In January 2004, in a Knoxville hospital, Shannon van Tol gave birth to Tennessee's first quintuplets: Meghan, Willem, Isabella, Ashley, and Sean. Amid the cigars, balloons, and donated diapers, Guille Cruze--CEO of the White Stone Group, the software company where the quints' father, Willem, worked--was both elated and worried.

Willem van Tol had worked as a programmer at White Stone for more than three years and, like many of the firm's 70 full-timers, had enrolled his family in the company's health care plan. The year leading up to the quintuplets' arrival had included a great deal of medical care, including fertility treatments, three ultrasounds a week, eight weeks of bed rest in the hospital, and extended stays for the newborn babies.

All told, the medical bills added up to more than $2 million. Cruze knew that his insurer, Blue Cross Blue Shield, would pass some of the costs back to him. But when he received his renewal notice a few months later, he was stunned. His annual premium had shot up more than 30%, from $290,000 to $380,000. For a company with $8 million in revenue, that extra $90,000 was going to hurt. "Willem said he was sorry," says Cruze, who tried to reassure his employee. "I told him that it was okay, that we would live and die as a team."

Privately, Cruze wondered what to do. When he hired his first few employees in 1997, he covered 100% of their health care expenses. Every year since, insurance premiums had gone up, forcing him to scale back. By 2004, he covered 95% of expenses for single employees and 55% for families. With this latest increase looming, Cruze was fed up. What if premiums jumped another 30% next year? In a moment of frustration, he considered doing away with health benefits altogether, but he soon realized that such a drastic step would destroy the close-knit culture he had spent years cultivating.

Cruze called dozens of insurance carriers for quotes, and they all told him that a $400,000 annual health insurance bill was the norm for a company White Stone's size. The situation seemed hopeless. Then he read about an interesting alternative: health savings accounts. HSAs let individuals save money for health care expenses using pretax dollars. The accounts seemed like a good deal for employees. They could roll over any money remaining at the end of the year and take the accounts with them if they should leave White Stone. They could also withdraw funds for nonmedical expenses, though they'd have to pay income tax and a 10% penalty. After age 65, they could withdraw anything remaining, paying only income tax.

There was one big drawback: HSAs are used in conjunction with qualified health plans with low premiums and high deductibles--between $1,000 and $5,100 for individuals and between $2,000 and $10,200 for families. (Unlike flexible spending accounts, HSAs limit employees to one health plan.) Cruze could save a bundle by taking advantage of the low premiums, but he worried that his employees might resent the high deductibles, or forgo necessary medical treatments to avoid paying them. The only way to get around that problem, he figured, would be to cover the deductible himself. After doing some calculations, he figured out he'd still wind up paying about $400,000 a year.

Cruze was torn. On the one hand, he liked the idea of HSAs. He'd much rather deposit money into his employees' accounts than continue filling an insurance company's coffers. But HSAs were a new concept, and he worried that his employees would be confused and even intimidated by the complex model. In many ways, it would be easier to stick with a traditional plan and either absorb the entire increase or ask employees to pony up a bigger percentage of the premium payments. By November 2004, as the renewal date for the company's insurance policy loomed large, employees began speculating about the fate of their health benefits. Cruze had to make a decision fast.

The Decision

One Monday last November, at White Stone's monthly town hall meeting, Cruze stepped up to the podium and proclaimed, "It's your money!" The slogan was part of a campaign designed to teach employees about their new HSAs, which would be administered by Wells Fargo. As COO Jeff Peters and HR director Leslie Evans handed out pamphlets and debit cards, Cruze made a PowerPoint presentation to explain how the system would work.

Each month, he explained, an employee with a family plan would have $379 deducted from paychecks for the same Blue Cross Blue Shield plan he or she had always used. White Stone would cover the entire deductible, $417 a month, deposited into the employee's HSA, and kick in $58 toward the premium, for a total monthly contribution of $475. (If Cruze had simply renewed White Stone's traditional policy, the company's contribution would have been $487 a month, and the employee would have paid $383 a month, on top of a $1,000 deductible.) Under the new plan, individual members would follow the same drill, but make premium payments of only $52 a month.

Cruze pointed out that employees would no longer be required to make copayments on doctor's visits and prescriptions because the entire bill would be paid for with the money deposited in their HSAs by White Stone. He also emphasized that HSAs would help them become educated consumers. "I saw it as a healthy education for them," he says. "They needed to learn that all-you-can-eat health care is not an entitlement and start asking doctors hard questions like, 'Do I really need this test?"

At first, employees seemed dubious. "People were scared because they didn't understand," Cruze says. Evans, the HR director, held weekly meetings with plan members and their spouses at which she addressed questions and problems that arose. Initially, employees complained that their doctors didn't understand how HSAs worked. Rather than submitting their bills to insurance carriers, doctors had to swipe debit cards and create payment plans if charges exceeded the amount of money in employee accounts at any given time. In one case, just two days after the plan went into effect this past January, Evans stepped in to help an employee whose doctor insisted on being paid up front. "We knew we would be at risk for the first few months until employees could build up their accounts," Cruze says. "The whole thing took some education and a little bit of getting used to."

Now, almost a year later, many of the kinks have been worked out. The best part about HSAs, Van Tol says, is that he no longer has to make copayments--the quints, who will turn two in January, are healthy but still have quite a few doctor's appointments. Even better, he adds, is that the kids are finally sleeping through the night.

The Experts Weigh In

Time is not on your side

I love that health savings accounts will keep costs down for White Stone and, if the company's employees are frugal, they won't lose the money at the end of the year. My only concern is the timeline for funding the deductible. If Cruze's employees don't have enough money accumulated in their accounts to pay for immediate medical needs, they shouldn't have to dip into their own pockets or deal with annoyed doctors.

Aaron Keller
Managing principal

It's a win-win

Both Cruze and his employees come out winners. Cruze can control premium costs by eliminating minor claims against White Stone's policy, while employees benefit from having 100% of their deductibles funded. Cruze is a smart employer who's adapting to the changing philosophy regarding benefits. Going forward, employees will be expected to have some skin in the game.

Eric Paul
Benefits director
Outsource Group
Walnut Creek, Calif.

Too many downsides

A high deductible plan will keep White Stone's premiums low, but my fear is that some employees may keep the cash in their HSAs and not go to the doctor. Another downside is that HSAs don't offer a choice of coverage, unlike other models, such as health reimbursement arrangements and flexible spending accounts. Contributions are also capped, which limits how much you can purchase tax-free.

Michael F. Cannon
Director of Health Policy
Studies, Cato Institute
Washington, D.C.

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