California's community banks are sinking on unfamiliar ground at the state capital, struggling in the political quagmire known as health care reform.

About 200 of the state's smallest banks are fighting to exempt the California Bankers Association group health insurance plan from the health care reform law the state passed last year.

Since then, some of the smallest banks and their employees have seen their health care insurance costs skyrocket - with premiums going up as much as 40% and, in some cases, deductibles and copayments going up 200%.

The reason: As small-group employers, small banks are now legally subject to the same underwriting criteria as all small businesses, which typically pay much more for health insurance per employee than large corporations. Before the reform law, they could join with the California Bankers Association as one giant employer, negotiating much lower rates as a group.

"The whole thing is rather unlogical," said Wayne C. Clark, senior vice president of First National Bank of Ventura, Calif., a $35 million bank with 25 employees. "If we stayed with the California Bankers Association, our costs skyrocket and we don't get the same level of service or choices. It's sad, because it hurts employees the most."

The association is waging a vigorous lobbying effort in Sacramento to pass a bill that would create a special class of business sponsored by a "qualified association" that would be considered a single employer, even though its association members are all small-group employers. Certified public accountants, through their California association, would also be exempt.

But the bill, which has passed the California Assembly and is now in the State Senate Insurance Committee, faces stiff opposition from the administration of Gov. Pete Wilson, a Republican, and the state Health and Welfare Agency, which engineered the 1994 reform law.

According to Lisa Kalustian, spokeswoman for the agency, the idea of the reform law was to create a small-group employer market, making health insurance accessible to all small businesses. She said the state is worried about setting a precedent.

"By exempting certain groups, you open the door to other groups to self exempt," she said. "What do you tell small businesses who don't belong to a private group? You risk diminishing the small-group employer market, upon which access depends. For the greater good of all Californians, this system is good. It's an adjustment for everybody."

James Clark, vice president of state government relations for the bankers association, said the bill is tailored so that it will only affect "qualified" association groups that have had group health plans for more than 10 years. The 200 banks affected have about 12,000 employees and dependents, which amounts to only a minuscule chunk of the small-group employer market created by the reform law.

Small banks that were in the California Bankers health plan, however, have already taken steps to remedy the increased costs of being a business with less than 50 employees.

"We pay 75% of our employees' health-care costs," said First National's Mr. Clark. "A significant chunk of our employees are over 40, so that pushed it up even more. We joined an HMO, so our costs are down. It's a good plan, but we had a much better deal with (California Bankers.)"

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