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In March, One-Stop Calibration Services Inc. of Keene, Texas, began offering health-care benefits to its employees for the first time. As a sole proprietor, James Stiles was unable to afford health-care coverage for his six employees.

That changed in March, thanks to the growing individual health-care market created by the introduction of Health Savings Accounts in 2004, along with new options in defined contribution health-care programs. Stiles can now offer health benefits to his workers.

To do that, Stiles turned to Extend Benefits Group LLC, Salt Lake City-based health insurance management company, for help.

"Health savings accounts focus on individualizing employee benefit programs and, in many cases, allow small businesses to begin or continue offering health-care benefits to their employees," says Brian Tenner, senior vice president of sales at Extend Benefits. "The HSA provides an individual contract between the employee and the health insurance company that is permanent and portable. Employees realize that it's their money to use in their own best interests."

The HSA model allows employees to take their health funds with them to a new job. In addition, HSAs allow individuals to purchase their own high-deductible health-care policies to pay for routine and catastrophic medical expenses, independent of their employers.

Consumers can open accounts at insurance companies, banks and credit unions. HSAs also allow small employers--who may not be able to provide their employees with health-care benefits--to make nontaxable contributions to their employees' accounts. Funds in the account grow tax-free through investment earnings, just like an IRA, and unused funds can be rolled over from year.

Another consumer-directed option, the Health Reimbursement Arrangement, or HRA, available since 2002, allows employers to reimburse their employees tax-free for amounts spent on individual or family health insurance premiums. An HRA provides first-dollar medical coverage until funds are exhausted.

Employees are typically insured by a traditional PPO plan that may require copays or coinsurance. Any unused funds are rolled over at the end of the year, but the funds belong to the employer and cannot be transferred if the employee leaves the company.

"Employees are often most concerned about deductibles and out-of-pocket costs, coverage for prescription drugs, lifetime maximums, and how to choose a doctor or hospital," says Tenner. "We provide them with information to help them make informed decisions and choose the plan that's best for them."

MAKING CHOICES

Determining which type of plan to implement and how to fund these plans has been a challenge for many companies. One-Stop Calibration chose an individual HRA for its employees.

"We contribute a certain dollar amount to each employee's HRA, based on their level of service," says Stiles. "While deductibles vary for each employee, averaging around $1,000 for an individual, employees can choose the plan that best suits their needs. Employees' biggest concern was how they would be reimbursed for out-of-pocket costs from their HRA."

Jay Savan, health and welfare group leader at benefits consultant Towers Perrin in St. Louis, agrees. He says employers face the following issues: Is it a benefit design I can feel good about if I offer it? How will the plan be designed? Will I contribute to the plan? Will employees contribute to the plan? Who will 'host' the HSA?

"The more customized the plan, the more challenging it is to set up," he says.

Consumer-directed health plans give smaller employers a legitimate vehicle to offer health-care coverage he also says, because employers can match the funds employees put into their HSAs, or allow individuals to set up their own accounts.

"While these accounts are not flawless," Savan adds. "They--and other consumer-directed approaches--are demonstrating significant savings, as well as a reason for individuals to care about and invest in their health."

Lee DeClaire, president of PDF Industries, a tool and die company based in Grass Lake, Mich., began offering individual HSAs to his employees in February 2005.

"Our insurance costs were skyrocketing year after year," says DeClaire. "Group insurance costs would have put us out of business, and employees would have had to pay a significant portion of their premiums under the group plan."

Through an arrangement with Custom Benefit Solutions, an independent agency in Northville, Mich., that sells individual HSA policies through Golden Rule Insurance Co., a UnitedHealthcare subsidiary, DeClaire set up individual HSAs for his employees.

"Employees pay for their health-care services up to a deductible of $2,700 for an individual or $5,450 for a family. Medical expenses after the deductible is met are covered 100 percent through a PPO plan. Any money not used is rolled over in the employee's HSA for use the following year.

While adopting the plans made sense on paper, selling the plans to employees wasn't always easy.

"Employees were concerned about the deductible issue," says DeClaire. "We explained that the funds in their HSA would provide money that they can use as they see fit for health-care expenses, and they can take their account with them if they leave the company."

He says that employees can now invest the money as they want for future health-care costs instead of paying money to an insurance company through payroll deductions without getting anything in return.

"We can now afford to give our employees raises, which they can apply to funding their HSAs, because the cost of insurance is no longer a concern," he says. DeClaire has seen premiums drop 50 percent since implementing the HSAs. Employees seem to be satisfied with their coverage, he also says.

"With an individual HSA, the employer knows his exact exposure upfront," says Tom Rogala, an independent agent at Custom Benefit Solutions who underwrote DeClaire's HSA plans. "The company is provided with one list bill for all employees, which the employer pays through the employees' payroll deductions, so it feels like a group plan."

Rogala has seen an increase in interest in HSAs from sole proprietors such as attorneys, mortgage brokers, real estate agents.

Eddie Curry, CFO of Atlanta-based Jan-Pro Franchising International worried that with a traditional insurance plan, a catastrophic medical claim could affect the entire company. "With only 10 employees, we felt that individual HRA policies would be more cost effective and provide less risk than a traditional health benefits plan. Despite our initial concerns about the insurability of individual employees and questions about how the plans work, the process has been relatively easy."

Jan-Pro began working with Extend Benefits in December, enrolling eight of its 10 employees in the Extend Choice HRA plan. "We were previously unable to offer health-care benefits to our employees," says Curry. "We liked the flexibility that the consumer-directed plan offered to our employees, giving them the ability to choose a benefit level that best suited their situation." The company contributes a set amount each month to each employee's HRA. Employees then purchase an individual plan that best suits their needs.

"These plans change the mindset of the employer knowing what's best for the employees and gives employees the resources to make the right health-care decisions for themselves," says Extend Benefits' Tenner. "Employers can save a significant amount on their premiums and employees get the coverage that best suits their needs and are generally more satisfied with their benefits."

Plenty of small businesses have bought into the idea of consumer-direct health care, even if critics say the model could turn into a sneaky way for employers to shift the price of health care onto employees. "Nearly 3.2 million consumers are enrolled in high-deductible health plans offered in conjunction with HSAs, according to a survey conducted by America's Health Insurance Plans (AHIP) of Washington, D.C. "Enrollment in these accounts has roughly tripled since last March," says Karen Ignagni, AHIP's president and CEO. According to the report, in the small group market, companies that previously did not offer health-care coverage to their employees purchased 33 percent of HSA policies. In the individual market, 31 percent of new enrollees in high-deductible health plans with an HSA component were previously uninsured.

The group market now comprises 58 percent of the enrollment in such plans, up from 21 percent in September 2004. The AHIP census was based on responses from 96 member companies, representing nearly all the health insurance plans offering HSA-eligible policies.

"Consumer-directed plans offer an affordable cost option for many small businesses," says Karen Kerrigan, CEO of the Small Business & Entrepreneurship Council in Washington, D.C. "Employers have tinkered around with their health plans for years. There is only so much they can do to continue making these plans cost-effective and meaningful for employees."

MINDY TORAN lives in Pennsylvania.

May 1, 2006

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