Updated at 4:45 p.m. on Nov. 24 to reflect continuing legislation.
The public option proposed by some Democrats makes a public health insurance plan available in health insurance exchanges or gateways, alongside private plans, for some uninsured Americans.
The pitch for a so-called "public option" sounds simple enough: The federal government creates a public insurance plan some uninsured citizens can opt for over private insurers. Since the government has more leverage than private industry when negotiating with hospitals and doctors and can get lower rates, the plan would likely be the cheapest option out there.
But the very shape of the public option has become a strong point of contention. The current Senate plan has an “opt-out” provision, where states can choose to exclude themselves from the public option. Sen. Olympia Snow, R-Maine, favors a trigger option instead, that would kick in if premiums rise above a certain level in a state, while Sen. Kent Conrad, D-N.D., would rather see an opt-in public plan. More liberal Democrats would like to see a public option that ties its rates to Medicare, which many believe would keep costs the lowest. However, moderates prefer a plan with rates that are negotiated between providers and executives.
The two biggest questions in the debate over a public option are also the most contentious: How many Americans will sign up and will it lower private insurance premiums for the rest of us?
Proponents of a public option argue that lower prices will create beneficial competition and force private insurers to drop their premiums. The Congressional Budget Office estimates that the public plan would be 10 percent cheaper on average than the private plans in health care exchanges, markets where the uninsured can buy public and private coverage. However, the CBO says it's "unclear" what effect that would have on private premiums. While the CBO says the public option would eventually reduce the deficit in conjunction with other reforms, there are no specific estimates.
The New York-based Commonwealth Fund, meanwhile, argues in a June report that with a public option forcing private carriers to cut costs and improve efficiency, average annual insurance premiums would drop 14 percent from $4,704 to $4,068 in 2010.
Republicans counter that a low-cost public plan with an unfair competitive advantage will drive private insurers out of business, leaving the government running health care for millions of Americans.
And there's a chance, they argue, that private insurance rates would increase. Take, for example, Medicare, which pays providers far less than private insurers for the same services -- 15 to 20 percent lower, according to industry experts. And two-thirds of all hospitals lose money on Medicare, according to Len Nichols, director of the Health Policy Program at the New America Foundation. Hospitals depend on private insurance to cover their losses.
The rate at which a public option reimburses providers becomes critical then. The closer its rates are to Medicare's, the greater the chance that hospitals may jack up prices for private insurance. That in turn could raise private insurance premiums and send more Americans into the arms of the public plan.
Determining just how many Americans will opt for a public option is important too: More Americans on the public plan could mean more downward (or upward) pressure on private premiums. The CBO estimated that the Senate plan's “opt-out” provision would leave one-third of the population without public coverage thanks to some states choosing not to participate.
And what if the public plan is more widely available? Republicans point to an April report by the Lewin Group, a health care policy research firm owned by United Health Care, which predicts that if all Americans are given access to the public option, 119 million of them will flee their private plans to join up. Many Democrats don't necessarily see that as a bad thing, though there is some concern that that scenario could stunt innovation in health care delivery.
The CBO disputes the Lewin estimate, though it adds that "estimating enrollment in the public plan is especially difficult." There are other reasons to doubt the Lewin figure, critics allege.
Excessive caution will prevent many people from immediately leaping to the public option, Nichols argues. "People may very well be wary -- is this Medicaid or not? -- and inertia is a powerful force, and especially powerful when it comes to your health," he said. "People aren't going to switch until it proves over time that it offers the same benefits."
The Lewin Group's estimate also assumes that private insurers won't trim fat and lower premiums to compete with the public option, says Stuart Guterman, who studies payment system reform at the Commonwealth Fund.
"Do you turn with the road or do you just drive straight off the cliff?" he asked. "I think private plans are more flexible than the Lewin Group gives them credit for, and I think they would make the adjustments to help them stay competitive with the public plan."
Of course, trimming the fat may not be enough to compete if hospitals begin charging private plans more to make up for the money it loses from patients covered by the public plan.
The Senate bill sets up an opt-out public option, where states could choose to exclude themselves from the public plan. The House plan, meanwhile, sets up a public option where the government can negotiate rates with providers.