As the politicians in Washington debate the wisdom of a "public option" in health insurance, California has a real-life example of how such a program might work. And oddly enough, Democrats here have voted to sell off a portion of our state-owned insurance company while Republicans are trying to preserve it.

That company is known as State Fund, and it sells workers' compensation insurance – the policies that every California employer must carry to pay for medical care and disability benefits for workers who are injured on the job.

Gov. Arnold Schwarzenegger proposed and the Democratic majority in the Legislature passed – over objections from the Republican minority – a measure to sell part of the plan as a way to bail out the state budget. But Insurance Commissioner Steve Poizner, a Republican who is running for governor, called the sale "unconscionable and unconstitutional." He's suing in Sacramento Superior Court to stop it.

Some history: Before the early 1900s, the only remedy for workers injured on the job was a lawsuit. That didn't work, either for employers or workers.

As in other states, the California Legislature in 1913 created a no-fault workers' compensation system. It mandates that all employers carry insurance to cover workers who are injured or become ill at work. As part of that, California established a public option, the State Compensation Insurance Fund (known as "State Fund"). It's a nonprofit overseen by a board appointed by the governor and Legislature and operated by 8,000 state employees.

As a nonprofit, the public option provides insurance to employers at cost. The money to pay the medical care and lost wages of injured workers comes exclusively from employer premiums and investment revenue. No money comes from the public purse.

This public option plays a key role in the market, particularly for small businesses, start-up ventures and high-hazard businesses, such as construction and agriculture. As Poizner said Friday, many of these are businesses that "simply cannot get workers' compensation insurance in the private market." For these businesses, State Fund plays a role as an "insurer of last resort."

It also is a long-term, reliable source of insurance in a market that can be volatile – especially during economic downturns. For example, in 1935 at the height of the Great Depression, 18 private workers' compensation insurance carriers went under and didn't pay claims. State Fund paid benefits in a timely fashion.

More recently, 28 private carriers went under or fled the market between 2001 and 2004, and rates skyrocketed. Many employers saw their premiums double or triple. State Fund provided a stable and affordable option at a time when market conditions had worsened.

Historically, State Fund has insured an average of 23 percent of the work force since its creation. In crises, however, it is a key safety net. For example, State Fund's market share spiked to 58 percent during the 2001-04 crisis. That dropped back to the norm of 23 percent last year.

As Poizner points out, State Fund "has created healthy competition" between public and private options, resulting in choices for businesses at lower cost. Today, about 200,000 California employers get workers' compensation insurance through State Fund.

State Fund is not without flaws. It had to clean house after two former board members and two former executives resigned over conflict-of-interest allegations in 2006 and 2007. And the company has sometimes been late in paying benefits.

But through the years, the company has served its purpose as an insurer of last resort that keeps the private market honest.

It's worth examining as a potential model for a state or national public option in health care.