As health-insurance costs have skyrocketed in recent years, activity has surged as well at VEBA Service Group LLC, a Spokane-based medical-benefit company, says Mark Wilkerson, the 21-year-old companys co-owner.


VEBA Service Groups annual revenues have increased by an average of 10 percent a year over the past five years as it has expanded its geographic scope beyond the Northwest. Wilkerson declines to disclose VEBAs revenue figures, but says the company expects at least to maintain that pace in coming years.


VEBA Service Group helps school districts and city, county, and state governments set up and maintain what are referred to as health-reimbursement arrangements. Through such an arrangement, a public employer puts aside money in a trust for its employees to use to pay medical expenses not covered by insurance or to pay health insurance premiums after they retire. In many instances, public employers and their employeesthrough collective-bargaining agreements or other negotiationshave agreed to set up trusts rather than pay employees for unused sick leave.


Over the last five years, weve seen much higher awareness and much higher willingness by employees to participate in these programs, Wilkerson says. Were fortunate to be in the middle of something thats really growing.


VEBA Service Group has 11 employees, seven of whom work at its Spokane office on the fourth floor of the Freeman Center, at 170 S. Lincoln downtown. The other four employees work at its office in Puyallup, Wash., which is headed by Wilkersons partner, Peter Laney.


VEBA Service Group, which generates its revenue through consulting fees, has helped set up and operate health-reimbursement arrangement trusts for more than 450 employers, and those trusts currently hold more than $250 million in combined assets, Wilkerson says.


Its customers include 250 school districts in Washington state, as well as 75 state agencies, all of the states public four-year universities, and 30 of the states community colleges. In addition to other clients statewide, the company also works with employers in Oregon, Idaho, Montana, California, and Indiana.


Recently, the company signed an exclusive contract with AIG Valic, a Houston-based affiliate of financial services giant American International Group Inc., under which VEBA will help that company establish and market a health-reimbursement arrangement benefit for AIG Valics customers. AIG Valic plans to roll out that benefit in 10 states initially, then to expand nationally.


VEBA and Valic is a natural marriage, Wilkerson says. Our product started in schools, and they are the dominant retirement-plan provider in K-through-12 schools in the U.S.


Wilkerson points out that whats good for VEBA Service Group also benefits a couple of other companies here. One, Rehn & Associates PS, of Spokane, provides third-party administration services, handling accounting, claims payment, statement generation, and regulatory compliance, for all of VEBAs clients. Washington Trust Bank handles either investment management or custodial services for those customers.


Health-reimbursement arrangements are designated as tax-exempt through 501(c)9 of the federal tax code, and funds set aside for an employee can be withdrawn tax-free for specific purposes.


VEBA stands for Voluntary Employees Beneficiary Association, a term used to describe 501(c)9 tax-exempt status. The term health-reimbursement arrangement was coined by the IRS in 2002 when clarifying the rules governing such accounts.


Medical expenses for which that money can be used include insurance co-payments, prescription drugs, over-the-counter medicines, dental- or vision-care expenses, and insurance premiums for an employee or a family member.


Health-reimbursement arrangements are similar in benefit to health-savings accounts, but are different in that they are funded exclusively by an employer and dont include any sort of optional payroll deductions by employees.


Most private employers who offer such a benefit opt for health-savings accounts, Wilkerson says, because gains realized on investments held in trust through a health-reimbursement arrangement arent tax-free until theyre withdrawn to pay for medical expenses. Consequently, private employers would have to pay taxes on such gains. Public employers dont face such tax implications, because they dont pay income taxes.


Many of the trusts that VEBA Service Group has established serve multiple employers. For example, one trust, the VEBA Trust for Public Employees, holds funds for all of the Washington state universities, community colleges, and state agencies that have health-reimbursement arrangements through VEBA Service Group.


Much of its work outside of the Pacific Northwest has involved established single-employer trusts. Clients that have opted for such arrangements include the cities of Santa Clara and Burbank, Calif., and Riverside County in California.


Wilkerson says his father, Russ, and his partners father, Bill Laney, establishing the company in 1984 as a division of their insurance and investment company. Wilkerson says he started working for his father in 1986, after graduating from Eastern Washington University with a bachelors degree in business finance. He and Laney bought their dads shares in the company over time, he says.


Wilkerson also operates Wilkerson & Associates Inc., of Spokane, which offers financial-planning services.