By Eric Pianin and Clay Chandler
Washington Post Staff Writers
Wednesday, June 4, 1997; Page A01

President Clinton and House Republicans yesterday settled a key difference over a plan to preserve Medicare for the next decade by imposing the largest spending cuts in the program's history and offering the nation's 33 million senior citizens a much wider choice of health insurance coverage.

In the face of stiff White House opposition, GOP leaders backed away from a proposal to allow any Medicare beneficiary to shift from the traditional health insurance program to a tax exempt medical savings account (MSA). Republicans, however, will be able to test their plan for a medical savings account program under a pilot program that would be available for as many as 500,000 seniors.

At the heart of the GOP plan is an effort to save billions of dollars annually by opening the huge federal health insurance plan to intense competition from health maintenance organizations and other private health providers.

The Medicare proposal also would offer a wide range of new preventive care services such as free Pap smears and mammography and prostate cancer screening. Colorectal cancer screenings will be covered by Medicare for the first time and Medicare will pay for blood testing strips for diabetics, and for training courses on diet and other lifestyle changes.

Administration officials said they still disagree with some elements of the GOP plan, but view it overall as a "constructive step" toward translating their balanced budget accord into legislation that can win bipartisan support. "There really was a sense . . . we can get this done," White House spokesman Barry Toiv said after a meeting between Clinton and congressional leaders.

The majority of the $115 billion of savings in the Medicare program, to be achieved over five years, would come from reductions in government payments to hospitals, health maintenance organizations (HMOs), physicians and other health care providers. For recipients, premiums would rise over the course of the agreement at least $5 a month more than they would have under current law.

The Medicare savings are part of a broader effort to balance the federal budget by 2002 that was negotiated by the White House and GOP leaders last month. The success of that plan hinges on relatively swift passage of significant changes in the Medicare health insurance program for the elderly, as well as agreement on a large tax cut package acceptable to all sides.

Yesterday, Clinton responded to GOP criticism of his demand for nearly $35 billion of education tax credits by agreeing to rewrite some key features in his proposal. Treasury Secretary Robert E. Rubin plans to brief lawmakers today on the details of those changes.

Following the White House meeting, Rep. Bill Thomas (R-Calif.), a senior member of the Ways and Means Committee, announced the GOP Medicare reform bill, including the medical savings account pilot program, similar to one favored by the "Blue Dog" conservative Democrats.

Conservatives have pushed medical savings accounts as one of several alternatives to the traditional fee-for-service Medicare system to ensure that seniors make efficient use of their health care dollars by allowing them to keep in a medical savings account any money they save by avoiding unnecessary procedures and consultations now covered by Medicare. However, the White House and other opponents contend that only the wealthiest and healthiest beneficiaries will choose to take advantage of the MSAs, leaving behind a pool of mostly lower-income and infirm beneficiaries and driving up the per capita cost of the program.

Thomas said that unlike previous years, when Republicans sought to define their differences with the Democrats through confrontations with the White House, the GOP was determined to skirt controversy that would jeopardize the bill. He said he received "a very clear indication" from White House Chief of Staff Erskine B. Bowles and other White House officials that Clinton would accept a limited pilot project. Thomas added that he expects that the GOP Medicare bill will receive substantial bipartisan support in committee and on the floor. "I don't believe there is any deal breaker left out there," Thomas told reporters.

Clinton aides characterized the hour-long meeting in the Cabinet Room as cordial and productive in contrast to previous discussions on Medicare. "Some members who I've seen at each other's throats in the past . . . were being rather accommodating to each other," Toiv said. And, Rep. Fortney "Pete" Stark (Calif.), ranking Democrat on Thomas's health subcommittee and a frequent critic of the GOP, endorsed most of the plan.

One issue still looming is how to cut Medicaid, the health care program for the poor and disabled. The White House said it needs to squeeze $16.1 billion out of the program that compensates hospitals for caring for the uninsured by the year 2002. The Congressional Budget Office says it may take considerably more, $20.9 billion, to reach the Clinton target.

"That's a massive level of cuts," said Jennifer Baxendell, senior policy analyst for the National Governors' Association, noting it would slash 35 percent from that program over five years. "You can't come up with a . . . package that large without a lot of screaming and pain."

White House officials said Clinton's decision to modify his proposed $1,500 tax credit for students in the first two years of college was primarily aimed at winning support from the higher education community, which has been cool to the plan.

The changes included dropping the proposal's requirement that students maintain a B average to qualify for the credit and easing a provision that would have excluded low-income students receiving federal Pell grants.

To accommodate the additional cost of those two modifications and remain within the $35 billion target established for education tax cuts in the bipartisan accord, Clinton now favors phasing in the credit and the deduction more gradually, White House officials said.

Education groups praised the changes yesterday. "I think it's a much improved package," said Stanley Ikenberry, president of the American Council on Education. "We now have a much stronger proposal to work with."

The revisions also may help blunt criticism in Congress, where Clinton's education tax plan has scant support. House Ways and Means Committee Chairman Bill Archer (R-Tex.) had charged that the grade requirement would oblige taxpayers to file college transcripts with their W-2 forms, granting unwarranted powers to the Internal Revenue Service. Meanwhile, Rep. Charles B. Rangel (N.Y.), the Ways and Means Committee's ranking Democrat, had complained that Clinton's tax plan would heap windfall benefits on middle-class students likely to attend college anyway while offering little for financially struggling families in his Harlem district.

But Clinton officials acknowledged yesterday that the changes may not be enough to dissuade GOP tax writers from attempting to use a substantial portion of the $35 billion to fund education tax proposals of their own. Among the alternatives preferred by the GOP: tax subsidies for employers who provide educational assistance to their workers, expanding rules for Individual Retirement Accounts to permit penalty-free withdrawals for education expenses, and tax breaks for interest on student loans.

Aides say Clinton is willing to support many of those ideas as long as they aren't financed with the $35 billion they say is set aside under terms of the budget accord for his proposals.

Staff writer Peter Baker contributed to this report.