The effect of managed care insurance contracts such as health maintenance organisations and preferred provider organisations on health costs is controversial. For some time periods and areas, there is a strong negative relationship bteewen managed care penetration in a market and health costs. Other researchers have found a positive relation between managed care penetration and health costs. Traditional fee for service premiums in a market area may decline as managed care penetration increases when managed care market share is low, only to increase as maaged care pentration increases when its market share is high. This paper seeks to provide a theoretical explanation for the various health cost/premium inflation patterns found at different levels of market share for managed care insurers
