June 3 (Bloomberg) -- President Barack Obama called the next few months a “make-or-break period” for health-care legislation in Congress, as his aides left the door open to a tax on benefits to pay for overhauling the U.S. system.

Democratic senators, who met with the president at the White House yesterday, promised they would meet the deadline even as two contentious issues -- taxing employer-paid health insurance and setting up a government plan -- are unresolved.

“Soaring health-care costs are unsustainable for families, they are unsustainable for businesses, and they are unsustainable for governments,” Obama said before the meeting with lawmakers. “This is the time where we’ve got to get this done.”

The administration is kicking off a campaign to push Congress to meet Obama’s deadline of finishing work on drafting a measure before Congress leaves for its August recess. That would give lawmakers time for final negotiations and passage after they return to Washington in September. Top Democrats in the House and Senate said they would meet that timetable.

Democratic Plan

Democrats, who control both the House and Senate, are considering proposals that would require employers to cover all full-time workers or pay a penalty to the government; create a “health exchange” to allow consumers to buy insurance at lower, group rates; set up a new government-run plan to cover some of the uninsured; and levy new taxes to pay for universal coverage.

Max Baucus, Democrat of Montana and chairman of the Senate Finance Committee, made it clear yesterday that he wants to consider taxing at least some portion of employer-provided health-care benefits for workers.

He said lawmakers should consider “an appropriate limit” on benefits that are free to employees, and beyond that, there should be a tax to help pay for health-care overhaul legislation. Obama aides said the president, who opposed such a plan during his election campaign, is focused on paying for his proposals through other means. Still, they refused to rule out he would sign legislation that included such a tax.

“The president has serious concerns about taxing benefits,” Linda Douglass, the communications director for the White House Office of Health Reform, said in an interview today. “He doesn’t like it.”

Other Options

“While all options should be considered while they are talking about the different components of health reform,” Douglass said, “he believes that those options should include the revenue proposals that he had in his budget.”

In the meeting with senators, Obama reinforced his support to help finance a health-care overhaul by reducing itemized deductions for charitable contributions and limiting deductions on mortgage-interest payments for the wealthy, past of the administration’s budget package.

“That is a proposal that he’s very serious about, and that is what he was pushing,” Douglass said.

Baucus got a key ally on the tax issue in Republican Senator Judd Gregg of New Hampshire. Gregg, the senior Republican on the Health, Education, Labor and Pensions Committee, offered a measure that would pay for the overhaul by capping the tax exclusion for employer-provided benefits.

Republican Proposal

His legislation would include in employees’ taxable income any contributions employees and employers made for health-care coverage that, taken together, exceed $11,500 a year for family coverage or $5,000 a year for individual coverage.

Even with the differences over how to pay for the health- care plan, Baucus said lawmakers will meet Obama’s deadline.

“We will pass a comprehensive, meaningful health-care reform bill this year,” the Montana Democrat said.

Representative Charles Rangel of New York, chairman of the House Ways and Means Committee, said he expected the House legislation would be finished in July and that a bill could be on the president’s desk by Oct. 1.

Another point of debate is whether to establish a government-run insurance plan to make sure coverage is universal.

Senator Sherrod Brown, an Ohio Democrat, said the “sentiment in the room at the White House meeting was that Democrats want a strong public plan.

Senator Bernie Sanders, a Vermont independent, said Obama expressed support for a public option.

“He understands that in order to at least police the private insurance companies we need a strong public plan,” Sanders said.

Opposition

That will run into strong opposition from Republicans.

Charles Grassley of Iowa, the top Republican on the Senate Finance Committee, said any attempt to win Republican votes on a compromise will be tough if Democrats push through a public insurance system that will compete with private insurers.

Grassley said he was dismayed that Republicans weren’t invited to this afternoon’s White House meeting.

Grassley said that, at a lunch he had with Obama a month ago, the president indicated he wanted support from both parties. Obama said he would rather get 85 percent of what he wants to achieve if it has bipartisan backing, rather than win everything with only Democratic support, according to Grassley.

“I think this president, when he says he wants bipartisanship, is very sincere,” Grassley said. “But he’s got people of his party in Congress who have been out of power for 14 years, and they know what they want and they’re going to get it and disregard their president.”

Grassley said the meeting today provides a “fork in the road,” where Democrats can decide to proceed with a bipartisan plan, or to go it alone on legislation.

To contact the reporters on this story: Roger Runningen in Washington at rrunningen@bloomberg.net; Laura Litvan in Washington at llitvan@bloomberg.net

Last Updated: June 3, 2009 11:32 EDT