Few people greet the gray of November with glee, but for Charles E. Mott, who with his wife owns a small business near Seattle, November is particularly unwelcome this year.

Mott has been reading that large increases in health-coverage costs are on the way. In November, he sits down with his insurance brokers to find out how much it will cost, come Jan. 1, to renew the policy that covers his small company.

He's bracing for the worst. Mott took a 9% hit this year — more than four times the rate of inflation. For next year, he's dreading an increase of up to 20% — and hours of calculations, research into alternatives, and soul-searching talks with his wife (who is his business partner).

His options are miserable. Mott had hoped to extend coverage to employees' families. But if the news is really bad, he may have to make employees contribute to the premium, which they don't now do. Or he may switch to cheaper "catastrophic" coverage, or drop health benefits altogether and give employees raises so they can buy their own coverage. "Why do you have to go through this?" says Mott, who runs Innovative Vacuum Services Inc. in Edmonds, Wash., a 32-employee company his father-in-law started in 1954. "It should be fairly simple," he says. "You want to provide coverage for your employees, and it should be affordable."

Many entrepreneurs are going through the same ordeal. They're on the front lines of one the most contentious social and economic policy debates in the U.S. — how to apportion the cost of health coverage among business, consumers, and the public sector. From 1989 to 1996, health-care premiums — under pressure from managed care — declined sharply and steadily, reversing the escalation of the 1980s. Yet the savings that managed-care companies wrung out of the U.S. health-care system have proved difficult to sustain. Consumers and doctors have rebelled against what they see as heartless health-care rationing. Meanwhile, health-care companies' shareholders want higher returns. Premiums have been rising since 1996, especially for small businesses, which lack the purchasing clout of big ones. From the spring of 1998 to the spring of 1999, premiums rose an average of 4.8% for employers in general, but 6.9% for companies with fewer than 200 workers, according to a new survey by the Kaiser Family Foundation and the Health Research and Educational Trust.

"NO PLACE TO GO." Small companies now face even more daunting increases. A new survey by Hewitt Associates, a Lincolnshire (Ill.) management consultant, found that big companies anticipate, on average, 9% increases in health-plan costs for the coming year — and 45% of those surveyed foresee 10% or more. Small employers can expect at least that, says Kenneth L. Sperling, a health-care consultant at Hewitt. "They certainly won't be lower."

More likely they'll be much higher — if the outlook for HMO premiums is any indication. William M. Mercer Inc., which negotiates with 400 health maintenance organizations for clients, has reports of premium increases of 15% to 20% for small companies, vs. 9% to 12% for large ones. It's particularly telling that premiums for managed care — once the cheap alternative for health-care coverage — are going up so sharply. "There's just no place to go," says Sperling.

That leaves small employers with a menu of unappetizing alternatives, says Anne Pasley-Stuart, CEO of Pasley-Stuart Consulting, a human resources consulting company in Boise, Idaho. They can absorb the costs, pass them on to employees or customers, cut back on coverage, or drop coverage altogether.

For now, Mitas Group, a software company with 21 employees in McKinney, Tex., has decided to absorb the shock, says Susan Mitas, treasurer of the company she and her husband formed 30 years ago. In 1997, the company faced a 25% increase in rates over the previous year, though it had no excessive claims or health expenses the year before. In hopes of holding the increase to 8%, Mitas raised employees' deductibles from $250 to $500. Even so, Mitas says the company's costs jumped 14% in 1998, and it will pay 17.5% more for a policy that expires on July 31, 2000.

Mitas says she's loath to switch plans. She considers others inferior, and her workforce includes several family members. Dropping coverage altogether is not an option: Mitas believes companies have a responsibility to provide health coverage, and in today's tight job market — at 4.1% the U.S. jobless rate is the lowest in 29 years — she must offer coverage. "It's part of what you offer to hire good employees and retain them," says Mitas. "It's what professional people want when they are looking for jobs."

GOOD COMMUNICATION. Kathleen Rothschild-Zuroweste learned that the hard way. Rothschild-Zuroweste, who with her husband owns the Colony House restaurant in New Haven, Mo., about an hour west of St. Louis, recently lost a "very valued" lead cook to a factory that offered health benefits. "She said, 'The only reason I'm leaving is the health-care situation,'" Rothschild-Zuroweste recalls.

Rothschild-Zuroweste says she would love to have a health plan and has met with a number of insurers over the past 18 months. She is priced out of the market, though. The plan she liked costs about $2,000 a month. "For a 13-person payroll, we can't even look at it," she said.

If not handled properly, rising premiums can strain employers' relationships with their staff. Lynn Scherr Bowles, owner of Scherr's Refrigeration Co. in Richmond, Va., has handled rate increases by asking her seven employees to contribute more. About 10 years ago, the company paid 100% of the cost of coverage for employees. Today, Scherr's and the employees split it 50-50. While that may sound like a big shift in burden to the workers, the alternatives, says Bowles, would have hurt them — and her business — more. Unlike many small companies, Scherr's covers employees' families. Bowles could have switched to an employee-only plan, but that would have left most of their children uninsured. And she feared that her skilled repair people, who are crucial to her business, would have repaid the favor by leaving. "Service technicians are very hard to come by," she says. "You take that [coverage] away, they go somewhere else to get it."

With that in mind, Bowles goes out of her way to explain her decisions to her workers. Over the years, she has brought her insurance broker and representatives from the health plan in to discuss coverage and changing prices. Communication is crucial in such a difficult environment, say benefits consultants. Pasley-Stuart advises companies to form employee health-care committees made up of executives and line workers to help find good, affordable policies. The committees can be a valuable resource for employers struggling to find a good solution with limited resources. They put more people to the task of trawling the complex health-care market for options, and they help keep employees informed about the difficult decisions. "You need to have really good communication and even walk them through what's happening, so they can see that these decisions are not being made capriciously," she says.

TAX PLANS AND POOLING. Higher costs may be inevitable, but there are ways to contain them aside from raising deductibles and co-payments or paring coverage. If you're going to pass on the higher premiums to employees, says Hewitt's Sperling, look into setting up what are known as Section 125 plans, from the portion of the tax code that authorizes them. These plans allow employees to pay their health-insurance contributions from pretax instead of aftertax income. Using pretax funds represents a substantial savings to the employee.

Another option is to see if there is a local association that pools small businesses so they can negotiate with carriers for cheaper rates. In Cleveland, about 13,000 companies — from dry cleaners to ad agencies, with an average of seven employees — get health plans through the Council of Smaller Employers, a division of the Greater Cleveland Growth Assn., the community's chamber of commerce. The Council, which represents a pool of about 210,000 people, has been able to keep costs down for its members, says Scott J. Lyon, executive director of the unit that administers the program.

Meanwhile, as health-care companies seek to maximize their returns and consumers press for more coverage, employers such as Mott, who feels that giving his workers health insurance is the right thing to do, are caught in the middle: He paid about $4,800 a month last year and $5,300 this year. "It seems like a struggle to write out the check every month," he muses. Whatever solution he finally chooses, providing health care will remain one of his biggest business problems for the foreseeable future.

By Pamela Mendels in New York