WASHINGTON -- The Bush administration refused yesterday to withdraw new Medicaid financing rules that have unleashed a storm of criticism from state governments and Capitol Hill, but a top federal health official pledged to clarify the rules by the end of the month to help states comply.

Those regulations, issued by the Health Care Financing Administration on Sept. 12, will disallow certain types of state funds that had been eligible for federal matching funds under the Medicaid program.

State officials and members of Congress have called on the administration to withdraw the rules because they violate congressional intent and because they will become effective Jan. 1, in the middle of the fiscal year for many states that had counted on receiving the funds.

But Gail R. Wilensky, head of the health financing administration, said the rules would go into effect on schedule because "we cannot condone the alteration of the Medicaid program through financing mechanisms that go beyond the conventional matching rate structure without an open policy discussion and appropriate financing." Ms. Wilensky was testifying before the House Energy and Commerce Committee's subcommittee on health and the environment.

The rules, which are designed to implement a 1990 Medicaid law, would require the federal government to stop matching the portion of states' Medicaid funds garnered through donations. The regulations also would place tight restrictions on the use of taxes states collect from hospitals for the Medicaid program.

The health administration has said using donations to count toward the match is inappropriate because it allows a state to receive more federal aid without kicking in its own funds. State-taxes also can be unfair because many states make higher Medicaid payments to hospitals to pay such taxes, in effect reimbursing them for those levies, the administration has said.

But Rep. Henry A. Waxman, D-Calif., chairman of the subcommittee, said the 1990 law does not expressly prohibit donations or most types of hospital taxes from being eligible for matching Medicaid funds. He has repeatedly said Congress would block the regulations if the administration did not withdraw them voluntarily.

"In my view, the Sept. 12 regulation is illegal," Mr. Waxman said. "I fully expect that the courts will strike this regulation down." He added that the health administration could save the states and itself "a lot of unnecessary trouble if it would simply withdraw the regulation and start all over."

Ms. Wilensky's agency came in for a raft of criticism from other members of the subcommittee and from other members of Congress who testified before the panel. Some of the lawmakers said Medicaid cuts could be so severe in some areas that they would create real hardship, and even the loss of some lives.

"Let's be clear about what's happening here: The administration is attempting to cut [federal] Medicaid spending by regulation," said Rep. Martin Frost, D-Tex., who testified before the subcommittee. Rep. Frost said the regulations would cause his district to lose $68 million in Medicaid funds.

"This is child abuse, George Bush style" said Rep. Peter H. Kostmayer, D-Pa.

But Rep. Thomas J. Bliley, R-Va., rose to Ms. Wilensky's defense, citing Pennsylvania as an example of a state whose Medicaid matching arrangement had run amok.

Ms. Wilensky described how in that state, a group of hospitals recently borrowed money to make a donation to the state so the federal share of Pennsylvania's Medicaid payments would rise. In return, the state reimbursed the hospitals for the donation and for debt service on the loan they took out to make the donation, Ms. Wilensky said. She said Pennsylvania was "by no means alone" in using such techniques to garner more Medicaid funds.

But she also acknowledged under questioning by Rep. Peter H. Kostmayer, D-Pa., that the arrangement was within the letter of the 1990 law.

Ms. Wilensky also said the administration will issue a clarification of the regulations by Oct. 31 "to eliminate confusion that has emerged" because of "deficiencies" in the regulations.

One of the major issues the clarification will spell out is what kinds of intergovernmental funds transfers will be eligible for federal matching funds, Ms. Wilensky said. She said the Sept. 12 regulations clamped down on transfers because the administration is concerned some were really donations in disguise. For example, the regulations disallow hospital donations made to a county that are passed through to the state.

But Ms. Wilensky said states are mistakenly assuming all types of intergovernmental transfers are disallowed under the regulations.

The rules "could be read broadly to eliminate intergovernmental transfers, including long-standing state practices. HCFA is not eliminating the use of all intergovernmental transfers," Ms. Wilensky said in her prepared statement. "Our clarification will explicitly state that legitimate public funds transferred between different levels of local government will continue to be allowed under current law."

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