Katie Beckett has retired from trying to hack a path through Washington's red-tape jungle. At age 5, she spends her time swimming in a little plastic pool in her back yard in Cedar Rapids, Iowa, playing on her swing set, watching cartoons and growing--7 inches in the past year.

Last year Katie and her parents were instrumental in getting some stiff-necked Medicaid regulations changed so that disabled children could be treated at home instead of in a hospital without losing their eligibility for Medicaid.

The result has been to save the government money and make several dozen families a good deal happier. It's a process presided over by a panel that has come to be known around the Health and Human Services Department as the "Katie Beckett Review Board."

In 1981 the Becketts said they felt caught in a bureaucratic trap. Katie had been hospitalized for a year and a half, recovering from viral encephalitis contracted when she was 4 months old. In order to continue to receive Medicaid benefits, Mark and Julie Beckett had to leave their daughter in the hospital, where her care cost $12,000 a month, compared with the $2,000 a month it would cost at home.

They argued that if the rules were changed it would not only allow Katie to begin leading something akin to a normal life, but would save the government $10,000 a month.

The Becketts were having little luck convincing government officials of the reasonableness of their position. Then their congressman, Rep. Thomas J. Tauke (R-Iowa), told Vice President Bush that HHS had rejected the Becketts' request for a waiver, and Bush brought the case to the attention of President Reagan.

Reagan cited Katie's case at a news conference in November, 1981, as an example of "hidebound regulations." Richard S. Schweiker, then the secretary of HHS, intervened and waived the rules, allowing Katie to go home without losing her benefits.

Schweiker also created a three-member board to review cases similar to Katie's. In the past 19 months, the board has approved 31 waivers, and 39 cases are pending. So far, it hasn't turned down a request.

Families who believe they may be eligible for a waiver apply to state Medicaid agencies, which screen out the clearly ineligible cases. The states then are responsible for submitting to the review board cases that appear to meet the criteria--that adequate care can be provided at home, and that the care will not cost the government more than institutional care.

The board is chaired by the surgeon general, Dr. C. Everett Koop, and includes representatives from the Health Care Financing Administration and the HHS general counsel's office.

Last April, HHS Secretary Margaret M. Heckler extended the life of the board through the end of this year, saying, "When common sense, compassion and sound medical judgment unite in agreeing that a disabled child can best be cared for at home, no American parent should be forced to keep that child in an institution on pain of losing Medicaid benefits."

Heckler has directed the states to come up with appropriate changes in their own rules so that when the board goes out of business, they will be in a position to provide similar waivers without consulting the federal government. According to officials in a number of states, the process of developing such regulations is well under way.

As for Katie, the energetic young lady is thriving at home, and is headed off to kindergarten this fall, according to her mother. Katie took her first trip out of Cedar Rapids this Fourth of July, traveling to Dubuque.

Katie's care still costs between $2,000 and $3,000 a month, mostly for equipment and drugs. She still spends each night on a respirator, but doctors, saying her prognosis is excellent, are beginning to wean her from it.

Julie Beckett says she thinks what has happened as a result of her daughter's case is "tremendous."

"You have to realize," she said, "we had no idea that this would come to pass. But we really couldn't see why she had to stay in the hospital." CAPTION: Picture, Katie Beckett, a viral encephalitis patient, is saving the government $10,000 a month. UPI