"While the public option is not a silver bullet, I believe it's an important way to ensure competition and to level the playing field for patients with the insurance industry," Reid, D-Nev., said during a news conference.
Reid and Sens. Christopher Dodd, D-Conn., and Max Baucus, D-Mont., chairmen of the Senate committees on health and finance, have been meeting for several weeks to meld the two committees' bills into one.
States would be able to opt out of the government-run insurance program if they choose, Reid said.
"I believe that a public option can achieve the goal of bringing meaningful reform to our broken system," Reid said. "It will protect consumers, keep insurers honest and ensure competition. And that's why we intend to include it in the bill that ... will be submitted to the Senate."
The White House, in a statement, hailed the action, saying, "(We're) closer than we've ever been to solving this decades-old problem. And while much work remains, the president is pleased that at the progress that Congress has made."
President Barack Obama also was pleased that "the Senate has decided to include a public option for health coverage, in this case with an allowance for states to opt out."
Reid said he would be sending the proposal to the non-partisan Congressional Budget Office for scoring, a move that "will make us a step closer to achieving a bill this year that lowers costs, preserves choice, creates competition and improves quality of care."
Reid said he believed the opt-out, public option "will have the support of my caucus to move to this bill and start legislating" once it is returned from the CBO.