IT'S FASHIONABLE among budget critics these days to knock Medicaid, the federal-state health program for low-income people. Certainly there's a lot to knock in a program that began modestly in 1965 as a sort of afterthought to Medicare, the giant health insurance program for the aged, and is now the third largest human service program of the federal government.

Originally estimated to add only $238 million to the federal budget, Medicaid's combined federal and state outlays have ballooned to $80 billion a year; only Social Security and Medicare outweigh it in the domestic budget. States are now groaning under their share of the burden -- it's their second biggest outlay after education -- and warning that Medicaid will ruin them. And the load will get worse because Congress has just mandated that states phase in Medicaid coverage for all poor children through age 18, not just those who now qualify under state welfare rules.

Yet for all it costs, the program covers only about half of the nation's more than 30 million poor and a tiny fraction of the near-poor, while leaving tens of millions in these groups without any health insurance at all. Everybody's Safety Net Before there is a rush to pull the plug, though, Americans should note that Medicaid has become much more than a "welfare medicine" program. Indeed, to an extent nobody envisioned when Medicaid began, it has become the nation's first, and so far only, "catastrophic" care program -- a safety net that exists for millions of people. That is a long way indeed from the modest program that Rep. Wilbur Mills (D-Ark.) and Assistant Secretary of Health, Education and Welfare Wilbur Cohen hatched in 1965.

The change has come about in part as a result of amendments from 1967 to 1972, and in part from demographic changes and scientific progress in medicine. As a result, Medicaid today provides catastrophic care not only to low-income people of all ages, but to those who started out middle class and exhausted all their resources on health problems: children born mentally retarded or with physical illnesses and disabilities, people crippled by accidents and disease, elderly suffering Alzheimer's and other debilitating diseases.

Medicaid, in short, has become the last and only resort for those in deepest need. And, ironically, the growth of long-term and catastrophic care may be "starving out" primary acute care for welfare mothers and their children.

Rep. Henry Waxman (D-Calif.), chairman of the House subcommittee with authority over the program, said, "I don't think they foresaw a lot of things that happened . . . that it would be paying for over 25 million poor people," or that "Medicaid would become "the single largest payer for nursing home care or institutional care for the mentally retarded, or that there would be a disease like AIDS . . . ."

Gail Wilensky, administrator of the federal Health Care Financing Administration, which runs both Medicaid and Medicare, said that Medicaid has "become a catastrophic care program to a greater extent than expected -- in the nursing-home component, in the increasing share of AIDS expenditures." The program helps pay the costs of 40 percent of all AIDS patients and 90 percent of children and infants with AIDS. Where the Technology Bill Lands Part of the reason for Medicaid's huge cost is precisely that catastrophic and institutional care is extremely expensive.

"The program was enacted on the crest of a demographic and technological explosion," just when the numbers of people living far into old age "with multiple illnesses and disabilities," started to climb, said Sara Rosenbaum, policy director for the Childrens Defense Fund and a tireless advocate of health care for low-income children. It became possible, Rosenbaum said, to save and treat children with cystic fibrosis, with severe breathing problems, with cerebral palsy. "That caused the program to tilt more and more toward catastrophic."

To a certain extent, the same trends are present in other medical insurance programs, but they are far more evident in Medicaid because Medicaid is the payer of last resort; unlike other progams, it doesn't have anyone to pass the cost on to.

Program figures reveal this situation very clearly. Even in 1975, when mothers and children made up 72 percent of beneficiaries, the aged, blind and disabled accounted for 61 percent of program outlays (they get sick more and they need more institutionalization). By 1989, the share of Medicaid benefits received by the elderly, blind and disabled had risen to 72 percent.

Breaking the numbers down by type of services reveals that in 1975, 39 percent of all Medicaid outlays went for some type of long-term-care services such as skilled or intermediate care nursing homes, homes for the mentally retarded and home health. In 1989, it was 45 percent, and this doesn't even count hospital costs for long-term patients like 14-month-old Patrick Jones. {See related story below.}

In 1989, 1.4 million people received Medicaid nursing home benefits, mainly in long-term care facilities. In Maryland, said Nelson Sabatini, deputy secretary of the Maryland Department of Health and Mental Hygiene, "60 percent of long-term nursing home beds for the elderly are Medicaid." Squeezing Out the Poor It is a curiosity of Medicaid that a program thought to cover all the poor does not do so. Indeed, it covers only about half and was never intended to do otherwise.

"They have these cliches, 'If you've very poor you're taken care of; if you're very rich you can take care of yourself,' " said Ball. "They certainly don't realize that Medicaid doesn't cover all the poor."

When the program was created, it mandated state coverage broadly speaking only for welfare clients on programs now called Aid to Families with Dependent Children and Supplemental Security Income for the aged, blind and disabled. The states were also given the option to cover the "medically needy" -- low-income families with dependent children, and aged, blind and disabled not receiving cash welfare because their incomes were a bit over AFDC and SSI cutoffs.

The impact was to exclude from Medicaid at that time -- and still today -- tens of millions of needy working age people: those who are not aged, blind or disabled, do not have minor children and are not pregnant. Moreover, the state basic Medicaid and medically needy cutoffs (which differ from state to state) are generally well below the poverty line, thereby further excluding from Medicaid more millions who are poor.

For example, in July 1990, according to the National Governors Association, the estimated poverty line for a family of three including dependent children was about $10,500. But in Alabama, such a family could not get Medicaid if its income exceeded $1,416 -- only 14 percent of the poverty line. In Delaware the figure was about $3,990, a third of the poverty line, but in Connecticut, $9,278 -- about 88 percent.

These figures don't tell the whole story, however. There are many special rules and exceptions which expand coverage somewhat -- special rules for people needing nursing home care, even some above the poverty line. Recent amendments will require states to cover pregnant women and children up to age 6 with income up to 133 percent of the poverty line; and, on a phased-in basis, children 6 through 18 with income up to 100 percent of the poverty line.

According to a study by John Holahan and Sheila Zedlewski of the Urban Institute, only 51.4 percent of officially poor people under 65 were receiving Medicaid in 1989. The new provision on children through 18 will eventually add a few million, but millions of other poor people will still not be covered.

What about the theory that burgeoning long-term and catastrophic care is "starving out" acute care for the welfare poor?

"Certainly, something is eating away at Medicaid," said James Todd, executive president of the American Medical Association.

Deborah Steelman, who heads the Social Security Advisory Council, said, "As long as long-term care remains in Medicaid, it will maintain a competition with acute care services and the latter will never get the funding it needs." She thinks long-term and catastrophic care should be separated out and handled elsewhere.

Rosenbaum agreed that "services for women and children have been squeezed by institutional and long-term care needs," but nevertheless, Medicaid "has played a remarkable role in access to primary care for families with children."

Wilensky said she is not certain the starve-out theory is correct: If states were providing less catastrophic and long-term care within the program, "I rather doubt" the money saved would be shifted to primary care, particularly for mothers with children.

Is it time, then, to start restricting the long-term-care and catastrophic components of Medicaid, thus saving the states money and freeing up dollars for better primary care of more of the younger population? The question answers itself: Society is clearly not willing to simply say "Let them die." So abolishing long-term and catastrophic care in Medicaid would simply shift the problem to some other format, not get rid of it.

Waxman, who has had a vast impact on forcing the states to expand the program to new categories of children and pregnant women, said that while he has sponsored various plans to broaden health care to everyone in the population and to provide for long-term care, so far there is no national agreement. And meanwhile, "We have the obligation to provide a safety net" to the needy and aged, and Medicaid is helping do that.

Waxman does not believe that long-term care should be restricted on the theory that it is robbing money from primary care for mothers and children; both should be taken care of.

"I don't think the government is ever going to say someone's too old to keep alive. The patient could say it, but not the government. I don't think the government should say just based on a number on a chart, just pull the plug and end their life. Medicaid has already made the decision not to pull the plug and I agree that society has a responsibility to take care of them."

The mother of 14-month-old Patrick Jones put the matter more succinctly: "My God, it's still a life."

Spencer Rich covers social policy for The Washington Post.