Senior executives in the United States should be doing everything they can to control the rising costs of health care benefits while maximizing returns on this investment. Benefits costs are increasing three to four times faster than inflation, mushrooming into one of the biggest expenses for companies. Indeed, within a few years benefits costs at some Fortune 500 companies could even eclipse profits. The issue has gone well beyond budgeting discussions by human-resources departments, as suggested by GM chairman and CEO Rick Wagoner's call for a national health policy to address a problem he says threatens the competitiveness of US corporations.

Most companies don't apply the same rigor to managing their health and retirement benefits that they bring to other business investments, such as research and development. Too often, executives consider benefits a fixed cost, with little room for savings. Our experience, however, shows that employers can continue to offer attractive plans while reducing expenses. To achieve this goal, a company should take a product developer's approach to designing benefits packages, by viewing its employees as internal customers and developing plans that closely match their expressed needs. This approach goes beyond offering à la carte plans that allow employees to...