Creating the market under managed competition: getting there will not be half the fun.

To develop a framework for managed competition, implementers of health care reform will need to encourage the development of a large number of new AHPs. If experience with the rapid growth in HMOs that occurred in the late 1980s can serve as a guide, it would be expected that many new IPAs will form and that their development will occur at different rates in different communities, depending in part on the supply of medical resources and population demographics. There is evidence from past studies that new IPA entrants can stimulate the price competition desired by health care reformers. Lower bid prices were submitted by plans in the AHCCCS program in markets where new IPAs were competitors. IPAs also can fail, however, particularly at low enrollment levels. Implementers need to be concerned about the political and operational consequences of AHP failures during the early stages of health reform. If managed competition is to contain costs, implementers will need to develop effective policies to stimulate AHP entry, to oversee the performance of new AHPs during initial periods of low enrollment, and to protect consumers from any adverse consequences of AHP failures. It is possible that a large number of failures could occur among newly formed AHPs and that such failures could undermine the confidence of the public in managed competition. This would probably lead to calls for the replacement of managed competition with a more centrally managed and closely regulated health care system.