Think Tank Seeks to Cut Cabinet, Revamp Medicare : Budget: Heritage Foundation helped develop ‘contract with America.’ It aims to shape deficit-slashing efforts.

In a blunt preview of the looming budget battle in Congress, an influential conservative think tank Monday urged Congress to scuttle nine Cabinet departments, overhaul Medicare, cut $152 billion in taxes and shift vast federal responsibilities to the states and private sector.

The fiscal manifesto released by the Heritage Foundation, which helped develop the “contract with America” that dominated the first 100 days of Congress, is a bid to shape the deficit-cutting efforts that will assume center stage when the House and Senate return to work on May 1 and April 24, respectively. The think tank has been the nerve center for conservative policy formulation in Washington since the Ronald Reagan Administration and claims credit for key elements of the current GOP agenda, including the $500-per-child tax credit that recently passed the House.

Because of that, the Heritage plan is distinguished from the rival ideas floating around Washington and provides a window into the debate that will consume Congress for much of this year.

“This budget is essentially a handbook for the leadership on Capitol Hill today,” said Stuart Butler, vice president of the foundation, as the group unveiled its blueprint titled “Rolling Back Government: A Budget Plan to Rebuild America.”

Many members of Congress wish to reduce the federal government and cut taxes, Butler added, but when it comes to the complex, basic facts of overhauling policy, “they have only the vaguest notion of how to do these things.”

To achieve a top-to-bottom overhaul of government, the think tank Monday proposed a handful of strategies that it said would lead to a balanced budget by the year 2000 while also granting tax cuts for families and corporations and hiking defense spending. Among the proposals:

* Privatizing the government’s commercial activities in a range of areas from transportation to finance. Amtrak, much of the Postal Service and National Weather Service, federal helium reserves, real estate holdings, non-defense aircraft and a $200-billion loan portfolio all would be shifted to private hands.

* Eliminating corporate welfare. To the chagrin of special interests that have long evaded the budget knife, the plan would lacerate dozens of programs, including agricultural subsidies, energy research activities, export-credit guarantees and more.

* Shifting programs to state and local governments. More than 70 anti-poverty programs would be transferred to the states, financed by a block grant with few strings attached.

In the tumult of reorganizing and shifting responsibilities, nine Cabinet-level departments would disappear, their functions either being folded into other agencies, privatized or sent to the states. For example, nuclear programs run by the Energy Department and the entire Department of Veterans Affairs would be taken over by the Defense Department. The Federal Communications Commission, Interstate Commerce Commission and Small Business Administration would vanish.

Heritage analysts say only a few, fundamental core functions of government should retain Cabinet-level status: the departments of Defense, Health and Human Services, Justice, State and Treasury.

Such ideas are not intended to be academic. Next week, the Senate Budget Committee plans to begin work on a budget resolution, a broad-brush document intended to show how the deficit can be eliminated over the next several years. Beyond that, Congress will work on efforts to restrain spending growth so that the budget, in theory, can be balanced by 2002--a debate that will force budget cutters to consider Medicare and other popular programs for possible cuts.

“Whatever Heritage puts out is much more mainstream than it’s ever been before. This will get a real hearing,” said Stanley E. Collender, director of federal budget policy for Price Waterhouse in Washington.

As members of Congress well know, the budget is about more than dollars: It is a key document of national policy. Whether the issue is national defense or entitlements for the middle class, the budget is the battleground.

This year, with the enormous Social Security program deemed mostly off limits to budget cutters, an over-arching question is where the ax will fall.

On Monday, Heritage Foundation analysts suggested that part of the answer was in Medicare, the health care program for the elderly.

Under the Heritage Foundation plan, Medicare would be transformed, with beneficiaries having the option of accepting federal vouchers that could be applied to any approved private health insurance plan or remaining in the current system. If a private plan cost more than the voucher, the beneficiary would be responsible for the difference. If it cost less, the savings would go to the beneficiary. This change, Heritage estimates, would save about $155 billion over five years.

Another major change would be in the premiums the elderly pay for Part B, which covers doctor bills and other medical services. Currently, the federal government pays 80% of the Part B bill, with the beneficiary paying the additional 20%. The Heritage proposal would increase the co-payment to 50%, which is estimated to save Medicare about $37 billion over five years.

Other Medicare programs would face changes too. Home health care and skilled nursing services, which are currently totally covered, would require a 20% co-payment, saving about $19 billion over five years. Clinical lab services, which are also fully covered, would come under a 20% co-payment, saving about $3 billion.

The Heritage proposal would also restructure the formula used to give extra money to hospitals that treat a disproportionate share of low-income patients; consequently fewer hospitals would be eligible. The five-year savings are estimated at about $15 billion.

The savings in Medicare and other programs, adding up to $799 billion over five years, would yield another $89 billion in savings on interest payments, due to lower debt, and would allow for a program of tax cuts similar to the package that passed the House this month.

The think tank plan, for example, would give families a tax credit of $500 per child and also would ease the rules for participating in individual retirement accounts, thereby encouraging households to put more money into savings rather than consumer spending.

Under the plan, defense spending would increase by $130 billion over White House plans, reflecting current expenditures plus inflation, the group maintains.