There is an encouraging – perhaps surprising – amount of agreement that health care in the United States must be reformed now. Key players in the debate, from Wal-Mart executives to labor union leaders, agree that reform should expand affordable health coverage to all, that no one should be denied insurance, and that government, employers and individuals should all share responsibility for funding health care.

Democrats and Republicans alike envision a new health-insurance marketplace for Americans who don't have coverage through their employer. However, an increasingly pitched argument about the choices consumers will have in this market threatens this harmony.

At issue is whether consumers should have the choice of a "public" insurance plan that competes with private insurance. Each side of the debate has already drawn its line in the sand. One side says all people must have access to a public program like Medicare; the other side says this would amount to "socialized medicine." Republican Sen. Charles Grassley of Iowa said recently that allowing consumers to pick a public insurance plan "is a deal-breaker for Republicans if it's in, and it's a deal-breaker for Democrats if it's not." The choice, however, is not so stark. There is another option that the country should consider.

Why have the choice of a public insurance plan?

If private health insurers can be found in the phonebook, why should the government be in this business? Well, we used to think of health care reform as a 45 million-person problem, which was the number of uninsured in the United States, a number that rises daily as hundreds of thousands of people continue to lose their jobs. But it's becoming increasingly obvious that it is a 300 million-person problem, one that touches all of us. Even those of us who have never had serious frustrations with our health care system know family members or close friends who have lost or have been denied coverage.

This broken system is centered on employer-based insurance coverage. Large employers have begun to feel financial strain under the spiraling cost of health care, but it is the small-business owners and entrepreneurs who are in the toughest spot. Since small-business owners have little bargaining leverage, they often face a difficult choice: provide health insurance that imposes extremely high out-of-pocket costs on their workers or simply provide no coverage at all.

Private insurance companies claim they can solve these problems without additional government involvement. Their trade association, America's Health Insurance Plans, has placed a bold offer on the table to end the practice of "risk rating," or varying premiums based on people's health status. But if they are conducting their business efficiently, they will have nothing to fear from a publicly run competitor – if the playing field is level.

Creating a public plan modeled on Medicare, though, does not represent fair competition. Why? Private plans negotiate rates with doctors and hospitals. Medicare does not. Its prices are set by Congress on the recommendation of a panel of experts. Advocates of a Medicare-type public insurance plan contend that the government would not use this ability to control prices to drive its private competitors out of business. However, both the political pressures and the financial incentives for it to do so would be irresistible.

Making the playing field level

But there is another way. A Medicare-type plan or no public plan at all is a false choice. Health care reform could offer Americans a choice of a public insurance plan that competes fairly with private plans.

In basic terms, this fair competition would have three critical ground rules: equality under the law, self-sufficiency and free choice. Equality under the law means that all regulations apply equally to all plans, public and private. Self-sufficiency means that all plans cover their own costs. Free choice means that those who cannot afford insurance will be given government subsidies to choose either a public or private insurance plan.

Micah Weinberg is a senior research fellow in the California Program of the New America Foundation. Contact him at weinberg@newamerica.net.