Would any public plan really force insurance companies out of business? Would it burden the government with significant new financial obligations? Is "public plan" really just a cover phrase for "single payer in 10 years?" This is a complex debate, but Congress is certainly capable of crafting a public plan that doesn't compete very well in the marketplace. Indeed, health reform advocates can make the case that a weaker public plan might be preferable to a stronger one. That sounds counterintuitive, but it's not. One reason why the Democrats refer to a government-run option as a "public plan" is that it's more easily swallowed that calling it a "government plan." That's the first knock against it. Advantage: private insurance. Then you've got to have faith that the Democrats can design a plan that would be attractive to people. Maybe they will. But if they're keen on putting the plan under the supervision of, say, a bipartisan team of well-meaning health care experts, they might produce a clunker. The private health insurers have advertisers and marketers and decades of experience selling their plans; the government has no comparable experience, and an expert-run plan might not be salable enough. Potential advantage: private insurance. Three: will a government plan require doctors to participate? That's the big concern of the American Medical Association. Let's assume that it won't. That means that, so far as one's choice of doctors is a value, you're likely to decide to perhaps pay a little more to preserve that choice. Potential advantage: private health insurers.
Four: the primary public policy rationale for a public plan is that it would foster competition because the government could use its size and purchasing power to negotiate agreements with providers and drug companies. Medicare can do this to a degree, but the public plan won't be Medicare. And if it's not initially subsidized, if it doesn't quickly grow, it won't have the same leverage, assuming that it really does remain revenue neutral -- that is, assuming that it's paid for out of the premiums and fees of its members. Five: let's assume that the government option is able to provide roughly the same level of care and benefits at a lower cost to employers and individuals. It doesn't necessarily follow that employers won't (a) try to get the insurance providers they like to give them a better deal, that (b) the company's existing relationship with the insurance company has no intrinsic value, that (c) the companies, particularly if they are small, want to deal with the federal government on a daily basis regarding insurance, and that (d) the government will easily replicate the (supposed) Medicare overhead premium with a relatively healthier, younger pool of insured people.
I suppose I should make a self-exonerating flip here: it is more likely than not that a well-designed public option, even if it starts off fairly small, will evolve into a source of competitive pressure. And insurance companies will undoubtedly face significant pressure to reduce costs. It's just that there are plenty of uncertainties and unexplored assumptions that will determine whether it forces the insurance companies to consolidate, or to lose business.