A Lewin Group study estimates that 119 million Americans would trade their private health insurance for a public option if reimbursement rates are similar to Medicare. The figure amounts to 70% of 171.6 million people with non-group or private employer coverage.

Families on average would save about $2,500 a year and, thus, flock to a public plan in droves, observes John Sheils, the Falls Church, Va.-based firm’s vice president.

James Klein, president of health care reform for the American Benefits Council in Washington, D.C., doubts that a level playing field is possible for employer plans if a public plan is subject to a different set of rules governing taxable income and physician rates. The chief concern is that such an arrangement would exacerbate the cost shift to private payers, which has occurred with Medicare.

“How can the government be both the referee and player on the field at the same time?” he asks rhetorically. America’s Health Insurance Plans and the Blue Cross Blue Shield Association blasted the public plan option in a recent letter to senators.

One clear conceptual problem is that many public health plan advocates are stressing the need to base any action on current insurance market flaws when Klein says even the insurance industry acknowledges a need for massive reforms.

His larger point is that there’s no need to reinvent the wheel when all lawmakers need to do is simply reform the current system. Those steps include enacting consumer protections to eliminate pre-existing condition exclusions and medical underwriting, as well as champion guaranteed issue and renewability.

President Barack Obama recently told reporters at a White House news conference “if private insurers say that the marketplace provides the best quality health care ... then why is it that the government, which they say can’t run anything, suddenly is going to drive them out of business?”

Although his senior adviser David Axelrod has indicated that the commander in chief isn’t likely to abandon his call for a public insurance option, White House Chief of Staff Rahm Emanuel is hoping for bipartisan support on the health care reform issue.

An olive branch has been offered by Sen. Kent Conrad (D-N.D.) who proposed an alternative that would establish private, nonprofit cooperatives that enable individuals and small businesses to pool their resources for affordable health insurance coverage.

Meantime, conflict is brewing over how providers would be paid in a public plan. Hospital rates under Medicare are about 68% of what private plans pay for the same service, while physician payments are about 81%, Sheils notes. He says the income of physicians in hospitals, who typically can’t afford to turn away Medicare patients, could fall anywhere between $16,000 and $45,000 a year under various proposals.

Lawmakers are considering paying physicians at the Medicare rate, plus an additional 10%, though Sen. Charles Schumer (D-N.Y.) has called for parity in any such rate structure – a scenario under which the Lewin Group predicts only up to 12 million people would move to a public plan.

Guest blogger Bruce Shutan is a former managing editor of Employee Benefit News and a freelance writer based in Los Angeles.