The Bush administration yesterday put forward a plan to revamp the nation's largest public health insurance program, offering states vast new power to dictate what medical services are provided to many of the poor and disabled Americans on Medicaid and how much patients have to pay for them.

The proposal would hand states a strong financial incentive to make major changes in the program. States could put new restrictions on benefits, shift more people into managed care, charge more for services and employ new strategies to give some coverage to people who are currently uninsured. States willing to undertake such experiments, which no longer would require federal permission in advance, would be given extra money -- totaling $12.7 billion -- for the next seven years, although their subsidies would be cut later to make up the financial difference.

The plan is the administration's answer to recent pleas by states for federal relief from soaring Medicaid expenditures that are the largest contributors to historic budget deficits across the country. Instead of simply providing bigger subsidies for the program, as many governors and Democrats want, the administration is proposing to tie such assistance to "a real, major modernization" that would give states "complete new flexibility," Health and Human Services Secretary Tommy G. Thompson said yesterday.

Medicaid is a shared responsibility of the federal government and the states.

None of the changes would affect the roughly two-thirds of the 44 million Americans on Medicaid who are so poor that federal law requires they be covered by the program. But in states that took the government's offer, the proposal could revolutionize care for the remainder -- about 15 million additional low-income people, many of them children and elderly people in nursing homes -- whom states have also chosen to include.

The plan, part of the budget that President Bush is to recommend to Congress on Monday, is one facet of an ambitious attempt by the administration at the start of its third year to persuade Congress to profoundly alter some of the nation's largest and best-known social programs.

The president's top health advisers announced the Medicaid plan the same day that the White House called for a shift of power to states for Head Start, the government's main preschool program for poor children. Bush also has begun promoting a proposal, which the White House has not completed, that would redefine Medicare by offering popular drug benefits to elderly people who are willing to join a new version of that program relying on various private health plans.

The Medicaid plan essentially would import to the 38-year old insurance program for the poor the central idea behind the government's overhaul of the welfare system and the creation of the Children's Health Insurance Program (CHIP) in the 1990s. Relying on a staple of GOP thinking, the changes alter the notion of federally promised "entitlements" to help needy Americans, replacing them with programs that rely on federal subsidies but are designed and run by individual states.

In presenting the plan to reporters, Thompson called it "an opportunity to do something remarkable for states." He and other administration officials said it would give states another route to ease their financial strains at a time when four out of five states have tightened Medicaid benefits or eligibility rules or added small charges for services that used to be free.

The administration's sentiments were echoed by one GOP governor invited to share HHS's stage with Thompson, Gov. Mike Leavitt (Utah). Three other Republican governors, including the president's brother, Gov. Jeb Bush (Fla.), wrote a joint letter to the administration in mid-January, asking for the kind of changes proposed yesterday. One source said the letter was dispatched urging Washington to act after they had received assurances that the administration shared their views.

As with the administration's thinking on Medicare and Head Start, the Medicaid changes would require the approval of Congress. Democrats and leading consumer advocacy groups yesterday reacted harshly to the Medicaid changes, accusing the administration of trying to create a block grant that would abandon the program's central guarantee of health care to the poor.

Although they said the changes envisioned parallel the 1996 revision of welfare policy, administration officials insisted yesterday that their plan would not amount to a block grant -- that is, a fixed sum for a specific program that states can spend largely as they choose. Administration documents said, however, that states' allotment for the "optional" Medicaid patients -- the ones affected by the plan -- would be based on how much they spent last year, with a formula that determined how much spending would rise in the future. That method would differ from the current one, in which states' subsidies are determined by how many people are in the program each year and how much their care costs.

The plan would for the first time combine into a single pot subsidies for Medicaid, children's health insurance and special payments to hospitals that treat an especially large share of poor people. As a result, both administration officials and critics said, states could choose to divert some of that money to insure people -- particularly adults -- who do not qualify for any of those programs now.

Two previous attempts to restructure Medicaid caused political turmoil -- and ultimately failed. The Reagan administration in 1981 proposed to convert the program into a system of block grants; the idea was revived as part of the conservative "revolution" of then-House Speaker Newt Gingrich (R-Ga.) and passed both chambers of Congress in 1995 but was vetoed by President Bill Clinton.

Although the new plan is not quite as far-reaching, liberals greeted it with the same criticism they applied to earlier attempts. Marion Wright Edelman, president of the Children's Defense Fund, said the combination of money for Medicaid and CHIP "undermines our nation's commitment to ensure that sick children have the health care they need."

Rep. Sherrod Brown (D-Ohio), ranking member of the health subcommittee of the House Energy and Commerce Committee, which handles Medicaid, said: "Instead of investing sufficiently to protect current Medicaid beneficiaries, [Bush] is 'permitting' states to kick some people off the rolls so others can come on. If that's not shortsighted, then shortsighted has no meaning."

Health and Human Services Secretary Tommy G. Thompson said the changes would bring flexibility.Utah Gov. Mike Leavitt (R) shared Thompson's sentiments about the benefits of the proposed plan.Rep. Sherrod Brown (D-Ohio) suggested that the plan was the definition of "shortsighted."