A Health Insurance Dilemma

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