Finding affordable health insurance benefits for your employees is getting tougher every year, adding one more headache to managing a small business in these challenging times.

"Premiums have gone up tremendously in the last year," says John Kimbrell, an insurance agent in Orange. He said an aging population, increasing drug prices and a backlash against managed care, have all contributed to recent price hikes.

While it's tempting to give up the search for affordable coverage, savvy entrepreneurs know that providing good health insurance benefits can help retain valued employees and recruit new ones. And, as your business grows, you may find offering health insurance is no longer optional under many state laws.

"We did a survey about a month ago in Ohio," says Scott Lyon, executive director of group services for the Council of Smaller Enterprises (COSE) in Cleveland. "The average annual increase most business owners reported was in the 20-25 percent range. No increases were under 10 percent. The last time premium increases were this high, managed care was the answer," said Lyon. "This time, I don't know what the answer is."

Plenty of options

Despite the rising rates, the outlook for small-business owners is not totally grim. There are a lot of companies and organizations offering negotiating power and better coverage options to business owners.

Steve Katz and his wife, Alison Palmer, run Ali-Katz Productions Inc., an art pottery company in Pawling, N.Y., with six employees. Katz, a former musician, had been covered through his artists' group (American Federation of Theatrical and Radio Artists) for many years, but received a letter one day that said his health insurance benefits were terminated. Katz contacted the agent who sold coverage to his wife, but the agent came back with a quote that Katz thought was too high.

Frustrated and looking for information, Katz typed "small business insurance" into a search engine and came up with a link to He completed a form online and received a quote instantly. Although he started the process through the Web site, finding the right plan and processing Katz's application took a couple of phone calls over the next few days. "The policy was $250 a month cheaper than what the other agent quoted us," says Katz. "And, it was as easy as buying a CD or a book."

Katz, whose new coverage begins May 1, said he would recommend the service.

"It was really a great experience," he said.

Digital Insurance can offer competitive rates because it bargains collectively with health insurance companies. For those who choose not to go online, there are other options in many states that bring the same collective bargaining power to small companies.

Tom Usilton, president and CEO of Digital Insurance Inc., said he spent a lot of time thinking about the needs of small-business owners. Digital Insurance is an online broker that aggregates hundreds of plans from more than 50 carriers, offering coverage to individuals in 47 states, and to small groups in 24 states. Bringing small-business owners together allows the company to wield more negotiating power than if one small company sought coverage on its own.

"Health insurance is the number two issue after payroll for small-business owners," says Usilton. "Because of the economics in the system, small groups and individuals don't have much choice. Their empowerment is minimized, and it's only going to get worse."

In California, the leading health insurance purchasing alliance for small businesses is a company called CaliforniaChoice. If a company enrolls with CaliforniaChoice, every employee can choose a different plan, even a different carrier, all under one account. Business owners can set their contribution levels, allowing their employees to make the final decision about which carrier they will use, and how much more they want to spend for added benefits.

Choice of HMOs

John Kimbrell, who runs an insurance agency in Orange with five employees, has worked with CaliforniaChoice since it started three years ago. He chose this plan because of the "freedom that it gave to employees to choose their own health insurance." CaliforniaChoice currently offers plans in nine different HMO networks.

"It's cost-effective," said Kimbrell. "I can set a budget for myself and whatever the employees choose, they can pay for it. I sell a lot of health insurance, and most clients like that," says Kimbrell, who reports that about 70 percent of his small-business clients also use CaliforniaChoice.

"Most employers decide (on a health insurance plan) by price," said Kimbrell. "They don't care about the employees. One of the selling points of this plan is that it's really a good way to make employees happy."

The founder of CaliforniaChoice said his company has received a warm reception from business owners.

"Twenty-five years ago, small-business owners were asking for this product," said John Word, managing partner and co-founder of CaliforniaChoice. "They're tired of making these decisions for their employees. They'd say, 'Can't I just give them the money, and let them choose?'"

There are comparable health plans in many other regions. The Council of Smaller Enterprises (COSE) in Cleveland, Ohio, offers a selection of health plans to its members in much the same way that CaliforniaChoice does. Scott Lyon reports that several thousand of the 13,400 companies that offer insurance through COSE offer multiple plans to their employees.

Wisconsin is also developing an initiative for small businesses based on the CaliforniaChoice model.

Your local chamber of commerce can be a great resource in finding leads to purchasing alliances in your region, but be prepared to spend some time in the research process. Despite the convenience that these alliances can offer small groups, you will still want to devote time and thought to this purchase.

Lyon, who counsels business owners on many aspects of management, recommends that entrepreneurs approach a health-insurance purchase with a goal in mind. "Don't just buy a plan to buy a plan," says Lyon, "Buy a plan to accomplish a goal. Buy a plan that will meet the needs of the company and its employees."

"The average COSE member spends $20,000 a year on health insurance," says Lyon. "If you were buying a $20,000 machine every year, you'd want to do a lot of research before making the purchase. Health insurance deserves the same attention."

Reporting by Sarah Prior. Jane Applegate is the author of "201 Great Ideas for Your Small Business" and is the CEO of, a multimedia site providing small business resources. She can be contacted via e-mail at, or by mail to P.O. Box 768 Pelham, NY 10803.

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