This article argues that moral hazard is the main source of market failure in the health care sector. Cost sharing and managed care both are designed to control the extra costs of moral hazard. Managed care organizations (MCOs) have the potential to control costs by changing provider incentives away from excessive utilization of resources toward less costly and more effective treatments. However, MCOs have been given the wrong instructions by short-sighted employers who have overemphasized cost control. The solution is to give consumers more information and a choice of plans that emphasize different types and levels of cost control.