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I concur with Sandra' comments.  Our institution handles it the same way she has described.  However, we have a grant that is paying for students to intern at bioenergy facilities.  Initially, we were just going to pay the students out of the grant as consultants.  This was a point of angst for several companies who were concerned that if the students weren't "employees" of the company then their liability or workman's comp insurance would not cover in case of an accident.  So we have to offer the alternative for these companies to hire the interns, pay them through their normal payroll, and then invoice us at the end of the internship.  This was not a medical insurance issue, but it was an issue of liability that we had to work out.