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 past year," says John Kimbrell, principal and owner of Kimbrell Associates in Orange, California. 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 to 25 percent range. No increases were under 10 percent. The last time premium increases were this high, managed care was the answer. This time, I don't know what the answer is."

Despite the rising rates, the outlook for small-business owners is not entirely 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., a pottery company in Pawling, New York, with six employees. Katz, a former musician, had been covered through the American Federation of Theatrical and Radio Artists for many years, but he received a letter one day stating his health insurance benefits had been 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 seeking information, Katz typed "small business insurance" into an Internet search engine and came up with a link to Digital Insurance Inc. 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 few 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."

Atlanta-based Digital Insurance can offer competitive rates because it bargains collectively with health insurance companies. For those who choose not to find health insurance 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, says he spent a lot of time thinking about the needs of small-business owners when designing his site. 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 were to seek coverage on its own.

"Because of the economics in the system, small groups and individuals don't have much choice [about health insurance]," says Usilton. "Their empowerment is minimized, and it's only going to get worse."

In California, the leading health insurance purchasing alliance for small businesses is an Orange, California, 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.

Kimbrell has worked with CaliforniaChoice since it started three years ago. He chose this plan because of the freedom it gave his five employees to choose their own health insurance. CaliforniaChoice currently offers plans in nine different HMO networks. "It's cost-effective," said Kimbrell, who reports that about 70 percent of his small-business clients also use CaliforniaChoice. "I can set a budget for myself, and whatever the employees choose, they can pay for it. I sell a lot of health insurance-most clients like that."

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

If you don't live in California, there are comparable health plans in many other regions. COSE offers a selection of health plans to its members in much the same way that CaliforniaChoice does. Lyon reports that several thousand of the 13,400 companies that offer insurance through COSE offer multiple plans to their employees.

Small businesses in New York City and Westchester County can find coverage options through HealthPass, an initiative sponsored by New York City. 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, adding that the average COSE member spends $20,000 a year on health insurance. "Buy a plan to accomplish a goal. Buy a plan that will meet the needs of the company and its employees. 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."

Sarah Prior contributed to this report.

Jane Applegate is a syndicated columnist, author and founder of Small Business TV, global network for entrepreneurs.