By Ceci Connolly
Washington Post Staff Writer
Wednesday, February 25, 2009; 4:22 PM

President Obama intends to release a budget tomorrow that creates a 10-year, $634 billion "reserve fund" to partially pay for a vast expansion of the U.S. health care system, an overhaul that many experts project will cost as much as $1 trillion over the next decade.

Obama would pay for the expansion by trimming tax breaks for the wealthy and tightening payments to insurers, hospitals and physicians, according to a senior administration official.

By first identifying a large pot of money to underwrite health care reform -- before laying out a proposal on who would be covered or how -- Obama hopes to signal his willingness to negotiate with Congress over the details of an eventual plan.

"We wanted to get this process going by putting some serious resources on the table," said the official, who was not permitted to speak on the record until formal release of the budget blueprint. "This is a reserve fund, instead of a 700-page plan. We learned the lessons of the past and want to work interactively with Congress. This is a first step."

Under the Obama budget blueprint, about half of the new "health care reserve fund" would come by limiting the tax break on itemized deductions for families with incomes above $250,000. The proposal would reduce the value of tax deductions by about 20 percent, a change which would generate about $318 billion over the next 10 years, according to administration documents provided to The Washington Post.

Throughout the campaign, Obama promised to reduce the number of uninsured Americans, improve the quality of care in the country and save the typical American family $2,500 a year in medical costs. Despite an ever-weakening economy and skyrocketing federal deficit, he has remained firm to his pledge to press ahead this year.

The budget "includes a historic commitment to comprehensive health care reform -- a downpayment on the principle that we must have quality, affordable health care for every American," the President said in his address to Congress Tuesday night. "It's a step we must take if we hope to bring down our deficit in years to come."

Many of the itemized savings are both familiar and controversial to segments of the health industry.

Nearly one-third of the reserve fund would be generated by forcing private insurers who sell Medicare managed care plans to undergo a competitive bidding process. Currently, the government pays the plans, known as Medicare Advantage, about 14 percent more than traditional fee-for-service Medicare coverage, according to estimates by the Congressional Budget Office.

"The administration believes it's time to stop this waste," according to the document. That provision is estimated to save $175 billion over the next decade.

Drug manufacturers and hospitals would face reductions as well. If the budget is approved, drug companies would be required to increase the rebate they now provide for medications sold to Medicaid patients from 15 percent to 21 percent. The proposal would likely spark a ferocious lobbying campaign by the industry, which has argued that the current 15 percent rebate is already cutting into profits.

The budget figures also represent significant shifts in how the United States will pay for medical care in the future.

For example, experts have identified hospital readmissions -- especially for elderly patients -- as a sign of inadequate care and unnecessary expense. About 18 percent of Medicare patients are readmitted to the hospital within 30 days of their original visit. The new approach would establish flat fees for the first hospitalization and 30-day follow-up. Hospitals with high readmission rates would be paid less.

Spending on Medicare and Medicaid, the government's two primary safety-net health programs, currently consumes 5 percent of the gross domestic product, or $660 billion a year. Absent restructuring, the two safety-net programs will equal 12 percent of the GDP by 2050.

Earlier today, the Senate Finance Committee held a hearing to review possible budget changes with the head of the Congressional Budget Office.

Without changes in policy, said Douglas Elmendorf, the number of uninsured Americans will rise from 45 million to about 54 million over the next decade.

"We cannot afford to delay health care reform," Chairman Max Baucus (D-Mont.) said in opening remarks. "Delay will make the problems that we face today even worse. If we delay, millions more Americans will lose coverage. If we delay, premiums will grow even farther out of reach. And if we delay, federal health spending will absorb an even greater share of the nation's economy."