Erza Klein’s attempt to rebut Jane’s post about the importance of the Public Option is disappointing, because he restates points that are not in dispute, ignores the points that are and seems in denial about the politics of what he’s saying.

In addition, Klein reveals a serious confusion over the functions and properties of his favored "exchanges" compared to those of the Public Plan and regulation. I address that in Part II.

First, there is no disagreement that the current bills severely limit access to the Public Option by (1) separating it from the rest of the market by placing it inside an "exchange," and (2) limiting access to the exchange(s) in the initial years. I warned about the limitations of the "firewall" against open access in several posts. Thus, if the issue were only whether the Public Option can have a large or small effect — as measured by the number of people eligible to use it during the initial years — there’s no disagreement.

For the Public Option (PO) to become a transformative concept, we need to expand access to it, if not in it’s first year, then soon thereafter. I’ve argued repeatedly for the principle of "open access" to the PO for all individuals and businesses — even make the PO one of the options a business could choose in providing insurance to its employees through work. In other words, don’t artificially separate the markets in the employer-based segment and the exchange-based segment — and I’ve pointed out how that "Enron-type" "market separation" creates opportunities for gaming and cost shifting.

But I’ve also noted that given the current bills’ framework, expanded access would mean more subsidies and thus require more federal revenues and/or employer contributions. Again, I don’t think anyone disagrees that’s what we’d have to confront.

The dispute is about the more generic claim that a Public Option is not that important as a concept, which is how Klein’s earlier post came across. Since many of today’s horror stories about America’s health care system arise from the current for-profit private insurance structure, it’s extremely important to challenge that system with an alternative not subject to the current system’s flaws.

In the absence of a single payer system, providing a strong Public Option that can play that transformative role becomes a necessary (though not sufficient) condition for effective reform. This is the point Klein failed to address in either his earlier post or in his response to Jane. Why not?

Nor is there dispute that some of the worst offenses of the current insurance system could/would be addressed by regulation. The various bills would outlaw or mitigate some practices like denials for previous condition, rescission, and various types of discrimination.

I do not agree, however, that statutory/regulatory prohibitions are sufficient — my 30+ years dealing with a regulated industry, including 20 years as a regulatory attorney taught me otherwise. I believe the presence of a viable alternative, the Public Option, would reenforce the incentives the private insurers have to comply with the rules. If they found ways to evade the rules and abuse their customers (or providers) they could lose market share to the Public Option, enhancing its importance in making the rules effective.

I assume there is agreement that cost-efficiency measures within the provider networks are also essential. The Public Option is about insurance, not health care practices or provider costs directly. Nevertheless, it seems logical to hope a well-designed Public Option could exert positive influence on how the providers dealt with cost-efficiency issues. I don’t know how strong that influence would be, but it seems reasonable to expect the Public Option’s ability to negotiate terms of payments and acceptance within the Public Option’s provider network could affect those issues. I would also expect, but have no way to prove, that the Public Option would do a better job on that score than the private insurers. If it did not, it probably wouldn’t survive.

In sum, the Public Option would bring competitive pressure to bear on the private insurers’ rates, practices, and relationships with providers — all of which mean that the PO could, if allowed to expand, become a central part of the reform effort. Again, we agree that until/unless eligibility were expanded, these effects would be limited. But it is important to get the institution established, to show that it works and then push to have the expansion occur as rapidly as feasible.

As to the politics, the PO’s existence is being threatened at this critical moment. The threats are coming not from policy wonks but rather from the very industry it would challenge and the elected officials to whom the industry has been so generous. Reforming this industry, and failing that, replacing it, is a large part of what the reform effort should be about. If Ezra is right, and the PO is just not very important even if access were expanded, then the industry’s opposition would be silly.

But these are not silly people; they are deadly serious. The industry knows how central the PO is to their future profitability and perhaps, to their long-run survival as the exclusive middlemen through whom trillions of dollars will pass. We should be putting unrelenting pressure on that industry to shape up or be replaced.

The PO can become a transformative concept, once it’s put in place and allowed to expand. That’s why getting a viable concept in the final bill is so critical. The industry and its supporters know this, which is why they’re fighting it every step. I’m surprised Klein doesn’t see that, but his obtuseness on this topic is not helpful.

More from Krugman, Healthcare Realities, about why there’s no competitive market in health care.