Both sides of the health care reform debate have argued vociferously about a public insurance option. But they have ignored an issue that could have a greater impact on both costs and coverage than a public plan: marketplace rules insurers must follow.

In most states, those rules permit insurers to determine who to insure and how much to charge. Health insurance plans today compete by trying to price, design and market their policies to attract better risks than their competitors. This makes economic sense for the insurers but raises costs for society because money that otherwise could be spent on health care is spent on seeking the healthy and avoiding the unhealthy.

But the rules could be changed to force insurers to compete for customers — regardless of health status — on price. That would eliminate the administrative costs associated with attracting good risks over bad, which can account for up to 15 percent of the health insurance premiums. It also would enable people with pre-existing conditions to buy private coverage.

Perhaps most important, insurers would have an incentive to drive down costs by stringently negotiating with doctors, hospitals, drug companies and other health industry suppliers.

The current health reform proposals would change the rules that insurers must follow to some extent. They would require insurers to insure people regardless of health status, but they still leave room for insurers to compete and profit through risk selection. Congress should do the following:

— Standardize the benefit package. When insurers sell the same benefits, the most obvious differentiation is price. Consumers then easily could compare price, and insurers would have to price low to attract business. When each insurer can sell a different benefit package, consumers can't make apples-to-apples comparisons.

— Mandate community rating. Most states now allow insurers to charge people different rates based on a multitude of factors, including health status, age, sex, occupation and size of group. This prices out people who most need health insurance and shifts the costs of taking care of such people to society as a whole. The opposite is "community rating" — charging everyone the same rate regardless of health status or demographic factors. Community rating would decrease rates for older and less healthy people while increasing rates for younger and healthier people. Savings from eliminating administrative costs associated with determining how much to charge each person and additional savings from insurers' increased incentive to drive down underlying health care costs could reduce potential premium increases for the best risks.

— Authorize both risk adjustment and private lawsuits to encourage compliance. Risk adjustment means transferring money from insurers whose clients are healthier than average to insurers whose clients are less healthy enough to neutralize the effect of varying health status. If it worked perfectly, insurers would have no incentive to seek out the healthy and drive away the sick because they would receive the same amount for each.

Unfortunately, no risk-adjustment system is perfect; risk adjustment would reduce — not eliminate — the incentive of insurers to avoid or reject the sick. However, the threat of lawsuits by people declined or canceled should discourage insurers from engaging in such conduct. Congress should ensure that such lawsuits can be brought.

— Authorize competitive bidding. The pending proposals would require millions of currently uninsured people to buy insurance through new entities called exchanges, with subsidies for low-income people. Requiring everyone to buy insurance is essential if insurers are required to insure everyone regardless of health status — otherwise people could wait until they got sick to buy insurance.

To keep the cost to both the insured and taxpayers in such a system as low as possible, Congress should authorize exchanges to implement competitive bidding. Specifically, each exchange could invite each insurer to submit a single rate at which it will provide the standard benefit package to any new prospect. He could buy from any insurer, but any subsidy would be based on the cost of the low-bidding plan.

It would encourage insurers to bid low because people choosing any insurer except the low bidder would pay the difference between the low-bid and another plan. Such a structure really has driven down costs: When Missouri implemented these rules in its state health benefits plan in 1995, the monthly cost to the state per employee fell from $224 to as little as $125.

Implementing these rules would pose substantial problems, practical and political. But they have the great virtue of restructuring the insurance marketplace so that insurers must both insure people regardless of health status and drive down costs.

Jay Angoff, a lawyer in Washington, D.C., was Missouri's Insurance Director from 1993 to 1998.