From the November 2005 issue of Entrepreneur

Looking for a way to give employees health-care options while trimming your company's costs? In a growing number of states, small companies can now opt for greater flexibility and lower-cost health benefits through "managed competition."

How does it work? Essentially, employers choose--and pay for--a set of streamlined plans with fixed employer and employee contribution amounts. Employees choose from among these plans; those who want greater coverage may also select add-on options offered by multiple providers.

Ultimately, empowering employees to allocate their own heath-care dollars also encourages competition among health-care providers, explains Alain Enthoven, professor of public and private management at Stanford University. "Managed competition lets the more efficient groups market their services by charging lower prices for care."

Traditionally, managed competition has been employed primarily by large-scale state and federal employers. But two "exchanges"--California-Choice in California and BENU in Oregon, Washington and the Washington, DC, area--are making managed competition available to smaller employers. Small companies can also band together to develop managed competition in a given market.

Momentum around the concept may be slow to build, however. Insurance companies accustomed to contracting with an employer's entire employee base are likely to resist the shift. Managed competition can also boost plan complexity--and administrative costs for employers, notes Enthoven.

Yet the payoff can be well worth overcoming hurdles along the way. Says Enthoven, "Over time, there's a lot of money to be saved."