HealthDay News -- As the Obama administration begins tackling health reform, a key element of the president's strategy -- the creation of a new government insurance plan -- is generating heated debate.

During his campaign, Obama called for a "National Health Insurance Exchange" that would offer a new public health plan alongside private plans to ensure access to affordable health coverage.

The idea appeals to many Democrats on Capitol Hill, including Senate Finance Committee Chairman Max Baucus (D-Montana), whose own health reform proposal envisions a similar design. Proponents of a private-sector approach, however, fear that erecting another government plan moves the nation closer to a single-payer system.

"I think there is going to be a lot of ideological argument over it," said Linda J. Blumberg, principal research associate at the Urban Institute's Health Policy Center in Washington, D.C.

The Obama administration has yet to fully describe how such a plan would work. While the President's 2010 budget blueprint, released February 27, sets aside more than $630 billion over 10 years to help finance health reform, it says nothing about creating a new public plan option.

Many health policy analysts believe it will be modeled after either Medicare or the Federal Employee Health Benefits Program.

"The way that we're envisioning this is more modeled after a traditional Medicare-type plan," said Blumberg, co-author of a recent Urban Institute paper examining the cost and competitive implications of creating a public insurance plan. The government would set the fees and bear the risk, she said, and the benefits package would be structured to look more like an employer-sponsored plan.

As for provider payments, Blumberg suspects that the government plan would pay doctors slightly better than Medicare does. "I think the pressures from the private market are going to help to make sure that what's being paid in the public plans is going to be sufficient to providing good quality care," she said.

Joel C. Cantor, professor of public policy and director of the Center for State Health Policy at Rutgers University in New Brunswick, N.J., noted that the current payment system needs to be changed, regardless of whether care is covered by a public or private plan.

"High technology, specialized care is overcompensated and preventive and generalist care is undercompensated," he said. "Providers are paid to provide higher volumes of service regardless of the benefits -- or risks -- to patients."

But he doesn't expect physicians to shun a new public plan, as is the case with many doctors who refuse to take Medicaid patients because reimbursement rates are below other payers. "If a new public plan is large, and covers politically engaged constituencies, as Medicare does, it seems unlikely that payment rates in such a plan would be so low that doctors would not accept the plan," he said.

The Commonwealth Fund's Commission on a High Performance Health System recently released its own vision for reform, including a public health plan option. Writing in the February 26 issue of the New England Journal of Medicine, Commonwealth Fund President Karen Davis said a public plan option "is key to achieving savings." Largely due to significantly lower administrative costs, a public plan could offer premiums that are at least 20 percent lower than commercial rates for similar benefits, the Fund reported.

But Grace-Marie Turner, president and founder of the Galen Institute, argued in a February 27 editorial for the San Diego Union-Tribune that such a move "could actually be the tipping point in government dominance of our health sector." Over time, she explained, private insurers would be squeezed out of the market, unable to compete against a plan that benefits from government subsidies and maintains federal policing and price-control authority."

Turner argued for new federal subsidies to help the uninsured purchase the private coverage of their choice. "This could turn us around toward a properly functioning market in the health sector so that doctors and patients, rather than politicians and bureaucrats, control medical decisions," she wrote.