This paper analyses contracts to keep down costs while maintaining quality of health
services when patient demand does not reflect quality. There is then a natural role for forms
of contract that have emerged during the reforms of the NHS in Britain that differ from
pure fixed price or cost reimbursement contracts. The optimal form depends on whether the
provider is entirely self-interested or benevolent in having genuine concern for patient
welfare. With fully benevolent providers there are roles for block and cost and volume
contracts. With partially benevolent providers, some degree of cost sharing is typically
optimal. © 1998 Elsevier Science B.V.