Most analysts expected Barack Obama to back away from the public option in his speech to Congress on Wednesday evening.  However, the president surprised them by strongly endorsing — but not quite demanding — the inclusion of a government-run health-insurance plan in the final version of ObamaCare.  The progressive wing of the Democratic Party cheered Obama, but the New York Times reports that it may have been the last gasp of a program that has drawn the ire of everyone else:

It was just one line in a campaign manifesto, and it hardly seemed the most significant or contentious. As a presidential candidate, Barack Obama said he would “establish a new public insurance program” alongside private health care plans.

That proposal took on a life of its own, but it now appears to be dying, a victim of an ineffectual White House strategy, the president’s failure to argue passionately for the “public option” and all-out opposition by the insurance industry and much of the health care industry.

In the campaign, Mr. Obama said the public plan would compete with private insurers on the price and quality of care, thus benefiting consumers. What Mr. Obama did not foresee is that, to some people on the right and the left, it would become the most important issue in the debate over health care, touching off a battle over the role of government in one of the nation’s biggest, fastest-growing industries.

It seems odd to have the Times cast the public option as “just one line” in Obama’s campaign “manifesto”.  Obama himself made a much bigger deal about the public option, demanding it as a necessity through most of the debate, until poll erosion forced the White House to send conflicting signals.  Even leading into the speech, the White House seemed confused about the message, hinting at retreat just days before Obama went back on the offensive for the public option on Wednesday.

In its place will come co-ops, which have the potential for the same kind of problem the public option presents.  The Senate wants to fashion them as hands-off, member-owned co-ops, but one does not need the government to form co-ops anyway.  When government creates the co-ops, it tends to keep them alive on federal funds — as has been seen with electricity co-ops in rural areas formed during the Depression.  They’re bottomless pits for federal subsidies, and some of the same Senators calling for health-care co-ops as an alternative to the public option have demanded investigations into the energy co-ops still feeding off the government teat.

Politically, the loss of the public option is a big, big blow to Obama and his leadership.  It won’t be as bad as not passing any kind of health-care reform bill, but it’s close.  His waffling in August and September won’t erase the memory of his insistence on getting it, and by doubling down on Wednesday, it makes the loss that much worse for his image.  If Obama can’t hold a Congress in which his party holds large majorities, it makes him look radical and weak, neither of which comes as any surprise to his opponents.

Update: Mark Impomeni says it doesn’t help that the White House hinted at the Trojan Horse nature of the public option this week (h/t Allahpundit):

But the bigger story the MSNBC missed with its focus on the Wilson flap is found in the second bullet point sent out by the White House last night.  The Obama Administration inadvertently confirmed that the president’s plan will begin a slow take over of the health care system by the federal government.  How else could this be interpreted?

“Undocumented immigrants would be able to buy insurance in the non-exchange private market, just as they do today. That market will shrink as the exchange takes hold, but it will still exist and will be subject to reforms such as the bans on pre-existing conditions and caps.”

In other words, as the federal exchange takes hold, plans not complying with the federal government’s standards will start to disappear.  Eventually, it won’t make any sense for any company to offer health insurance as the federal requirements will make the business of providing health insurance far too expensive, and the premiums far too expensive for the insured.

This is not quite what Mark thinks it means, but it’s still bad.  The exchanges are run by the states under the authority of the federal government, and private insurers will sell plans through them.  The White House statement refers to insurers selling outside the exchanges, which will get more and more difficult to do, especially once the IRS starts enforcing the mandates.  The problem with this arrangement is that the government sets the terms for private insurers, which makes them less competitive, far less innovative, and puts them at the disadvantage one sees when the regulator competes in the market it regulates.