The open-ended reimbursement of hospitals, physicians, and other providers by the government and by private third party payors has played a major role in the increasing costs of health care as well as the types and amounts of health care received by the American public. In the pages to follow we review the effects of cost reimbursement and other methods of financing on the use of hospital care, on the outcome of medical care practices, and on medical innovation and its diffusion. We examine the likelihood that changes in method of reimbursement will achieve their intended effects of eliminating or reducing unnecessary care and improving the efficiency with which medical care is delivered, and we also consider secondary effects of reimbursement on the quality of medical care and on its distribution.