July 16 (Bloomberg) -- The head of the Congressional Budget Office dealt a setback to House and Senate lawmakers seeking to overhaul the U.S. health system, saying their plans won’t curb government spending on medical care.

“We do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount,” Douglas Elmendorf, director of the nonpartisan agency, told the Senate Budget Committee today. “On the contrary, the legislation significantly expands the federal responsibility.”

Elmendorf’s comments on drafts issued by one Senate panel and three House committees may hinder efforts to pass the biggest expansion of health care in four decades. His office releases cost projections that may make or break legislation.

Democrats are struggling to craft legislation that will meet the twin goals of trimming health-care costs and expanding coverage to an estimated 46 million uninsured Americans. One of the thorniest issues is how to pay for the measure, which is likely to cost more than $1 trillion over a decade.

Three House committees with jurisdiction over health care worked today to amend a 1,018-page measure unveiled on July 14 by their chamber’s leaders. The Senate health committee cleared its version on a party-line vote yesterday. Senate Finance Committee Chairman Max Baucus said his panel didn’t reach a deal tonight and voiced confidence it can succeed next week.

Critical of Obama

Baucus earlier complained that President Barack Obama has made his job harder by joining labor unions in opposing the idea of taxing health-care benefits to pay for the plan. “That’s making it more difficult,” Baucus said.

House Speaker Nancy Pelosi today signaled that her chamber may scale back a proposed a tax on the wealthiest Americans after the idea drew fire from Republicans and members of her own party. The plan called for a surtax on annual incomes of more than $350,000 that graduated to a 5.4 percent surtax on couples making more than $1 million a year.

The government may be able to trim costs in the system enough to reduce the tax, Pelosi said.

“If we can get more savings, we can perhaps lower the percentage that the high end will pay,” Pelosi, a California Democrat, told reporters at a press briefing in the Capitol today. “To the extent we get the cooperation of those who want to squeeze in the system, we can do less on the tax side.”

Elmendorf’s Testimony

Elmendorf’s testimony raises questions about the level of savings that lawmakers will be able to achieve. He said the plan by the Senate Health, Education, Labor and Pensions Committee would worsen the overall outlook for the government’s budget, and a review so far of the House proposal hasn’t found change “of the order of magnitude” needed to make up for increased insurance coverage costs.

Republicans quickly seized on Elmendorf’s comments.

The testimony “should be a wake-up call” to lawmakers, Senate Republican Leader Mitch McConnell said in a statement. It confirms Republican arguments that the Democratic plan “would actually make things worse.”

John Boehner, the House Republican leader, said Elmendorf’s testimony shows “the Democrats’ government takeover will drive health-care costs even higher.”

Democratic leaders expressed frustration.

Asked about Elmendorf’s comments, Senate Majority Leader Harry Reid said, “what he should do is run for Congress.”

‘Worst-Case Scenario’

Pelosi had already taken aim at the CBO on June 18. “The CBO will always give you the worst-case scenario on one initiative and never a best case,” she told reporters.

Lawmakers’ efforts have so far mainly featured missed deadlines as the House and Senate race to pass their own versions of the legislation by an August goal set by Obama.

Obama scored a victory when the Senate health committee became the first congressional panel to vote on a plan, clearing its measure on a party-line, 13-10 vote yesterday. That plan will be merged with one that comes out of the Senate Finance Committee.

The three House panels working on health care -- the Education and Labor, Energy and Commerce and Ways and Means committees -- aim to finish their portions of the bill by tomorrow or early next week, staff members said.

The House version of the measure would also be financed with a 1.5 percent tax on couples with incomes between $500,000 and $1 million and a 1 percent surtax on incomes over $350,000. Depending on the savings that emerge from the overhaul, those rates may go up or disappear, according to the plan.

Surtax Skepticism

The idea of imposing a so-called millionaire’s tax to help fund the health-care expansion was met with skepticism by Democrats including Senator Ben Nelson of Nebraska. And Democratic leaders can’t afford to alienate many lawmakers as they push toward a compromise measure that will eventually have to pass both the House and Senate.

“We should be able to find more savings,” Pelosi said. She also said some of the surtax might be used to help cut the federal budget deficit. “It will be directly to reduce the deficit or to reduce the deficit by helping cover the cost of this initiative,” she said.

Pelosi’s comments may also have been aimed at the 40 Democrats of the Blue Dog Coalition, who describe themselves as fiscally conservative. The group has urged leaders to insist on bigger changes to the health-care system to find savings, and some have complained the surtaxes would hurt small businesses.

Not ‘First Choice’

The surtax is “not my first choice,” one Blue Dog Democrat, Stephanie Herseth Sandlin of South Dakota, said yesterday. “I’ve got some concerns.”

Arkansas Representative Mike Ross, the group’s chairman, said the Blue Dogs couldn’t support the current House measure.

Among other things, the House version calls for a public- health insurance plan and includes mandates on employers and individuals to purchase coverage. Both issues are sticking points in the Senate Finance Committee.

The committee’s negotiations aren’t likely to get any easier after some of its Democratic members yesterday said they want insurers to pay as much as $100 billion of the overhaul and may push to assess fees on the industry. America’s Health Insurance Plans, a Washington trade group that represents the industry, criticized the proposal.

“As families and small businesses struggle during the current economic slowdown, now is not the time to impose new fees on health-care coverage that will make coverage less affordable,” said Robert Zirkelbach, a spokesman for the group.

‘Complex, Costly’

Obama met with both Nelson and Republican Senator Olympia Snowe of Maine at the White House today. Snowe, a member of the finance panel who in the past has been willing to support Obama initiatives, said she told the president the Senate may need more time even as he stuck to his August deadline.

“We have a very complex, costly endeavor, something that has never been undertaken by the United States Congress,” Snowe told reporters after her meeting with Obama. “So it is important that we get this right.”

To contact the reporters on this story: Jim Rowley in Washington at jarowley@bloomberg.net; Kristin Jensen in Washington at kjensen@bloomberg.net

Last Updated: July 16, 2009 19:45 EDT