Health insurance premiums are growing at unsustainable rates. Large parts of the population don’t have any insurance at all, and Medicare beneficiaries continue to be covered by an antiquated program with large gaps in coverage – most conspicuously, a lack of coverage for outpatient prescription drugs. This is all eerily similar to the health-care landscape a decade ago.

Arriving on the national scene in the early 1990s, Bill and Hillary Clinton offered “managed competition” as a way to provide universal coverage. As developed by Stanford University professor Alain Enthoven and colleagues, managed competition prescribed a tightly controlled system of managed-care organizations that competed with each other on the basis of price and quality. It was promoted as a carefully constructed balance between competition and regulation. But the Clintons’ statist tendencies took over.

They created a plan with far more bureaucracy and government control than the architects of managed competition had intended. Enthoven himself dismissed the plan, which was deservedly rejected. But it would be a mistake to conclude that managed competition is a workable concept that hasn’t been given its due. Consider how managed competition evolved.

In March 1978, Enthoven wrote “Consumer-Choice Health Plan,” a two-part series in the New England Journal of Medicine. The term “managed competition” is never used in these papers, which are for the most part excellent. Enthoven identifies the tax code, the link between employment and health insurance, and public programs like Medicare and Medicaid as the key factors driving a costly, inefficient, and inequitable health insurance system.

Consumer-Choice Health Plan, or CCHP, sought to create a defined contribution system of competing private health insurance plans that would be financed by refundable tax credits, with larger vouchers for the poor. As Enthoven explained, “It would give people an incentive to seek out systems that provide care economically by letting them keep all the savings” from choosing a less-expensive plan. Unfortunately, one of his key assumptions was flawed.

Enthoven believed that health maintenance organizations (HMOs) were the superior mechanism for delivering low-cost, high-quality health care. He assumed that consumers would concur and that HMOs would become the dominant type of health care plan. Further, health policy analysts convinced Enthoven that CCHP lacked sufficient regulation to be viable. Mostly in response to concerns about adverse selection, Enthoven and colleagues transformed CCHP into the more heavily-regulated managed competition.

Competing plans would be forced to offer standardized benefits and, although premiums paid by consumers would be community-rated, the premiums received by plans would be risk-adjusted for the health status of their enrolled participants. The effect of these regulations would be to reduce consumer choice and to quell innovations in benefit design. There is also no evidence that risk-adjustment of premiums would eliminate adverse selection. In the end, Enthoven’s original proposal remains his best.

CCHP was simply a national defined contribution system that assumed HMOs would dominate the landscape. But there is no reason to make such an assumption or to limit the competition in a defined contribution system. Moreover, a competitive system with strong cost-control incentives and a level playing field for both consumers and insurance plans does not require extensive regulation. For the under-65 population, this can be accomplished without creating a new regulatory structure.

Refundable tax credits should be enacted to give all non-elderly people a government-financed defined contribution toward the purchase of any health-insurance plan. Families and individuals might wish to voluntarily join a group in order to purchase group health insurance. Due to the effects of adverse selection, voluntary purchasing groups would, over the long term, consist of roughly similar risks. Such groups would exist mainly because they could reduce administrative costs.

For the Medicare population, a defined contribution system closer to Enthoven’s original concept would be a better fit. A federal oversight agency such as the Office of Personnel Management, which oversees the Federal Employees Health Benefits Program, would send out for bids and would coordinate and disseminate information about the competing health insurers.

If we agree that consumers should play a stronger role in their health-care decisions, then the defined contribution approach makes too much sense to ignore. Let’s invite all health plans to the competition and let consumers decide.

Chris Middleton is the Senior Health and Tax Policy Analyst for the Center For Entrepeneurship of the Pacific Research Institute in San Francisco. He can be reached via email at cmiddleton@pacificresearch.org.