Several news sources are reporting that Harry Reid plans to put a national public option with an opt-out provision in the merged Senate bill. So far, there have been almost zero details on how this national public option with an opt-out provision would be structured. I’m going to explain four important variables and how they could affect the success and availability of the public option.

When can states first choose to opt out? There are two different opt-out time frames, which I will call “pre-reform opt-out” and “post-reform opt-out.” The public option is not going to be available until most of the reforms really start in 2013. A “pre-reform opt-out” would allow states to opt out anytime before the public option would first be made available in 2013. This would be a “bad” opt-out provision which would probably result in more states opting out. The earlier that states would be allowed to start opting out, the worse it is. Since no one would yet have access to the public option, opting out before reform started would be politically easier.

A “post-reform opt-out” would only allow states to opt-out after first having the public option available in their state for a period of time (say, 1-4 years). This is a “good” opt-out provision, and the longer the delay before a state can opt out, the better. By first making the public option available, states and their residents would be able to better know if it is something people like. If the public option succeeds as progressives hope, it would be politically more difficult to take away something people already have and like.

How would a state opt-out? There are several ways a state could be allowed to opt out: the reform package could require passing a law, or it could allow opt out solely by an act of the state legislature, a decree by the governor, popular ballot referendum, an order by a state insurance regulator, or some combination of the proceeding options. I’ve previously broken down how many people would likely be denied the public option depending on the different opt out mechanisms. The harder it is for a state to opt out, the better. I suspect, based on polling, a popular ballot referendum would be the mechanism to result in the fewest states opting out. The “best” opt out mechanism would require the state to pass a law opting out of the public option, then requiring it be upheld by a popular referendum.

Who will pay for the added cost of states opting out? By holding down cost on the new health insurance exchange, the public option will reduce the amount of tax credits the federal government will need to provide individuals to help them afford health insurance. The CBO expects even a weaker “level playing field” public option would save the government $25 billion over the next decade. (I’ve examined the issue in more detail earlier.)

If a state opted out of the public option, it could increase insurance rates and the cost of reform to the federal government. Who should pay for this increased cost? The federal government could just pay the increased cost (the “federal government pays”). Uninsured people living in the state which opted out could pay the cost, by the federal government reducing the amount of their tax credits (the “middle-class pays”). Or the state government could be forced to reimburse the federal government for the added cost that resulted from them opting out (the “states pay”). I think it is unfair to force the rest of the country to pay higher taxes because Texas wants to reject a potential cost saver. The only fair solution would be to make states cover the added cost of opting out. This “states’ pay” provision should dramatically discourage states from opting out.

What kind of public option will it be? From reporting, the public option is likely going to be a “level playing field” public option which must negotiate rates with providers. We still do not know how the public option will be structured, or how it will be run. Will it get to combine its administrative paperwork functions with Medicare for better efficiency? Will all providers need to opt in to the public option or would Medicare providers be presumed to part of the network unless they opted out? Will it be part of the federal government or just have congressionally appointed management? It could be run directly as a part of department of HHS and run by government employees. It could also be structured like a quasi-public government corporations similar to Amtrak, the Federal Reserve, FDIC, or the Corporations For Public Broadcasting. The Senate HELP Committee’s public option would have quasi-subsidiaries in each state to slightly customize the public option for local needs. Would this feature be retained?

A public option that most closely resembles Medicare would be the best possible structure. Having a Medicare provider presumed opted in should help the public option get off the ground more quickly. Allowing Medicare and the public option to use a combined paperwork processing system would save the government money, and cut down on paper work for doctors. Preferably, the public option would be part of HHS and not a stand alone public corporations.

These four categories are some of the most important (but not the only) variables which should determine the viability of Reid’s public option with an opt-out. It is possible to design an opt-out that would result in very few if any states opting out. It would be a “post-reform opt-out” with a “states pay” provision. It would require a state law to opt out and a ballot referendum.

On the other hand, it is possible to design an opt-out that would result a large number of states opting out of the public option. If it were a “pre-reform opt-out” where the federal government paid 100% of the added cost, that would be a very “bad” opt-out design. Allowing only a decree by the governor or an act by the state legislature to opt-out the state would also dramatically increase the likely hood of states opting out. Like all things, the devil is in the details. We will soon know if Reid scored a real victory or delivered only an empty triumph.