June 24 (Bloomberg) -- Senate legislation to overhaul the U.S. health-care system will likely drop a proposed mandate that all employers offer medical benefits to their workers or pay a penalty, a senior Democratic lawmaker said. The move may make it easier to reach a compromise with Senate Republicans o a bill.

Senator Kent Conrad of North Dakota, a member of the Finance Committee, said the panel is considering an alternative that would force employers to pay part of the cost of employee insurance if their workers are covered by Medicaid or are poor enough to qualify for a proposed new tax credit that can be used to purchase a health-insurance policy.

Conrad and committee Chairman Max Baucus, a Montana Democrat, also said a bill being drafted by the panel will tax employer-provided health benefits to help offset the cost of legislation they say will total about $1 trillion. Senators have discussed applying a tax on benefits valued at more than $15,000 to $17,000 for a family of four, but Baucus said the level is still under discussion.

“It is hard for me to see how you can have a package that is paid for that does not reduce the subsidy” on employer-paid benefits, Conrad said.

The two spoke amid a day of closed-door meetings by members of the panel. Some of the broad outlines of the emerging legislation are beginning to take shape.

Conrad Alternative

The issue that has sparked the most partisan division is the call by some Democrats for a new government insurance program that would compete against private insurers. Most Republicans oppose that approach, and Conrad has been floating an alternative that utilizes non-profit cooperatives rather than a government program to spark more competition.

President Barack Obama this week continued to push for a public option, but indicated he will listen to lawmakers’ ideas. When asked today whether the public program is “off the table,” Baucus declined to answer definitively while indicating that the panel will center what it does on “more robust, beefed up” co-operatives.

“The goal here to keep the insurance industry’s feet to the fire,” he said.

Panel members are crafting legislation that can meet Obama’s goal of bringing down the pace of health-care cost growth and expanding coverage to the 46 million Americans who lack insurance.

Obama is calling on Democratic congressional leaders to send him legislation by mid-October, and to seek Republican support.

Whittling Costs

Members of the panel today spoke by phone with Congressional Budget Office Director Doug Elmendorf to help whittle down costs that Conrad said still total around $1.2 trillion. One possible way to curb the expense is reducing subsidies to lower-income Americans, he said.

Conrad also said the committee is considering tax ideas that Obama promoted earlier this year. Obama suggested limiting deductions for expenses such as charitable gifts, mortgage interest, and investment-advisory fees.

Baucus earlier indicated he wasn’t giving Obama’s proposal much consideration.

Bipartisan Deal Sought

By dropping the employer mandate, Senate Democrats would raise their chances of having bipartisan legislation. Senator Charles Grassley of Iowa, the top Republican on the finance committee, says most Republicans oppose that mandate. Draft legislation in the House would impose a tax on employers who don’t provide benefits, equal to 8 percent of their payrolls, a proposal that the U.S. Chamber of Commerce is campaigning against.

The alternative under consideration would force employers to pay a pay a share of the cost if their workers receive Medicaid or qualify for a tax credit to buy coverage at group rates through a proposed new online “insurance exchange.”

If their employees get Medicaid, they would pay half of the national average Medicaid costs for their workers enrolled in the government program. They would pay 100 percent of the cost of the tax credit for workers that utilize that tax benefit.

Baucus said it will take time to get a bipartisan deal.

“Senators want to get to yes, but to get to yes they have to feel more comfortable.”

To contact the reporters on this story: Laura Litvan in Washington at llitvan@bloomberg.net and Nicole Gaouette in Washington at ngaouette@bloomberg.net

Last Updated: June 24, 2009 18:32 EDT