The private health sector is experiencing a crisis of spiralling costs, with average annual cost increases of between 13% and 32% over the decade 1978-1988. This trend is partly explained by the high utilisation rates that result from the combination of the 'fee-for-service' system and the 'third-party' payment structure of the sector. Medical schemes have responded by promoting the idea of 'flexible packages', and have won the right to 'risk-rate' prospective members. It is argued that these measures will undermine the principle of equity in health care, and will not solve the problems of the private sector. Instead, a more significant restructuring of the sector is likely to emerge. This may take the form of 'managed care' structures, along the lines of the health maintenance organisation model from the USA. The principles, advantages and problems of 'managed care' structures are described. These are shown to be potentially more rational and efficient than the current structure of the private sector. Although some resistance to 'managed care' structures can be expected, the convergence of interests of large employers and trade unions in containing health care costs suggests that their emergence is a likely development.