This study develops and tests a model to examine the determinants of the structure of payment systems for providers as a contract between the insurer and the provider and to explain the existence of a variety of payment systems in health insurance markets. This article characterizes payment systems in terms of financial risks and incentives for providers to control medical care costs. It is shown that the structure of payment systems and its distribution across markets for health maintenance organizations depend on the characteristics of consumers and providers in the market area. Consumer preference is reflected in the structure of payment systems because a rational consumer, who understands the effect of payment schemes on provider behavior, chooses the plan which adopts the provider compensation system yielding the combination of quality and premium he or she desires. Providers' ability and willingness to bear the burden of financial risks imposed by payment systems also affect the structure of payment systems in health insurance markets.