Nov. 19 (Bloomberg) -- Senate Majority Leader Harry Reid unveiled an $848 billion health-care plan that would create new government competition for private insurers, cover almost all Americans and raise a payroll tax on the highest earners.

Reid’s proposal, the most sweeping overhaul of the U.S. health system in four decades, cleared a major hurdle when the Congressional Budget Office said it would cut the federal budget deficit by $130 billion in the first decade. That met a standard set by President Barack Obama and allows Reid to seek a vote on Saturday to open the way for Senate debate.

The 2,074-page Senate bill would cover 94 percent of all Americans, extending coverage to 31 million uninsured people, lawmakers said. The House passed its version on a vote of 220- 215 on Nov. 7.

“Generation after generation has called on us to fix this broken system, and we are now closer than ever to getting it done,” Reid said at a press conference today.

The road ahead is full of obstacles. Senate Republicans are universally opposed to his plan and Democrats are divided over issues ranging from the new government-insurance plan to how to pay for the measure. An even bigger battle looms when the Senate and House try to work out a compromise, each pushing for their own version of the legislation.

Calendar Threat

The calendar is also increasingly a threat. Should work spill into next year, the congressional elections and breaks in the legislative schedule may open the effort up to the same types of criticism that dogged Democrats during their August recess. Democrats in tight re-election battles might be tempted to defect from their party’s agenda.

The legislation is intended to reduce the ranks of the uninsured and curb rising medical costs. Both the House and Senate versions require that Americans get health coverage or pay a penalty, set up online insurance-purchasing exchanges and offer government aid to help lower-income people.

While Obama has said he wants to sign health-care legislation into law this year, Reid has faced months of setbacks and signs the Republicans want to prolong the debate.

“We’re closer than ever to enacting solutions to these problems,” Obama said in a statement released by the White House. “I look forward to working with the Senate and House to get a finished bill to my desk as soon as possible.”

Reid’s Gamble

Reid included a so-called public option to compete with private insurers such as Hartford, Connecticut-based Aetna Inc. even though it’s opposed by all Senate Republicans and some Democrats. He’s gambling he can get support to start debate on a bill that is likely to be rewritten later.

Much of the funding for the Senate bill would come from a tax on high-end insurance. That so-called Cadillac tax would be assessed for plans valued at $8,500 for individuals or $23,000 for families, with higher thresholds for high-risk workers and people living in states with costlier premiums.

Reid settled on a Medicare payroll tax increase for some Americans, raising the rate to 1.95 percent from 1.45 percent for couples earning more than $250,000.

He also plans a new commission to help set rates paid by Medicare, the government program for the elderly.

Cosmetic Surgery Tax

Another twist is Reid’s decision to put a 5 percent tax on elective cosmetic surgery. Still, much of the funding for the bill would come from cuts in future Medicare spending, largely through curbing fraud and abuse, Obama and lawmakers have said.

Reid took steps to keep the costs down in the CBO estimate in part by delaying many elements of the bill to 2014 from 2013, including establishment of the insurance exchanges and their subsidies for the poor.

In the second decade of implementation, the Senate legislation would lead to “small reductions in federal budget deficits,” according to a CBO estimate. Yet “those estimates are subject to substantial uncertainty.”

The CBO said the new public option would likely cover only about 3 million to 4 million people and that about two-thirds of the public would have a government program offered in their state. Reid’s public option would probably have premiums “somewhat higher” than what private companies offer, largely because it would attract sicker people, it said.

Betting Against Option

Still, the public option is so unpopular among many lawmakers that just 3 percent of online traders believe Congress will enact a health-care plan containing the program by the end of the year, according to Dublin-based Intrade. It’s the fourth- most-traded issue on the online exchange. The odds jump to 19 percent, based on yesterday’s close, for Congress to pass a plan including the public option by March 2010.

Under Reid’s bill, companies with 50 or more workers would face penalties if they don’t provide coverage and have workers who get taxpayer-funded subsidies to buy policies. It also includes a federally run long-term care insurance plan that would let workers pay premiums and then get a cash benefit later for adult day care or assisted-living expenses.

Like the House legislation, Reid’s plan would bar insurers from denying coverage based on pre-existing conditions and help seniors pay for prescription drugs.

To win passage, Reid has to keep all 60 votes controlled by Democrats together. Three Democratic senators - Ben Nelson of Nebraska, Mary Landrieu of Louisiana and Blanche Lincoln of Arkansas - have declined to say they’d support opening the debate.

Lieberman Says No

And Connecticut Senator Joe Lieberman has been critical of the public option. Lieberman, an independent who caucuses with Democrats, said he would support the vote to start debate and work with lawmakers to strip out the government program.

Maine Senator Olympia Snowe, the only Republican to vote for a health plan in the committee phase, said she can’t support a public option. Senator Orrin Hatch, a Utah Republican, said it’s doubtful any Republican will back Reid.

Reid has safeguards to keep federal dollars from funding abortion, though not the restrictions adopted in the House. Abortion rights supporters have threatened to vote against a final bill if it contains the House language and have been working to keep it out of the Senate version.

If the Senate passes legislation, it would work with the House to come up with a compromise plan for a new round of votes in both chambers before a bill would go to Obama.

With the two chambers still far apart on some key issues, including the employer mandate and the abortion issue, speculation is running high that the debate will at least spill into next year and could fail altogether.

To contact the reporters on this story: Laura Litvan in Washington at llitvan@bloomberg.net; Kristin Jensen in Washington at kjensen@bloomberg.net

Last Updated: November 19, 2009 17:42 EST