MEDICARE has been a lucrative cutting ground in the effort to reduce the deficit, and now the administration is proposing to cut some more. Protective congressional Democrats have denounced the proposal as a breach of faith, in that cuts were included in last year's budget agreement and more aren't needed to meet the agreement's terms.

In part this is the usual posturing when a budget appears, the parties taunting and using each other as foils to demonstrate which is the true defender of fiscal responsibility and which the abiding friend of the elderly. But this is a substantive dispute as well; it involves the important question of what the giant Medicare program is for. Will Medicare be used to pay just the covered health care costs of its statutory beneficiaries, who are a seventh of the population, or, in the absence of a broader national program, will it also be used as a backstop to help defray health care costs more generally?

Medicare was originally set up to be deferential. In order not to be seen as interfering with the practice of medicine, it pretty well paid hospitals whatever costs they claimed to incur in the treatment of Medicare patients. In 1983, because those costs were rising too rapidly, the government shifted to a less accommodative system in which it basically set a fee schedule. The idea was to pay the reasonable costs of treating Medicare patients only, subsidizing neither other parts of the population nor inefficient hospitals, which in theory would have to reform or fold.

The new system (a similar one has been created for doctors) has succeeded in slowing the increase in hospital costs, but not enough. The point has been reached where costs are still rising faster than they should, but hospitals, having shed the easy fat, have begun to lose money on Medicare patients. Who blinks? Does Congress ease up or keep the pressure on?

Medicare now threatens to become the largest domestic program in the budget; it and its cousin, Medicaid, neither of which existed 25 years ago, now account for a ninth of all spending. The administration would therefore keep the pressure on. Some notable hospitals on the front line of health care in big cities would be particular victims. The law now provides that teaching hospitals be paid a special allowance that Medicare accountants say is greater than their higher cost of treating Medicare patients and that the administration would cut. That's the largest single cut it proposed and a third of the total of $25 billion it would save over five years. Do you follow the rules and make the cut or junk the rules for reasons having to do not with Medicare but the care of the population at large?

The administration would be in a stronger position if it were also recommending some way of keeping these hospitals afloat. So would the Democrats if they were proposing some further way of keeping costs in hand. The budget raises a structural question about the health care system that needs to be addressed in more than budgetary terms, but neither the president nor the Democrats are doing so.