Medicaid, the nation's largest welfare program, faces new cuts at the hands of the Reagan administration.

Under the program, created in 1965, the federal government reimburses the states for an average of 55 percent of their costs for medical care of the poor, chiefly those receiving Aid to Families with Dependent Children and Supplemental Security Income for the aged, blind and disabled. Recipients of those two types of aid are automatically eligible for Medicaid.

Within certain limits, each state determines its own eligibility standards and range of benefits.

In 1981, Congress, at President Reagan's request, reduced the number of people eligible for AFDC, and therefore for Medicaid, by more than 1 million, according to estimates by experts, and also cut federal funding for Medicaid. The resulting reductions in federal Medicaid payments to the states were estimated at $3.9 billion from 1982 to 1985 by the Congressional Budget Office.

In 1984, some of the eligibility reductions were modified in a congressional counterattack, potentially restoring a half to two-thirds of the people removed from the programs in 1981.

Two weeks ago, Reagan, as part of his $34 billion in domestic budget cuts for fiscal 1986, tentatively approved plans to propose a "cap" or other reduction on the growth of federal Medicaid payments to the states.

Budget documents given to Republican leaders on Capitol Hill estimated that in fiscal 1985, federal Medicaid payments to the states would be $23.2 billion and, under current law, would rise as a result of inflation and other program developments to $24.6 billion in fiscal 1986, $26.9 billion in 1987 and $29.5 billion in 1988.

Under the president's plan, however, federal payments in fiscal 1986 would be capped at $23.6 billion, or $1 billion less than the level they would have reached without the cap. Thereafter growth would be limited to the national inflation rate as measured by one index, the GNP deflator.

Instead of reaching $26.9 billion in fiscal 1987, federal payments would be $2.3 billion less. And in 1988, instead of reaching $29.5 billion, federal payments would be $3.9 billion less.

These proposals, even if softened, are expected to meet sharp opposition on Capitol Hill. Since the cost of services in the medical sector is rising one-third to one-half faster than the national inflation rate, critics contend the only way the states can meet these lids on the federal payment is to reduce benefits.

Supporters of the cap contend that this isn't so. They say states can maintain the same benefits and make up the loss in federal payments from their own treasuries by improving the efficiency of program operations or by further squeezing payments to providers of medical services.

However, Rep. Henry A. Waxman (D-Calif.), chairman of the House Energy and Commerce subcommittee on health, which has jurisdiction over Medicaid, has vowed, "I will fight a Medicaid cap with every resource at my disposal . . . .

"Unless we can discover how to keep people from getting sick, how to keep expectant mothers from needing prenatal care, how to keep people from getting old and going into nursing homes and how to keep health care costs from increasing, we can't put a cap on Medicaid expenditures."

The National Governors Association strongly opposes cuts in Medicaid, as do the American Association of Retired Persons and the National Council of Senior Citizens.

Incoming Senate Majority Leader Robert J. Dole (R-Kan.) said he does not think the earlier changes were as harmful as critics contend. Dole said incentives for better administration, plus changes in the law allowing the states more freedom to experiment with new forms of paying hospitals, doctors and nursing homes had produced efficiency improvements that were allowing the states to begin expanding benefits after an initial round of restriction.

"The offsets and incentive rebate allowances" enacted in 1981, Dole said, "have met their goals as evidenced by three factors: first, streamlined administrative practices in the states; second, the interest of more states in the creation of rate-setting commissions; and third, the movement of states toward capitated payment systems and away from the traditional fee-for-service system for health-care providers.

"Contrary to earlier dire predictions, the Medicaid reductions that states have absorbed since 1982 have not resulted in a weakened Medicaid program nationwide."

In fiscal 1984, federal and state Medicaid outlays totaled about $38 billion, with the U.S. share was about $20.5 billion.

In 1975 the number of people receiving Medicaid services reached 22 million. In the recession of the mid-1970s it edged close to 23 million, then gradually fell to 21.5 million in 1983, although many had expected it to rise again during the 1981-82 recession.

In 1981, Reagan, despite strong opposition, not only succeeded in persuading Congress to cut AFDC and Medicaid eligibility but also to reduce federal reimbursements to each state by 3 percent in fiscal 1982, 4 percent in fiscal 1983 and 4.5 percent in fiscal 1984 below what they would have been under previous law, although states could escape by meeting certain requirements.

A third major change gave state Medicaid programs flexibility to experiment with new payment mechanisms and forms of cost control.

The initial impact, according to the George Washington University Intergovernmental Health Policy Project, was to foster cuts in state eligibility and services.

In 1981, IHPP reports show, 11 states started requiring patient co-payments for eyeglasses, drugs or dental services, 10 started limiting the number of days in the hospital for which Medicaid would pay and 14 adopted policies reducing the number of those eligible.

In 1982, 11 states imposed limits on hospital days, 14 imposed co-payments and 13 reduced or eliminated some services.

In Maryland, according to Dr. Marsha Gold, director of policy analysis and program evaluation for the Maryland Department of Health and Mental Hygiene, officials think that 18,000 to 30,000 people lost Medicaid eligibility as a result of the 1981 AFDC changes.

Because of the reimbursement changes, she said, the state lost $20 million in federal Medicaid payments, the cost of giving Medicaid coverage to 28,000 people for a year. The state tried not to cut services, but it did tighten up on hospital stays, she said.

New York, among others, also sought to hold the line. Brad Johnson, director of the state office here, said a medical aid program for those not eligible for Medicaid jumped from 174,000 people to 274,000 from 1981 to 1984, partly because of shifts of people dropped from Medicaid, increasing the net cost to the state by $230 million over that period.

By 1984, the trend to cuts had bottomed out, the IHPP reported. "No state adopted the sweeping kinds of cuts and restrictions in program eligibility which so characterized state programs in 1981 and to a lesser extent in 1982." It reported there was a counter-trend, in which some states were beginning to expand eligibility and services.

Dick Merritt, director of the IHPP, said, "When you look at the magnitude of the changes from 1981 to 1983, the breadth of the changes was extensive but the depth and impact was not. The changes did not cut the heart out of the Medicaid program."

Merritt said that along with their program cuts, and then increasingly in 1983 and 1984, states began to take advantage of operational flexibility provisions to cut costs by squeezing providers of services and improving efficiency.

For example, "probably two-thirds of the states . . . have prospective payment elements in their systems," under which payment levels are set in advance, discouraging hospitals from piling on marginal added services to collect more money.

In 1984, the IHPP reported, five states -- Pennsylvania, Michigan, Ohio, Minnesota and Washington -- set in motion plans to implement prospective payment systems for hospitals based on diagnosis-related groups, similar to the system Congress voted for Medicare in 1983. Illinois and Nebraska authorized contracting for hospital services on a bid or negotiated basis. Other states have adopted various systems of contracting with group health associations to provide services for a fixed amount.

Without these changes, Merritt said, the entire funding cuts would have come out of eligibility and service reductions.

Waxman said there is no slack left to cushion further cuts. "The Medicaid program is not a Pentagon contractor, wallowing in waste, fraud and abuse," he said. "Whatever fat there was has been stripped off in the past three years."