Archive for April, 2010

Bank of America Includes Small Business Customers in CARD Protections

Friday, April 30th, 2010

In an earlier blog posting, I criticized CARD (Credit Card Accountability, Responsibility and Disclosure Act) legislation for excluding small businesses from the protections it affords to individual consumers. Those protections include banning the practice of retroactively raising rates on old balances. Now one major bank has decided to do what Congress did not. Bank of America has announced that it will extend the CARD Act protections to its two million small business customers. Specifically, BofA will provide at least 45 days’ advance notice of future interest rate changes, a minimum 25-day grace period between the end of the billing cycle and the payment due date and a one-page summary of the terms and conditions of the credit account, to bring transparency to rates, payment information and fees. In addition, BofA will apply payments made on small business card accounts to the portion of their balance with the highest interest rate. I am heartened to read this news and frankly wonder what took a major bank so long to take this initiative. Surreptitiously sneaking in fee hikes and reassessing past interest rates was no way to build market share and goodwill among customers. Now let’s see if the other banks follow suit.

The Disaster Before Traditional Disaster Season

Thursday, April 29th, 2010
Getting Closer

Getting Closer (Source: NOAA)

The 2010 hurricane season does not start for another month, but small businesses in the Gulf Coast states are already facing a major threat to their livelihoods. More than 40,000 barrels of oil have been leaking into the Gulf of Mexico since April 20, when an explosion destroyed the Deepwater Horizon, which was drilling within 50 miles of Louisiana’s coastline. Eleven workers on that rig are unaccounted for and presumed dead. The cause of the explosion is not yet known. Crews are working round the clock to contain the expanding oil slick; deepwater robots are maneuvering to close the platform’s submerged valves. Burning the slick has been proposed as an option, but that creates air pollution and may further damage marine life. It could take months to contain the damage. Meanwhile, the oil spill could reach the shoreline of the Gulf Coast within days, threatening the oyster and shrimp industries and tourism. This comes at a time when the fishing industry is already struggling for its survival. It is threatened by lower-cost imports from Southeast Asia and unaffordable insurance at home. The fishing, shrimp and oyster industries are a major part of the Gulf Coast economy and have not yet recovered from the losses they sustained in Hurricane Katrina. We can only hope that the oil leakage is stopped as soon as possible and damages are minimized.

A Bitter Pill for Small Business

Wednesday, April 28th, 2010

The following is an op-ed I had written last year about the Senate’s health insurance reform bill, which favors the interests of large health insurance companies at the expense of expanding access to affordable health care for the small business sector. Congressman Ron Paul wrote a column on his website about corporatism, the advancement of big business interests to the detriment of our personal liberties and economic freedoms. He said it better than I did, but we are essentially on the same page on this one:

A Bitter Pill for Small Business

Proposed Health Insurance Reform Sacrifices Economic Recovery

As a small business owner for ten years, I paid the high price of limited choice. If allowed the freedom to do so, I would have chosen health plans available to the Fortune-500, options the Senate Finance Committee and the health-care lobby would deny.

But this uneven playing field could be corrected Thursday when the U.S. Senate Committee on Small Business and Entrepreneurship will hold hearings to consider the impact of the insurance reforms recommended by the Senate Finance Committee.

The genesis of this game-changing opportunity was Monday’s public break-up of the alliance between the insurance industry and Congress, an alliance that had promoted reform measures harmful to the nation’s 29.6 million small businesses.

Having spent roughly $100 million in advertising to promote the reforms, America’s Health Insurance Plans, an industry lobby group, on Monday published an analysis demonstrating that the proposed reforms would accelerate increases in medical insurance premiums.

Stung by this apparent betrayal, Senate Finance Committee spokesman Scott Mulhauser attacked the report as a “health insurance company hatchet job, plain and simple.”

The health-care industry’s initial support of the proposed reforms and even its eventual about-face on the matter simply reflect its self-interest. The industry’s support of the Senate Finance Committee’s plan was the result of government’s promised mandate that millions of uninsured Americans must obtain coverage, many with government subsidies, or face serious penalties. The insurance industry presumably calculated that these financial benefits warranted sacrificing sound underwriting practices to contain costs, as such costs could be passed on to policyholders anyway. When the Finance Committee didn’t deliver the desired mandates, the deal was no longer attractive to insurers.

But the deal was always disastrous for small businesses, so insurers likely want political cover to escape blame for rising premiums that they will have to pass on to policyholders.

Consider that costs of regulatory compliance are a significant burden hindering small business employment. The Office of Advocacy of the U.S. Small Business Administration reports that on a per-employee basis, small businesses pay 45% more to comply with government regulations than large corporations. The proposed excise tax on certain health plans represents a new administrative burden for requiring businesses to report the costs of their employee benefit packages provided by each of their vendors. Considering the 2009 Small Business Health Care Reform Survey of the National Small Business Association found that 30% of small businesses use three or more vendors, and some as many as 12 different vendors, this requirement is onerous.

Even worse is the suggestion that such excise taxes defray the costs of expanding coverage. The Senate Finance Committee would broaden eligibility for Medicaid without providing a viable plan to pay for it or contain its spiraling costs, which are increasingly borne by smaller businesses. Currently Medicaid is funded by taxpayers at 65% of costs and Medicare at 85% with the balance paid in the form of what are, in effect, hidden taxes in the form of higher premiums on private plans.

Large corporations, (defined as those with at least 50 employees) are able to escape such assessments because they benefit from self-insured health plans. The Kaiser Foundation estimates that self-insured companies covered 75 million out of 137 million workers in 2008. Self-insurance allows the flexibility of plan design to manage costs and utilization as well as significant cash flow and tax benefits.

But most importantly, self-insured plans are not subject to conflicting state mandates, as they are regulated under federal law (ERISA, the Employee Retirement Income Security Act). The plans are also not subject to state health insurance premium taxes, which typically cost 2% – 3% of premiums and they avoid insurance charges for fluctuations in claims, which typically range from 3% – 10% of premiums.

These are significant cost savings, but they are not available to smaller employers which cannot absorb any volatility in self-insured claims. Nor would the insurance lobby have any interest in expanding access for small business, as insurers earn less when they limit their role to administrators of self-insured plans.

The federal and state governments also benefit by holding small businesses hostage to limited choices as, according to the AHIP, the private sector pays 135% – 140% of the cost to subsidize the continued underfunding of Medicare and Medicaid. The federal government’s reimbursement formula incents politicians to spend more for their constituents to capture more federal dollars from Washington. Politicians postpone the day of fiscal reckoning for Medicaid, in part, by holding small businesses hostage to costly mandates.

To be sure, supporters of the Senate bill will say that small businesses priced out of the market can access coverage on the insurance exchanges. But that violates the President’s promise that those who are satisfied with their insurance may keep their plans. In any event, the insurance exchange is not financially sustainable, requiring over $800 billion in subsidies over the next decade. Comparable efforts to establish insurance exchanges in Texas, Florida, North Carolina and California all failed, in part for the inability to design plans to manage risks, which plan design restrictions are enshrined in the Senate’s proposed reform.

There is a proven model for self-funded plans that could be adapted to broaden access to affordable health insurance. Prior to starting my small business, I was a senior executive of the world’s largest reinsurer of health risks, where captive insurance programs were commonly structured to manage other insurance costs. This model can be applied to health insurance plans and, with enabling legislation, structured for small business access.

Outside the reinsurance industry, captives are not well understood. They are thought to insure a single corporate parent. In fact, captives are often structured for ownership by multiple companies, agencies or an association. Because larger groups have more predictable medical claims, captive associations are even better mechanisms for containing health insurance costs than allowing small businesses to negotiate their individual purchases across state lines.

What hinders the implementation of this solution is that it is impossible to design a single offering that complies with the mandates of all 50 states. And if such a plan were to exist, it would not offer any cost savings as the policyholders would have to be rated and priced as individual small groups within their states of domicile.

It is time to change this status quo.

The insurance lobby is correct to state that the Senate’s reform measures will raise the cost of coverage. The President is correct to state that small businesses need affordable health insurance to expand job creation. On Thursday, ranking Senate Small Business Committee Senators Mary Landrieu (D-LA) and Olympia Snowe (R-ME) should resolve this apparent conflict by calling for enabling legislation for health care entrepreneurs to design ERISA-qualified captive health benefit plans for small business associations. That would be a win for everyone’s stated goals.

Fire Destroys Vermont Landmark

Tuesday, April 27th, 2010
Traditional New England

Traditional New England

The New York Times reported the moving story of how life in a small town in Vermont was upended when arson destroyed the general store that was the center of community life. The Putney General Store, built over 200 years ago, was likely the oldest general store in Vermont. A landmark building, tourists would pose for photographs in front of the store even as residents relied on it as a hub of information. The town has raised $200,000 to repair the building, but the story is a reminder of how small businesses define the character of local communities, unlike the anonymous national chain franchises or big box institutions. The tragedy also reminds us that everyday disasters, such as fires, are more likely to strike that major disasters.

Deadly Tornadoes Strike Mississippi

Monday, April 26th, 2010
Tornadoes Strike Without Warning

Tornadoes Strike Without Warning

Over the weekend, tornadoes with wind speeds in excess of 160 mph struck an area at least 50 miles long from Louisiana to central Mississippi, killing at least 12 people and injuring more than three dozen others. Hundreds of homes were damaged in the storm. Although tornadoes are more common in the Midwestern states, the fact is that they have been reported in each of the fifty states and countries throughout the world. This is a sad reminder of the need to stay up to date on tornado safety. Here are some tips from Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (Wiley, second edition 2008):

Tornadoes are known as “twisters” because tornado winds gust at speeds in excess of 200 miles per hour, destroying everything in their paths. Spring and summer are considered the tornado “season”, but they can happen at any time of the year. A tornado watch means that a tornado is possible in your area; a tornado warning means that a tornado has already been sighted. An approaching tornado sounds like a speeding train. Remain indoors, away from the windows, which could be shattered by the high-speed winds. If you are in a high-rise building, try to make it to the basement safely. We recommend that you avoid the elevators and take the stairs as fallen power lines could disrupt the supply of electricity to your building without warning. If you don’t have sufficient time to go to the basement or the ground floor, move to the center of the building, which is as far removed from windows on either side of the building as possible. If you are outside, go to the basement of the nearest sturdy building or lie flat in a ditch or a low-lying area. If you are in a car or a mobile home, get out immediately.

Once the tornado has passed, check your premises for damage. Be careful when you leave your premises, as fallen power lines pose a particular hazard. Don’t light matches or use candles, as there may be gas leaks of which you are unaware. Listen to the news reports to determine if it is safe to go home and which areas you should avoid on your commute home.

Louisiana Prepared

Thursday, April 22nd, 2010
Gulf Seafood - the Best!

Gulf Seafood - the Best!

I am in Baton Rouge today, working with a team representing each of the nine Small Business Development Centers to develop the disaster preparedness training in advance of the 2010 hurricane season. Forecasters expect that beginning June 1, we will see an above-average storm season, with a greater than average number of storms making landfall in the U.S., with those storms representing greater severity than historical averages. This year’s hurricane season particularly worries me because our states are facing $90 billion budget shortfalls. They simply don’t have the resources to fund a significant disaster relief effort. This was recently demonstrated to painful effect in Rhode Island. Sadly, the state with the second highest unemployment rate experienced its worst flooding in more than two centuries. This makes our preparedness efforts assume greater urgency, as with fewer resources to cushion our losses; we must redouble our efforts to mitigate the risks. On a happier note, this photograph shows one of my favorite seafood restaurants in Louisiana to which I am about to return! I can always count on being well fed when I am here.

Another Cost of Homeownership

Wednesday, April 21st, 2010
The Cost of a Dream

The Cost of a Dream

This is a quote from Seth Godin’s blog:

“If you have a steady job, matching your mortgage to your income isn’t dumb. But if you are a freelancer, an entrepreneur or a big thinker, a mortgage can wipe you out. That’s because the pressure to make your monthly nut is so big you won’t take the risks and do the important work you need to do to actually get ahead. When you have a choice between creating a sure-thing average piece of work or a riskier breakthrough, the mortgage might be just enough to persuade you to hold back.”

This should be required reading for our policymakers, as loans from the U.S. Small Business Administration, particularly disaster recovery assistance loans, generally require real estate collateral. If you are planning for contingencies in your working capital needs, you generally don’t want resources tied up in real estate assets. And if you had real estate collateral, your equity is likely worth much less now than it was two years ago, reducing your borrowing capacity, or even putting you underwater. We should give more careful thought to the costs of home ownership, particularly the manner in which it induces risk aversion.

Digital Spring Cleaning

Tuesday, April 20th, 2010
It's That Time of Year

It's That Time of Year

It’s time for digital spring cleaning for your business computers. If you use a single computer for your business, as in a home-based sole proprietorship, for example, you should regularly schedule maintenance tasks, such as clearing our your caches and de-fragging your hard disk. (Your computer stores information in various places on the hard disk, as if the information were a book taken apart, with individual chapters placed here and there. When you de-frag the computer, you optimize the use of your hard disk space and your computer’s performance.) If you have more than one computer, you will follow a different set of procedures to maintain your network more efficiently. Everyone should get rid of the digital clutter – make sure files are properly stored on network drives and not individual hard drives – and I particularly like to clean up the dizzying array of icons that finds it way on to my desk top. I also make sure my operating system is up to date, old applications that are not likely to ever again be used are removed (unless I think I will have need for them to open an archived file), and older files are properly archived. Check to make sure your e-mails are organized into named folders for prompt retrieval. Clutter does build up over time in your computer. Putting everything in apple-pie order will give you a sense of calm efficiency.

My Week-End Project

Sunday, April 18th, 2010
Not Just Memories

Not Just Memories

The weather was cold this weekend, so I took the opportunity to work on a long-standing business project: updating my inventory with digital photographs. I take pictures of key assets and record the information for insurance and personal replacement purposes. This is particularly important for assets that could be difficult to value, such as an aquarium or art work. I recommend doing this for both your business and home assets. It is not so overwhelming once you break the task down into manageable steps. I find it also helps me to make better purchasing decisions, as I know at my fingertips what I have. Indeed, with the 2010 hurricane season approaching, this task may assume particular urgency for small business owners in coastal areas. Once you get the base project done, updating for new purchases gives you an incentive to stay organized.

Mitigating Flood Risk in NYC Subways

Saturday, April 17th, 2010
Sharp and Functional

Sharp and Functional

This subway grate represents a creative design and a practical solution and was this week recognized with an Urban Design Award of the American Institute of Architects. (The photograph is courtesy of New York City’s MTA Facebook page.) Because ventilation grates are flush with the sidewalk, above subway stations that are not deep underground, stations are at risk of flooding. When a particularly heavy rainstorm in August 2007 completely flooded the New York City subway system, the transit authority instituted a $31 million flood prevention plan in susceptible areas. This clever subway grate doubles as street furniture. What the transit authority has yet to address, however, is passenger education about disaster risks. There is concern that New York City residents would seek refuge in subway stations in severe storms which are, of course, the last place you want to be during a disaster alert.