Every well-informed executive knows that the cost of providing health care for employees is on the rise. But few realize just how quickly the cost is growing and its impact on the bottom line. Employee benefits now represent a company's third-largest expense—after the cost of goods sold and the non-manufacturing payroll—and health insurance is the fastest-growing component (Exhibit 1). Some economists are even beginning to point to the prohibitive cost of providing health care benefits as a reason for the reluctance of companies to hire more aggressively.

It's not as though they haven't tried to deflect the one-two punch of rising health care prices and growing consumption: most have shifted more of the cost to their employees through higher co-payments and deductibles. Some have tried to contain costs by slashing benefits and searching more aggressively for cheaper health care coverage. Still others have introduced programs to prevent and manage disease in hopes of helping employees avoid expensive trips to the doctor. While these approaches have helped, they have failed to get health care costs under control. In fact, we estimate that in the absence of extraordinary economic growth,...