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(For more on U.S. healthcare reform, click [nN20512341])
* Obama praises Senate deal on alternative public option
* Senate proposal could resolve big stumbling block
* Proposals submitted to CBO for cost estimates (Adds reaction, details, background)
By John Whitesides
WASHINGTON, Dec 9 (Reuters) - U.S. President Barack Obama on Wednesday endorsed a compromise on a public insurance option reached by Senate Democratic negotiators and said it could clear the way for passing a sweeping healthcare reform bill.
After four days of private talks, Senate negotiators agreed late on Tuesday to replace a government-run public insurance option with a non-profit approach featuring private insurers, potentially resolving the bill's biggest stumbling block.
"The Senate made critical progress last night with a creative new framework that I believe will help pave the way for final passage and an historic achievement," Obama said at an event attended by congressional leaders.
"I support this effort, especially since it's aimed at increasing choice and competition and lowering cost."
Shares of health insurers initially rose on expectations the Senate would jettison a government-run insurance plan viewed as damaging to the industry, but later lost those gains as the market focused on proposed new rules.
Under the tentative Senate deal, the federal Office of Personnel Management would negotiate with private insurers to offer national non-profit health plans similar to those offered to federal employees.
Liberal Senate negotiators, who backed the public option as a way to create more competition for insurers, agreed to drop their support in exchange for allowing people aged 55 to 64 to "buy in" to the Medicare health plan for the elderly, which now begins at age 65.
The deal includes a provision that would require insurers to spend 90 percent of revenue from premiums on medical services, which could crimp their profits.
All of the provisions have been sent to the non-partisan Congressional Budget Office for cost estimates, which are expected within the next five days. Senate Democratic leader Harry Reid will then decide which parts to move ahead with.
The deal could make it easier for the Senate's Democratic leaders to meet their self-imposed end-of-the-year deadline to pass a bill, which would then have to be reconciled with a version approved by the House of Representatives on Nov. 7.
The House bill includes a large government-run public insurance option, creating a potentially difficult negotiation when the two chambers try to merge their bills.
Opposition to the government-run plan among some Democratic Senate moderates has been one of the biggest hurdles for the healthcare overhaul, Obama's top domestic priority.
The Senate is on its 10th day of debate on the bill, which would extend coverage to 30 million uninsured Americans and halt industry practices like refusing coverage to people with pre-existing medical conditions.
Obama backed the public option as a way to expand choices for consumers and competition for insurers, but he had signaled for months it was not an essential part of a final overhaul.
Reaction to the Senate proposals was mixed on Wednesday. Liberal Howard Dean, a former presidential candidate and a supporter of a government-run insurance plan, said the compromise was "a positive step forward."
"This is what should have been done in the first place," he told the "Early Show" on CBS.
But the liberal activist group "Move On" sent an e-mail to members saying senators had "bargained away the heart of healthcare reform."
Senator Joe Lieberman, an independent who promised to oppose any bill with a government-run plan, was "encouraged" by the deal. He said he wants to see the costs, particularly on the Medicare provisions, before deciding on his support.
The S&P Managed Healthcare index .GSPHMO of larger U.S. health insurers rose initially rose by as much as 2.5 percent before losing those gains to trade slightly lower. The broader market, in contrast, was slightly higher in afternoon trade.
Market analysts cited concerns over the regulations on insurers and the details of the Medicare expansion.
Bruce Josten, executive vice president of the U.S. Chamber of Commerce, told business executives the deal had not changed the chamber's opposition to the healthcare package.
"We oppose a government-run public plan in all of its forms, no matter how it is tweaked, no matter how it is contorted," Josten said. (Additional reporting by Thomas Ferraro and Patricia Zengerle; Editing by John O'Callaghan)