An article in Monday's Washington Business section incorrectly said MD-IPA is the largest prepayment health program in the Washington area. It is the largest independent practice association.

As recently as five years ago, one out of every two federal workers got their health benefits through Blue Cross and Blue Shield. Television and radio ads for health insurance were rare, and the phrase "HMO" was unheard of in government lingo.

The scene is different today, however, as a result of the explosive changes transforming the health insurance and delivery business.

There are 340 different health plans in the government's 1986 insurance program, compared with less than 50 a decade ago.

Depending on where an employe lives, that effectively means he or she has a choice of several dozen plans, ranging from traditional fee-for-service options to a variety of prepaid health plans, popularly known as health maintenance organizations (HMOs).

No longer do the "Blues" command instant enrollment at the drop of their name. Rising inflation and health costs have spawned a host of alternative health insurance plans for consumers to choose from.

Among the principal beneficiaries of this transformation are the 10 million workers and dependents, many in the Washington area, who are covered by the federal government's health plan.

"The federal consumer now has such an array of choices to choose from that he can marshal his plan to his overall objectives," said Gino Nalli, president of MD-IPA, the largest prepayment program in the Washington area.

"As those objectives change, he can change carriers," Nalli said.

"The competition for new members is so stiff that nobody is taking it for granted that they can casually inflate their prices," he added.

Federal employes are now getting their annual taste of this competition during the open enrollment period that began a week ago and continues through Dec. 6.

During this time, nearly 4 million federal workers are supposed to choose their health insurance programs for the following year, and, if past years are any indication, several hundred thousand will, in fact, switch carriers.

This latitude is the result of the 1960 law setting up the federal employe health benefits program.

The program consists of two nationwide plans -- Blue Cross and Aetna -- about a dozen employe-organization plans open to all federal employes, additional plans available to employes of specific agencies, such as the FBI, and prepayment plans available in some geographic locations.

The government each year negotiates the rates and benefits offered by each plan and agrees to contribute up to the equivalent of 60 percent of the average premium charged by six representative plans.

The rest is up to the worker, who -- with the help of a barrage of advertising attention -- ultimately makes the final choice. Blue Cross Dominated for Years

Though the system seems ready-made for competition, industry executives say that in practice the plan was virtually monopolized by Blue Cross for much of its early years.

With inflation low and cost-containment on the back burner, people rarely thought of many other options, said James J. Lapenta, the executive director of the Mail Handlers Association health benefits plan, one of the largest of the employe-organization programs.

Even as late as 1979, roughly half of the government's eligible workers were covered by traditional insurance programs offered by Blue Cross, which essentially pay for a specified percentage of medical bills, no matter where they are incurred.

The rising inflation and hospital costs of the late 1970s changed all that, according to Lapenta and others involved with the health-care plan.

Keeping down hospital costs is the idea behind HMOs, which have been around in various forms since the 1930s.

For a fixed fee, a family that enrolls in such a program is provided with all its medical care -- from pediatric checkups to dental care to surgery in the hospital.

The idea, however, is to provide as much care as possible outside of hospitals, where the real costs of medical care pile up.

The idea flourished, particularly in the government employe market, where HMOs of all types cropped up.

In 1979, federal workers had 86 total plans to choose from; five years later the figure had doubled, largely on the strength of the proliferation of prepaid health plan options.

This year, some 80 new HMOs will be offering their services to federal employes, and officials with the Office of Personnel Management, which administers the health benefits program, expect a comparable number next year.

The actual percentage of federal employes enrolled in HMOs is also growing, although not as rapidly.

This year roughly 580,000 employes (not including dependents) were members of such programs, or 15.6 percent of the total, according to government statistics.

That compares with 14.1 percent in 1984 and 12.3 percent the year before. Much of this growth has come at the expense of Blue Cross, which, while still the largest program, has been losing members. Blue Cross Plan Losing Members

This year, the carrier enrolled some 1.4 million workers in its traditional plans, compared with more than 1.8 million six years ago.

But even the kind of growth enjoyed by the HMOs in the government sector, a little over 11 percent in 1984, is nothing like the popularity HMOs have enjoyed in the private market, according to William R. Boyles, a health industry analyst.

Boyles, publisher of the newsletter Health Market Survey, said that, as of June 30, some 19 million people nationwide were enrolled in HMOs, and the figure is expanding at a 26 percent annual growth rate.

Boyles predicted the federal market will become comparatively less important for the HMO industry, which he says will see greater potential for profits in more normal corporate settings. Traditional Lines Are Blurring

In both the government and private sectors, though, analysts and industry executives say the lines are blurring between HMOs and more traditional fee-for-service carriers, which are themselves stepping up their involvement in the HMO business.

James N. Gillman, a vice president at Blue Cross and Blue Shield, said the carrier ran some three dozen HMOs as part of the federal program in 1985, in addition to its traditional plans.

A new Blue Cross program, CapitalCare, has been organized this year to meet the stiff competition posed by HMOs in the metropolitan area.

Even in the traditional lines, insurance programs are increasingly relying on the kind of cost-containment techniques popularized by the HMOs.

Cost containment entails a whole range of steps designed to keep patients out of the hospital, including offering hospice care for terminally ill patients, increasing outpatient surgery, and requiring second opinions before allowing members into the hospital.

Marsha L. McQuillen, who runs the health benefits plan for the National Association of Government Employes, said carriers ignore such features at their own risk: "Your expenses will be high, your rates will be high, and you'll be shot out of the ballpark."

Generally, the kind of competition engendered by the federal plan is all to the good of consumers, according to the federal officials who run the program.

"It is an enormous advantage to be able to reassess your health needs every year," said Jean M. Barber, an administrator with the Office of Personnel Management.

If in a given year a worker believes his or her family will require extra hospital care, the employe can select a more expensive plan with greater benefits -- and then turn to a less expensive option the following year.

This latitude to jump around has drawbacks.

Executives say that some carriers involved in the federal program have to charge higher rates on the whole because they have to take into account the risks of what is known in the trade as "adverse selection."

That is, some face the risk that they will have to shell out large sums to pay the bills of sick workers who seek them out in one year -- only to take their premium dollars away in the next.

On the whole, however, federal and insurance industry officials said they believe the fierce competition helps drive down the cost of premiums.

This year, OPM's Barber anticipates that the average share of premium costs borne by employes will drop by about 7 percent in 1986, compared with a fall of about 6 percent this year, the first decline after years of average premium increases. Reserves Lead to Lower Rates

A lot of the decline has to do with a hotly disputed decision by the government to require the traditional carriers this year to draw down almost all their reserves.

These reserves had built up over the past several years because of the slowing inflation rate and an unanticipated low level of health costs.

The dramatic use of these reserves is allowing carriers to reduce their rates, but officials with some programs say the decline is illusory, and they expect sharp rate increases the following year.

Federal officials say it is too early to tell what next year will look like, but they remain confident that the tight market will continue to reap benefits for workers.

Indeed, the main thing they seem to worry about is how their employes can keep pace with the dizzying array of information thrown at them yearly by the carriers.

Said Barber: "It's work to take advantage of all the riches you have here."