Place potatoes in a saucepan and cover with water; cover and bring to a boil over medium-high heat. Cook for 5 minutes.
Drain; place in a greased 2-qt. baking dish.
In a large skillet, cook sausage and onion over medium heat until meat is no longer pink; drain. Spoon over potatoes; sprinkle with cheese.
In a large saucepan, melt butter; stir in flour, salt and pepper until smooth. Gradually add milk. Bring to a boil; cook and stir for 2 minutes or until thickened and bubbly.
Pour over cheese. Cover and bake at 350° for 45-50 minutes or until potatoes are tender.