With the Clinton Administration beginning to expose the details of its plan for health care reform, the concept of managed competition will be a key ingredient to remedy our ailing, often inaccessible, and increasingly costly health-care system.

Managed competition is an idea conceived by Alain C. Enthoven of Stanford University, nurtured by an informal think tank of health care professionals in Jackson Hole, Wyoming, and adopted as the basis of the Clinton Administration's health care reform package. It is a market- driven policy of regulated competition among insurance companies, with incentives for insurance carriers, physicians and other health care providers to improve quality, increase benefits, expand access, and control costs.

The pivotal idea within managed competition is the creation of large regional Health Insurance Purchasing Cooperatives (HIPC's), which would negotiate and coordinate health care coverage. These consortiums of employers and individual consumers, by virtue of the numbers of individuals they represent (in the hundreds of thousands or more), would have the leverage and the buying power necessary to generate healthy competition among health care plans. Premium costs would be borne by both employers and employees (probably in an 80/20 ratio), with the Federal government paying for the unemployed and those covered by Medicaid. Medicare could also be incorporated into the system at some point. HIPC's would pay annual fees to contracted health care plans based on enrollment; individuals would be able to choose from several health care plans, and would not have to change plans when changing jobs.

In The Logic of Health Care Reform, Paul Starr discusses three elements integral to managed competition's endurance:

1. Standard benefits to guarantee a minimum level of coverage (hospitalization, surgery, and office visits) and to facilitate comparisons of quality and value between health care plans;

2. Risk adjustment to require plans to accept all applicants, regardless of any pre-existing medical conditions; premium amounts would be determined by each state under a community rating system, guaranteeing that the same premium would be charged to all, regardless of age, sex or prior medical history;

3. Price competition to compel plans to provide specific cost information to consumers and employers; tax credits for employers would only apply to the cost of the least expensive plan; more comprehensive packages would be available to consumers at additional cost.

Such major changes to the health care system under managed competition will impact most intensely on the traditional, independent, fee-for- service physician. Solo practitioners will become a minority as most physicians merge their practices into one or more managed care networks.

Managed Competition Is Not Managed Care

The concept of managed care is distinct from that of managed competition. Managed care is a system of health care delivery in which organized networks of hospitals, physicians, and other health care providers offer accessible and cost-effective medical care. Managed care can take various forms:

* HMOs: Health Maintenance Organizations, the earliest form of managed care, are prepaid health plans which provide a broad range of health care services for a flat monthly premium (and often a patient co-payment of $2-15 per visit). Physicians may work from their private offices, usually under a fee-for-service or a capitation form of payment, or may be hired to practice in a hospital/clinic setting in a "staff-model" HMO.

* PPOs: Preferred Provider Organizations are groups of hospitals and physicians that have contracted with either private insurance companies or directly with employers to provide medical care for a discounted fee. Covered individuals are reimbursed 80%-100% for services provided within the scope of the PPO, but only 50%-70% for outside services.

* IPAs: Individual Practice Associations are essentially decentralized HMO's which contract with physicians to provide services to the plan's patients for a discounted fee (usually 50%-80%) of which 15%-20% may be retained by the managed care entity for a "withhold" or a "risk" pool.

* POSs: Point-of-Service plans (sometimes known as versatile HMO plans) are the newest form of managed care. These "open-ended" HMO's allow patients to use providers outside the plan's network, although deductibles and co-payments for non-plan services are generally high.

Under managed competition, insurers will tend to associate with those providers who are willing to discount their fees and who display an ability to effectively contain costs. Fee discounting alone, however, is not a long-term solution, since it monitors neither the quality of care nor the mix of services in relation to demand. Consequently, those insurers and health care providers best able to deliver quality care at a reasonable price will prevail under a system of managed competition.

Those employers, health care providers, insurers, and consumers who prepare themselves now for the changes that are beginning to take shape will be better positioned, than do those who choose to ignore the inevitable and necessary transition to a new system in which quality care, cost containment, universal coverage, and managed competition predominate.

Jeffrey G. Blumengold, FHFMA, CPA, is Director of Health Care Services at M.R. Weiser & Co., and is Chairman of the NYSSCPA's Health Care Institutions Committee. Michelle M. Zeman is Manager of Health Care Consulting Services at M.R. Weiser & Co.