A Senate panel on Tuesday rejected a government-run public insurance option as part of a broad healthcare overhaul, handing insurers an early victory and setting the stage for a long fight over one of the bill's most contentious issues.

The two votes in the Senate Finance Committee were the first of several battles expected in Congress over a public insurance option, a flashpoint in the raging debate over President Barack Obama's top domestic priority.

The panel's Democratic chairman, Max Baucus, opposed both amendments and said Democrats could not muster the 60 Senate votes needed to clear Republican procedural hurdles and pass a healthcare reform bill if it includes the public option.

I can count, Baucus said. No one has been able to show me how they can count up to 60 votes with a public option in the bill.

Supporters of the option disagreed and said they would have more success when the issue is taken up in the full Senate and in the House of Representatives, where Speaker Nancy Pelosi has vowed it will be in a final bill.

The more the American people hear about the public option, the more they like it, said Democratic Senator Charles Schumer, sponsor of one of the amendments. We're going to keep at this ... until we succeed.

The Senate Finance proposal by Baucus is the only one among several healthcare reform bills pending in Congress that does not have a public insurance plan, which Obama and other backers say would boost competition for insurers.

Republican critics say the public option would devastate the private insurance industry, which has strongly opposed the measure, and ultimately lead to a government takeover of the sector.

Democratic Senator John Rockefeller, who offered the other amendment to insert a public option, said the approach would give the public more choices and force the insurance industry to compete.

Who comes first, the insurance companies or the American people? he asked.

Senator Charles Grassley, the senior Republican on the panel, said the public option would represent a first step toward the eventual goal of Democrats -- a complete government-run health insurance system.

'DRIVE INSURERS OUT OF BUSINESS'

A government-run plan will ultimately drive private insurers out of business, Grassley said. If you support government bureaucrats, not doctors, making decisions, you should support this amendment.

Obama supports a public option but has signaled it is not essential to a final bill as long as there is a way to boost choices for consumers and create competition for insurers.

Five Democrats joined panel Republicans to oppose Rockefeller's amendment, 15-8. The second amendment, by Schumer, failed 13-10 with three Democrats opposed -- Baucus, Kent Conrad and Blanche Lincoln.

Democrats, who have 60 votes in the 100-member Senate, have not been successful in attracting Republican support, leaving them vulnerable to party defections on a Senate healthcare vote. But so far no Democrats have said they would vote to support Republican procedural tactics to block the bill.

The panel's votes came as it opened its second week of debate on an overhaul of the $2.5 trillion healthcare system.

The panel is expected to finish by early next week and send the bill to the full Senate, where Democratic Leader Harry Reid will merge it with one passed by the Senate Health committee.

The $900 billion Baucus bill is designed to control costs, regulate insurers and expand coverage to more of the 46 million uninsured people living in the United States.

The proposal would create state-based exchanges where individuals andsmall businesses could shop for insurance, but would not offer a government-run plan as an option.

As an alternative, the committee's bill would create nonprofit insurance cooperatives to create competition. Rockefeller and other public option backers say cooperatives are unproven and would not offer enough competition.

Conrad, the prime proponent of cooperatives, said there were plenty of innovative models using non-profit approaches that have been tried around the world.

We've gotten locked in a really sterile debate that says the only alternatives are what we've got now or a public option, Conrad said.

Rockefeller's amendment would have tied reimbursement rates for healthcare providers to the lower rates under Medicare, the health insurance plan for the elderly, for two years.

If that happens, Conrad, who is from North Dakota, said, every major hospital in my state goes broke.

Schumer's amendment would have required the plan to negotiate with providers as private insurers do.

Rockefeller and Schumer said they had expected the issue to lose in the more conservative Senate panel but just wanted to kick off debate to allow momentum to build. Republicans were skeptical.

If it's so popular, why are there so many Democrats who have a problem with it? Republican Senator John Ensign asked of the public option.

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