HARRISBURG -- For decades, Pennsylvania's neediest residents have been driving the Cadillac of Medicaid systems.

Soon they may have to trade down to something in the midsize range, in order to bring the state budget into line.

Thanks to rising health care costs, ever-expanding enrollment and disappearing federal aid, the projected shortfall in next year's Medicaid budget at one point was $1.6 billion. The state's accountants have made progress toward reducing that shortfall, but as of last month, there was still a $400 million gap, which is why Medicaid benefits will be among the items nipped and tucked in Gov. Ed Rendell's upcoming budget proposal.

The annual budget address is scheduled for Wednesday. The current budget, approved in July, was nearly $23 billion, and it's expected that the 2005-06 budget will exceed $24 billion.

Rendell, in various interviews last week, said he and the state Legislature are committed to balancing the general fund budget without a tax increase.

"It's difficult," Rendell said of this year's budget. "This is not going to be without pain," despite higher-than-forecast revenue collections for 2004.

Read between the lines, and that means this budget will be much less ambitious than the spending plans Rendell offered up in his first two years as governor, when he negotiated big increases in education spending and economic development funding, and also won an increase in the state's income tax rate.

Medicaid is the state's managed-care health plan, run through the Office of Medical Assistance Programs, that pays for medical care and long-term care for low-income adults and children. About one in seven Pennsylvanians receives benefits through Medicaid. Without offering details, Rendell said it was likely that certain types of benefits would be dropped or scaled back, but that he'd prefer not to "knock people off" the Medicaid roster entirely.

"No one loses medical coverage," the governor said.

Independent reports have said Pennsylvania's Medicaid program is one of the top three in the country, along with Arizona and Massachusetts'. Pennsylvania's system is commended because of its efficient management, and because of the breadth of its coverage -- it is especially efficient at caring for the state's special-needs population, people with asthma, high blood pressure and diabetes, according to a report by the Rockefeller Institute of Government in New York.

Rep. Brett Feese, a Republican from Lycoming and chairman of the House Appropriations Committee, said Pennsylvania has continued offering the "Cadillac" version of Medicaid coverage, while other states have been trimming benefits or reducing enrollment for some time.

A separate program, Temporary Assistance to Needy Families, is running a deficit because that program has spent its cash reserves. That means programs or people who receive money through TANF may be impacted. TANF is different from Medicaid -- Medicaid is a coverage plan, while TANF is a funding stream, providing cash assistance for children and their parents or relatives. Both fall under the jurisdiction of the Department of Public Welfare.

As was the case in 2003, when Rendell proposed a "bare bones" budget that cut money from the state's health and human services budget, advocates for the needy are already protesting the anticipated Medicaid cuts.

"We recognize the need to address rising health care costs that face our state," said Kate Sorensen, health care policy director with Citizens for Consumer Justice. "But rather than cut the existing health care safety net and critical provider networks, Gov. Rendell should work to find needed revenue" in other areas of the budget.

He'll be trying to do just that. Across the board, most other state agencies should also expect either cuts or minimal increases. Rendell may also look to other funding sources to fill budget holes -- for example, he might request that the Legislature reopen the state's annual, $350 million cut of the money won through lawsuits against the tobacco companies.

That money is supposed to be designated for smoking cessation programs and medical research, but more of that money could be diverted to Medicaid.

The Democratic House whip, Beaver County's Rep. Mike Veon, last month proposed reopening the tobacco settlement to adjust the spending formula. Not only may smoking cessation programs be cut if the formula is tinkered with, but hospitals may see less research money from the tobacco settlement, several lobbyists and legislators said.

Those same lobbyists said last week that the governor is also asking pharmaceutical companies and health insurance companies to make either donations or cost concessions in order to bring down the state's cost of caring for the poor. Hospitals may also see lower reimbursements for the costs they incur treating Medicaid enrollees.

Despite those anticipated cuts, the governor's favored program, the new $200 million education block grants program that Rendell and the Legislature wrangled over for nearly a year, will not be reduced in the budget to come. He may also propose new funding for another education initiative, called Project 720 and aimed at increasing student achievement in high schools.

Still unsettled going into the budget address is how, or if, the state will bail out the struggling urban transit systems in Pittsburgh and Philadelphia. The governor and the Legislature are also negotiating an environmental cleanup package, but both of these issues could be separated from the general budget talks.

In a mid-year budget update, Budget Secretary Michael Masch suggested that these budget cuts might not have been necessary if Rendell had won the income tax increase he'd first sought. In December 2003, Rendell and the Legislature agreed to a 10 percent boost in the state income tax rate, from 2.8 percent to 3.07 percent. But Rendell had wanted a larger increase, to 3.1 percent or even 3.75 percent.

Republicans said that Rendell, a Democrat, would have spent the money by now and would be facing the same challenges.