John Sheils, a senior vice president with the Lewin Group, a consulting firm known for its health policy analyses, says that the plans Obama and Democratic leaders are developing rely on a single key proposal to contain health costs: a government-run health plan that would compete with private insurers and might dictate prices to health providers.

But the fate of what Democrats call a “public-plan option” is very much in doubt. Private insurers, nearly all Republicans and many conservative Democrats oppose the idea. For a bipartisan health overhaul, Democrats will have to drop the public plan, or at least scale it back to a version that would work much like a private plan. “If you table the public plan or cut it back in a significant way, you really drive the cost containment to zero, or very close to zero, for the under-65 population,” Sheils says. “It’s very frustrating. There’s no plan B.”

Len Nichols, health policy director at the centrist New America Foundation, is not as pessimistic; legislation is still in its early stages of development, and he sees indications that Congress may yet take on costs. “Everybody knows that a comprehensive bill enables you to, in a profound sense, address all the issues,” Nichols says. “Whereas, if you do an incremental bill, you’re going to have more stark winners and losers.”

For many Democrats, however, the cost of a health overhaul isn’t a serious problem, except to the extent it complicates the passage of legislation. Not overhauling the system, they argue, is far more expensive. “The cost of doing nothing is a fiscal trajectory that will lead to a fiscal crisis over time,” Obama’s budget director, Peter R. Orszag , told the Senate Finance Committee on March 10.

Orszag himself believes strongly that Congress should pass an overhaul that reduces the growth of national health spending, which totaled $2.2 trillion in 2007. That was 16.2 percent of gross domestic product, according to the Health and Human Services Department. The sum increases at a rate of 6 percent to 7 percent a year. Inflation, measured by the Consumer Price Index, is significantly lower — 2.8 percent in 2007.

“The administration believes that it would be irresponsible to expand coverage without accompanying changes to reduce health costs, and that it would be shortsighted to reduce costs without expanding coverage to Americans who need it,” Orszag told the committee.

Nibbling Around the Edges

Government Spending: Click here to view chart

One of the reasons the administration so enthusiastically embraced the industry’s May proposal, in fact, was its cost-saving aspects, which White House officials estimate could amount to $2 trillion over 10 years.

But there is no guarantee that the organizations could achieve these promised savings. Republicans, many health policy experts not involved in the discussions, and even some of the providers themselves are skeptical. “There is no way to know what costs would have been in the absence of the promise,” Sheils said. “They will need to establish a good verification process for this to be credible.”

Senate Finance Committee Chairman Max Baucus of Montana has proposed his own package of proposals aimed at reining in health care costs. But they would mostly affect only Medicare and Medicaid, and it is not yet clear if ideas such as paying primary care doctors a bonus at the expense of specialists — to encourage more primary, preventive care — would yield tangible savings.

Obama has proposed $316 billion in health cost savings, but like Baucus’ proposals, they mainly affect Medicare. Obama’s proposals, says Robert Laszewski, president of Health Policy and Strategy Associates, a consulting firm, are “low-hanging fruit,” or obvious, broadly popular cuts, such as a provision that would encourage hospitals to reduce re-admissions of people recently discharged from their care. And Obama’s proposals would cover only a fraction, perhaps a quarter, of the cost of an overhaul.

Obama proposes increasing taxes on wealthy Americans to raise another $318 billion. But raising money to spend more, rather than cutting health care spending, is not likely to be popular in all quarters.

“So many people talk about taking what we’re spending now and spending another trillion dollars,” Laszewski says. “That makes absolutely no sense. Why would you pour another trillion dollars into this mess?”

Too Radical for Many

Wyden’s plan recognizes what some experts say is the brutal reality of health care: nothing short of a complete reorganization of the system could really get at the cost problem. He proposes encouraging people with employer-sponsored insurance into a system in which they would obtain insurance through new state “health help agencies.”

In some respects, these agencies would operate like Massachusetts’ new health agency, the Commonwealth Connector, which helps uninsured people obtain private insurance if they are not eligible for Medicaid.

The value of their employer-provided health benefits, meanwhile, would be converted to cash wages. Employees would pay the full cost of premiums for their insurance, but the government would provide subsidies for low- and middle-income people, and premiums would be tax-deductible. Employers would pay the government a portion of their workers’ premiums.

People covered through Medicaid or the State Children’s Health Insurance Program would also be moved to fully subsidized private plans under Wyden’s bill, though the government would still provide “wraparound” coverage, such as Medicaid’s Early and Periodic Screening, Diagnostic and Treatment services for children.

The cost-cutting magic of Wyden’s plan, the senator and Sheils say, is in its administrative simplification and in its application of market forces to the insurance market. Because employees would be responsible for their premiums, Wyden and Sheils say they would have incentives to shop for lower-cost insurance. And the new Health Help Agencies would make that shopping easy, they say.

These are ideas that historically have been more popular with Republicans than with Democrats. Of Wyden’s 13 Senate cosponsors, five are conservative Republicans — Robert F. Bennett of Utah, who was the first to sign on; Lamar Alexander of Tennessee; Mike Crapo of Idaho; Judd Gregg of New Hampshire; and Lindsey Graham of South Carolina. Arlen Specter of Pennsylvania, who recently joined the Democratic Party, is also a cosponsor, as is independent Joseph I. Lieberman of Connecticut. Debbie Stabenow , D-Mich., is probably Wyden’s most liberal cosponsor.

His plan worries many other Democrats, though, and Congress is highly unlikely to pass it or anything like it. Ron Pollack, executive director of the left-leaning health consumer advocacy group Families USA, commends Wyden for almost single-handedly keeping health reform in the public spotlight through 2007 and 2008, before Obama was elected.

But Pollack says Wyden’s plan is designed “to eliminate or come close to eliminating employer-sponsored insurance and to eliminate the Medicaid program.”

About 210 million people, or two-thirds of the country, are now covered through either employer-sponsored insurance or Medicaid, he notes. “Before you set in motion a process of eliminating or radically reducing that coverage, it’s critically important to know that what will be in its place will be better,” Pollack says. “[T]here no doubt will be unexpected outcomes from such massive change, and in the process some significant number of people will be and certainly will feel to be worse off. So that’s a problem.”

Nichols, who advised Wyden on his bill, says that Wyden’s plan is unpopular in large part because it is a compromise — and therefore it is seen as a bad starting point for legislation.

“It is in many ways an endgame strategy,” Nichols says. “So some people don’t get what they want on both sides of the aisle. So people on both sides didn’t want that to be first. So in a sense, it would have been interesting — obviously, we can’t know now — if he had worked it all out, kept it all secret and unveiled it this summer.”

Wyden says that critics like Pollack make his plan sound more disruptive than it would be. To attempt to mollify them, he added a section to the legislation this year that would guarantee people who like their employer-sponsored insurance could stay in the same plan. “It’s nowhere near as involved as people would like to portray it,” Wyden says.

The Price of Incrementalism

Therein lies the cost conundrum. Meeting the concerns of Pollack and other Democrats would require that any overhaul be less sweeping — incremental reform, as it’s called. And that, Sheils says, will lead to higher costs.

“Comprehensive reforms can reduce health spending while also reducing the federal deficit by targeting those fundamental elements of the system that contribute to inefficiency and uncontrolled cost growth, such as consumer incentives and excessively complex administration,” he wrote in a December analysis. “Incremental reforms that do not address these core problems will not save enough to achieve universal coverage without increasing the federal deficit.”

On April 23, Sheils produced a report demonstrating how Wyden’s plan could be combined with the outlines of a health overhaul that Baucus has proposed. But the combined plan still would look a lot like Wyden’s legislation, with employer health benefits converted to wages and Medicaid reduced to a supplementary program.

Sheils isn’t optimistic that Baucus or any other leading Democrat will seriously consider the proposal. “I think people have just decided they’re going to go the way the leadership goes,” he said.

Wyden’s outlook — publicly, at least — is rosier. He says he will “pull out all the stops” to get his ideas included in whatever overhaul Congress takes up in the coming months. Some kind of significant cost reduction, he says, is vital.

“It’s almost a credibility test for health reform,” he says. “If you don’t have savings, I think it’s very hard to get buy-in from the public for the reform effort.”