UPDATE 3-Obama: Health reform needs public insurer option

* Public insurance would “discipline” private

* No “lines in the sand” on many reform issues

* Insurers insist no public plan is necessary (Adds background, quote from group representing insurers)

WASHINGTON, June 23 (Reuters) - President Barack Obama said on Tuesday his healthcare overhaul needed a public insurance option to enforce market “discipline”, but stopped short of saying he would veto legislation without one.

Obama, who has made healthcare reform a top legislative priority, said he would insist Congress pass a plan to control skyrocketing costs and cut the number of uninsured. But he added “we have not drawn lines in the sand” on other issues.

“The public plan, I think, is an important tool to discipline insurance companies,” Obama told a White House news conference. “I think there is going to be some healthy debate about the shape that this takes.”

The United States spends some $2.5 trillion annually on healthcare, about 16 percent of gross domestic product, but trails many developed countries on important measures of health. Some 47 million Americans are uninsured and have little access to the healthcare system.

Obama, who promised reform during his presidential campaign, has stepped up his efforts to sell the public on his proposals, holding a series of speeches and town hall meetings, including one at the White House set for Wednesday night.

He has proposed allowing those who do not have insurance through their employers and who cannot afford to buy it privately to purchase it from a marketplace where private insurers and a public insurance plan would compete.

Shortly after Obama’s news conference, an organization representing private health insurance companies made public its blunt rejection of any state-run health plan, posting a June 19 letter to Democratic Senator Edward Kennedy on its website.

“A government plan option -- in any form -- is unnecessary to achieve comprehensive reform and would have devastating consequences on the health insurance coverage,” said the letter from the heads of America’s Health Insurance Plans and the Blue Cross and Blue Shield Association.

Republicans and private insurance companies have raised concerns over a public plan, arguing it would lead to a government takeover of the entire U.S. healthcare system and drive private insurance companies out of business.

Obama rejected that notion at his news conference.

“If private insurers say that the marketplace provides the best quality health care; if they tell us that they’re offering a good deal, then why is it that the government, which they say can’t run anything, suddenly is going to drive them out of business? That’s not logical,” he said, adding, “They should be able to compete.”


Democrats in Congress who are developing healthcare reform legislation hope to keep a public option, but have also suggested that non-profit medical cooperatives could be formed to compete with insurers.

Obama said a government-run plan could help drive efficiencies throughout the system.

“If it turns out that the public plan, for example, is able to reduce administrative costs significantly, then I’d like the insurance companies to take note,” he said. “That’s good for everybody in the system.”

He repeated his vow that health reform -- which early estimates indicate could cost in excess of $1.6 trillion -- would be paid for primarily by reallocating funds and not be allowed to add to the record U.S. deficits.

“If we’re going to spend that much money, then it’s going to be largely funded through reallocating dollars that are already in the health care system, but aren’t being spent well,” Obama said.

He opened his news conference saying he was confident about the progress being made on healthcare in Congress, which he hopes will send him a bill by the end of the year.

Finance Committee Chairman Max Baucus, whose panel is taking a lead role in writing the legislation, met on Tuesday with some Republican and Democratic members of his committee and expressed optimism they would ultimately reach a deal.

“There is increasing comfort in the room on all the major issues. We are still not there yet, but there is a very strong feeling that senators want to reach agreement on the major remaining questions,” he said.

Baucus said they wanted to keep the bill’s cost under $1 trillion. Concern about cost has caused the committee to delay its timetable for broader consideration of the legislation.

“I think it’s important to come up with a credible product. It isn’t enough to come up with a product and then not have the means to finance it,” Republican Senator Olympia Snowe told reporters after the meeting.

Additional reporting by Andrew Quinn; editing by Patricia Zengerle