(FORTUNE Magazine) – IF YOU THINK your company's medical costs are off the fever charts, listen to Harry Featherstone. He's president and CEO of Will-Burt, an Orrville, Ohio, fabricator of automotive parts that employs 300. Will-Burt's health insurance premiums have nearly quadrupled in the past three years and now stand at $315 a month for a family, including the worker's 25% contribution. ''We just can't afford this,'' fumes Featherstone, who worries about his ability to pass such costs along in the prices he charges customers. Mid-Cities Honda, a motorcycle dealer in Paramount, California, endured even steeper increases -- to $360 a month -- as it bounced like a pinball among five insurers in ten years. The first carrier went bankrupt, leaving a worker liable for $8,500 in unpaid medical bills. Because one of the 18 current employees has Addison's disease, a malfunctioning of the adrenal glands, several insurers turned down owner Diana Slumskie before one agreed to take on the company. At least everybody is fully covered. Less fortunate is George McAmis, 58, general manager of Stanford Glass Blowing Laboratories, near the university of the same name. He has undergone angioplasty, and the insurer of his five- person outfit stands ready with protection, except where it is needed most: for his heart condition, which is specifically omitted. The anxieties of such people, and of the self-employed, who often pay $1,000 a month to cover a family headed by a healthy male in his 50s (when they can find medical insurance of any kind), are material for a stadiumful of Franz Kafkas. All of which should sober up those who are impatient to see health insurance extended to everybody. It's hard to be against protecting 33 million fellow citizens who have no coverage at all, especially when the U.S. is the only Western industrial power that leaves a large portion of its people exposed to calamitous medical bills. But how to do it? State governments as well as the feds are devising megaplans to address the problem, leading insurers -- frightened of what the politicians might dream up -- to advance their own proposals. Nearly all the plans would help the unemployed through a beefed-up Medicaid. The battle is over how to help the far greater number of the uninsured who work for small companies, where coverage is eroding for those already protected. The way that issue is eventually resolved -- and some sort of legislation looks likely -- will affect the competitiveness of American industry and the health care costs of all U.S. companies, large and small. The trouble is that small employers, ranging from beauty salons to Silicon Valley startups, pay dearly for policies that may be drilled full of exclusions -- and they can encounter shocks. The monthly bill jumped more than fourfold at Forbes Consulting Group, a market research firm in suburban Boston, after a worker needed treatment for lymphatic cancer. Last year New York Life announced it would drop a group of employers that included an Oakland, California, software company called Soft Press. Erica Zeidenberg, one of two employees along with her husband, was pregnant at the time; the insurer offered them two substitute plans that would have been far more expensive than the original. Luckily, her baby arrived just four days before the old coverage ceased. It is hard to expect struggling entrepreneurs to offer medical benefits if the cost is both unaffordable and unpredictable. Nor does it do much good if the insurance policy promises life jackets to all but those who cannot swim. How did we get into this mess? Because of brokers' commissions and higher administrative costs, small companies have always paid 15% to 20% more than big corporations for the same package of health benefits. But as medical costs have exploded nationwide, little outfits have been the victims of buck- passing. First the government's Medicare and Medicaid programs for the elderly and poor began tightening up on reimbursement of hospitals and doctors. Now giant corporations are starting to rein in health expenses with so-called managed-care techniques (FORTUNE, April 23). To make up for pinched revenue elsewhere, says Francis Miller, president of the Colorado Business Coalition for Health, hospitals and physicians are shifting costs to small business. Exacerbating the problem, some insurers have distributed this ballooning burden unevenly among little firms. Practicing what they call risk selection, they aggressively cherry-pick the market by offering relatively low premiums to firms with young and healthy workers. Other employers pay much stiffer rates -- up to eight times as much -- or get the cold shoulder. Many carriers redline whole occupations rated as poor health bets, such as structural ironworkers (who risk falling), cosmeticians (exposed to chemicals on the job), restaurant employees (deemed a casual, sickness-prone lot), and those who work in motorcycle shops (ditto). Instead of spreading risks, the private insurance system has been shedding them. The market was not always so chaotic. Health insurance in the U.S. began in the Thirties with Blue Cross and Blue Shield, nonprofit outfits started by hospitals and doctors. The Blues took all comers, big and small, at so-called community rates: To distribute the burden evenly across the entire population, they charged all employers in a region the same premiums regardless of their workers' ages or medical histories. This system still prevails in a few cities, most notably in Rochester, New | York, where the business leadership and the Blues have worked hard to keep it. But elsewhere community rating started to come apart in the Fifties and Sixties, when commercial insurers snatched business from the Blues by offering lower prices to companies with healthier work forces. If young joggers predominated at your company, the sales pitch was hard to refuse. Why pay rates that subsidize somebody else's workers who are older, sicker, and flabbier? To stay competitive, the Blues abandoned community rating in most places. Even health maintenance organizations like Kaiser Permanente, which long believed that its social mission was to offer the same price to all, have reluctantly begun to tailor their premiums. Kaiser draws the line at practices that have given health insurance a bad name among small-business men. Says Chairman James A. Vohs: ''We don't kick out small groups, even if your grandmother gets sick and comes on the payroll.'' The ranks of the uninsured are growing, for reasons that go beyond risk selection. More workers toil in low-wage service or temporary jobs that pay no fringe benefits. Because of budget constraints, the federal-state Medicaid program finances health care for only 40% of those below the poverty line, vs. 65% in the mid-Seventies. Among Americans younger than 65 and thus ineligible for Medicare, says Katherine Swartz of the Urban Institute, about 18% lack health insurance, compared with 13% in the late 1970s. Why not scrap the hodgepodge U.S. health insurance system and start over? According to the Noble Lowndes benefits consulting firm, medical costs have mounted to nearly 14% of payroll for all companies; in firms paying low wages the cost can easily surpass 20%. Some business executives have begun yearning for government to take over this obligation. ''The frustration level is growing,'' says Karen Berg Brigham, manager of health care policy for the U.S. Chamber of Commerce. ''People with an innate mistrust of government have begun to say that national health insurance may not be a bad idea.'' The most alluring model is in Canada, where the government pays doctor and hospital bills for everybody, and medical expenses are a lower percentage of GNP. Such a system has no more chance in the U.S. Congress than a polar bear in the Everglades. Business lobbies like the Chamber of Commerce are strongly opposed. The extra tax burden would be hundreds of billions a year. Carson Beadle, a managing director of the William M. Mercer benefits consulting firm who hails from Canada, has another objection: ''Up there the health budget has to compete with the military, highway spending, and everything else.'' And while nobody has to worry about paying, you can wait a long time for care. The grand designs coming out of Washington would plug the holes in the U.S. health insurance system. While the bells and whistles vary, most of the proposals follow the same basic principles. An expanded Medicaid or successor system would handle the poor and the jobless. Employers would be required to cover the two-thirds of the uninsured who are workers or their dependents, with premiums for the near poor subsidized by the government. Among the most prominently sponsored proposals are virtually similar bills from Senator Edward Kennedy of Massachusetts and Representative Henry Waxman of California, both Democrats, making health benefits obligatory. A commission headed by Democratic Senator John D. Rockefeller IV of West Virginia has called for an employer mandate with a wrinkle: a dual option similar to the ''play or pay'' law that takes effect in Massachusetts in 1992. Employers could comply by buying health insurance, or they could pay a fixed percentage of payroll into a government-financed health plan. Business naturally hates these proposed requirements and always has. A recent survey by the National Federation of Independent Business, whose members employ ten workers on average, shows that a third pay no health benefits. Half of that third said they would cut jobs, trim hours, or close their doors if forced to provide coverage. Says Deborah Steelman, who advised candidate Bush on health policy in 1988 and heads one of Washington's study commissions: ''Mandating insurance is a nonstarter politically.'' Maybe in Washington. But in state capitals it is building power. Hawaii already has a mandate, and in California the idea of a state takeover of health insurance is so politically strong that a group of major insurers, hoping to offer a more attractive alternative, has accepted the notion of an employer mandate. ELSEWHERE AS WELL, the insurance industry is trying to fend off heavy-handed political solutions with proposals of its own. The boldest comes from Robert Laszewski, executive vice president of Liberty Mutual in Boston, who would require community rating for all businesses with fewer than 100 employees. Insurers serving an area would be required by law to sign up any small outfit seeking coverage. Such rules, Laszewski says, would have a favorable side effect: They would transform insurers into watchdogs over medical expenditures. ''We must drive insurance companies to compete on the basis of which can best manage their customers' health care dollars,'' he says, ''not which can churn business and find the cream most effectively.'' Among commercial insurers, reactions to this idea range from applause to apoplexy. Big carriers, because of their size, could survive and even prosper under community rating. At the other extreme are some small insurers with limited pools of enrollees, which could go bankrupt if they attracted more than their share of the sick. In the middle, with the job of crafting a consensus in a 320-member organization almost as fractionated as the new Hungarian Parliament, is Carl J. Schramm, president of the Health Insurance Association of America (HIAA). In February the group agreed on a general set of principles that would fundamentally change the way insurers serve companies with 25 or fewer workers. The plan requires federal and state legislation to make the whole industry play by the new rules, and Schramm puts the chances of passage at better than fifty-fifty within three or four years. Connecticut, home to some of the biggest carriers, is considering a bill that would usher in similar reforms, and a committee of state insurance commissioners is drafting model legislation with a similar thrust. So the HIAA plan is worth a close look. No employer would be denied coverage, even if half of those on the payroll tested HIV-positive. For such workers and for others with serious preexisting illnesses, benefit payments could not be delayed beyond a one-year waiting period. Once on board the insurance system, neither a company nor one of its workers could be dumped, no matter how high the medical bills. Employees with serious illnesses could stay covered without interruption if they switched jobs -- a change from today, when thousands are chained to jobs they hate for fear of losing benefits. Insurers could still vary premiums widely by industry and the age mix of a small group's work force. But the HIAA reforms would narrow the range of premiums and rate increases. Whatever a company's subsequent claims experience, its premiums would never exceed those of similar age and occupational groups by more than 50%. To make sure no insurer bled financially from taking an outsize share of the ill, all the carriers would pay assessments to a newly created reinsurance system -- a kind of insurer's insurer -- to pay the bills for the serious cases. Assuming this elaborate mechanism succeeds, lowering the costs for some sickness-prone companies would obviously mean raising them for others. But the rise in premiums for healthy groups, says Richard Hill, vice president for small business and individual health insurance at Prudential, would be ''just a few percent.'' In one stroke the HIAA is offering guaranteed coverage to an estimated ten million uninsured American workers in tiny firms and their families. Moreover, says Schramm, the reform package would ''stop the unraveling'' of insurance for those who have it. BUT SOME EMPLOYERS still won't be able to afford the product because medical costs are rising so fast -- about 9% a year. The best eventual answer to that problem is a statistical research effort, just getting into high gear in the health establishment and government, to determine which medical procedures and tests are worth the cost and which could be dropped. But in the meantime, business can bargain-hunt in health care as zealously as it does when buying raw materials and parts. In cities such as San Diego, Seattle, Chicago, and Denver, coalitions of small and big companies have won impressive discounts from groups of doctors and hospitals. In addition, insurers have at last realized that the health insurance mess is a market opportunity. The Blues have rolled out new low-cost health plans designed to reach the uninsured. ValuMed, a stripped-down package of benefits at about half the usual premium cost, is aimed at low-income families in the Rochester area without employer-paid benefits, such as Denice and Anthony Cavallo and daughter Christa (see photo). Only 360 families and individuals have bought policies, far fewer than hoped. Bigger expectations are riding on a Virginia plan for employers that provide no coverage. For this package only, the legislature has just waived the list of state-required treatments that normally must be included in health insurance plans. The Virginia plan goes on sale soon, and nearly half the target employers say they are interested. A COMMERCIAL INSURER has already found that if the product is cheap enough, employers will go for it. Last summer in Denver, United States Life began selling one of nine health plans designed for the uninsured with the help of the Robert Wood Johnson Foundation. Total premium for the plan, which enjoys hefty hospital discounts: $118.10 a month for a family headed by a parent under 30. Scope, as the plan is called, is limited in scope like any low-cost plan that insurers are able to devise under today's medical inflation and their industry's ground rules: Certain occupations and severe preexisting illness are excluded. Moreover, about 42% of the 600 small firms signing on already had insurance and merely switched to Scope as a cheaper alternative. Nevertheless, says senior vice president David Dunn of United States Life, the response has been ''truly extraordinary.'' These are only pieces of the answer for the uninsured. Slowly but irreversibly, momentum is building for a more ambitious solution, and business is showing new interest in hammering out a consensus. Twenty-seven companies, including Ford Motor, AT&T, Kodak, and 3M, have just joined several unions and other organizations to form the National Leadership Coalition for Health Care Reform, which hopes to produce its own blueprint next year. The answer may ultimately have to be a law requiring all companies to buy health insurance for employees. But with insurers willing to go a long way toward making it more affordable, a government mandate now would be premature.

CHART: NOT AVAILABLE CREDIT: SOURCE: EMPLOYEE BENEFIT RESEARCH INSTITUTE CAPTION: 33 MILLION WITH NO HEALTH INSURANCE Who's caught in the crunch: New Census Bureau data for 1988 show that half the uninsured are full-time workers and their dependents. Some are far from poor.