In October, hospitals will face new limits on the amount of money they can claim from Medicare for treatment of eligible patients. The new system, disclosed last week, will not increase costs paid by Medicare patients and it will probably not result in immediate budget savings. If the system works as its designers intend, however, it could help provide both better and more affordable medical care.

Under the new system, the federal government will no longer reimburse hospitals on the basis of what they spend in treating each Medicare patient. Instead, fixed-payment rates will be set for each of several hundred types of diagnoses--adjusted for special complications in treatment, differences in local wage rates, higher costs in teaching and research hospitals and the like.

Rates will also be raised annually to reflect increases in the costs of labor and materials. But hospital expenses have been rising much faster than these costs. Average charges for treating typical ailments now vary by thousands of dollars. The new system could produce substantial savings if hospitals respond to the incentives it provides for more efficient and careful use of their resources.

The law that authorizes the system gives considerable discretion to the secretary of health and human services to adjust payment levels for hospitals' differing circumstances. If the secretary is too inflexible, good hospitals could be forced out of business and patient care could suffer. Too much accommodation to the pleas of affected institutions would ultimately mean reversion to the old-high cost system under which hospitals can charge pretty much what they like and the taxpayers foot the bill.

Success will depend even more heavily on how hospitals, doctors and patients react. If high-cost hospitals simply shift unreimbursed Medicare costs to other patients or cut back sharply on the quality of care--two responses that HHS plans to monitor closely--no reform will result. Nor can hospitals curtail unnecessary costs unless doctors are more careful in prescribing expensive surgery, diagnostic tests and other treatments. And doctors will be reluctant to make prudent economies as long as many of their patients continue to view medical care as close to a free good and anything less than a full and speedy recovery as grounds for a malpractice suit.

While Americans keep demanding, and medical technology supplying, more and better ways to prolong or improve life, the nation's medical bill will grow. Changes in the system are essential to keep costs from outstripping benefits.