer to work this out rather than lose their premiums. But the best agencies lose as a result because this amounts to a handout.

3. Giving away free services. The debate that is occurring between agencies and brokers and even among regulators on whether it is ethical for agencies to give away free services such as loss control in order to get accounts is eye-opening.

The average agency makes zero dollars of profit on a commission basis per the last Growth and Performance Standards (GPS) study by the National Alliance Research Academy. So how do these firms plan on increasing their costs without going broke? Free services require significantly good management and good cost accounting methodology, which are severely lacking in most agencies and even large and supposedly sophisticated brokerages. I suspect many of these accounts will cost the agency much more than it makes — either that or the free services being offered are not that real.

More than one agency/brokerage advertises services they don't deliver. Sometimes they don't deliver because they don't actually offer the service. Sometimes they have the service but the producers won't deliver it because the producers have to pay for it through a lesser commission.

On the other hand, the desperation of this market has clearly changed buyers' perspectives of what they are buying. They understand better now that the insurance policy is only one aspect of their purchase. So moving forward, it is no longer an issue of whether these services need to be offered to adequately complex commercial accounts. Burying your head in the sand while thinking important clients will never demand these services is pure denial of reality. The real issue is what price an agency will charge for these services.

4. Companies buying into agencies. Companies cannot figure out how to grow themselves, but they are convinced they can grow agencies so their strategy is to buy into agencies. Insurance companies may not be able to grow, but they have a lot of excess cash and are desperate to invest that cash, just like they are desperate to grow. It is too early to know, but the question worth asking is whether an agency owned wholly or even partially by a carrier will treat all carriers equally? Will they treat other agencies equally?

5. Rising rates in a poor economy. Most people in this industry have never experienced a hard market in a poor economy. Customers will shop harder than ever when rates rise. They will be susceptible to promises that they don't need limits and coverages. They'll be susceptible to buying insurance from poorly rated carriers and ignorant agents. The question is, what are you doing to protect yourself and your agency when the market turns hard in a poor economy?

Most employers know they must maintain accurate records showing the specific time when nonexempt employees begin and end each work period. This requirement includes ensuring that the in and out times for meal periods and split shifts are also accurately kept. Although many employers still use handwritten timecards or punch machines to meet the recordkeeping requirements, an increasingly large number have moved to electronic timekeeping systems such as a card swipe, keypad entry or computer login. In addition to simplifying the act of timekeeping and the calculation of the hours worked for payroll, more sophisticated systems produce state-of-the-art reports and can be extremely helpful in defending against wage claims.

Regardless of the timekeeping system used, a large number of employers round employees' actual recorded time up or down to determine the hours to be paid. Unfortunately, many engage in the practice without a full understanding of the legal ramifications.

Under a 50-year-old federal regulation, employers have been permitted to round the recorded starting and stopping times of nonexempt employees to the nearest 5 minutes, or to the nearest one-tenth or one-quarter of an hour as long as the rounding does not result over time in the failure to compensate employees properly for all the time they work. The California labor commissioner has long followed this same rule in interpreting state law. Until recently, however, the California courts had not ruled on the practice of rounding.

In a recent decision, the California Court of Appeal confirmed that employers can lawfully use time rounding practices. The court's decision highlights, however, the fact that not all rounding practices are lawful, and that employers should use extreme caution in adopting and utilizing rounding policies. While a rounding policy may be presumed valid on its face if it rounds up and down in a neutral fashion, it can still be challenged by an individual employee or class of employees. The challenge could prove successful if it is shown that, over time, the amount employees would have been paid based on actual recorded time is less than they were paid under the "rounding" policy.

Moreover, the proof in this kind of litigation can be very costly because it involves extensive statistical analysis by expert witnesses. A successful challenge will expose the employer to liability for unpaid wages, potential overtime wages, penalties, attorneys' fees, costs and interest. Even with tiny amounts of time involved each day, the total exposure could be huge.

Rounding is not required. In the absence of strong practical and operational reasons for time rounding, employers with modern electronic timekeeping and payroll systems should avoid rounding and pay employees based on the actual time entries recorded. If a rounding policy is used, the following important points should be considered:

• Statistics will play a large role in any litigation concerning rounding. Make sure your timekeeping system rounds up and down, so that both the employer and employee get approximately equal benefit from rounding over time. Rounding techniques that only round time down (to the employee's detriment) will on their face be invalid.
• Educate your staff to know the capabilities of your electronic timekeeping system. Many organizations are using the software without knowing its full capability and restrictions and do not understand what the reports actually mean.
• Utilize your organization's IT resources to analyze the electronic timekeeping system's accuracy and integration with the payroll system. Make sure that you do not end up with two separate databases (timekeeping system and payroll system) with conflicting records.
• Make an informed decision about the purpose of adopting a rounding policy. Understand the risks associated with rounding and make sure that the policy adopted accomplishes a legitimate purpose.
• Run reports and conduct analyses periodically to confirm that over time your system is not underreporting employees' actual hours worked.
• If you are using an electronic system, get a clear understanding of what manual changes are allowed in the system and how those changes are electronically tracked. This could be crucial evidence in wage and hour litigation. Likewise, the failure to retain such tracked evidence may also be used against an employer.
• Develop and publish appropriate personnel policies.

In addition to rounding policies, some employers use electronic systems to set up grace periods for clocking in, automatic 30-minute meal period deductions and other devices. These are all extremely risky in today's environment and should be carefully evaluated to ensure legality.