4 activities that reduce the need for medIical care. Both responses -- more utilization of covered services and less risk avoidance -- have been desc-4hed as 'moral hazard," the tendency for consumers to behave differently when insured.<sup>8</sup> Because of these moral hazard effects, insurance increases the demand for medical services.<sup>9</sup> If the supply of services cannot satisfy the demand forthcoming at a near-zero price, some form of non-price rationing must be adopted or inevitably will emerge.

Even in the U.S. health care system, where the private sector has played a more important role in insuring consumers and providing health care, the introduction of major public insurance programs (Medicare and Medicaid) and the spread of private insurance, especially through the workplace,<sup>10</sup> have expanded the demand for care, raised concerns about moral hazard and socially inefficient levels of utilization, and stimulated the search for offective ways to control utilization and costs. These cost containment approaches include greatsr 'cost-sharing" (highez coinsurance rates), various forms of utilization review under the rubric of "managed care,' ana the introduction of ""lternative delivery systems' (e.g., health maintenance rganizations or HMOs) that are thought to have stronger incentives or more effective ways to contxol utilization. However, any such effort to raise coinsurance rates or to limit access to services often is perceived by consumers as a benefit reduction and loss of insurance protection.'<sup>1</sup> Indeed, the natural 8. Pauly (1968) generally is credited with explaining the economic incentives underlying the moral hazard problem. While moral hazard has been extensively discussed within the context of private health insurance plas, the same problem plagues public health insuance systems. For example, moral hazard appears to be a particularly acute problem in Easter. Europe. For an overview of the problem in the Bulgarian health care system, which is quite similar to those of other Eastem European co..utries, see The World Bank (1993a), Ch. 6.

9. If the agency relationship between consumers and providers of health care extends beyond medical decisions to include financial interests, providers also may exhibit a form of moral hazard by recommending services to insured patients that would not be recommended to uainsured patients. We focus on the problem of structuring insurance to give consumers appropriate incentives, but the problem of structuring provider reimbursement- to induce costeffective forms of health care also merits attention.

10. In 1960, consumers directly paid 55.9 percent of U.S. personal health care expenditures. By 1990, this figure had declined to 23.3 percent [see Levit _et aL_ (1991), p.50]. This average coinsurance rate for the entire population may understate the degree of insurance coverage among _insured_ individuals, since approximately 35 million Americans have no insurance _[Eonomic Report of the President_ (1993), p. 1<sup>3</sup> 4].

11. Beyond the problem of consumer resistance to cost-sharing, there is considerable debate about the effectivwess of higher coinsurance rates or copayments on utilization and expenditures. The Rand Health lsurance Study is viewed as one of the most comprehensive attempts to evaluate the effects sf cost-sharing on utiliz..ion, expenditures and L.alth status. Rand researchers conclude that "...the response to cost-sharing is nontrivial.' [Manning _et aL_ (1987)1. Implied price elasticities of demand in the Rand study are roughly -.2, but such estimates vary across