WASHINGTON–Congress has begun drafting legislation designed to reform the U.S. healthcare delivery system, an initiative that could dramatically reshape the nation’s health insurance industry.

It is a debate radically altered June 2 by the decision of President Barack Obama to outline certain principles he insists should be included in the bill–most controversially a so-called “public option.”

As envisioned by the president’s liberal supporters, including Sen. Edward Kennedy, D-Mass., such a system would be government-run. It is being promoted as a means of ensuring competition and therefore lowering rates for customers.

In comments to Democratic senators at a White House meeting June 2, Obama said that it was important to include a public plan option and that such a plan could help control health costs.

Several senators who attended the meeting said the president “spoke very enthusiastically about a public plan” that would compete directly with private insurers.

But it has generated intense opposition both from the industry and from Republicans in Congress.

For example, in a response to the President’s call for the public option, all but one of the Republican members of the Senate Finance Committee sent a letter June 5 to the President calling a public option requirement a “divisive issue” that would stand in the way of enacting a bill with bipartisan support.

“At a time when major government programs like Medicare and Medicaid are already on a path to fiscal insolvency, creating a brand-new government program will not only worsen our long term financial outlook but also negatively impact American families who enjoy the private coverage of their choice,” the letter said.

The letter contended that “Washington-run programs undermine market-based competition through their ability to impose price controls and shift costs to other purchasers.”

Requiring private plans to compete with government-run programs “would create an unlevel playing field and inevitably doom competition,” the letter also said.

Speaking for America’s Health Insurance Plans, spokesman Robert Zirkelbach says reform is needed, citing the estimated 47 million Americans who don’t currently have healthcare coverage.

But he notes the concessions the industry is already making to facilitate universal coverage and says that adding a public plan would be counterproductive.

The industry has proposed guaranteed coverage for pre-existing conditions and phasing out the practice of varying premiums based on a person’s health status, he noted.

But to make that work, he says, there needs to be a personal coverage requirement to get everyone into the health care system.

AHIP shares the concerns that providers and employers have raised about the potential impact a government-run plan would have on the U.S. health care system, he explains. He notes that Medicare and Medicaid currently underpay providers for services and that those costs get passed through the health care system, requiring employers and consumers to pay higher premiums.

Zirkelbach contends that “a government run plan would exacerbate this cost-shift,” citing data that as many as 119 million people would move from the private system to a government-run plan and “effectively end the employer-based health care system as we know it today.”

Moreover, he said, a government-run plan “would turn back the clock on innovative programs to improve patient care.”

AHIP believes “we need a uniquely American solution to health care reform that builds on what is working in the current health care system,” he said. “Health plans are committed to this goal and will continue to do our part to achieve quality, affordable, and portable coverage for every American.”

At the same time, key players in the debate, as well as analysts, are cautioning that exactly what a public plan would entail has not been clarified.

For example, in voicing support for the public plan in the wake of President Obama’s comments, Sen. Max Baucus, D-Mont., chairman of the Finance Committee, was unclear about the details of reform.

Baucus is considering a public plan option as part of the final legislation, his office said last week.

“However, right now the specifics of a public option are still largely undetermined,” his office stated.

Ira Loss, a healthcare securities analyst at Washington Analysis Corp., added that “Obama has been in favor of a public option since the campaign; that is not new. But he has not defined it; no one has.”

Moreover, “his letter to Congress indicates that healthcare reform is clearly a priority,” Loss said. “But it does not close off any options for Congress to come up with bipartisan legislation.”

The Senate Finance Committee and the Senate Health, Education, Labor and Pension Committee plan to begin drafting legislation soon.

Representatives of the two committees will then meet to meld the two plans before Congress leaves for a short July 4 recess.

In the House, the Energy and Commerce Committee, the Education and Labor Committee and the Ways and Means Committee are drafting plans that will be joined in a comprehensive plan, also hopefully before the July 4 recess.

That would set the stage for action in each house before the month-long summer recess begins in early August, setting the stage for reconciliation of the different bills when Congress returns to work in September.

According to industry officials, the House, dominated by the Democrats, is not looking for a bipartisan plan. In fact, conservative Democrats are already criticizing inclusion of a public plan that is certain to be part of a final House bill.

These so-called “blue dog” Democrats argue that a public plan should be used only as a fallback option, as suggested by Sen. Charles Schumer, D-N.Y., and a possible compromise with the Senate, only if changes in the insurance market do not produce affordable, accessible coverage.

The growing debate includes the agents and brokers who are a core part of the health care insurance industry.

The issue is of such importance that organizations representing the entire agents’ industry, property-casualty as well as life and health, plan to send representatives to Washington July 15 to help assure that they will have an important role in any reformed system enacted into law.

These groups include the Health and Employee Benefits unit of the Association of Health Insurance Advisors and the National Association of Insurance and Financial Advisors as well as NAIFA itself, the Council of Insurance Agents & Brokers, the Independent Insurance Agents & Brokers of America, and the National Association of Health Underwriters.