After many years of testing and experimentation, most insurance companies, managed care plans, and self-insured employers now have effective programs in place to manage their health care expenditures. More important, the recent efforts to balance the federal budget have led to a series of changes in the payment systems for both Medicare and Medicaid that are designed to reduce the amount of money the federal government will spend on health care services in the future. It appears that all the loopholes have been closed. Many hospitals, as well as other types of providers, are now projecting flat revenue growth, while some are actually anticipating declines in revenues. To fully understand health care finance and be effective in reducing costs, hospital managers need to understand the history and evolution of the payment system and how they have influenced both cost measurement and cost control efforts.