Anticipating ACA Risks
As implementation of the Affordable Care Act rolls onward, many employers are still lagging in compliance due to the law’s complexity, according to a presentation at the annual RIMS conference held this week in New Orleans, La.
One reason could be is that the act itself is about 10,000 pages in length.
“People tell me they’ve read the whole thing. I don’t believe them,” said James Anelli, partner at LeClairRyan, a law firm that also provides business counsel.
The primary area of confusion, especially for smaller employers, is determining whether or not they are in fact covered by the ACA. Employers must offer “minimum-value” health care coverage if they have at least 50 full time – or “full time equivalent” – employees.
Full time equivalency is calculated by adding all part-timers’ service hours per month and dividing by 120. An average of 30 hours per week qualifies as full time. Employers with many part-time employees often get tripped up here, as “service hours” include actual work time, paid time off and vacation days.
Wellness plans present another challenge. Encouraged by the ACA as a method to create a healthier workforce and reduce costs long-term, wellness initiatives have come under heavy fire by the Equal Employment Opportunity Commission for violations of the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA).
The EEOC filed three lawsuits against employers in 2014, alleging that their wellness plans were not effectively “voluntary” due to severe penalties or withdrawal of incentives levied against employees who did not participate.
“If your company has not had a conversation with your D&O carrier, you’re a little behind on the times,” said Randy Jouben, director of risk management for Five Guy Enterprises, Inc.
“We know there will be claims,” and employers should know who will cover their defense costs.
“If there’s a section that plaintiff’s attorneys will latch onto, it’s the retaliation provision.” — Randy Jouben, director, risk management, Five Guys Enterprises, Inc.
The ACA’s non-discrimination provision with respect to benefits also makes employers vulnerable to litigation. Employers can’t offer advantages like free coverage or shorter waiting periods to highly compensated employees.
The penalty for doing so is an excise tax of $100 per day for each individual negatively affected. But the real penalty will be in the cost to defend against claims by employees that claim they were treated unfairly.
“If there’s a section that plaintiff’s attorneys will latch onto, it’s the retaliation provision,” Jouben said.
An employee who is terminated could potentially claim they were targeted for objecting to an action or practice by their employer that does not comply with the ACA.
“The standard of proof is incredibly low,” Anelli said. An employee would simply have to show that their objection was a contributing factor to their termination; then the burden of proof falls on the employer to show it was non-discriminatory.
The speakers reiterated that “litigation will occur because of the sheer complexity and uncertainty surrounding numerous issues relating to ACA implementation.” With a lack of regulatory guidance in place, court decisions will fill in the gaps, and are likely to vary widely from state to state. In essence, ACA mandates will be enforced by plaintiff’s attorneys, more so than the federal government.
“Litigation will occur because of the sheer complexity and uncertainty surrounding numerous issues relating to ACA implementation.”
In addition to lack of guidance, many companies lack the resources to update their systems and policies quickly and effectively.
According to Jouben, risk management, human resources, IT and legal departments all need to work together to identify compliance issues, because “no one group will fully understand it.”
“This screams for ERM,” he said.
“This is an opportunity for risk managers to be the heroes. They have to let people know who’s on the hook.”
New reporting requirements also present additional risks. Beginning in 2015, employers must report certifications for penalty exemptions and other details of the coverage they offer to the IRS.
“Many HR systems are not set up to capture this information,” Jouben said. Many may not distinguish, for example, between stand-alone dental and vision plans – which may not be covered by the ACA – and those that are rolled into full health care plans, which would be subject to ACA provisions.
Collecting and reporting more detailed health plan information also introduces greater cyber risk.
Employers should adopt “clean desk” policies, ensuring that physical documents are scanned into systems that can encrypt their information and are then shredded.
Thirty states so far have enacted laws to destroy personal identifiable information or otherwise render it undecipherable through encryption. Forty six states have legislation requiring notification of a breach to all affected parties.
Jouben and Anelli also addressed concerns that ACA implementation will drive up health care costs. Jouben pointed out that hospitals and health care providers have been a driving force in stabilizing rate increases, and Medicare reimbursement rates have actually decreased. However, it’s unclear if this trend will continue.
Regardless of its effectiveness in reducing health care costs thus far, the reality is that the ACA is here to stay for the foreseeable future, and employers must face its complexity head-on, utilizing resources from every department to find gaps in compliance.
More Accountable Care
More physicians are selling their practices and becoming employees of larger entities, as the Affordable Care Act encourages the creation of expanded accountable care organizations.
So far, underwriters are viewing the trend as a positive, with improved risk management practices and less “finger-pointing” between hospitals and doctors during the claims resolution process, as all parties are now covered under the employers’ professional liability policies (physicians working as employees typically no longer buy medical malpractice insurance.)
But as more patients are served under this model, experts said, certain issues need to be ironed out, such as whether health care organizations can meet new “pay-for-performance” metrics and whether they are buying as much limits as they should to adequately handle jury awards.
Berkshire Hathaway Specialty Insurance views the ongoing migration of physicians toward institutional employment as a favorable trend, both for the individual practitioner as well as for the institution employing them, said Leo Carroll, head of healthcare professional liability.
“Physicians are less distracted and burdened by some of the administrative responsibilities of running a practice, by handing that over to the institution to manage,” Carroll said.
Physicians benefit when they join an institution’s risk management program, in part by being able to use a common medical record system, usually electronic, to help to optimize technological efficiencies and promote consistent communication, he said.
Moreover, communication between physicians and institutions within the employment model generally is “a little tighter and more efficient,” as comprehensive treatment plans can be shared more effectively across a unified team.
Physicians are also integrated into a larger insurance program overseen by the institution, which allows them access to broader risk management training and promotes more time with patients, Carroll said.
Claims can also be resolved more efficiently because the “finger-pointing” between doctors and hospitals under separate insurance policies has been eliminated, and the cost of a coordinated defense using one law firm is typically much lower.
Still, a unified approach to resolving conflict “does come with compromise for all involved,” so that claims can be resolved in the best interests of all parties, Carroll said.
“The future is a pay-for-performance environment.” — Bob Allen, president, Pro-Praxis Insurance
“It’s really important for physicians to be open and well-informed about the culture of the institution they are joining,” he said.
“They need to make sure to understand that there may be differences in the way that care is delivered and what the expectations are of the physicians by the institutions.”
Medical specialists are also making the switch, said Mary Ursul, executive vice president at Coverys, a Boston-based provider of medical professional liability insurance.
In recent years, Coverys has seen instances where independent cardiologists in a community all become employed by a health system, Ursul said.
“Whether it is the push to upgrade equipment, implement electronic medical records, the uncertainty of future private payer and government reimbursement, or the predicted shortage of health care providers, the shift away from independence seems to be heavily weighted towards financial concerns,” she said.
The ACA’s call for more integrated care delivery is also prompting the move toward employment — as well as the increasing trend of hospitals and health care organizations to also acquire acute care, post-care, rehabilitation facilities and other entities across the health care delivery system, Ursul said.
As larger entities acquire physician practices, there are certain training protocols that should be considered to minimize risk exposure, she said.
“For example, something as simple but important as a new patient intake process within an unfamiliar electronic medical record can create situations where risk exposure can increase without sufficient training,” Ursul said.
“That could be a steep learning curve for staff in a physician’s medical office, therefore, time, training and appropriate resources are all important to make the transition smooth and to ensure that clinical information is handled appropriately so that risk can be reduced.”
While Coverys offers comprehensive clinical risk management services to its insured independent physicians, the carrier finds that not all physicians have access to such services, she said.
Coverys advises hospitals acquiring physician practices to conduct risk management assessments as soon as practical, a service that the carrier provides to insured hospitals.
“These assessments can provide a baseline of data on processes, possible gaps in best practices, and assist in determining what type of education and training staff may need,” Ursul said.
One benefit to being acquired is often access to professional clinical risk management resources through the hospital’s risk management department.
“This may not actually be viewed as a benefit from the physician side of the transition as physician practices are largely unregulated, so the level of oversight may be viewed as burdensome,” she said.
As hospitals and health care organizations acquire more physician practices and other entities throughout the health care spectrum, the risk in maintaining “the health of the community” becomes the new issue, said Bob Allen, president of Pro-Praxis Insurance in New York.
The Importance of Care Coordination
To manage the health within a patient population, there has to be coordinated care across physicians, hospitals and rehab services, Allen said.
“For example, one entity says that it can take care of all of the diabetes cases in its region for x number of dollars, and so the ‘risk’ is being able to have the hospital and the doctors on the same page to be able to take care of those cases at or under that targeted dollar amount,” he said.
That exposure is also translated into the financial risk of taking a flat fee for a particular type of care, what is known in the industry as a “capitated risk,” Allen said.
If a health insurer agrees to give a hospital and its physician network a flat fee to treat 1 million people in its area, the insurer may pay for office visits, including annual checkups, but it likely won’t pay if the network provides poor quality of care.
Insurers are now measuring that by “quality indicators,” he said. Insurers are increasingly reviewing the number of surgical infections or falls during hospital stays that occurred due to poor quality treatment or follow-up after surgeries, and determining whether the rates are too low, high enough or whether not to pay.
“The future is a pay-for-performance environment,” Allen said.
“If the network doesn’t perform well, it doesn’t get paid for services rendered — that’s the risk. It’s more of a business risk than a typical malpractice risk.”
To mitigate this financial risk, hospitals and physicians have to be on the same page, have greater collaboration, and “probably” the best way to do that is within an employer/employee structure, he said. Historically physicians had hospital privileges as independent contractors, but now as employees, there is better management of making sure doctors do checklists before performing surgery.
“As an integrated group, there are resources and rules for who will do the follow-up calls after surgery to make sure stitches are not going to be ripped open,” Allen said.
Pro-Praxis offers a professional liability program that covers every entity within the network — hospital, physicians and other employees such as certified nurse assistants, as well as other entities that hospitals have been acquiring such as nursing homes and outpatient surgery centers, as part of providing a continuum of care, he said.
Professional liability has taken the place of medical malpractice for individual physicians, Allen added.
For example, a hospital may pay $1 million in premiums, but after it brought a physician group of five doctors who each used to pay $100,000 in premiums for medical malpractice insurance, the hospital would now pay a total of less than $1.1 million in premiums.
In addition to less “finger-pointing” with a joint defense, typically the new employer/employee structure can result in “behavioral changes.”
“That is not to say that physicians didn’t behave well before, but now the hospital can better manage treatment and follow-up, and the workflow of all of its employees,” he said.
For insurers, the biggest challenge with the new structure pertains to policy limits, Allen said. Under the traditional structure, hospitals typically have a $2 million limit for professional liability and physician groups have a $1 million limit for malpractice. If they were sued and the jury awarded $3 million, the two entities could cover it with their respective limits.
“But now that there is no more sharing and just one health system that has to pay that $3 million jury award, the hospital would now have to pay $1 million out of pocket because its limit is still $2 million,” he said.
“This hasn’t happened yet, but from an underwriter’s perspective, we are concerned about loss allocation.”
Some health care organizations have been buying more limits and have been paying more in premiums, so they won’t have to pay out-of-pocket, something the insurers are hoping more will do as their exposure to losses increases.
“They have to be careful now that they’ve brought on all of those physicians as employees,” Allen said.
“Our job is to figure the impact of losses on how much limits they should get, and there is no hard data on that, yet.”
Pathogens, Allergens and Globalization – Oh My!
In 2014, a particular brand of cumin was used by dozens of food manufacturers to produce everything from spice mixes, hummus and bread crumbs to seasoned beef, poultry and pork products.
Yet, unbeknownst to these manufacturers, a potentially deadly contaminant was lurking…
What followed was the largest allergy-related recall since the U.S. Food Allergen Labeling and Consumer Protection Act became law in 2006. Retailers pulled 600,000 pounds of meat off the market, as well as hundreds of other products. As of May 2015, reports of peanut contaminated cumin were still being posted by FDA.
Food manufacturing executives have long known that a product contamination event is a looming risk to their business. While pathogens remain a threat, the dramatic increase in food allergen recalls coupled with distant, global supply chains creates an even more unpredictable and perilous exposure.
Recently peanut, an allergen in cumin, has joined the increasing list of unlikely contaminants, taking its place among a growing list that includes melamine, mineral oil, Sudan red and others.
“I have seen bacterial contaminations that are more damaging to a company’s finances than if a fire burnt down the entire plant.”
— Nicky Alexandru, global head of Crisis Management at AIG
“An event such as the cumin contamination has a domino effect in the supply chain,” said Nicky Alexandru, global head of Crisis Management at AIG, which was the first company to provide contaminated product coverage almost 30 years ago. “With an ingredient like the cumin being used in hundreds of products, the third party damages add up quickly and may bankrupt the supplier. This leaves manufacturers with no ability to recoup their losses.”
“The result is that a single contaminated ingredient may cause damage on a global scale,” added Robert Nevin, vice president at Lexington Insurance Company, an AIG company.
Quality and food safety professionals are able to drive product safety in their own manufacturing operations utilizing processes like kill steps and foreign material detection. But such measures are ineffective against an unexpected contaminant. “Food and beverage manufacturers are constantly challenged to anticipate and foresee unlikely sources of potential contamination leading to product recall,” said Alexandru. “They understandably have more control over their own manufacturing environment but can’t always predict a distant supply chain failure.”
And while companies of various sizes are impacted by a contamination, small to medium size manufacturers are at particular risk. With less of a capital cushion, many of these companies could be forced out of business.
Historically, manufacturing executives were hindered in their risk mitigation efforts by a perceived inability to quantify the exposure. After all, one can’t manage what one can’t measure. But AIG has developed a new approach to calculate the monetary exposure for the individual analysis of the three major elements of a product contamination event: product recall and replacement, restoring a safe manufacturing environment and loss of market. With this more precise cost calculation in hand, risk managers and brokers can pursue more successful risk mitigation and management strategies.
Product Recall and Replacement
Whether the contamination is a microorganism or an allergen, the immediate steps are always the same. The affected products are identified, recalled and destroyed. New product has to be manufactured and shipped to fill the void created by the recall.
The recall and replacement element can be estimated using company data or models, such as NOVI. Most companies can estimate the maximum amount of product available in the stream of commerce at any point in time. NOVI, a free online tool provided by AIG, estimates the recall exposures associated with a contamination event.
Restore a Safe Manufacturing Environment
Once the recall is underway, concurrent resources are focused on removing the contamination from the manufacturing process, and restarting production.
“Unfortunately, this phase often results in shell-shocked managers,” said Nevin. “Most contingency planning focuses on the costs associated with the recall but fail to adequately plan for cleanup and downtime.”
“The losses associated with this phase can be similar to a fire or other property loss that causes the operation to shut down. The consequential financial loss is the same whether the plant is shut down due to a fire or a pathogen contamination.” added Alexandru. “And then you have to factor in the clean-up costs.”
Locating the source of pathogen contamination can make disinfecting a plant after a contamination event more difficult. A single microorganism living in a pipe or in a crevice can create an ongoing contamination.
“I have seen microbial contaminations that are more damaging to a company’s finances than if a fire burnt down the entire plant,” observed Alexandru.
Handling an allergen contamination can be more straightforward because it may be restricted to a single batch. That is, unless there is ingredient used across multiple batches and products that contains an unknown allergen, like peanut residual in cumin.
Supply chain investigation and testing associated with identifying a cross-contaminated ingredient is complicated, costly and time consuming. Again, the supplier can be rendered bankrupt leaving them unable to provide financial reimbursement to client manufacturers.
“Until companies recognize the true magnitude of the financial risk and account for each of three components of a contamination, they can’t effectively protect their balance sheet. Businesses can end up buying too little or no coverage at all, and before they know it, their business is gone.”
— Robert Nevin, vice president at Lexington Insurance, an AIG company
Loss of Market
While the manufacturer is focused on recall and cleanup, the world of commerce continues without them. Customers shift to new suppliers or brands, often resulting in permanent damage to the manufacturer’s market share.
For manufacturers providing private label products to large retailers or grocers, the loss of a single client can be catastrophic.
“Often the customer will deem continuing the relationship as too risky and will switch to another supplier, or redistribute the business to existing suppliers” said Alexandru. “The manufacturer simply cannot find a replacement client; after all, there are a limited number of national retailers.”
On the consumer front, buyers may decide to switch brands based on the negative publicity or simply shift allegiance to another product. Given the competitiveness of the food business, it’s very difficult and costly to get consumers to come back.
“It’s a sad fact that by the time a manufacturer completes a recall, cleans up the plant and gets the product back on the shelf, some people may be hesitant to buy it.” said Nevin.
A complicating factor not always planned for by small and mid-sized companies, is publicity.
The recent incident surrounding a serious ice cream contamination forced both regulatory agencies and the manufacturer to be aggressive in remedial actions. The details of this incident and other contamination events were swiftly and highly publicized. This can be as damaging as the contamination itself and may exacerbate any or all of the three elements discussed above.
Estimating the Financial Risk May Save Your Company
“In our experience, most companies retain product contamination losses within their own balance sheet.” Nevin said. “But in reality, they rarely do a thorough evaluation of the financial risk and sometimes the company simply cannot absorb the financial consequences of a contamination. Potential for loss is much greater when factoring in all three components of a contamination event.”
This brief video provides a concise overview of the three elements of the product contamination event and the NOVI tool and benefits:
“Until companies recognize the true magnitude of the financial risk and account for each of three components of a contamination, they can’t effectively protect their balance sheet,” he said. “Businesses can end up buying too little or no coverage at all, and before they know it, their business is gone.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.