While reiterating White House support for a public health insurance plan that could compete with private insurers, health reform director Nancy-Ann DeParle said the controversy over this plan was fueled by a lack of information. “People aren’t so clear about what it is,” she said, adding that she believed there were “policy ways of getting around some of the objections” and creating a “public plan that everyone could agree to.” This seems to have become the guiding strategy of the Senate’s Democratic leadership. In April the Senate Finance Committee kicked off its discussions with an outline that included four configurations of a public plan, which ranged from a “Medicare-like option” to one that would be administered through agents that would act much like private HMOs.

Now that we’re moving from a discussion about principles to a fight over specifics, it’s important for supporters of the public plan to be clear about what elements cannot be compromised if the plan is to be a tool for fixing our healthcare system. As the debate unfolds, here are the top three points to watch:

1. The public plan must rein in costs. This, proponents agree, is the most important part of a public plan. Not surprisingly, it is also the most controversial.

The Medicare program–the ideal public plan to many progressives–pays providers less than private plans do, because its size gives it tremendous market power. Providers howl that Medicare rates are too low (they’ve already succeeded in getting annual bumps from Congress). The most aggressive public plan proposals would reimburse providers at the same rate that Medicare does.

Senate Democrat Charles Schumer of New York has taken the lead in trying to forge a compromise that could win over moderates, promising “a level playing field” between the public plan and private insurance. While progressive advocates are not rejecting his plan out of hand–they even think it could produce a useful compromise–there are two provisions that could wind up gutting the public option. Schumer rules out requiring that providers who accept Medicare patients also take public plan patients. Some believe such a requirement is the only way to ensure that the public option has the market power to get lower rates with enough participating providers. Schumer would also have the public plan pay more than Medicare. The public plan could still bring down costs by paying somewhere between Medicare rates and those of private insurers (the more liberal House is reportedly considering such a structure), but if lawmakers settle on a requirement that the public plan pay prevailing market prices, the point of a public plan will have been largely lost.

“It’s got to have the ability to hold down rates–to me that’s the critical part of it,” says Urban Institute economist Linda Blumberg. It defeats the purpose to say, “We have a public plan option but we’re going to do everything we can to increase its cost so we can have a level playing field.”

2. The public plan must fix uncompetitive markets. Even if a public plan doesn’t have the most aggressive cost containment powers, it can make a difference simply by being allowed to compete fairly where local markets have failed. In Iowa, for example, home to the Finance Committee’s senior Republican senator, Charles Grassley, a single company controls 71 percent of the insurance market. Many other states are similarly uncompetitive, which creates several problems. There is no penalty on insurers for raising rates or trimming benefits, because patients have nowhere better to go. Since dominant insurers can protect their profits by raising premiums, they do not have to negotiate as intensely over the rates they pay providers. They also do not need to worry about runaway administrative costs, which can consume as much as 30 percent on some plans. Competing against a public plan, Iowa’s private insurers would be forced to earn business based on cost and service and find profits by improving efficiency and getting better value for the benefit dollar.

3. The public plan must change the way medicine is practiced. In the long run, the public plan can do the most to promote savings by changing the payment system so medicine is practiced more cost-effectively. An estimated $700 billion a year–one in three healthcare dollars–goes to treatments that have not been shown to improve outcomes. Crafting a reimbursement scheme to favor treatments that work, however, is not easy. The public plan can make it part of its core mission to pioneer these reforms and lead the market.

Of course, many of the most powerful healthcare interests are likely to fight a public plan tooth and nail, no matter how hedged it becomes. Indeed, at this writing, the insurer Blue Cross Blue Shield was reportedly preparing TV ads targeting a public plan, even though it had been making nice with the White House on healthcare reform. Democrats seeking a compromise on this issue must remember that a public plan is a tool for fixing the healthcare market so that all Americans can afford the care they need. If they’re going to fight for such a plan, it should be one that actually helps accomplish that goal.