Using a framework based on principal-agent theory, this study examines problems faced by managed care organizations (MCOs) and major health care providers under the state of Tennessee's current capitation-based managed care programs called TennCare. Based on agency theory, the study proposes a framework to show how an effective collaborative relationship can be forged between the state of Tennessee and participating MCOs which takes into account the major concerns of third-party health care providers. The proposed framework further enhances realization of the state's key health care reform goals which are to control the rising costs of health care delivery and to expand health care coverage to uninsured and underinsured Tennesseans.