Accelerating health-care premiums and sharp revenue shortfalls due to the recession are forcing some small companies to choose between dropping health insurance or laying off workers -- or staying in business at all.

Sheryl Weldon, owner of Commerce Welding & Manufacturing Co., saw health-insurance payments increase to more than $800 monthly per employee from about $200 five years ago. With monthly revenue down 10% since December, Ms. Weldon stopped providing health coverage to employees, including one being treated for prostate...