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At this point in the progress of the health-care reform bill, we are all supposed to go down on bended knee, and praise the Lord, and celebrate how the public option, which looked practically dead two weeks ago, not only came back to life but actually made it into the Senate version of the bill.

And many of us are doing just that. Richard Kirsch, the national campaign manager for Health Care for America Now, celebrated as well as anyone else:

We applaud Majority Leader Reid’s leadership in making sure the Senate bill includes a public health insurance option to lower costs and inject much-needed competition into the health insurance marketplace. We appreciate his recognizing a public health insurance option is key to achieving meaningful reform, protecting consumers, and keeping insurers honest.

So let’s be clear about what’s being celebrated. The opt-out public option that Harry Reid has included in the Senate bill will be available only to about 10% of Americans. It’s not an option for anyone covered by employer health-care, or anyone who qualifies for Medicare/Medicaid.

To be sure, having it included in the Senate bill is a positive. Uninsured Americans will now have an affordable health-care option, and that was definitely one of the objectives of health-care reform. Americans who currently buy insurance themselves in the private health insurance market will be able to switch to a cheaper plan.

But let’s not get carried away with all this talk about injecting much-needed competition into the health insurance marketplace.

Premiums for employer-provided coverage should certainly fall a bit right away. Not due to any increased competition, but merely due to extending health insurance coverage to the uninsured. The insured will no longer have to bear the hidden tax of providing health services to the uninsured via emergency room care, and this is a burden widely estimated at $1000 a year per insured family. To that extent, everyone’s premiums should come down.

But will the opt-out public option constitute any meaningful competition for, or exert any downward pressure on premiums in, the private insurance market?

If the opt-out public option becomes law, the private health insurance market will come to consist of two distinct market segments. Health insurance companies will have to decide whether they will actually compete in the non-employer-provided insurance market, or just cede this market segment to the public option. And choosing to compete in this market may well hurt their profitability in the employer-provided insurance market. If employers see them dropping their premiums to compete with the public plan, they would probably demand some reduction in their premiums as well.

And what about the employer-provided insurance market segment. In what way would the opt-out public option provide any meaningful competition in this segment? None at all, unless employers decide they are better off winding up their employer-subsidized coverage, and providing cash subsidies to employees to sign up for the public option. (Or unless employers can use this threat to extract premium concessions from insurance companies.)

How likely is this to be a credible option? Currently, health insurance companies charge considerably more for individual insurance policies than they do for the group insurance policies that constitute employer-provided coverage. Premiums for the public plan would definitely be cheaper than current premiums for individual insurance policies, but would they also be significantly cheaper than current premiums for group insurance policies? Without a significant difference, there is no way employers could threaten to wind up their employer-provided coverage and push their employees into the public plan.

Let’s also remember the CBO’s estimates of the impact of the House bill:

Most importantly, the CBO coverage tables undermine the conservative claim that a public option would eliminate private insurance and erode employer-sponsored coverage. The House bill actually increases the number of people who receive coverage through their employer by 2 million (in 2019) and shifts most of the uninsured into private coverage.

So when people talk of the opt-out public option injecting “much-needed competition into the health insurance marketplace”, it’s not clear at all what this competition is supposed to consist of.