Sept. 30 (Bloomberg) -- New York Senator Charles Schumer and fellow Democrats vowed to keep fighting for a government- run health-insurance program on the U.S. Senate floor after the finance committee defeated the proposal yesterday.

The panel rejected amendments offered by Schumer and West Virginia Senator Jay Rockefeller to create a “public option” that would compete with private insurers such as Indianapolis- based WellPoint Inc. Panel chairman Max Baucus and two other Democrats joined with all of the committee’s Republicans to vote against both amendments.

While Baucus said he was voting against the program because it couldn’t pass the Senate “at this point,” Schumer said he sees growing support. The public option has been the biggest point of contention in the debate over revamping the nation’s health system, with many Democrats arguing it would curb costs and Republicans saying it would hinder competition.

“I’m more optimistic than I was six hours ago,” Schumer, the No. 3 Senate Democratic leader, told reporters after his amendment was defeated. “Every day, I get more optimistic that we can get this passed.”

The idea already has widespread support in the House, where it’s included in legislation passed by three committees. House Speaker Nancy Pelosi says she can’t get a measure through without a public option, and a showdown between the two chambers looms if the Senate ends up dropping it altogether.

“The public option is on the march,” Rockefeller told other members of the Senate finance panel yesterday.

Paring Losses

Health insurance stocks pared losses after the votes. The Standard & Poor’s index of the six largest managed-care companies fell 1.2 percent yesterday, after dropping as much as 3.5 percent earlier in the day. Coventry Health Care Inc. of Bethesda, Maryland, rose 12 cents, or 0.6 percent, to $19.94.

Later in the evening, the Senate panel unanimously adopted an amendment by Iowa Senator Charles Grassley and Kentucky Senator Jim Bunning, both Republicans, to require lawmakers, their aides and all other federal employees to buy their insurance from health insurance exchanges created by the legislation after 2013.

The next major battle for insurers is over taxes to pay for the plan’s estimated $900 billion cost over 10 years. Baucus’s proposal, the framework for the finance panel’s debate, includes a tax on high-end, or “Cadillac,” health-benefits plans. The insurance industry opposes new taxes as well as the public option, saying they would disrupt coverage.

Baucus’s committee will begin a sixth day of debate today, missing the chairman’s original target of three days. The group has been working late into the evenings and is holding the longest “mark-up” of a measure in 15 years, Baucus said.

‘Interesting Week’

“It’ll be an interesting week,” the Montana Democrat told senators as he convened yesterday’s meeting. “We are clearly giving this bill the due consideration it deserves.”

The three House committees and the Senate health panel finished their work in July on legislation designed to rein in health-care costs and cover tens of millions of uninsured Americans. Baucus spent two extra months trying to court Republican votes for his plan, so far unsuccessfully.

As part of that effort, he ditched the idea of a public option in favor of nonprofit, member-run insurance cooperatives that would get government seed money. Under his proposal, insurers would also have to issue policies to all who need them and face restrictions on the premiums they can charge the youngest and oldest policy holders.

“My job is to put together a bill that will become law,” Baucus said before the vote on Rockefeller’s amendment. “I fear if this provision is in this bill as it comes out of this committee, it will jeopardize” the overhaul effort, he said.

Focus on Families

Rockefeller said his amendment, which was defeated 15-8, would probably save $50 billion over 10 years and reduce costs for families, not focus on profits for insurers.

“Why would we not do this?” he said. “People come second and the profits come first if we’re against this.”

The Rockefeller amendment would have initially pegged the rates that the public option paid health-care providers to the lower levels paid by Medicare, the government program for the elderly. Schumer’s proposal would have required the program to negotiate rates with providers, as private insurers do.

“We’re going to keep at this and at this and at this until we succeed,” said Schumer, whose amendment went down 13-10.

Democratic Senators Bill Nelson of Florida, Blanche Lincoln of Arkansas, Thomas Carper of Delaware and Kent Conrad of North Dakota joined Baucus to vote against Rockefeller’s plan. Lincoln and Conrad also voted with Baucus against the Schumer amendment.

Reducing the Price Tag

Democrats in the House are now combining the three panel measures and debating whether the public option program should be allowed to peg payments to Medicare.

House leaders have developed a path to reducing the plan’s price tag to meet President Barack Obama’s demand that it not add to the federal budget deficit, Pelosi told reporters yesterday. She declined to give details.

If the Senate finance panel passes its legislation, Senate leaders must combine the measure with one passed by the health committee and then schedule a chamber vote. It would have to be merged with a House version before more votes.

“At the end of the day, Democrats are going to coalesce, they’re going to come up with an agreement,” said former Senate Democratic leader Tom Daschle, a Bloomberg Television contributor, in an interview yesterday.

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

Last Updated: September 30, 2009 00:01 EDT