Abstract

Health care costs are rising because of the incentive effects of insurance. These effects were supposed to be corrected by HMOs and Preferred Provider Insurance in which providers of care have incentives to be economical. But employers have not made these health plans compete on price. For example, under the formula used by the University of California for its employee health care, there is no marketplace reward for health plans with premiums below the average to reduce or hold down premiums. In the interests of a high-quality but affordable system of care, the U.C. and all other employers should instead adopt a strategy based on managed competition.