IF YOU'RE WAITING ON THE GOVERNMENT OR ANYONE ELSE TO DO SOMETHING ABOUT THE RISING COSTS OF HEALTH BENEFITS, FACE FACTS: IF YOU WANT COSTS CUT RIGHT, YOU HAVE TO CUT THEM YOURSELF.

WHEN KIERSTY LOMBAR WAS SHOPPING FOR HEALTH INSURANCE FOR THE SEVEN EMPLOYEES OF HER YEAR-OLD ONLINE COFFEE AND GOURMET-FOODS COMPANY, SHE FACED TWO CHALLENGES. "WE HAD LIMITED FUNDING, YET WE NEEDED A COMPETITIVE BENEFIT PACKAGE TO RECRUIT PEOPLE," SHE RECALLS. LOMBAR, 27, WORKED WITH AN ONLINE INSURANCE BROKER TO FIND THE RIGHT PLAN. SHE FINALLY SETTLED ON A PREFERRED PROVIDER ORGANIZATION (PPO), A FORM OF MANAGED CARE THAT OFFERS MORE FREEDOM AND A WIDER RANGE OF CHOICES THAN THE TRADITIONAL HEALTH MAINTENANCE ORGANIZATIONS (HMOs).

TODAY, LOMBAR'S COMPANY, THE PERK.COM, OFFERS GENEROUS HEALTH-CARE BENEFITS. THE AUSTIN, TEXAS-BASED COMPANY PAYS 100 PERCENT OF ITS EMPLOYEES' COSTS AND 60 PERCENT FOR SPOUSES. "IT'S IMPORTANT FOR US TO TAKE CARE OF OUR EMPLOYEES," REASONS LOMBAR. "WE SEE THIS AS A RECRUITING AND RETENTION TOOL. EVEN THOUGH WE FELT LIKE WE WERE AT THE MERCY OF THE INSURANCE COMPANIES, WE DECIDED ITWAS SOMETHING WE COULDN'T CUT BACK ON." TO OFFSET THE COST OF HEALTH INSURANCE, THE PERK.COM KEEPS TIGHT CONTROL ON SALARIES AND OTHER OVERHEAD. NO FANCY OFFICES FOR THIS INTERNET START-UP. "WE DON'T HAVE A WHOLE LOT OF BEAUTIFUL FURNITURE IN OUR OFFICES," SAYS LOMBAR. "HEALTH COVERAGE IS MORE IMPORTANT TO US."

STIFF COMPETITION

Lombar's dilemma is shared by millions of America's entrepreneurs, who are wrestling with one of the tightest job markets in years and double-digit annual health-care cost increases this year.

Finding and keeping good employees these days means offering plenty of competitive benefits, something small employers historically haven't had to do. "Most small businesses I represent feel helpless," observes Keith Rosenbaum, an attorney specializing in health care at Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone in Irvine, California. "They see the health-care benefit as required because they can't attract good workers without it. It's like high-tech companies not offering stock options. The health benefit has become just as important in attracting a talent pool."

The pressure for small employers to offer health-care benefits is increasing. An emerging trend as the labor market continues to tighten: Low-wage hourly workers, the largest group of uninsured, are now being offered health-care benefits by employers ranging from day-care providers to restaurant owners.

Nearly everyone wants and expects health-care benefits today, says Randy Myer, who teaches entrepreneurial policy at New York City's Pace University. "Unlike other benefits, [health insurance] is attractive to many workers because it crosses the age and gender spectrums."

Myer, 52, who founded and still owns shares in Norwalk, Connecticut-based Best Friends Pet Care, national pet-care company, offered healthcare coverage to his hourly workers to reduce turnover and to help in recruiting. It worked. "Many employees said they stayed with us because of the health-care coverage," he says.

If you're forced to shift a greater portion of the premium costs to your employees, it's better to offer some coverage than no coverage, say experts. "Even if employees have to pay a large portion of the premium, it will still be cheaper for them than individual coverage," advises Don Gasparro, managing director of Apex Management Group, a healthcare consulting firm in Princeton, New Jersey.

But merely offering a health-care plan may not be enough in today's especially competitive job market. "Your plan has to be competitive with other employers, even much larger ones," Gasparro adds. "You have to see what kind of provider network is around your office and your employees' homes so your people can use it." Matching your particular employees' specific needs with a plan's benefits will save you time and money and also help your employees get the most out of a plan.

BIGGER IS BETTER

Finding a health plan that meets your employees' needs is only the first step. You may also need to offer some of the bigger and better benefits larger companies provide, because they're often vying for the same workers. But, of course, large companies enjoy a significant cost advantage when it comes to health-care benefits, making for a less than even playing field.

The Health Research and Educational Trust says health-care costs for larger employers rose 4 percent between spring 1998 and spring 1999. "Smaller employers faced a very different experience," says Jon Gabel, vice president of the organization. The costs for small companies rose about twice as fast. "It's not that employees of small employers were sicker," explains Gabel. "Many large employers self-insure, while small ones have to purchase their insurance from health insurance companies.

Larger cost increases are on the horizon. This year health-care premiums are expected to rise 12 to 20 percent for smaller employers and 8 to 14 percent for larger ones, according to Matt Quade, a vice president at employee-benefits provider AON Consulting's Bethesda, Maryland, office.

What's behind it all? "All the [managed care] companies were fighting for market share throughout the nineties by underpricing their products. Now it's catch-up time," says Gabel. "The small employer is the one who is paying for it."

In other words, the lower-priced products many managed-care companies came into new markets with have been hurting their bottom lines in recent years. They now see from experience how much the real costs are. According to Weiss Ratings Inc., over half the country's HMOs lost money in 1998--and those combined losses approached half a billion dollars.

Small employers have few options and little purchasing power when it comes to buying their companies' health-care coverage. "Rising costs hit small employers right between the eyes. They have no control when rates go up, and there's little they can do about it," says Patricia Halo, author of Managing Health Benefits in Small & Mid-Sized Organizations (Amacom), president of Halo Associates and founder of the Wellness Institute in New York City, which provides benefits consulting services and work-site wellness programs. One sick employee in a small work force can wreak havoc on the group's rates. "Carriers look at the track record of small groups very carefully," Halo adds.

Another issue: Several states have enacted legislation that makes it illegal to deny a group member coverage. While this has helped people obtain coverage who might have been rejected before, it's added another cost factor to the mix for business owners. "Since the states got involved in legislating health insurance in the last five years, we've seen many carriers pulling out of the small-group market," explains Edith Livingstone, a vice president at AON Consulting. And typically, less choice means higher prices.

Another detail adding to the consistently growing costs are state mandates such as those requiring infertility treatments to be part of health plans. That means an employer whose work force has little or no use for certain costly treatments must still provide them. "Small businesses are the ones underwriting state mandates. They get socked with paying the additional costs of each new mandated state benefit," says Richard Coorsh of the Health Insurance Association of America, an industry trade association whose members include 290 health insurance carriers. Because many large companies self-insure and don't buy coverage in the standard marketplace, they are largely exempt from these state mandates.

PRESCRIPTIVE MEASURES

No question about it, small employers are in a tough spot. But don't despair. "No matter what you hear, small employers are not powerless; they do have options," stresses Halo. Those options include reducing benefits, shifting more of the premium cost to your employees, requiring employees to pay higher co-payments when they visit a doctor, switching from a PPO to an HMO, and covering only employees rather than including family members.

One area ripe for possible savings is prescription drug coverage. In recent years, drugs as treatment have been winning out over more costly invasive procedures. So it's no surprise the cost of prescription drugs has risen rapidly, with insurance carriers passing those cost increases on to employers. Over the last several years, prescription-drug-plan premiums have risen as much as 50 percent, says Ivy Silver, an employee benefits broker in Jenkintown, Pennsylvania.

To offset the cost increases of drug coverage, employers are now asking employees to pay larger co-payments at the pharmacy, says Silver. "Instead of paying $5 per prescription, maybe they're paying $20. That will save some money on your monthly premium," he says.