WASHINGTON - President Barack Obama told Congress on Wednesday that any requirement for mandatory health insurance in a proposed overhaul of the U.S. healthcare system should allow exemptions for the poor and for small businesses.

Obama, setting out requirements for a healthcare bill he hopes will be passed by October, told the chairman of the two Senate Committees drafting the legislation that he was open to the idea of insurance mandates, which he had opposed during his presidential election campaign.

But he wrote in a letter to key senators that any such mandates would have to allow those who cannot afford insurance and small businesses to opt out. This could make the proposal less palatable for the insurance industry.

Obama also repeated strong support for a new government insurance plan to help cover an estimated 46 million uninsured Americans, setting up another clash with Republicans and private insurance companies who fear they will be squeezed out of business.

I strongly believe that Americans should have the choice of a public health insurance option operating alongside private plans, Obama said in the letter to Senators Edward Kennedy and Max Baucus who are taking a lead in writing the legislation.

Obama's letter followed a White House meeting on Tuesday with key Senate Democrats and made clear what he expected in the bill he wants Congress to pass by October.

Obama said a public plan that would compete with private companies would give people more choices and keep insurance companies honest.

COMPETING AGAINST GOVERNMENT

Republicans in Congress and insurance companies have expressed concern about the potential role of a government plan, with many fearing that it would become so big that it would effectively become a monopoly.

Kennedy heads the Health, Education, Labor and Pensions Committee and Baucus chairs the Senate Finance Committee. The two panels expect to draft and vote on healthcare legislation this month.

Obama reiterated his proposals to finance the reform, specifically a limit on the value of itemized deductions for wealthy taxpayers.

Baucus has been considering limiting tax benefits for employer-provided health insurance, which Obama opposes, although he said on Monday that Obama might be open to discussing the issue.

Obama's letter said he was committed to enacting appropriate proposals to generate additional revenues through strategies such as improving technology and going after rocketing costs including unmanaged chronic diseases, duplicate tests and unnecessary hospital readmissions.

Obama also said he was committed to finding more cost savings in the Medicare and Medicaid government insurance plans for the elderly and poor than proposed in his budget.

(Reporting by Donna Smith and Doug Palmer; Editing by Andrew Quinn and David Storey)

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