In their first face-to-face talks on merging health bills in the Senate and House of Representatives, Democratic leaders worked through differences on how to pay for the overhaul, how to structure new insurance exchanges and a host of other issues.

In a joint statement afterward, House Speaker Nancy Pelosi, Senate Democratic leader Harry Reid and Obama said they were encouraged and energized by the discussions.

Today we made significant progress in bridging the remaining gaps between the two health insurance reform bills, the statement said.

Obama popped in and out of the meeting in the White House Cabinet room with Pelosi, Reid and nine other top leaders in each chamber. White House officials there included Vice President Joe Biden, Chief of Staff Rahm Emanuel and Health and Human Services Secretary Kathleen Sebelius.

Staff members will continue talks and congressional leaders plan another White House meeting on Thursday, a Democratic aide said.

Prospects of reaching agreement between the Senate and the House are better than they were 24 hours ago. We're getting close, House Democratic leader Steny Hoyer said.

The House and Senate versions of the overhaul, Obama's top legislative priority, must be melded into one bill and passed again by each chamber before Obama can sign it.

Both bills would extend insurance coverage to more than 30 million uninsured Americans, create exchanges where individuals can shop for insurance plans and halt practices such as refusing insurance to people with pre-existing conditions.

DIFFERENT APPROACHES

But the two chambers have clashed on how to pay for the changes, with House Democrats and labor unions in sharp opposition to a Senate tax on high-cost insurance plans that Obama has endorsed.

Critics say the tax will hit middle-class families and union members who gave up higher wages for better health benefits. House-Senate negotiators are considering raising the threshold for the tax and exempting certain industries.

One way negotiators might replace some of the lost revenue would be to raise the payroll tax on Medicare, the health program for the elderly, and extend it to income from investments by the wealthiest Americans.

With public opinion polls showing majorities opposed to the healthcare overhaul, Republicans said on Wednesday they were confident they could still block final passage.

This healthcare bill can be defeated, Eric Cantor, the No. 2 Republican in the House, told reporters.

He said Republicans would target 37 Democrats from more conservative districts who backed the bill in November but could face political consequences in hopes of getting them to switch positions.

The choice for them is: Are they going to be with the people, or are they going to be with Pelosi? Cantor said.

A shift of three votes in the House could doom the bill, which passed by a 220 to 215 vote in November. The Senate has even less room for error; the bill passed on Christmas Eve with exactly the 60 votes it needed to overcome unified Republican opposition. A defection could ruin its chance of passage.

Because of the narrow margin in the Senate, the version produced by that chamber has served as the framework for negotiations.

But the House has pushed for a more generous level of federal subsidies to help expand coverage to the uninsured and to adopt a single national insurance exchange. The Senate bill calls for state-based exchanges.

The House's version of a government-run insurance plan was not included in the Senate bill and is almost certainly dead.

Democratic Representative John Larson cautioned against reading too much into the problems merging the bills.

How many times throughout the course of the year have we heard that this bill is dead? How many times have we heard that there are problems, Larson said.

Democrats hope to finish the bill before Obama's State of the Union speech in early February.

(Additional reporting by Thomas Ferraro, Ross Colvin and Andy Sullivan; editing by Cynthia Osterman and Philip Barbara)

Eric cantor Joe biden Nancy Pelosi Barack obama