(FORTUNE Magazine) – Don't like your managed-care company? Tired of dispirited doctors processing the mob in the waiting room with all the care and compassion of postal clerks? Tough. What are you going to do about it? Switch doctors? Switch to another HMO? Oooh. Great idea. Boy, that should solve the problem. Face it: You don't have much choice. About all you can do is endure it.

Then again, you could always move to Minneapolis.

For just over a year an ambitious experiment in overhauling the managed-care mess has been quietly under way in the Twin Cities. No fewer than 26 of the biggest corporations and employers in the region, including 3M, Honeywell, Dayton Hudson, Pillsbury, and Carlson Cos., have started what doctors and executives are calling a rebellion: They have banded together to bypass the region's three huge HMOs, contract directly with doctors, and inject a massive dose of plain old marketplace economics, which has been missing almost forever from the health-care industry.

In this radically new scheme doctors are free to charge, organize, and operate as they choose. But greedy or cavalier docs should suffer. Employees have to pay extra for expensive doctors, and the employers also make sure patients know which ones are overpriced or deliver poor service.

This consortium of employers is better at medical economics than at catchy nomenclature: It is called the Buyers Health Care Action Group, with the unwieldy acronym of BHCAG, pronounced "bee-kag." If BHCAG works, the approach could be powerful medicine for the U.S. health-care system, which got hijacked by a managed-care approach that is little more market-driven than the old and abused fee-for-service model. "A lot of people are watching to see how this turns out," says Ellen O'Connor, vice president of the Washington Business Group on Health, an alliance of big companies worried about health-care issues. "This is probably the major health-care experiment going on anywhere in the country."

How does it work? Essentially all 2,500 primary care doctors and their doctor groups in the Twin Cities are free to make their own rules on how they will treat patients or let them see specialists, and free to set the prices they will charge the employers. It's not a return to the old charge-anything, doctor-as-god fee-for-service era, though. If a doctor charges too much or delivers lousy service, just about everybody in town will know about it and will have a powerful incentive to find a new physician. That's because the health consortium distributes an annual "restaurant review" guide covering all the doctor groups, dishing out one to three stars for a dozen quality-of-care measures, and one to three dollar signs for price.

So, Dr. Plushbottom may conclude he is one fabulous physician and join a group of doctors that decides to charge the 26 employers a bundle for its services. Fine. But there's an economic catch: Nearly all 26 companies in BHCAG have agreed to require a worker's family to pay $500 extra a year if he picks a "three dollar sign" doctor group instead of a "one dollar sign" group. There's another catch. What if the doctor group fares badly in BHCAG's annual survey of patient satisfaction? The same thing that happens to every other merchant charging high prices for crummy goods: Customers walk and revenues drop.

At least that's what should happen in theory. The fact is, it's too soon to tell how the 100,000 or so participants in BHCAG's Choice Plus program will actually behave in the face of far more economic and performance data about their doctors than they've ever had. Patients may do nothing, concedes Fred Hamacher, vice president for benefits at Dayton Hudson and a founder of BHCAG: "We don't even know yet if health care is a market." Employees participating in the BHCAG program get to choose new doctors and groups each December, but the results haven't been tabulated yet.

Already, though, the BHCAG approach is reshaping the medical marketplace in the Twin Cities. The Quello Clinic, a big group of 90 primary care doctors and four hospitals, was stunned to discover it got a lot of low ratings on customer satisfaction last year. Patrick Taillefer, Quello's executive director, disputes the accuracy of the survey but says it has triggered lots of self-examination anyway. "We got together and asked, 'How are we coming across to people,' " he says. "We looked at things like childhood inoculations and asked if there were ways to deliver them sooner than we were." Other physician groups responded to the new scrutiny that BHCAG imposed too. "Just before we were about to print our first guide, for 1997, a lot of doctor groups told us they were adding evening and Saturday hours for the first time," says Hamacher.

Why Minneapolis? Everywhere else in America, corporate managers are focused on the core competencies of their business and are outsourcing every imaginable chore. So why are all these giant Minnesota companies tackling something as ambitious as overhauling the health-care system? Partly because employers there have had a lot of experience with managed care: The Twin Cities area was where Dr. Paul Ellwood, one of the founders of the entire managed-care movement, got his start 30 years ago. As a result, about 90% of employed Minnesotans are in managed care already--about three times the national average. BHCAG has a long history too. It was formed in 1988 to grapple with health-care issues, and even set up its own HMO back in 1991.

But what's really going on is a corporate rebellion against a near monopoly of three giant HMOs--Blue Cross, Allina Health System, and Health Partners--that has come to control 90% of the patients and doctors in the region, according to the complaints of numerous human resource directors. With such a concentration of suppliers, they say, competition among the HMOs is almost nonexistent, and the prices they charge are rising. Virtually every doctor in the region has had to join all three HMOs to survive, further homogenizing and standardizing medical care into one big, undifferentiated commodity. "Doctors had no incentives to deliver outstanding performance or operate efficiently. It's like communist Russia," says Dee Kemnitz, vice president of employee benefits for Carlson Cos., a big marketing and travel services company. "The doctors can't shine through if they are good or bad."

To many employers it was as if the HMOs were thumbing their noses at them. Steve Wetzell, an executive director of BHCAG, says that as the three HMOs gradually bought out rivals or pummeled competitors like Prudential into withdrawing, they became less cooperative with the employers who were paying most of the workers' medical bills. "It was getting harder and harder to negotiate with them," he says. "They weren't doing enough to offer new services, they all looked pretty much the same, and they refused to give us access to information about where our money was going." And though there is no evidence that the HMOs colluded on prices, all three seemed to sense when they could get away with charging more, says Wetzell. "The prices the HMOs charged might remain stable for a few years, and then all three would raise their bids on new contracts at the same time." (Susan Flygare, a Blue Cross executive, says that if the three HMOs raise prices in the same year, it's because costs have risen similarly for all. "We're all dealing with the same doctors and similar populations of patients," she says. "All of us spend at least 85% of premiums on medical care.")

The employer group also realized that its early attempt at reform--setting up its own HMO--wasn't much of an improvement over its competitors, according to Hamacher, the Dayton Hudson executive. In 1995 a group of doctors participating in the BHCAG-created HMO came forward to complain that BHCAG was unwittingly penalizing the docs for developing more efficient ways of operating. The doctor group had streamlined procedures for treating a common ailment: bladder infections in women. Rather than have the women come in for a doctor's visit, they could call a nurse, describe the symptoms, and get a prescription. The women could diagnose the problem as well as the doctors, they had concluded, and indeed, bladder infections were getting cured faster this way than before. Best of all it cut the doctor group's cost of treating bladder infections by $250,000 a year. But the doctors didn't get a nickel of the savings. Instead the employers cut payments to the doctors by $250,000 and kept the savings for themselves. "It was an eye opener," says Hamacher. "It's the law of unintended consequences. Without realizing it employers had created exactly the wrong incentives. And that sort of thing has happened over and over again in managed care."

The buyer group finally concluded that there would be no significant reform of managed care until the doctors got far more control over the medicine and economics of their practices. What they came up with is a novel hybrid of the old fee- for-service approach and managed care's fixed-allowance, or capitation, model. Doctors in a group can decide a sort of "hourly rate" at which they all will perform procedures of various complexity. But BHCAG knows if the patients going to a particular doctor group are sicker or healthier than average, based on employees' prior year's records. BHCAG tells the doctors what it thinks those 1,000 or 5,000 patients will cost to treat next year, based on their average health and the doctors' agreed-upon rate. Then, every quarter, the docs and BHCAG go over the bills. If the docs have come in under the cost projections, they may get a higher "hourly rate" for their work the following quarter. If they are over budget, BHCAG looks to see if a flu epidemic or something drove medical costs up and in that case doesn't impose a penalty. But if medical bills are high because the doctors were inefficient, ordering unnecessary tests or visits to specialists, they get a lower rate the next quarter. It's a big improvement over the current managed-care approach, where doctors get a fixed amount per patient per month and can lose money if too many patients get sick. With BHCAG's Choice Plus approach, docs get paid for any work they perform or order, and have months to worry about developing new ways of cutting costs, if necessary.

This approach addresses another, more unappetizing, consequence of most managed care: doctors chasing healthy patients and spurning sick ones that will cost them money. Under existing HMO rules in most places, doctors generally get paid a flat "per member per month" rate. Some doctor groups, especially large ones, can negotiate more generous PMPM rates than others. But mostly the payments reflect the average cost of treating all the patients in a region. The doctor gets paid the same whether five or 50 of his patients actually show up for treatment. Doctors, naturally, are motivated to attract the healthiest patients, since they are the cheapest to treat. In fact, a doctor group unlucky enough to attract sicker-than-average patients can easily go bankrupt, says Wetzell, executive director at BHCAG. One doctor group in Minneapolis specialized in diabetes for years and did fine under the old fee-for-service approach. But when traditional managed care came along, offering essentially the same price per patient to everyone, they got screwed, because diabetes often causes a host of other serious problems, from blindness to nerve damage to diminished circulation.

Doctor groups were stunned by the information and autonomy they got from BHCAG under Choice Plus. "They were able to tell us that the 2,000 patients we were getting through BHCAG cost this much to treat last year and would probably cost such and such next year," says Mark Fisher, president of St. Croix Valley Healthcare, a group of 42 primary care doctors and 100 affiliated specialists based east of St. Paul. "What they told us made us realize that what we had been charging the HMOs to treat patients was a lot lower than most of the other doctor groups. We were amazed. We'd never gotten any information from the HMOs that told us whether we were expensive, low cost, or average."

For the first time, too, primary care doctors got information on one of their biggest costs: how much the various outside specialists they referred patients to actually charged the HMOs. That lack of information about a specialist's prices was one of the frustrating features of life in an HMO, says Fisher. If the St. Croix docs sent a patient to a specialist who later billed the HMO $3,000 for a series of procedures, while another specialist was charging half as much for the same work, they wouldn't know who was cheaper. But the primary care docs got penalized anyway. "At the end of the year the HMO would tell us our costs for, say, cardiologists was way above normal, and reduce our reimbursement. They wouldn't even tell us which doctor was overcharging. We had to pay the bill, but we couldn't do anything about it. It was awful." Since the average primary care doctor refers patients for hospital and specialist treatments costing well over $1 million per year, the stakes are huge. It turned out that most of the specialists working with St. Croix were within normal ranges, but one had been charging the HMO several times the typical rate. At one of their periodic meetings the St. Croix doctors told the specialist to lower his charges or he would get no more business from them.

The $64 trillion question, of course, is whether BHCAG's radical surgery can truly transform managed care in the Twin Cities--or anywhere else. It's not clear how things will turn out. Last year, when patients got price and quality information about their doctors for the first time, few changed doctors. And though Wetzell says results of the latest "voting" are not yet in, he doubts that many patients will change doctors this year, either. "I think it's going to take a few years before it sinks in to people that they can and should make a choice." One of Wetzell's rivals at an HMO across town is less optimistic. Says Susan Flygare, head of national accounts at Blue Cross and Blue Shield of Minnesota: "I don't think there's any evidence that consumer behavior is being changed by BHCAG's price and quality data."

A few patterns in how customers respond to the doctor data have emerged, though. "For most people the price information influences the choice of doctor more than the quality information," says Steve Ogren, a health-care consultant for Deloitte & Touche in Minneapolis. "And obviously people who don't use the health-care system much are very price sensitive." Sicker patients, by contrast, tend to gravitate toward the high-priced medical groups, figuring they will deliver better service. And patients with lots of medical problems are generally reluctant to switch doctors even if there is a cheaper alternative.

Disappointingly, the doctors participating in Choice Plus raised prices, on average, this year. Some groups adjusted their prices and shifted into lower price categories, but overall, rates went up about 10%. Why the drift up in prices? Wetzell says many doctors may not have predicted their costs well the first year or bid low just to begin participating and adjusted prices upward for 1998 when they had a better grip on costs. But Ogren wonders whether some doctors were dismayed to discover that low prices didn't attract as many new customers as they had hoped. "Maybe they just said, 'Sheesh, then let's raise prices.' " Human resource directors at a few big companies think doctors that raised prices will have second thoughts. Says Kemnitz at Carlson: "In the past when the employees' cost of medical care went up, they'd call up and complain to me. Now employees are calling up their doctors and demanding to know why they raised prices. And that's exactly what we hoped would happen."

Will all this effort at reform ever spread to the rest of the country? Health-care experts think it may be slow. Minneapolis is unusual, they say, with a surprisingly large and close-knit collection of FORTUNE 500 companies. The long history of managed care in Minnesota, and the high rate of participation in it by employers, probably adds to their willingness to tinker with the system.

It seems inevitable, though, that as baby-boomers develop an ever-growing collection of aches and ailments, they will demand more economic and quality-of-care information from their doctors and managed-care companies, making medical care a more competitive market. This, after all, is the generation that had to learn the intricacies of investments, Morningstar, and mutual funds--or face financial ruin at retirement. If baby-boomers ever realize they are not immortal, managed care will never be the same.