The inclusion of a strong public insurance option has become, for most observers I know, the single most recognizable marker for victory. If the public plan exists, liberals have won. If it's eliminated, or neutered, then conservatives have triumphed.
Of course, as an economic issue, this is totally irrelevant. The economic issue is that some people need subsidies to get health insurance. especially to get the sort of insulation that we call health insurance. Some people need subsidies because they are poor. Others need subsidies because they are obviously high risk. You can give subsidies in the form of vouchers. You could subsidize poor people with vouchers based on income. You could subsidize high-risk people with vouchers for pre-existing conditions. A public plan is one vehicle for providing a subsidy, but it is by no means the only vehicle.
The purpose of the public health insurance plan is political. The idea is to drive away Republican support by threatening the private health insurance industry. As I explain in the beginning of my Cato talk (short video excerpt, whole thing), the real issue is health care costs, driven by over-use of services with high costs and low benefits.
Getting people to reduce their use of medical services is the spinach of health care reform. Expanding insurance coverage is the dessert. The Democrats want to enact dessert now, and worry about spinach later. For the dessert part, they want no Republicans involved. Down the road, when they are ready to tackle the spinach part, they will press for bipartisan cooperation and statesmanship from Republicans.
My suggestion in the talk is that the Republicans not fall on their swords to defend private health insurance. Yes, many people like their insurance. But many of us hate the claims process. In our household, the phrase "going postal" has been replaced by "going health insurance." My guess is that sticking up for private health insurance is a political loser. Moreover, real health care reform would require radical innovation in health insurance, so it is counterproductive to try to entrench for the existing system.
If I were a Republican, I would support a public health insurance plan that provides real health insurance. That is, it would have low premiums, but extremely high deductibles and co-payments--beyond anything we see today. People on the plan would, on average, pay more than 50 percent of their health expenses out of pocket. Only people at the very high end of expenses would get insurance payments. Even their co-oayments would not drop to zero.
There are various reasons why such plans do not exist today. Many of these reasons are regulatory. I am not sure how such a plan would fare in a free market. But that is the kind of public plan I could get behind.