* Republican control of House sets up healthcare fight

* Repeal unlikely but funding could be attacked

WASHINGTON, Jan 4 (Reuters) - The stage is set for a battle early this year over funding of U.S. President Barack Obama’s healthcare overhaul as Republicans try to make good on a campaign promise to roll back one of the administration’s main policy victories.

Republicans in the House of Representatives will likely approve scrapping healthcare reform at a vote on Jan. 12 but a repeal will probably not succeed since Democrats continue to control the Senate and can block the move.

Even so, Republicans will yield considerable sway over the government purse strings once they take control of the House on Wednesday and will try to use that power to deny the administration’s requests on financing to implement the law.

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“They are not going to get what they want on funding for healthcare. The House is not going to give it to them,” said a senior Republican Senate aide.

“All of this slows it down, by slowing it down it gives us a real opportunity, when we take over the Senate and or the White House in 2012, to take this law apart piece by piece,” the aide said.

Republicans, particularly from the Tea Party fiscally conservative wing, were emboldened to attack the healthcare reform after a good showing at November’s midterm elections.

The White House is sure Congress will not repeal the bill, which extended insurance coverage to millions of Americans. Obama would probably veto any repeal.

“The president is confident about defending the healthcare bill,” said Reid Cherlin, a White House spokesman.

A key battle over money for healthcare reform could come by March when a temporary funding bill for the government runs out. Republicans balked at $1 billion to start implementing the healthcare law that had been included in an earlier longer-term funding bill.

“They could just dig in their heels and refuse to pass a (spending) bill,” said Eric Zimmerman, a partner with the Washington law firm McDermott Will and Emery. “We’ll have to see who is willing to succumb in that game of chicken and what the public thinks of that.”

UNDER SCRUTINY

Republicans will use control of the House to underscore any weaknesses in the new law and increase public doubts about it.

Representative Fred Upton, the incoming chairman of the House Energy and Commerce Committee, has promised to hold a series of hearings on the “unconstitutional aspects of the health care law and other critical health care challenges facing our nation.”

Polls have shown tepid public support for the new law, but also indicate people are willing to give it a try. The U.S. healthcare system is the most costly in the world and still leaves about 50 million people without medical coverage.

Health insurers are coming off a strong financial year, as results were helped by fewer people going to the doctor and undergoing procedures to save money, but they face new limits on their profit margins in 2011 from the healthcare overhaul.

Shares of U.S. health insurers have slightly lagged the broader market since the mid-term elections. The Morgan Stanley Healthcare Payor index .HMO of large and small health insurers is up 4 percent since the election, compared with a more than 6 percent rise for the broader S&P 500 index .SPX.

A series of legal challenges by states, rather than any action in Congress, may have the best chance of bringing down healthcare reform. A judge last month backed a challenge by Virginia to a key element of the reform. [ID:nN13251084]

Some of the more popular aspects of the healthcare overhaul, such as allowing young adults to stay on parents’ policies until they turn 26, have already taken effect.

Ron Pollack of Families USA, a healthcare advocacy group that pushed for the reform, said Republicans could end up regretting the hard line.

“I believe these things are going to backfire politically,” he said. “When Republicans vote for repeal proposals, the public is going to understand that they are trying to take away from the American public what these same members of Congress receive, courtesy of the taxpayers, in terms of their health benefits and rights.”

Pollack said the administration has sufficient funds to continue implementing the law even if Republicans refuse to appropriate additional money.

Republicans argue the new law will end up costing the federal government more than estimated and does little to contain medical costs. Penalties for employers who do not provide health insurance to workers will discourage job creation, they argue.

To reduce costs, they say, it would be better to simply allow insurers greater ability to sell policies across state lines, which they say would increase competition, and impose limits on medical liability. (Additional reporting by Patricia Zengerle in Washington and Lewis Krauskopf in New York; Editing by Vicki Allen)