One important motive for deregulating social health insurance is to encourage product innovation. For the first time, the cost savings achieved by non-US managed care plans that are attributable to product innovation are estimated, using a novel approach. Panel data from a major Swiss health insurer permits to infer health status, which can be used to predict health care expenditure. The econometric evidence suggests that the managed care plans benefit from risk selection effects. In the case of the health maintenance organization (HMO) plan, however, the pure innovation effect may account for as much as two-thirds of the cost advantage.