Suddenly, the public option is the Charles de Gaulle of the healthcare debate: resurgent, victorious, beloved by all. I'm not sure I get it.
The only way the public option saves money is by using fiat to slash reimbursement rates to some variation on Medicare reimbursements: Medicare +5%, +10%, or whatever rate they finally settle on. Otherwise, it's unlikely that the thing will even compete on an even basis with private insurers, who have a lot more experience managing billing, claims experience, and negotiations with providers.
The problem is, Medicare doesn't pay the average cost of providing services in many cases--in some cases, it doesn't even pay the marginal cost of providing services. Conservatives frame this as Medicare "free riding" on the private sector, but that's not necessarily correct. The fixed costs of the health care industry are, as the name implies, fixed--they have to be averaged over the entire population of patients. Now, if you think that without Medicare, seniors would consume a lot less healthcare, the population of patients with private insurance would still have to pay for most of those fixed costs. So as long as Medicare patients generate more revenue than the marginal cost of treating one additional patient, they're profitable for the hospital--and probably even lower everyone else's bill a little bit, by at least partially defraying some overhead.
Of course, if you think that in a universe without Medicare, many or most seniors would probably have found a way to consume a bunch of health care, then yes, Medicare is free riding.
But moral calumny aside, the thing about patients whose insurance doesn't cover the average cost of treating them is that they cannot be 100% of your patient pool. Someone has to cover the cost of that MRI machine. If the public option does manage to crowd out other insurance--as it might well do, with the ability to dictate price controls--then suddenly, the public option won't be cheap any more. Hello, fiscal crisis.