THE White House conference earlier this month on mental illness highlighted the Administration's campaign, led by Tipper Gore, to achieve ''parity for all'' -- requiring health insurers to provide the same coverage for mental illness that they provide for physical illness. Bills in Congress would do the same.

The call for parity raises two questions. Is coverage of mental health the same as that of physical health? And who should decide?

Almost all employer-based policies impose higher co-payments and other stricter limits on coverage of mental illness. Critics often blame bias -- an irrational stigma attached to mental problems -- or ignorance, misjudging the plight of the ''worried well'' or glibly dismissing the value of ''taking cures.''

Bias and ignorance are only a small part of the story. A new study by Richard G. Frank of Harvard University and Thomas G. McGuire of Boston University shows that powerful economic forces compel plans to discriminate between physical and mental health. Congress may still want to proceed. But markets will counteract parity in ways that advocates will almost surely not like.

About 30 percent of Americans experience some diagnosable mental disorder in a typical year. Only about 25 percent of them receive treatment. About 4 percent of the population suffers in any year from the most severe problems: schizophrenia, manic depression and major depression. But only between 30 and 55 percent of them receive treatment. Given the yawning need, why don't employers offer parity?

The Frank-McGuire study offers two economic reasons. First, adverse selection. A plan that offers generous coverage of mental health would attracts people with expensive mental health problems. In health care, a few patients always account for a large fraction of expenditures. The disparity is exaggerated for mental health, where 5 percent of such patients may account for 30 percent or more of costs. So a plan whose lavish benefits attract the sickest mentally ill people invites bankruptcy.

One way to diminish adverse selection is for government to impose parity. That way, plans could not easily tailor their benefits to push the chronically mentally ill onto other insurers. But health plans that offer equal physical and mental benefits would butt up against a second insurance problem, moral hazard: changes in behavior that are caused by the presence of insurance.

People with health insurance buy more medical treatments than do the uninsured. But studies of patients in fee-for-service plans show that the impact of insurance on demand for treatment was twice as large for treatment of mental problems as for physical problems, Mr. McGuire said in a recent interview. Part of the reason can be traced to the fact that nonsevere forms of mental illness are hard to diagnose and leave therapists wide discretion over course of treatment. He concludes that some of the insurance-induced demand is for mental health services that patients did not deem very valuable when asked to pay themselves.

Here's a sobering estimate: about 12 percent of the population with no diagnosable mental disorders receive treatment and account for nearly a third of all visits for mental health. If parity drives up mental health costs and premiums, the danger is that more employers will drop coverage and more workers will turn it down because it will have become too expensive.

The Frank-McGuire study, then, decisively concludes that coverage of mental health is different from that of physical health. So should insurance coverage treat the two types of patients differently? Mr. Frank and Mr. McGuire used to think so, at least for patients with nonsevere mental problems.

But they have changed their minds, for a reason advocates will find upsetting. The difference between then and now, they say, is the explosive rise of managed care. Under managed care, contractual niceties, like co-payments, deductibles and lifetime limits lose their importance because every expenditure, regardless of contractual obligations, is subject to second-guessing. So managed care has all the tools it needs to control costs even if Congress requires parity.

''Parity,'' Mr. Frank said, ''is affordable only because managed care exists.'' But making parity work by driving patients into the scrupulous oversight of managed care is probably not what many of its advocates have in mind.

There are grounds for government to dictate the list of benefits that every private plan offers as one way to dull their ability to tailor benefits to drive away the chronically ill. But the prospect of legislators selling priority of place to medical specialities bearing campaign gifts is hardly inspiring. Perhaps a better idea would to turn the task over to a blue ribbon panel that would hand its recommendations over to legislatures for an up and down vote without amendment. That would put politicians in charge, but mute the craven features of the current system.

Drawing (Niculae Asciu)