The issue is so highly charged that even the term for the concept, "premium support," was causing trouble in the negotiations, Sen. Charles Grassley, R-Iowa, said.
Requiring traditional Medicare to compete with private plans has been a demand of conservative Republicans, who hold sway in the House.
"If a bill is going to the president, it's going to have to have at least enough of it to pass the House of Representatives," Grassley said at the end of a long negotiating session Thursday night.
But Senate Democrats, whose support is crucial for passage in that chamber, are united in their opposition. They made their view plain Thursday in a meeting with the two Democratic senators who are part of the negotiations.
"It's a poison pill I could never swallow," Sen. Kent Conrad, D-N.D., said after Democrats met in private to review the negotiations. "It's the one thing that truly endangers Medicare."
The Democratic negotiators, Max Baucus of Montana and John Breaux of Louisiana, conveyed the Democrats' sentiments during the evening session, lawmakers said.
Democrats also gave President Bush a list of conditions for their support of the legislation, rejecting what they called "arbitrary limits" on spending.
"The president can solve this problem," said Democratic leader Tom Daschle of South Dakota. He appealed to the president to urge Republicans to toss out proposals on premium support and spending limits.
The letter was signed by 39 Democrats, one Republican and one independent. It highlighted some of the most contentious, unresolved issues that remain four months after the House and Senate passed differing versions of the legislation, which would mark the largest expansion of Medicare in its 38-year history.
Under the GOP plan, if an HMO's services cost less than Medicare's, seniors choosing to stay in Medicare would pay the difference. Democrats call that a penalty, reports CBS News Correspondent Wyatt Andrews.
"We will not support a conference report that is going to do harm to the Medicare system. We cannot be clearer than that," said Sen. Ted Kennedy, D-Mass.
But Republicans say the HMO competition will restrain costs.
"We also have to have, at the same time, assurances that we are not busting such a big hole in the budget that the rest of the government services are going to dramatically suffer," said Rep. Billy Tauzin, R-La.
The questions right now are, number one, who blinks; and number two, can the HMO cost-saving language be finessed. Both houses realize that politically, they can't come this close to achieving the actual drug benefit and then fail to deliver.
The core group of negotiators, House and Senate Republicans, joined by two Senate Democrats and administration representatives, stayed at the table in Rep. Bill Thomas' Capitol private office Thursday evening reviewing options to resolve long-standing differences.
At one point, the lawmakers asked their aides and administration officials to leave the room, a signal perhaps of increasing intensity.
They discussed ways to ease some of the cuts in payments to hospitals and to doctors who administer cancer drugs, according to people familiar with the talks. One idea under consideration would encourage hospitals to meet quality assurance guidelines by allowing them to escape up to $12 billion in cuts, these people said.
The negotiators also looked for ways to lessen the impact on home health services from a proposed co-payment for home health visits.
Lawmakers also agreed to drop one of the two categories of tax-preferred health savings accounts that conservatives have deemed essential for their support.
While the letter listed several points for Mr. Bush's attention, several Democrats speaking on condition of anonymity said it was designed largely to slow any rush toward agreement that may be developing.
Republicans hope to finish the broad outline of an agreement by week's end, which would put them on track to have a final vote by mid-November. Daschle said Thanksgiving was a more realistic possibility.
The Democrats' letter was carefully worded. It said that the any final compromise "must not impose caps or other arbitrary limits on Medicare spending," for example. But it was less emphatic on another GOP priority, saying the bill should not include the tax-preferred accounts.
The letter contained an implicit threat that Democrats had sufficient strength to block the bill under Senate rules. "A partisan conference report that jeopardizes Medicare and does not provide meaningful assistance to the elderly and disabled should not and will not pass," the senators wrote.
But Daschle said, "We're not threatening a filibuster today."
Grassley said he took the Democrats' letter as "a signal they're watching us, which we already knew."