WASHINGTON -- The new head of the Health Care Financing Administration told state officials yesterday he will work to change upcoming Medicaid rules so they will not wreak havoc on state finances.

"If I worry about anything, I worry about fashioning a regulation that you will see as fair," William Toby, who became acting administrator of the agency seven weeks ago, told the 24th annual State Medicaid Directors' Conference.

Mr. Toby was referring to regulations set to take effect Oct. 1 that will implement a 1990 law preventing a state from counting certain tax revenues or donations from hospitals toward the contributions it makes to Medicaid that are eligible for federal matching funds.

But he did not spell out how the new rules would be changed or when they might be completed.

"I understand the great burden you carry" and the "great fiscal pressures at the state level," said Mr. Toby, who was the head of the administration's New York regional office before coming to Washington. The administration is an agency within the Department of Health and Human Services.

"As long as I'm here, you will have a voice," Mr. Toby told the state officials, adding he would be "someone who is most sensitive to your problems."

State officials had sharply criticized Mr. Toby's predecessor, Gail R. Wilensky, for the original version of the regulations, which she proposed Sept. 12, 1991. Those rules were supposed to go into effect Jan. 1, 1992.

They argued that the limitiations on donations and taxes were too stringent, and that states would lose billions of dollars in federal aid on which they had been counting. That loss would produce large budget shortfalls in many states and harm their credit ratings, the officials said. They also warned they would have to pass the cutbacks on to hospitals, thus also hurting their bond ratings.

While criticizing Ms. Wilensky, officials of state and local associations said she was merely carrying out the wishes of the Office of Management and Budget, which had directed her agency to place tight reins on federal expenditures for Medicaid. Ms. Wilensky left the health agency in March for a position in the White House.

Late last year, the National Governor's Association and federal health officials worked frantically to forge some kind of compromise on the rules. They finally reached an agreement that Congress codified in legislation passed in December. Among its provisions, the law directed the health administration to include generous transition rules in the regulations and to delay the effective date to Oct. 1, 1992.

But it also left a numbe of gray areas in which the health administration would have to make its own decisions. Administration officials have been negotiating with the governors group and representatives of other state and local associations for the last several months to reach decisions that would be acceptable to the federal government while accommodating states' concerns.

For example, the Sept. 12, 1991, rules would have almost eliminated the ability of states to count toward the Medicaid match revenues derived from taxes on hospitals and other health facilities -- so called provider-specific taxes.

But under the legislation, states will be allowed to count provider-tax revenues toward the Medicaid match under certain conditions. The tax must uniformly apply to all providers in a particular class and must apply to their entire range of business. The law does not define what constitutes a "class of providers," a key term for a state seeking to keep its provider-tax program intact.

The governors group stated in the May 11 edition of its Governors' Bulletin that administration officials have had "mixed reactions" to many of the state proposals for various parts of the regulations.

The administration accepted "with some reservations" the states' suggestions on how to fine tune the rules for donations, but was "less enthusiastic about accepting state proposals" on definitions of such terms as "provider class."

But even with those differences, Mr. Toby said he was "sure this [negotiation] process will continue and work very well." He added, "We can get through this together."

Mr. Toby also said the conflicts that have arisen over states' uses of hospital donations and taxes "are merely a symptom of the greater problem," the overall explosion in the cost of the Medicaid program. Federal, state, and local expenditures on Medicaid combined in 1993 are likely to approach $148 billion, Mr. Toby said.

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