While the implications of payment mechanisms for provider behaviour and cost have been amply explored in industrialized countries, there is little empirical evidence from developing countries. This study exploits the opportunities created by a pilot study of micro health insurance with capitation in Rwanda to address this issue. Using cross-sectional data collected in 52 health centres, the paper employs an econometric cost function with payer-specific outputs to assess the cost impact of two provider payment mechanisms: (1) user fees for care paid by the uninsured, and (2) capitation payment paid by informal insurance schemes for the insured. The cost function allows payer-specific marginal and average costs and scale measures to be calculated. Findings point to significant differences in cost between the two payment forms. These may be due to the incentives embodied in the capitation provider payment or the less severe case-mix among insured patients arising from improved access to care for this group, or both. For both payment types there are important short-run economies of scale, which could be exploited through more intensive use of idle resources in health centres.