Today, several Democrats on the Senate Finance Committee (SFC) joined with Republicans to defeat a public plan that reimbursed five percent above Medicare rates and another option that competed on an equal playing field with private insurers. The failure of both provisions suggests that the Senate Finance Committee’s health care bill will leave committee without a public option. (The Committee may still consider Sen. Olympia Snowe’s (R-ME) trigger proposal, although the final text of that amendment has yet to be released.)

This development is disappointing, but not surprising. SFC is led by a chairman who feels obliged to vote like a Republican to attract Republicans and the Committee is stacked with conservative Democrats from high-cost or rural conservative states (Sens. Nelson, Conrad, Lincoln come to mind).

The public option’s best chance was always in conference. Sen. Harry Reid (D-NV) has suggested that a final Senate bill (one that merges the Senate Finance bill with the Kennedy bill) won’t include a public option and any floor amendments will likely fail.

Once in conference, negotiators will have to reconcile the Senate bill with its far more progressive House conterpart (which will include some kind of public plan). Should Reid and Pelosi stack the committee with public option advocates like Rockefeller, Schumer, or Schakowsky, the option will live another day — no Democrat would vote against a health care package simply because it includes a public option that attracts some 10 million enrollees. Conversely, if likely conferees Baucus and Conrad feel ‘constrained’ to vote with Republicans, the option will likely die.

The final legislation won’t include a Medicare-like public option that saves the government $50 to $100 billion over 10 years. Nor will the plan negotiates rates with providers and compete on a level playing field with private insurers. In fact, it won’t be a national plan at all.

Instead, the very same Democrats who defeated the national program during mark-up, will likely resurrect a discarded idea floated by the New America Foundation and momentarily embraced by the White House. That compromise will create a network of public options modeled on state employee benefit plans. The proposal could be triggered by Snowe’s amendment if reform did not meet a low affordability measure, but any state-based proposal would lack the market clout to lower overall health care spending, reform health care delivery, or hold private health insurers accountable.

Today may have been the death of the public option and the birth of state-based public options.

During this morning’s debate over Sen. Jay Rockefeller’s (D-WV) public plan amendment, Sen. Debbie Stabenow (D-MI) reminded senators that “if you go back and look at the debate on Medicare, the very same arguments were used, in the 60s. That we couldn’t have Medicare for seniors because it would destroy the private markets. It would destroy the private insurance system and that’s not what happened.” “Replay to today, same arguments again.”

Indeed, at one particularly contentious moment, Sen. Chuck Schumer (D-NY) challenged Sen. Chuck Grassley’s (R-IA) claim that the public option would lead to single payer health care. The exchange flustered Grassley. He admitted that Medicare is part of the “social fabric” of America and praised the competition between traditional Medicare and Medicare Advantage. He could not explain why younger Americans should be afforded the same choice of coverage. Watch it:

According to a Congressional Budget Office analysis of Rockefeller’s amendment — which establishes a plan that reimburses providers at 5% above Medicare rates for the first two years — the public option would save the government an estimated $50 billion. Only eight million Americans would sign-up for the program, leaving the overwhelming majority of Americans to private coverage.

For Grassley, choice is a one-way street: he wants Americans to move from public to private coverage, but would deny Americans in private coverage the right to choose a public plan. Grassley fought to preserve access to Medicare Advantage and argued that Medicaid recipients should be able to enroll in private coverage. A shift from private to public coverage, however, is unacceptable.

During the debate, several senators reminded Grassley that under Rockefeller’s amendment, the public option would be self-sustaining and charge competitive rates after the first two years. “What are we afraid of,” Sen. John Kerry (D-MA) asked, “that Americans would like a plan that pays for itself and provides a good service?” As Schumer pointed out, Republicans are against government health care, but they have introduced numerous amendments to preserve Medicare. “That’s not fair, and it does not add up,” he said.

On September 16, Sen. Jay Rockefeller (D-WV) announced that he would not vote for the Senate Finance Committee’s health care bill unless the committee replaced the network of cooperatives with a robust public option, increased the threshold on the excise tax, restored the CHIP program (the reform bill folded it into the Exchange), improved affordability measures, and regulated self-insured plans.

This last demand may be the least understood and most complicated aspect of health care reform. The Senate Finance Committee’s legislation does not require large employers that self insure to abide by the same rules and regulations as insurers operating in the Exchange or the individual health insurance markets. As Rockefeller explained during mark-up, “you are grandfathering in an unfairness in the insurance market, where you treat 50 percent of the American people in one way…and 46 percent in a very favored way without restrictions, without discipline.” “Most people don’t know that they are treated so differently. Most people don’t know that they have these restrictions on them,” Rockefeller said. Watch it:

Self-insured plans — which are regulated by a law called ERISA — do not have to accept Americans with pre-existing conditions, or remove caps on out-of-pocket or lifetime expenses. “As many as 73 million people, or 55% of those who get insurance through private-sector jobs, are covered in self-insured plans, according to the non-partisan Employee Benefit Research Institute. Workers are often not aware their plans are self-insured because employers hire insurance companies to process claims.”

Congress enacted ERISA in 1974 to allow companies operating across state lines to offer uniform benefit packages. The law establishes minimum standards for pensions, but allows self-insured companies to elude both state and federal regulations.

The initial draft of ERISA exempt employee benefit plans for health and pension from state laws, but subject self-insured companies to existing state regulations. Large corporations would have to abide by the consumer protections of the various states, or so it seemed. Before the final floor vote, Congress folded to big-business demands and inserted the so-called “deemer” clause, barring “self-funded plans from being considered insured plans subject to state insurance regulations.” Suddenly, self-insured companies were exempt from federal and state regulations. The fix was in.

Rockefeller has offered an amendment (C1) to apply health insurance market reforms to the large group and self-insured market. Large corporations are already lining up in opposition.

On Friday, the US Chamber of Commerce chief lobbyist Bruce Josten “sent out a memo this afternoon listing three ‘dangerous amendments’ the business community should weigh in on before the committee gets back to work on Tuesday.” Rockefeller C1 is the most dangerous:

This amendment will significantly and adversely impact larger employers and self-insured plans and the millions of Americans who count on their employer provided health coverage. The federal uniformity standard under ERISA (also known as the “preemption” standard) is critical to our health care system, especially the 170 million Americans receiving coverage from the employer-based system. Its hallmark feature is that it allows employers to offer uniform benefits to their employees, retirees and families without being subject to the conflicting patchwork of mandates, restrictions and costly rules that vary from state to state….This amendment would jeopardize employers’ ability to offer uniform national plans without interference by contradicting state rules. Benefits costs could soar.

But Rockefeller’s amendment would presumably subject self-insured plans to the new federal regulations, permitting large corporations to continue offering uniform plan. The Committee is expected to consider Rockefeller’s amendment this week.