(FORTUNE Small Business) – For David Titcomb, buying health insurance is a bit like buying a candy bar. Over time the price keeps rising and the bar keeps shrinking. As the president of Titcomb Associates, a land-surveying firm in Falmouth, Maine, Titcomb buys health insurance for his 14 employees. Premiums have climbed between 10% and 20% per year over the past few years, and he has been able to keep the rate hikes that low only by constantly switching insurers. "Once we had the same insurer two years in a row; everyone was very excited," Titcomb says, only half-jokingly. In the meantime, the policies that the 31-year-old company has bought have come with more paperwork and restrictions on the choice of doctors. Employees aren't crazy about the arrangement. Neither is Titcomb. "I just kind of throw my hands up in the air," he says. "I feel I don't have control over the situation."

Join the club, David. Health insurance is a major headache for many of America's small companies. Like their larger brethren, small firms are coping with a general wave of medical inflation--the result of an aging population, advances in technology, and soaring prescription drug costs. But on top of that, small businesses have problems of their own. "They have to pay more for the same coverage," says Larry Levitt, an analyst with the Kaiser Family Foundation, a national health-care charity based in Menlo Park, Calif.

A recent Kaiser survey found that entrepreneurs are hit hardest by soaring health-care costs. It noted that health insurance premiums nationally rose 4.8% in 1999. Not surprisingly, the smaller the company, the bigger the price hike. Firms with fewer than ten workers saw an average increase of 9.2%. Anecdotal evidence suggests the numbers this year are much worse. Mark Carroll, an insurance broker in Herndon, Va., recently sent out renewal notices to small business customers. The most modest rate hike was 13%. Guardian Life, a New York insurer, says its small business customers are paying 20% to 25% more on new policies. In the insurance world, small usually means companies with fewer than 100 employees; often it means fewer than 50.

Why is small business at such a disadvantage? It turns out that in this field, size matters. Smaller companies have little negotiating clout. They also cost more to service. Think about it. If you were an insurer, would you rather sell to a company with 1,000 employees or make 100 sales to companies with ten workers each? Finally, tiny firms have fewer insurers competing for their business. From Maine to Texas, insurers have dropped out of the small business market, complaining that they can't make money. The biggest players left in the field are the nation's Blue Cross plans and such managed-care giants as Aetna U.S. Healthcare.

Small employers are left with a series of unappealing choices. They can decide not to offer health benefits, and many do just that. According to the Employee Benefit Research Institute, a Washington, D.C., think tank, 60% of America's 44 million uninsured people work for small firms. Another unappetizing choice: passing on more costs to employees. A number of companies will pay the full cost of a worker's premium but make the employee pay the additional cost for family coverage. The difference, which can easily run $300 a month, imposes a major burden on a work force.

In the current hot economy, many firms are choosing another path--absorbing the higher costs. They may not want to but are afraid that cutting back on benefits will prompt employees to look for greener pastures. "In terms of getting a quality staff--folks who will stay--it is a necessity that we offer health insurance," says Jim Amaral, owner of Borealis Breads, a 50-person wholesale bakery in Wells, Maine.

Is there any way out of this box? The answer is a qualified yes. There are ways to cut health insurance premiums, although none offers a perfect solution. Most involve a tradeoff--either taking on more risk or accepting limits on choice. Still, all the alternative strategies laid out below are bona fide options, and there are small companies out there that are successfully using them. One of them may work for you.

Health Maintenance Organizations

We admit it. On the face of it, this sounds outrageous. Health maintenance organizations today are about as popular as tobacco companies. And the trend is toward PPOs (preferred provider organizations), looser networks that give patients broad choice with few restrictions. HMOs, by contrast, usually require patients to stay within a smaller network; many also require a referral to see a specialist. The truth is, though, that millions of people get perfectly good care at HMOs and save money in the process. In most markets, the price gap between an HMO and a PPO is 15%. Donna McAllister just switched her 21-person Maine machine shop to a Blue Cross HMO strictly for economic reasons. The PPO she was in wanted $693 a month for a family policy. The HMO price: $600. "We had to bite the bullet," she says.

Those looking for an HMO need to do their homework. Specialists suggest studying the list of available doctors and hospitals to make sure it is large enough to satisfy your needs. Given the well-publicized financial problems of some HMOs, such as Oxford Health Plans, a Connecticut insurer that ran up huge losses in 1997 and 1998, it also pays to investigate the financial health of your prospective HMO. Weiss Ratings Inc., a Florida company, regularly rates the finances of the nation's HMOs (www.weissratings.com). The National Committee on Quality Assurance, a Washington, D.C., nonprofit, rates HMOs on a variety of quality-of-care measures (www.ncqa.org).

Drawback: Some employees may not like playing by the HMO rules. But insurers insist that the vast majority of people have no problem adjusting to life within an HMO. That has been Rob Hoyle's experience. The owner of Manchester Marine, a Massachusetts boat yard, Hoyle and his 40 employees have been HMO customers for the past six years. Hoyle says rate hikes have been modest, in the 4% to 7% range, and that his workers don't find the HMO rules onerous.

Association Health Plans

Figuring there is strength in numbers, many small businesses have banded together to purchase health insurance. Certain trade associations, like the American Consulting Engineers Council, offer health insurance to their members across the country. Other groups form coalitions in a given state and provide the same service. Participants like the fact that these groups save them as much as 10% and free them from the hassle of finding reliable insurers.

The Connecticut Business and Industry Association has been in the health insurance business since 1995. Today 4,000 small companies with 60,000 employees participate in its purchasing group. The arrangement gives small employers that pay between $200 and $400 a year in fees something only big companies normally get--a choice of both HMOs and PPOs, from four competing insurers. "We could never get this much choice on our own," says Patricia Zimmerman, who handles human resources for a 37-person property management firm in Hartford. The CBIA also offers savings on administrative costs and provides advice.

Drawbacks: In most states AHPs are legally barred from negotiating discounted prices from insurers. Even where they can, such as in California, the discounts tend to be tiny. For more information, contact the Association Healthcare Coalition (202-543-4455) or the Website of the Institute for Health Policy Solutions (www.ihps.org).

Self-Insurance

Most big corporations self-insure. They save on fees that otherwise would go to an insurer, and if their claims experience is better than average they can save even more. Small companies can do the same, although there is some dispute about how small you can be and do this. Some consultants say 75 employees is the minimum size; Great West Life, a Denver-based insurer, say it has self-insurance clients with as few as 20 people.

Here's how it works: You purchase stop-loss insurance that limits how much you have to pay out in a given year or on any one catastrophic claim. All other bills you pay yourself. But there is one big risk with self-insurance: You are betting on your employees' good health. If your work force includes a lot of older workers or people with chronic medical problems, this may not work for you.

Drawback: A few big claims or a series of medium-sized ones can turn a good deal into a bad one fast. Self-insurance requires a steady cash flow on hand to pay bills. For more information you can contact the Self Insurance Institute of America (800-851-7789).

Split-Funding

Think of this as the Mini-Me version of self-insurance. With split-funding you purchase an insurance policy with a high deductible, say $1,000, and then you pay all claims under $1,000. You can also ask employees to pick up a share of the deductible. KLK Construction in Pella, Iowa, used this system last year, and owner Barbara Kniff says she saved $9,000, or about 13% on the insurance bill for her 20 workers. The saving was big enough to pay for a prescription-drug benefit.

Drawback: As with self-insurance, the trick here is you are betting that your employees won't file too many claims. If they do, your savings, which can exceed 15%, will evaporate. You will probably also need a consultant or third-party administrator to set this up, because figuring out how to apportion the bills requires some expertise. For more information, contact your broker or Marsh Advantage America (800-441-1344), a benefits consulting firm.

High-Deductible Policies

Health insurance is like any other kind of insurance--the larger the deductible you take, the cheaper the insurance. For the past five years, Warren Bell, 53, has carried a health insurance policy with a $5,000 deductible for himself and his family, which includes his wife and three children, ages 13 to 21. The policy costs Bell $325 a month, about half of what a traditional policy would cost. "I feel comfortable taking the risk," says Bell, a self-employed Certified Public Accountant in Pownal, Maine. Neither Bell nor his family has had big medical bills, and if they did, he reasons, "the savings would pay for that infrequent claim."

Drawback: Going the high-deductible route may make the most sense for self-employed people like Bell. Taking a risk yourself is one thing. Asking your employees to do so may be asking for trouble. For more information, contact your broker or insurance company.

Medical Savings Accounts

When the Republican Congress created medical savings accounts four years ago, they were supposed to revolutionize health insurance for firms with fewer than 50 workers. Instead, they have been mostly a dud. For a variety of reasons, including their complexity, MSAs have been a tough sell, and that's why few insurance companies and brokers offer them. MSAs come with a long list of rules about tax deductibility and the specific financial obligations of employers and employees. Still, some people swear by them.

Doug Kronenberg is a believer in MSAs. The Alexandria, Va., firm Lumenos, where he serves as chief marketing officer, both sells MSAs and uses one for its own 65 employees. (Companies don't have to give up their MSAs if they grow beyond 50 workers.) The accounts work like this: You purchase a high-deductible insurance policy (the deductible can be as high as $4,650 for families) and then use some of the savings to set up individual accounts for yourself and your employees. The accounts are comparable to IRAs. Part of your contribution to them is tax- deductible (up to $3,487 for families), and you use the money to pay medical bills. Money not spent can be invested and used in future years. Entrepreneurs like Kronenberg love the flexibility. "I go to any doctor I want," he says, "there is no one in the middle."

Drawback: Unless Congress passes new legislation, the experiment with MSAs will fizzle out at the end of this year. However, firms already using them will be allowed to stick with them. To get a state-by-state list of brokers and insurers who are marketing MSAs, look at the Website of the National Association of Alternative Benefit Consultants (room100.com/msa). You can also contact Msavers National Resource Center (888-367-6727).

WWW.FSB.COM For more information on how to beat the high cost of health care, log onto www.fsb.com/toc.