Senate Majority Leader Harry Reid (D-Nev.) on Tuesday strongly urged Finance Chairman Max Baucus (D-Mont.) to drop a proposal to tax health benefits and stop chasing Republican votes on a massive health care reform bill.

Reid, whose leadership is considered crucial if President Barack Obama is to deliver on his promise of enacting health care reform this year, offered the directive to Baucus through an intermediary after consulting with Senate Democratic leaders during Tuesday morning’s regularly scheduled leadership meeting. Baucus met with Finance ranking member Chuck Grassley (R-Iowa) on Tuesday afternoon to relay the information.

According to Democratic sources, Reid told Baucus that taxing health benefits and failing to include a strong government-run insurance option of some sort in his bill would cost 10 to 15 Democratic votes; Reid told Baucus that several in the Conference had serious concerns and that it wasn’t worth securing the support of Grassley and at best a few additional Republicans.

By Tuesday afternoon, the Finance Committee began looking at ways other than taxing health benefits to deliver a health care overhaul that costs less than $1 trillion and is deficit-neutral, as Baucus wants. Baucus’ office declined to comment, but Senate Budget Chairman Kent Conrad (D-N.D.), a key member of Finance, confirmed as much late Tuesday.

“I would say there’s a search for alternatives,— Conrad told reporters. “There’s been feedback. There’s been additional questions in terms of getting the votes and public support.—

Sources said Tuesday’s Democratic leadership meeting centered around the serious concerns that Democrats have about the direction of Baucus’ legislation. Some Senators present apparently told Reid that Baucus’ focus on taxing health care benefits to pay for the overhaul was unworkable.

“They were saying, I’m never going to vote for that kind of thing,’— said one Democratic source familiar with the discussion. The source added that the meeting then devolved into “a cacophony of voices against bipartisanship— because Senate leaders could not reconcile how they could attract Republicans without sacrificing too many Democrats.

However, the Democratic source said the leadership’s decision could backfire by alienating other elements of the Democratic caucus, such as centrists.

“I’m concerned we’re going to be perceived as abandoning the Republicans,— the source said. “The demands Reid is putting on some Democrats is going to make it harder for other Democrats to support this. … Going the partisan route doesn’t get this bill done any faster.—

Baucus for months has worked with Grassley on a health care reform bill that could garner bipartisan support, believing that is the best approach to get to 60 votes and earn public confidence in a final product. But the Finance chairman was forced last month to delay the markup of his committee’s bill because such a compromise remained elusive.

Finance may not begin marking up its bill until next week or the week after that. Meanwhile, the Senate Health, Education, Labor and Pensions Committee is set to complete the markup of its health care reform legislation this week or next. One senior Democratic Senate aide warned Tuesday that further delays by the Finance Committee could result in the planned merger of the two panels’ bills being scrapped in favor of allowing each one to move to the floor on its own.

The HELP bill is unanimously supported by the panel’s Democrats, with all Republicans opposed. It was drafted with liberal reform goals in mind, including health care policies that many Democrats have sought for decades.

“The longer Baucus takes, the trickier it gets,— a senior Democratic Senate aide said.

And the issue doesn’t just rest on Baucus’ shoulders. For Reid, up for re-election in 2010 and to whom Obama is looking for delivery of a top priority, the stakes are incredibly high.

Complicating matters, the Majority Leader must contend with powerful committee chairmen who are not a part of his leadership team, including Baucus and HELP Chairman Edward Kennedy (D-Mass.). Sen. Chris Dodd (Conn.), the No. 2 Democrat on HELP, has been managing the markup of that committee’s bill in the absence of Kennedy, who is battling brain cancer. Dodd has said he confers with Kennedy regularly.

Reid also faces the challenge of reconciling two bills that have been developed with conflicting goals.

Particularly on whether to implement a government-run insurance option as a part of the overhaul, Reid must assuage a significant number of Democrats from conservative-leaning states who are either skeptical of or opposed to the proposal, while simultaneously keeping happy his liberals — whose numbers are greater.

Most Democrats, including Reid allies like Majority Whip Dick Durbin (D-Ill.) and Conference Vice Chairman Charles Schumer (D-N.Y.), are enthusiastic backers of the government-run insurance option. The HELP Committee’s bill includes a robust government-run option; Finance on Tuesday was still haggling over several policies, including an acceptable compromise to the public plan component.

The cost of reform and how to pay for it also remain contentious issues for Reid to navigate within his Conference. But at least one moderate Democrat whom Reid is likely to have to lean on at some point during the health care negotiations said the Majority Leader has the ability to bring a deal home.

It appears as though that effort began in earnest Tuesday.

“Harry is the leader, and people certainly pay attention to Harry’s advice and leadership,— Sen. Ben Nelson (D-Neb.) said. “I’m sure he’s going to find a way to sell what needs to be done. … He’s very good at that, and I hope he’s able to do it.—

Jessica Brady contributed to this report.