LAST SUMMER, when Congress passed the tax bill, it told the Department of Health and Human Services to come up with a plan to make hospitals live within a predetermined budget for Medicare patients. With a promptness uncharacteristic of bureaucratic endeavor, HHS Secretary Richard Schweiker has complied with that directive. The preliminary plan he unveiled last week is, moreover, a sensible but rigorous approach to curbing the soaring contribution of hospital costs to the Medicare budget.

Under the current system, the government reimburses hospitals on the basis of costs they incur in treating each Medicare patient. That system has encouraged hospitals to give patients the best possible care, but it has provided no incentives to control costs or limit unneeded treatments. In recent years, these costs have been increasing at over 19 percent annually. This year they are running at triple the overall inflation rate.

The new plan would change the payment system so that hospitals would be paid a fixed amount -- set in advance each year -- for each Medicare patient they treat. The payment would depend on the patient's diagnosis with allowances made for extra costs associated with teaching hospitals, construction or renovation and high labor cost areas. If the hospitals exceeded that budget, they would have to make up the costs elsewhere. If they spent less, they could use the money for other purposes.

Naturally, most hospitals aren't thrilled with the plan. The industry indicated last winter that it was open to talk about new payment methods, but it proposed a plan that based fees on each hospital's current costs with some adjustment for inflation. The trouble with that approach is that it simply locks in current inefficiencies -- high-cost hospitals could continue business as usual and low-cost ones would have no reward for their efficiency.

Hospitals also point to the fact that some hospitals, especially big teaching hospitals, may have to deal with more difficult cases within each category of diagnosis. Hospitals must also depend on cooperation from the doctors who use them, since doctors have the major say about how long patients remain hospitalized and how many treatments they receive. There is also skepticism about the accuracy of the data that HHS plans to use in setting fees.

Perhaps a few more reasons for variations in hospital costs will have to be built into the fee schedule. But if too many differences are taken into account, the system will simply build in the enormous--and unjustified--variations that now exist in what hospitals charge for treating virtually identical cases.

Controlling Medicare costs, of course, is only one part of the larger effort that needs to be made to make privately insured patients and health-care providers more cost-conscious about their decisions. Without action on these other fronts, cuts in Medicare costs may simply be shifted to other patients. The new system isn't complete and it isn't perfect. But after years of study and controversy, no one else has come up with a better idea for tackling the urgent problem of runaway hospital costs.