Medlantic Healthcare Group, Washington's largest hospital system, is moving into the health insurance business.

Medlantic officials said yesterday they have agreed to buy a 20 percent interest in Network Health Plan, a health maintenance organization with annual revenue exceeding $20 million and 37,000 members in the District and Northern Virginia. They declined to disclose the price, but sources said it was about $2.5 million.

The other 80 percent of the plan will be retained by Partners National Health Plans, a joint venture between Aetna Life Insurance Co. and the Voluntary Hospitals of America, a national group of not-for-profit hospitals. Medlantic also obtained an option to buy a majority stake in Network. Partners recently purchased the entire Network plan from the National Hospital for Orthopedics and Rehabilitation in Arlington for a reported $12 million.

The Medlantic move marks its entry into an industry that many other hospitals have tried in recent years, often with little success. In the Washington area, the Fairfax Hospital System owns 10 percent of Physicians Care, another health plan, while George Washington University Health Plan has long been affiliated with the university's hospital.

As prepaid health plans such as Network have grown in popularity, hospitals have hoped to buy into them and steer patients to their facilities, many of which have been losing patients in recent years. But more often than not, they have found the health insurance business hotly competitive and, in some cases, a money-losing proposition.

For Medlantic -- parent of the Washington Hospital Center, three other local hospitals and a number of affiliated health facilities -- buying a stake in Network represents a relatively risk-free way of getting into the business, according to area health care observers.

Medlantic, formerly known as Washington Healthcare Corp., was thwarted two years ago when it sought to buy another health plan -- MD-IPA of Rockville -- and has since spent hundreds of thousands of dollars to develop its own HMO.

The nonprofit firm will now shelve internal development of its own HMO and throw its efforts into helping develop Network. Under terms of the deal, Medlantic will have the option to buy up to 80 percent of Network in five years, an option it could exercise if the plan succeeds in attracting more patients and revenues.

Medlantic and Network officials are also negotiating with Aetna Life Insurance Co. about the possible acquisition of Aetna Choice, another area health maintenance organization with almost 20,000 members. This could then be folded into the Network operation, officials said.

"This gets us into the market in a very rapid way, much faster than you would with your own start-up HMO," said John Green, Medlantic's executive vice president. "It {also} reduces our financial risk."

Green said a major factor in Medlantic's decision to abandon its own HMO was the turmoil many other prepaid plans have experienced in the past year as competition heats up. "We've had some concerns -- I'll be very honest about that," Green said. "We were very cautious."

Although Network has been losing money since it was founded in 1983, it is close to breaking even and has shown strong membership growth recently, said Dr. Robert Rosenberg, Partners' senior vice president.

Area HMO experts said that one of the principal attractions of Network is that it offers instant entry into the tough Northern Virginia market, where the plan has most of its patients and doctors. They said doctors and hospitals there have been hostile to HMOs -- which often seek to cut costs by seeking to limit use of health facilities and limit reimbursement for health care providers.

"What Medlantic really wants is access to patients," said one area HMO executive. "They see this as a real opportunity for them. It would have been difficult for them to go into Virginia otherwise."