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# individual or family exceeds the expenditure goal (Eg) in a future period.

Third, administration of the stay-well plan does not appear to be unduly complex. In Mendocino, where initial expenditures (E < Eg) are paid by the employer from a self-insurance fund and subsequent outlays (E > Eg) are covered by the insurer, processing and coordination of claims is done through a local medical foundation. If anything, incorporation of a stay-well incentive in a single-payer or national health care system would be somewhat simpler. Insurance records of participants would need to contain information about the depletion (if any) of their potential reward, based on expenditures to date. At the end of the accounting period, these records would be used to issue reward checks or to credit the individual in some other fashion.

Fourth, success of the stay-well plan in reducing overall costs to the system hinges on the capacity of the incentive to shift the frequency distribution of health care spending. The purpose of the stay-well incentive is to reduce unnecessary utilization in the short-run and, in the long-run, to further reduce the need for care by stimulating better health habits. If utilization and personal habits are sufficiently responsive to such incentives, the plan may reduce overall system costs.<sup>19</sup> Fifth, financial solvency of the plan requires that revenues from various sources (premiums paid by individuals and/or employers, government subsidies, and income from any initial endowments) be sufficient to cover not only the insured portion of charges for high utilizers (E > Eg), but also the insured charges and _rewards_ for low utilizers (E < Eg), as well as any administrative costs and allowed profits. Again, the plan has a better chance of remaining independently solvent (i.e., not dependent on external subsidies) if parficipants' demand for health care and their willingness to adopt better health habits are sufficiently responsive to financial incentives. It should be emphasized that, despite the additional payments to low utilizers, the stay19. One might argue that hospital expenditures, which typically account for a significant proportion of total health care expenditures, will be less affected by the stay-well incentive. First, the demand for hospital care will be less responsive to financial incentives than other, less expensive types of services (e.g., routine office visits or examrs). Second, the power of the stay-well incentive hinges on the size of the reward; the lower the reward, the lower the power to affect excessive utilization and , particularly, to reduce the use of costly hospital services. We would argue, however, that this is essentially an empirical question that crucially depends on the expenditure distribution, demographic factors, and lifestyle characteristics of the population. Relationships between these features of the population and their responses (both utilization and health habits) to financial incentives would need to be studied befoe a large-scale stay-well plan is introduced (see the Section VI for some thoughts on this matter). If, however, poor lifestyle is .n important contributor to illnesses or diseases that ultimately require hospitalization, or if a portion of inappropriate' hospitalization is initiated by routine physician visits, even relatively modest incentives provided by the stay-well plan might be effective in reducing hospital costs, particularly in the long run.