What it is:
The public option refers to a portion of Obamacare that would have created a Medicare-like policy that most U.S. residents could purchase as an alternative to purchasing policies from private health insurers. The public option was eventually left out of the health care legislation after various parties objected to it.
How it works (Example):
The public option would have operated much like Medicare, whereby people under age 65 could buy health insurance from the federal government. The federal government, under these plans, would dictate or negotiate what they would pay to health care providers.
There was some question about whether medical providers would have been forced to participate (and therefore forced to work for less money even when private insurers would have paid them more). Additionally, the premiums for the public option plans would likely have been artificially lower than the market rates offered by private insurers, raising antitrust issues, though at least one version of the legislation involved charging premiums that were higher than the premiums offered by private insurers.
Why it Matters:
The theory behind the public option was that it would lower the cost of single-payer system, in which would provide coverage to all via the government, driving private insurance largely out of business.by introducing competitive pressure on insurers and thus allow more people to purchase coverage. The idea was introduced into the legislative reform process as an alternative to a