(For full coverage of U.S. healthcare reform, click [nN20512341])
* Reid to include government-run plan in healthcare bill
* Public option would allow states to choose to opt out
* Republican Snowe not on board but White House pleased
By John Whitesides and Donna Smith
WASHINGTON, Oct 26 (Reuters) - Democratic leader Harry Reid said on Monday the U.S. Senate's healthcare overhaul will include a government-run insurance plan that lets states opt out, handing liberals an early victory on the bill's most contentious issue.
After days of closed-door talks, Reid said he would include the "public" insurance option in a healthcare reform bill headed to the Senate floor for debate because it was the best way to lower costs and create competition.
"I believe there's a strong consensus to move forward in this direction," he told reporters, declining to say if he had commitments for the 60 Senate votes needed to pass a healthcare bill including the public option.
Reid's compromise decision was praised by many fellow Democrats but condemned by Republicans and the health insurance industry, whose stock prices fell out of apparent concern about the prospect of competition from the government-run plan.
The White House said President Barack Obama was "pleased" that a public option was included in the bill.
The option has become a flashpoint in the raging debate over Obama's top domestic priority -- a bill that reins in healthcare costs, expands coverage to millions of uninsured people and bars insurers from denying coverage for pre-existing conditions or dropping coverage for the sick.
Reid said he would send the bill to congressional budget analysts for a cost estimate and begin Senate debate on it as soon as they report their findings, perhaps next week.
Democratic leaders in the House of Representatives are nearing the end of a similar process to meld three pending bills into one. Each House bill includes a public insurance plan but members are negotiating which version to use.
Obama and liberals support the government-run plan as a way to boost competition in the insurance market but critics call it a government takeover that would hurt private companies.
About a dozen moderate Democrats in the Senate -- more than enough to sink the bill -- have voiced concerns about a public option.
But several said they are open to letting states "opt out" of the plan because it would allow local decision-making and Reid hoped to win them over with the compromise.
Reid said he talked to Senator Olympia Snowe, the only Republican to support any of the pending healthcare measures in a committee vote and a target of heavy Democratic lobbying, but so far she did not support the public insurance option.
"We hope that Olympia will come back," he told reporters. "I'm disappointed that the one issue, the public option, has been something that's frightened her."
Snowe, who has supported a proposal to "trigger" a public option in areas where insurance competition did not rise to certain benchmarks, said she was "deeply disappointed" by Reid's decision.
"I still believe that a fallback, safety net plan ... could have been the road toward achieving a broader bipartisan consensus," she said.
The Senate healthcare bill is the result of more than a week of negotiations between Reid, other top Senate Democrats and White House officials, who merged two bills passed by Senate panels into one piece of legislation.
Reid's decision amounts to a comeback for the public option, labeled dead by some pundits and senators after the Senate Finance Committee rejected it earlier this month. But the idea has gained momentum as some polls show it making slight gains among the public.
The lobbying group for the insurance industry, America's Health Insurance Plans, said the public option would not drive down costs as advertised.
"The American people want healthcare reform that will reduce costs and this plan doesn't do that," said the group's president, Karen Ignani. "The divisive debate about a government-run plan is a roadblock to reform."
Health insurance stocks were weak on Monday, with the S&P Managed Healthcare index of large insurers closing down 2.5 percent versus a 1.2 percent drop in the S&P 500 index.
The healthcare reform measures have bogged down in Congress. Republicans criticize the costs at a time of expanding federal deficits and Democrats have had trouble winning over party moderates concerned by the price tag and the cost for lower- and middle-income consumers.
"The core of the proposal is a bill that the American public clearly does not like and doesn't support," Republican Senate leader Mitch McConnell said after Reid's announcement.
But a top White House adviser said reforming the health insurance market could cut the federal budget deficit.
"Done correctly, healthcare reform can genuinely slow the growth rate of healthcare costs and thus put us on a path to greatly reduced budget deficits in the long run," said Christina Romer, chairwoman of the White House Council of Economic Advisers.
A Thomson Reuters report found the U.S. healthcare system wastes $505 billion to $850 billion a year and that proposed reforms could be paid for by fixing some of the most obvious inefficiencies, preventing mistakes and fighting fraud. (Editing by John O'Callaghan)