On December 22, Sen. Ben Nelson (D-NE) defended the Nebraska Medicaid deal by arguing that he was protecting the state from unfunded mandates at the Governor’s request. Nelson quoted Nebraska Governor Dave Heineman’s concerns about rising costs and stressed that he was “prepared to ask that this provision be removed from the amendment in conference if it’s the governor’s desire.”

Since the deal became public, however, Heineman has repeatedly said that he “didn’t want a special deal” out of Senate health care bill. “We’re embarrassed by what’s going on. We’re very surprised. Nebraskans are angry and upset about what occurred. And so they need to set this straight,” Heineman told Fox News’ Greta Van Sustren the day Nelson explained his reasoning. This morning he reiterated his opposition:

What I’m saying is, every Governor including myself is worried about unfunded mandates, education, Medicaid or whatever and we don’t want that and we don’t want this special deal and don’t wanted to be treated differently than any other state. We — all states ought to be treated fairly and equally, particularly when you are talking about a federal program like Medicaid.

Watch it:

Heineman’s public condemnations, the pending constitutional challenge from 13 attorneys general, and the growing Democratic discomfort with the agreement, may ultimately force negotiators to remove the provision from the final legislation. Sen. Blanche Lincoln (D-AR) has said that the deal should not be part of the final package and yesterday, Sen. Sherrod Brown (D-OH) predicted that it “won’t be law by the time that goes into effect.”

But so far, Nelson isn’t backing down. The Senator recently ran a television ad defending the agreement and even asked South Carolina Attorney General Henry McMaster — the leader of the so-called Gang of 13 AGs — to “call off the dogs” on the constitutional challenge.

Whatever the merits of Nelson’s carve-out, Congress has long considered each state’s unique economic conditions and circumstances in crafting legislation. In fact, even today, the federal matching formula varies from state to state, depending on each state’s poverty level. States are not always treated “fairly and equally,” nor should they be.

During yesterday’s press conference about the Democrats’ efforts to reconcile the House and Senate health care bills, House Speaker Nancy Pelosi (D-CA) seemed to concede that the final health care bill will not include a national public health insurance option. Pelosi stressed that there are “other ways” to “increase competition” and hold “insurance companies accountable.” “We will have what we need to hold the insurance companies accountable,” she said. “I contend that whatever we have coming out of this bill will hold them accountable and they’ll be crying out for a public option one of these days.” Watch it:

A national public health insurance option is unlikely to muster 60 votes in the Senate, but House Democrats could insist on including a provision in the final health care bill that provides start-up funds to states that choose to create state-based public options. The current Senate bill allows states to independently finance such programs. Offering government seed money, however, could entice more states to take up the venture and prove politically valuable to liberal Democrats facing a backlash for abandoning the provision. States like New York, California and Washington would likely establish such plans and their successes may motivate conservative states to also adopt the measure.

The state-based approach was first introduced in March 2009 by the New America Foundation’s Len Nichols. Nichols proposed the creation of 50 different-state based public options that would be operated by politically appointed managers and owned by the government. The plans would reimburse providers at market rates and compete on a completely level playing field with private insurers. The proposal was never publicly considered at the time, but a watered down version — that passes muster with Sens. Joe Lieberman’s (I-CT) and Ben Nelson’s (D-NE) — may be the last hope for including some kind of public plan in the final bill. For instance, lawmakers may have to adopt a broad definition for what constitutes a ‘public plan’ and eschew the ‘government owned’ language or simply expand the definition of co-ops, which already receive government seed money in the Senate legislation.

Democrats could also achieve some of the goals of the public plan by aggressively regulating health insurers. As Rep. Henry Waxman (D-CA) suggested Tuesday, “It’s going to be difficult to have a public option, but if there’s not going to be a public option, we’d better have a lot of restrictions on abuses by insurance companies,” Waxman said. “If we have to do it through greater regulation, that’s how we’re going to accomplish the goal.”

Senior Democrats have officially confirmed that they will bypass the traditional House-Senate conference process and fast-track the final health care negotiations through informal ‘ping pong’ discussions between the two chambers. “The informal approach would still require the House and Senate to pass identical bills but would minimize the opportunity for Senate Republicans — who united in opposition to the legislation — to slow the process,” the Washington Post reports. “Under the plan, the House would pass the Senate bill amended with new compromise provisions, then send the package back to the Senate for one final vote.”

In a meeting with Democratic Congressional leadership yesterday at the White House, Obama “forcefully communicated” his desire to pass a final health care reform bill in time for the State of the Union address, which the White House has reportedly pushed to February 2nd to give Congress more time to complete their negotiations. Obama “responded to Pelosi’s strong, repeated pitches for the public option by making it clear that, while he supports the proposal, he doesn’t think it is doable” and threw his support behind “several provisions in the Senate health care bill including the tax on so-called Cadillac health care plans ( …) and the Medicare Commission.”

But House leaders aren’t prepared to swallow the whole of the Senate proposal. House aides reveal that Pelosi is “miffed with Obama’s tilt toward the Senate plan and his expectation the House will simply go along with the Senate bill out of political necessity” and suggest that she is focusing on incorporating several ‘getable’ House provisions into the final legislation. Pelosi is pressuring the administration to increase the tax threshold on Cadillac plans (from $21,000 to $28,000 for family plans), adopt stronger affordability measures, end the insurance industry’s exemption from federal antitrust laws, and move up the implementation date for the exchanges from 2014 to 2013.

Obama has reportedly “stated his intention to work with leaders to strengthen affordability … beyond what is in the Senate bill,” but efforts to repeal the anti-trust exemption may run up against the opposition of Sen. Ben Nelson (D-NE), a key 60th vote to ending debate on the conference package.

The Wonk Room has also compiled 11 ideas for improving the final health care bill. See them here.