Oliver also saved on insurance costs this year by switching plans. His former carrier wanted to jack up his rates 20 percent with a $1,000 deductible. Instead, with a new plan and a higher deductible, his insurance bill fell by 42 percent.

Cafeteria plans: not for everybody

One way to help your employees meet the cost of health insurance is to set up a cafeteria plan, also known as a Section 125 plan. These arrangements come in three flavors: premium-only, dependent care flexible spending accounts, and unreimbursed medical flexible spending accounts. The premium-only plans, which may include a choice of health plans as well as life, disability, and dental insurance, allow employees to pay their portion of the insurance premiums out of pre-tax money. They also reduce the employer's contributions to Social Security, Medicare, and other payroll taxes, because employees' pre-tax payroll deductions serve to reduce their incomes.

The two kinds of flexible spending accounts—which are usually coupled—work the same way from a tax perspective. Employees can designate up to $5,000 of their pay before taxes to cover dependent care or an amount designated by their employer to cover unreimbursed medical expenses. The catch is that if they don't spend all of that money during the plan year, they lose the balance. Also, with some exceptions, they can't have both an FSA and a health savings account, a new option that we'll discuss later.

For a small physician practice, the main problem with cafeteria plans is their administrative cost. To set up a "full-flex" plan that covers premiums and FSAs, a third-party administrator will charge $1,500 to $2,500, says Bowden, and at least $2,500 a year for administration. Such a plan doesn't make sense unless you have more than 25 employees, he says.

H. Christopher Zaenger, a Chicago-based consultant, points out that a payroll service firm like Paychex will establish such a plan for $500 to $700 and will charge between $75 and $100 a month to administer it. A medium-sized practice might find that affordable, but Zaenger warns that you won't break even until the third or fourth year.

For a premium-only plan, the setup fee may be only $300 to $500, plus the same amount annually to maintain it, and administration may cost just $3 to $4 per employee per month (see "Staff benefits that won't cost a bundle," March 5, 2004, at www.memag.com/memag/article/articleDetail.jsp?id=108811 ). In some areas, practices may spend even less, says Randy Pickering, president of Pickering Insurance in Vista, CA. "We give those premium-only plans away free, and in the second year, it's $130 per employer. A typical employer will save 15 to 20 percent on payroll taxes, and the employees will save 20 to 25 percent."

Pickering directs clients who want cafeteria plans to California Choice, a privately owned health insurance "exchange" that gives small companies a wide choice of health plans with a fixed employer contribution. Nationwide, insurance exchanges and small business-insurance purchasing groups are less common than they were a decade ago. The Connecticut Business & Industry Association, however, still runs one for member firms with three to 100 employees. Internist Jeffrey Kagan of Newington, CT, purchases his group health insurance through CBIA; but even with higher co-pays, his premium rose 15 percent this year.

Consider the new health savings accounts Cafeteria plans are only one of several IRS-approved methods of paying medical and/or insurance expenses out of pre-tax income. For instance, the new health savings accounts, which must be combined with high-deductible insurance policies, allow employees to pay some or all of their noncovered expenses out of tax-free accounts funded by their employers. Alternatively, workers can fund HSAs themselves, deducting contributions from their taxable income. And physicians can set up HSAs for themselves, too.

The definition of "high-deductible" in the HSA model is $1,000 for individuals and $2,000 for families. The maximum out-of-pocket expense allowed is $5,100 for individuals and $10,200 for families.

There's a limit to how much money can be placed in an HSA each year. The maximum is the lesser of 100 percent of the deductible or $2,650 for single policies and $5,250 for family plans, indexed to inflation. The law allows people aged 55 or over who are not enrolled in Medicare to make additional "catch-up" contributions of $600 in 2005. Each year after that until 2009, the "catch-up" amount will rise by $100.

Unused funds in HSAs can be rolled over from year to year, and employees can keep whatever's accumulated in their accounts when they change jobs. The money can be held in savings accounts or invested in stocks and bonds.

Money withdrawn from an HSA to pay for "qualified medical expenses" is not taxable. But if you withdraw money for other purposes, you must pay tax and a 10 percent penalty. If you're over 65, on the other hand, there's no penalty; you just have to pay the taxes on money withdrawn for nonmedical purposes. This provision makes HSAs an ideal retirement savings vehicle for some physicians.

Any bank or insurance company can be qualified to be an HSA trustee or custodian. In addition, any person or entity that the IRS has approved to be a trustee of an IRA or a medical savings account (the predecessor of HSAs) is allowed to set up health savings accounts. You don't have to set up an HSA through the insurer that provides your high-deductible policy, but the vendor must be IRS-authorized.

Some banks charge an annual fee of $40 per health savings account plus a small fee for each transaction, says Randy Pickering. Debit card setups are available, or accountholders can submit expense statements and have checks mailed to them. All a practice has to do is fill out the paperwork, make payroll deductions, and deposit them automatically in the HSAs.

Congress authorized HSAs as part of the 2003 Medicare drug law, and they've been on the market only since Jan. 1, 2004. Insurance agent Donald Brain points out that some insurers aren't offering them yet, although many made them available effective Jan. 1, 2005. So when it comes time to renew your current insurance policy, you should take a look at HSAs.

HSAs offer advantages to doctors and staffers HSAs offer several advantages to doctors and their staffs. Employees own the accounts and can take the HSAs with them if they change jobs or retire. They can invest the money however they wish. And they can spend the money on any medical expense that's tax-deductible under IRS rules (except for health insurance premiums), whether or not it meets the health plan's definition of a qualified medical expense. Thus an employee could withdraw funds from his account for vision or dental care or alternative therapies that aren't covered by the insurer. However, he'd still be on the hook for meeting the deductible if he needed covered medical services.

For a physician who's already "maxed out" his other retirement accounts, HSAs can be an excellent way to save additional money for retirement. If you're in good health and put the maximum allowable amount into an HSA each year, it could add up to a very nice nest egg, notes Pickering.

For example, he says, one insurance company offers an HSA coupled with an insurance policy that has a $4,800 deductible and pays 80 percent of claims above that amount. If the insured were a 50-year-old physician with a 45-year-old wife and two kids, the family premium for this policy would cost $271 a month. If the doctor bought a dental plan for an extra $90 a month, and funded his HSA at 100 percent of the deductible, he'd spend about the same as he would for a low-deductible policy costing $10,000. But at the end of the year, he'd still have the balance after medical expenses in his HSA.

By the second year, a healthy doctor would have more than enough money to meet any medical bills that came up, and after that, whatever he invested in the HSA would be gravy, says Pickering. "You're putting the money in your pocket instead of paying the insurance company, and you're letting it roll over from year to year."

Pickering and other consultants warn that this rosy scenario depends on a doctor's own insurance being separate from that of his employees. If you fund your own HSA at 100 percent of the deductible in a group plan, you have to deposit just as much into your employees' accounts. On the other hand, if you leave the group and buy individual insurance, you can fund your HSA to the statutory limit. But the IRS has yet to provide guidance on how much you have to put in your employees' HSAs if you do that—or whether you must offer them HSAs at all.

HSA downsides: pushback, scant savings

From the viewpoint of providing insurance for your employees, HSAs have two disadvantages: They're unlikely to save you much money, and they can provoke a backlash from your staff.

For instance, California consultant Jeff Denning tells of an HSA/high-deductible plan he recently helped set up for a five-doctor plastic surgery practice. "It was an extremely long and difficult process to get everybody to understand the thing, and I don't know whether I'd do it again," he says. "It was very confusing, and when employees get confused, they start getting the idea that somebody's trying to pull the wool over their eyes. We had some people questioning our motives. And all we were trying to do was make things better."

New Jersey consultant David Sebastian agrees that this can be a big challenge. "Staffers see their compensation as a combination of benefits and salary. They're willing to take a slightly smaller salary for better benefits, but can you make a catastrophic adjustment in benefits? Most doctors feel they can't without angering their employees, and maybe losing some of them."

Even if you can get over this hump, it might not be worth it. Pickering maintains that health insurers are charging too much for catastrophic policies, making HSAs less affordable. As a result, he says, if a practice funds staffers' HSAs at 50 percent of the deductible, "it actually may cost them a little more money compared with a conventional plan. Even if you save, there's not that big a spread between this and an HMO premium."

Bowden estimates that a small practice would save no more than $200 per employee on an HSA funded at 50 percent of the deductible. And Denning says that the plastic surgery practice didn't save anything. "The object of this exercise was to be more competitive in the labor market" by offering the employees a choice of plans, including the HSA/high-deductible plan, he notes.

If you put less than half of the deductible in employees' accounts, you might save money, but you risk angering employees. "I'm encouraging clients to look at funding the account from 50 to 75 percent the first year," says Brain. "First, you've got a huge fear on the part of employees who see this high deductible. Second, there will be some bleeding of the deductible money into things that will not be covered expenses. Employees need to be protected from themselves the first year so they don't misuse this deductible money."

Unlike the other consultants, Brain says that high-deductible plans with well-funded HSAs can cut insurance costs. He cites a small firm that saved $1,000 on each of its 10 employees.

Other arrangements may be a better bet HSAs aren't the only tax-advantaged health insurance vehicle in town. Medical savings accounts still exist, although no new ones can be set up. And in 2002, the IRS established rules for something called health reimbursement arrangements (HRAs), which remain available to employers.

Although they're typically used with high-deductible plans, HRAs can be set up without an insurance policy. And unlike an HSA, an HRA doesn't have to be a designated account in a bank or trust. It can be no more than an agreement to pay a certain amount of medical expenses for employees, with corresponding notations in your books when claims are paid. In short, this is a limited form of self-insurance, and claims paid from corporate funds can be deducted from the practice's taxes, just like insurance premiums are.

The employer can contribute any amount of money to an HRA each year, and the funds belong to the company until they're spent. While the unused balance rolls forward to the next year, it doesn't travel with the employee when he leaves to take another job, as HSAs do. As group plans, however, health reimbursement accounts are subject to COBRA continuation requirements. These federal regulations require companies to keep terminated workers in group plans for up to 18 months, although the former employees usually pay their own premiums.

HRAs can be set up to let former employees and retirees draw from them. But the accounts are designed purely to pay medical expenses.

Internist Arthur C. Sgalia Jr. of Hopedale, MA, who established an HRA for his own family and his physician assistant, found he was able to save substantially on the cost of funding his own deductible for a major medical policy. He's able to do that because he's now paying his noncovered medical bills out of pre-tax rather than post-tax funds. In just one quarter, he says, "We saved the taxes on a couple of thousand dollars by having the HRA." The money he pays for his PA's noncovered expenses, he adds, was already tax-deductible before he got the HRA.

If you can afford it, says Zaenger, set up an HSA for yourself and fund HRAs for your employees. That way, you can build up personal savings and not have to tie up a lot of money in employee accounts. "The costs are usually less when you put the employees in an HRA," he says.

But be aware of HRAs' drawbacks: They require government filings and plan descriptions for staffers, and insurers might charge employers with HRAs more for high-deductible plans. Worst of all, practices that don't set aside enough money to cover claims could build up a big liability in just a few years' time.