WASHINGTON—The stage is set for the full House and Senate to take up health care reform legislation.

After months of work, House Democratic leaders last week finished cobbling together a 1,900-page reform bill, pulling provisions from measures that three House committees passed this summer while amending, dropping and adding others, including a cap on flexible spending account contributions.

With that step, the full House is expected to begin debate on the bill later this week and likely pass it at the end of the week, Washington observers say.

The Senate is not quite as far along, with consideration of reform legislation possibly to begin next week.

Senate Majority Leader Harry Reid, D-Nev., last week, though, announced a key decision: The reform bill he will send to the Senate floor will include a public option—a government-run health insurance plan.

A public option is part of the House reform bill, as well as an earlier bill passed by the Senate Health, Education, Labor and Pensions Committee, but is not in the measure approved by the Senate Finance Committee. Sen. Max Baucus, D-Mont., the chairman of the Finance Committee, kept a public option out, saying it lacked the votes to be approved by the full Senate.

Creation of a government-run plan has triggered enormous controversy. Its advocates say a public option is needed to inject competition into the health insurance market, while critics say a public plan would drive out private insurers and self-funded employers from the market and result in a single-payer health care system.

With both congressional branches moving ahead on reform measures, whose central features include health insurance premium subsidies for the low-income uninsured and penalties on employers that do not offer coverage, the odds of a final agreement being reached—either later this year or early next year—continue to improve, observers say.

“The Democrats control the House and Senate and the White House. They will make it happen,” said Frank McArdle, a consultant with Hewitt Associates Inc. in Washington.

Still, there are many battles to be fought and issues to be resolved.

“The last chapter certainly has not been written,” said Paul Dennett, senior vp-health care reform with the American Benefits Council in Washington.

“We are nowhere near the end,” said Neil Trautwein, vp and employee benefits counsel with the National Retail Federation in Washington.

In fact, a looming battle—perhaps the most important one to date—soon will play out on the Senate floor: whether a public option will be part of the reform legislation.

Sen. Reid has provided few details on how the public option would work beyond saying that states would have the right to opt out.

At the moment, though, observers doubt if Sen. Reid has the votes for a public option.

“He is giving it the old college try, but I don't see 60 votes for it,” Mr. Trautwein said.

“I just don't see where 60 votes would come from,” Mr. Dennett agreed.

In fact, Sen. Reid dodged answering questions at a news conference last week on whether he thought there was enough support for the full Senate to pass a public option, said James Gelfand, senior health care policy manager for the U.S. Chamber of Commerce in Washington.

If Sen. Reid sees that he lacks the 60 votes needed to stop a certain Republican-led filibuster on a public option, he might revamp the proposal to try to attract enough votes. One way the public option might be revamped, observers say, would be if it was triggered if health care costs exceed a certain level or if studies find there is insufficient competition among health insurers.

While the outcome of the public option battle won't be known for some time, employers already may have lost a battle on another reform provision: curbing tax breaks for those who contribute to health care FSAs.

The House bill now includes a provision in which, starting in 2013, the maximum pretax contributions an employee could make to an FSA would be $2,500. That amount would be increased annually to match annual increases in the Consumer Price Index.

That cap is somewhat similar to one embedded in the Finance Committee bill. That panel also would cap FSA contributions at $2,500, though starting in 2011 and with no future indexing.

With an FSA tax cap expected to be included in the health reform bill Sen. Reid will send to the Senate floor, and the House bill also including an FSA cap, the odds now are high that a cap will be part of the final bill.

Employers have embraced FSAs as a way for employees to pay for uncovered health care-related expenses on a pretax basis, significantly cutting the true cost for employees in higher tax brackets.

But employers prevailed on another issue: Excluded from the House bill is a provision that would have allowed states to set up their own single-payer health care systems.

Under current law, the Employee Retirement Income Security Act pre-empts states from passing measures that relate to employee benefit plans. The Education and Labor Committee provision, proposed by Rep. Dennis Kucinich, D-Ohio, would have exempted state single-payer laws from ERISA pre-emption.

Other provisions in the measures approved by the House panels and opposed by employers that made it in the bill that the full House will consider include:

c Preventing employers with retiree health care plans from reducing benefits unless they also cut benefits provided to employees. Experts previously said the effect of such a requirement would be to accelerate the exodus of employers from sponsoring retiree health care plans.

c Allowing COBRA beneficiaries to retain coverage far beyond what current law requires. Under the measure, COBRA beneficiaries could continue coverage until they become eligible for group coverage under a new employer's plan or until they become eligible for coverage through new state health insurance exchanges, which the legislation would start in 2013.

Under current law, employees who terminate employment are entitled to up to 18 months of COBRA coverage, while employees' dependents can obtain up to 36 months of coverage in situations involving death, divorce or marital separation.