Part three in our week-long overview of health care reform.

Despite all of the concern about and posturing on the public option, the fact is that it shouldn’t be considered such a vital provision. One can make a case that it’s important, but not that it’s necessary to comprehensive health care reform. (Why do you think the Obama Administration has been so hot and cold on the subject?)

The more important way to improve markets, create more competition, and allow for more consumer choices is to create health insurance exchanges – marketplaces in which individuals can purchase health insurance policies with much more information than is currently available.

Health care policy wonk and blogger Ezra Klein often argues persuasively for such exchanges. Here’s Ezra in June:

Imagine that you decided you didn’t like your current health insurance and you wanted to change it. Your employer very likely doesn’t offer any alternatives. If you do have a choice, it’s almost certainly not between more than three different plans.

You could, of course, spit at your employer’s offerings and go buy insurance on your own. But the individual insurance market is a scary place. You’re on your own, so you have no bargaining power with insurers. Providers can simply refuse to sell you health insurance, or they can jack up your prices because of past illness…

The Health Insurance Exchange gives you another option. Unlike your employer, it will have a wide array of competing providers offering different plans with varying benefit levels, emphases and price tags. Unlike the individual market, insurers won’t be able to discriminate based on your health history or your future risk. Plans will have to be certified as meeting a minimum level of comprehensiveness. Plans that routinely screw over members will lose customers to competing insurers.

The Health Insurance Exchange, combines the benefits of choice that are theoretically available on the individual market with the bargaining power and scale that’s generally accessible only in large employers (and the exchange will, in theory, have more bargaining power than even the largest employers, as it will have a much larger base of customers)…

And what happens when you introduce productive competition, efficiencies of scale, more innovation and increased consumer power into a market as dysfunctional as the current situation for health insurance? In theory, you get lower prices and higher quality.

It’s no surprise, then, that all of the main legislation (HELP, House, Baucus’ just released Finance outline, and Obama’s brand new plan) creates such exchanges in one form or another. Yet they all only offer access to individuals not covered by their employer-offered insurance and small businesses. This is largely due to the goal of maintaining an employer-based health care system.

(Note: the reason we get our health care through our employers is because of the health care tax exclusion. By offering health care as a benefit, employers don’t have to pay tax on that portion of your “income.” This badly distorts the health insurance market, since it conceals the true cost of our premiums, the bulk of which are payed by employers).

One piece of legislation with bipartisan support, Wyden-Bennett, eliminates this tax exclusion and creates state-based exchanges. Most employers would quickly stop offering health care as a benefit and individuals would purchase their insurance on the exchanges. Like other plans, it would offer generous subsidies for the poor and middle-class and would mandate that everyone obtain insurance. This would be a huge departure from our current system, which is why its obvious benefits (revenue neutral, the creation of more efficient markets, major cost savings) have been largely left out of the debate.

But what is in the debate? Tomorrow we will look at the major legislation currently working through the House and Senate.