The problem of attaining an efficient capital stock

Serious problems exist with the nature of health care financing in the United States. This article summarizes problems caused by the high cost of serving an aging population, the lack of incentives in insurance plans for preventive care, and the growing number of uninsured people in the population. The article then focuses on efforts to bring about greater efficiency by changing the contractual relations between the principal--either the payor or the patient--and the agent--the provider. These new contracts attempt to place a greater share of the financial burden on the provider. Evidence of the success of these new contracts is mixed. The major point of the article is that real efficiencies will not be reached unless these incentive mechanisms together with competitive market forces relieve the excess capacity in the health care industry.