Health care reform and policy sequencing

I know next to nothing about health care reform except for what I read on the internets, but President Obama had an interesting statement today on the subject that, well, provoked me. Answering a question about whether a "public option" (i.e. government-run health care plan that would compete with private plans) would drive insurance companies out of business, he said:

But just conceptually, the notion that all these insurance companies who say they’re giving consumers the best possible deal, if they can’t compete against a public plan as one option, with consumers making the decision what’s the best deal, that defies logic, which is why I think you’ve seen in the polling data overwhelming support for a public plan.

Huh? As he himself acknowledges, there is a legitimate problem in a public plan being subsidized by taxpayers "endlessly over time," since presumably having a competitor that is consistently operating at a loss will drive private insurers out of business. That seems "logical." But of course the extremely high risk that this is exactly what the public option will become is why anyone opposes it. While it's heartwarming to see liberals lecturing free marketers on why the public option is actually the "conservative" solution to rising health care costs, in the absence of any sign that the public option will be self-sustaining (i.e. not subsidized by taxpayers), I don't see how a government-created enterprise is going to foster real competition. 

Now, given that there are seemingly contradictory goals at play--cost reduction, expanded coverage, access to high quality care--"competition" may not actually be what the health care sector needs. If there was a public plan that was affordable and provided a fairly basic level of care, with costs controlled through rationing, "comparative effectiveness," etc., then it seems like there would still be a role for the private insurance sector to provide supplementary coverage that people could purchase depending on their anticipated needs. And because private insurance companies can charge more for more expensive care, the supply of super expensive treatments that are now easily accessible in the United States (but aren't available in places with nationalized health care, that strictly ration care) will be undepleted. 

It obviously makes sense to "bend the cost curve" of government-provided health care, since we just can't pay for the aforementioned super expensive treatments indefinitely. At the same time, if the government says it won't pay for expensive treatments, and the government is the only game in town, then there won't be a market for those treatments and they will cease to be provided. So now you can see why it's important for a public option not to put private insurers out of business. The following scenario seems plausible to me: (1) the government creates a public plan, (2) the public plan is affordable (thanks to taxpayer subsidies) but the government has not yet enacted cost controls or rationed care, (3) private insurers go out of business because everyone flees to the affordable public plan that seems to basically provide the same level of care, (4) government finally enacts cost controls and/or rations care, but now there is no private market to provide expensive or experimental treatments.

Of course, one might counter that (6) a new private market springs up, but putting an industry out of business and then watching it rise again seems like an inefficient way of going about health care reform.

Now, if the government can enact a public plan that already has cost-controls built in, and only covers a basic level of care (not including the aforementioned super expensive treatments), that seems like a way of expanding coverage (by making basic care affordable), reining in costs, and maintaining consumer choice by leaving private insurers in place to compete for the services that the government doesn't provide. 

The point is, it seems like the commitment to bending the cost curve has to happen before government-provided care swallows up the whole sector. Government-provided care will ultimately have to be rationed because otherwise it can't be paid for; so why not ration it at the outset and let the private insurance market pick up the slack? The downside is obviously that people who sign on to the affordable public plan won't get every possible kind of care; this is probably untenable to people who see that as a problem with the heath care status quo. But then, I don't know how you solve that problem without bankrupting the country. Health care, as with any other thing one has to pay for, involves trade-offs. 

Anyway, as previously mentioned, I disclaim any specialized knowledge, but seek only to counter the position held by liberals (including, apparently, President Obama) that any mistrust of a public plan is just not "logical."