June 12 (Bloomberg) -- Senators Max Baucus and Charles Grassley have spent eight years cutting deals on issues from taxes to trade. Now what may be one of the strongest bipartisan relationships in Congress is facing its biggest test over health care.

Grassley, the top Republican on the Finance Committee, says he won’t back legislation to overhaul the U.S. health-care system unless Democrat Baucus, the panel’s chairman, abandons some of his party’s key goals. Among them: a government-run insurance plan and a mandate that employers cover workers.

“The biggest challenge he has in his own caucus is that a large share of Senate Democrats really want the government to run everything,” said Grassley, 75, an Iowa farmer and former chairman of the panel, which is taking the lead on the bill.

As Congress enters what President Barack Obama calls the “make or break” period for the landmark legislation, the two lawmakers’ ability to reach an accord may determine whether the Senate approves the broad, bipartisan bill Obama wants or resorts to a piecemeal measure that only Democrats can support.

The stakes are huge for companies such as UnitedHealth Group Inc., WellPoint Inc. and Humana Inc. that are resisting a government-operated insurance plan and will likely face a host of new underwriting restrictions.

Baucus, 67, the scion of a Montana ranching family who has split with his party before, says he’s willing to compromise, even though many Democrats may not be. The party has a 59-40 advantage in the Senate.

‘Something Sustainable’

“It’s very important to get bipartisan consensus on something as big and large as health-care reform,” he said in an interview. “We want something sustainable.”

Baucus, Grassley and other senators met with Obama at the White House for two days this week to try to reach an agreement. The lawmakers are weighing one plan that would use nonprofit cooperatives to negotiate directly with health-care providers to get low-cost coverage for the uninsured. That could remove the biggest obstacle to an accord, a government-run program.

Grassley said the plan has “possibilities,” although he said it’s too soon to say whether Republicans will go for it.

The bill would next go to the House, where Democrats are drafting legislation that includes a Medicare-like public program. Trying to resolve differences between Senate and House bills could reopen partisan divisions even if Baucus and Grassley can reach an accord.

August Deadline Looms

Obama is pushing Congress for an August deadline to finish work on a bill to revamp a system that makes up 17 percent of the economy and still leaves 46 million people uninsured.

That heightens the pressure on Baucus and Grassley. The focus on the lawmakers is also sharpened by the illness of Senator Edward Kennedy of Massachusetts, the chairman of the health, education and labor committee who has crusaded for expanded health care throughout his 47-year Senate career.

Kennedy, 77, continues a battle with brain cancer and has been unable to take a lead role in the debate. Still, he drafted a version of the bill that might go beyond what Baucus is considering. It would require employers to cover all full-time workers or pay a penalty; create a “health exchange” to allow consumers to buy insurance at group rates; and levy taxes to pay for universal coverage.

Kennedy also supports a government-operated insurance program. Many proponents of the “public option” say it will offer competition to private insurers that would give them an incentive to treat customers better and keep costs down.

Follow Same Rules

Executives at Minnetonka, Minnesota-based UnitedHealth Group, Indianapolis-based WellPoint and Louisville, Kentucky- based Humana say a government-run alternative could hurt their business.

Senator Charles Schumer, a New York Democrat, has suggested a compromise in which a public plan would be sustained by its own premiums, not by government funding, and follow the same regulations as private competitors. Such a plan would be the “minimum starting point” for a conversation with insurers, said Bradley Fluegel, a WellPoint executive vice-president, in an interview.

Still, WellPoint believes a government option isn’t necessary at all, he said. The system can be fixed through changes in the private market, such as the industry’s offer to cover people regardless of pre-existing medical conditions, Fluegel said.

Strain the Limits

The deliberations may strain the limits of a Baucus- Grassley relationship in which the two have swapped the Finance Committee chairmanship three times in eight years. Their cooperation has yielded bipartisan passage of such measures as President George W. Bush’s 10-year, $1.35 trillion tax-cut package in 2001 and the 2003 Medicare prescription-drug benefit. Baucus was criticized by unions and other Democratic-leaning groups after the tax-cut and Medicare measures.

The two lawmakers have sometimes parted. In 2005, Baucus helped quash Bush’s bid to create private investment accounts in Social Security, an idea Grassley supported. Baucus vexed Grassley this year by helping push through the Senate an expansion of the State Children’s Health Insurance Program that went beyond a version Grassley agreed to in 2007.

Grassley said Republicans haven’t always gone along with his compromises with Baucus. When he struck the 2007 deal on children’s health insurance with Baucus, Grassley was surprised when fewer than 20 Senate Republicans backed it.

Fiery Temper

“I don’t know that he’s taken any more heat in his party than I’ve taken from Republicans for working with him,” said Grassley, whose folksy demeanor belies a sometimes fiery temper. Earlier this year, when American International Group Inc. gave $165 million in bonuses to executives after a federal bailout, he said executives of the New York-based insurer should follow Japanese tradition and “resign or go commit suicide.”

Baucus, a Stanford Law School graduate who at the end of his sixth Senate term will be the longest-serving finance panel member in history, says he and Grassley have much in common.

“Neither of us wears our egos on our sleeve,” he said. “We’re both Midwesterners, kind of. We’re from ranching families. Neither of us wants to be president.”

The two don’t socialize much and rely almost entirely on hour-long meetings every Tuesday, usually at 5 p.m. in Baucus’s office, to discuss issues.

Their ability to work together, and the lack of strong industry resistance so far, may open the way for passage of legislation that will dominate U.S. social policy for decades, said Senator Ron Wyden, an Oregon Democrat and senior Finance Committee member. Still, Baucus and Grassley face a challenge because most Senate Republicans are wary of an expanded government role, and Democrats have divergent views, he said.

‘A Real Tightrope’

“It’s a real tightrope,” said Wyden.

Some Republicans, such as Senator Orrin Hatch of Utah, who serves on both the Finance and the Health committees, said the party will reject any plan that includes a public option and tax increases, or one they consider too costly.

Baucus said there are ways to structure a new public program that might appeal to more Republicans. “There’s a lot we can trade off,” he said.

To contact the reporter on this story: Laura Litvan in Washington at llitvan@bloomberg.net

Last Updated: June 12, 2009 11:22 EDT