WASHINGTON (AP) - Senior Senate Democrats at work with White House officials on health care legislation are strongly considering a requirement for the federal government to sell insurance in direct competition with private industry, officials said Thursday, with individual states permitted to drop out of the system.

Liberals in Congress long have viewed such an approach, called a public option, as an essential ingredient of the effort to overhaul the nation's health care system, and President Barack Obama has said frequently he favors it. But he has also made clear it is not essential to the legislation he seeks, a gesture to Democratic moderates who have opposed it.

Sens. Ben Nelson, D-Neb., and Kent Conrad, D-N.D., said in separate interviews they had been told the plan was drawing interest in the private negotiations unfolding in an ornate room in the Capitol down the hall from the Senate chamber.

The final decision is up to Senate Majority Leader Harry Reid, D-Nev., who led a delegation of Democrats to the White House late in the day to discuss health care with Obama.

"I'm not part of those discussions. What I'm hearing is that this is the direction of the conversation," said Conrad, who supports an alternative approach under which nonprofit co-ops would compete with private industry.

"I keep hearing there is a lot of leaning toward some sort of national public option, unfortunately, from my standpoint," Nelson said.

The White House declined to comment.

Reid's office did likewise, and the Nevada Democrat left the White House without talking with reporters.

Several officials said no final decisions had been made about including the so-called public option into the legislation. In the extraordinarily complicated atmosphere surrounding health care, one possibility seemed to be that the idea of a public option was being given wide circulation to see whether it could attract enough support to survive on the Senate floor.

If not, it surely would be jettisoned beforehand, with liberals urged to accept something less or risk defeat of health care legislation. There is little margin for error among Obama's allies in the Senate as they confront nearly unanimous Republican opposition.

Democratic moderates are skeptical of allowing the government to sell insurance, concerned that it would mark an unwarranted federal intrusion into the private marketplace. And even if they agreed, it would raise questions of payment rates for doctors, hospitals and other providers.

Conrad, for example, has said repeatedly he could not accept a plan with payments tied to Medicare, the federal health care program for the elderly, because rates in North Dakota are too low to give doctors an incentive to treat additional patients.

The public option issue has been one of the most vexing of the yearlong effort by Obama and his Democratic allies in Congress to remake the nation's health care system.

Legislation taking shape in the House is also expected to include a public option, although it is unlikely states will be allowed to opt out.

After months of struggle, both houses are expected to vote in the next few weeks on sweeping legislation that expands coverage to millions of people who lack it, ban industry practices such as denial of coverage for pre-existing medical conditions and slow the growth of medical care spending in general.

The House and Senate measures aim to expand coverage to about 95 percent of the population, and include federal subsidies to help lower-income families afford coverage and permit small businesses to provide it for their employees.

The two bills differ at many points, although both are paid for through a combination of cuts in future Medicare spending and higher taxes - a levy on high-cost insurance policies in the case of the Senate and an income surcharge on very high income individuals and families in the House measure.

House Speaker Nancy Pelosi said at a news conference she and her leadership were entering the "final stages" of assembling a health care bill to be voted on this fall. Officials have said the measure would cost $871 billion over a decade, but that total excluded a handful of items not directly related to expanded coverage that would push the total to well over $1 trillion.

Pelosi told reporters a provision eliminating the health insurance industry's exemption from federal antitrust law would be incorporated into the House measure.

Officials said a similar move was under discussion in the Senate, part of a strong response to recent industry criticism of the legislation.

White House press secretary Robert Gibbs declined to take a position on the antitrust proposal, saying it was under review.

Similarly, Christine A. Varney, the head of the Justice Department's antitrust division, testified before Congress recently that the administration "generally supports the idea of repealing antitrust exemptions. However, we take no position as to how and when Congress should address this issue."

Varney also said that repeal of current exemptions covering the industry would "allow competition to have a greater role in reforming health and medical malpractice insurance markets than would otherwise be the case."

The Senate negotiations have proceeded in unusual secrecy, attended by Reid, two Senate committee chairmen, Sen., Max Baucus, D-Mont., and Christopher Dodd, D-Conn., and a small group of administration officials led by White House Chief of Staff Rahm Emanuel.

Nominally, their task is to merge bills cleared earlier in the year by two Senate committees. But in fact, they have a virtual free hand to draft legislation that Reid will then usher onto the Senate floor for one of the most widely anticipated debates in recent years.

Democrats hold a 60-40 majority in the Senate, counting two independents, precisely the number needed to overcome a threatened Republican filibuster. Sen. Olympia Snowe, R-Maine, voted for the health care bill that cleared the Senate Finance Committee recently, giving Democrats one potential additional vote.

But she has long voiced opposition to a public option along the lines under consideration, as has Nelson, and other moderate Democrats have voiced skepticism. Without 60 votes, the legislation could stall even before debate began in earnest.

---

Associated Press writers Charles Babington, Ricardo Alonso-Zaldivar and Erica Werner contributed to this report.