(FORTUNE Magazine) – "Something absolutely terrible is going on," says Stanford University economist Alain Enthoven, a leading apostle of unleashing market forces to tame costs and improve the health care system. While headlines dwell on the Washington debate about forcing companies to pay for coverage, Enthoven and employer groups are alarmed at a lobbying effort that in their view would turn reform into a means of protecting inefficient doctors, hospitals, and other providers. Competition, they say, depends on the ability of HMOs and other managed-care plans to "contract selectively" with providers -- picking, choosing, hiring, and firing. Enthoven and several business organizations say lobbyists for providers are out to undermine such options. The lobbyists have already done so in many states, which have recently enacted "any willing provider" laws mostly applying to pharmacies. Such legislation makes it difficult for health networks to keep them out. The Clinton Administration's bill, along with marked-up versions moving through several congressional committees, generally upholds selective contracting. Even so, it makes room for exceptions. For example, the Administration would force HMOs and others to contract with teaching hospitals and a list of other organizations deemed "essential community providers." On Capitol Hill -- no surprise -- this list is growing. The American Medical Association wants to make it hard for managed-care plans to fire doctors. The AMA insists that its proposed "patient protection act" would enable HMOs and others to reject or dismiss incompetent medicos. What they couldn't do, says Dr. Lonnie Bristow, just elected as the AMA's first African American president, is summarily sack a physician for putting the patient's interests ahead of the health plan's bottom line. Says Bristow: "Physicians should not compromise their decisions for fear of losing their jobs." Counters Karen Ignagni, president of the Group Health Association of America, which speaks for HMOs: "The legislation proposed by the AMA would handcuff HMOs, restricting their ability to contract with only those doctors they believe provide the best quality of care." A congressional version of the AMA's proposed "due process" rules -- they could force HMOs into court to defend firings -- survived Ted Kennedy's Senate Labor and Human Resources Committee. With floor and conference committee battles yet to come, the fight over selective contracting is far from over.