ALBANY — New York’s health care industry is bracing for Governor Spitzer’s first budget proposal, which is expected to trim about $1 billion out of projected growth in Medicaid, sources said.

Mr. Spitzer and his budget director, Paul Francis, are wrapping up the governor’s spending plan for the 2007–2008 fiscal year, which the governor is due to present to the Legislature by the end of the month.

Perhaps the most closely watched element of the budget is in the area of Medicaid, whose growth the governor has pledged to curtail to pay for high-profile priorities, such as Mr. Spitzer’s plan to give homeowners a $1.5 billion property tax break and a campaign promise to settle a multibillion-dollar lawsuit brought by the Campaign for Fiscal Equity that concerns funding for New York City public schools.

Sources say Mr. Spitzer will propose a Medicaid package that slows down built-in inflationary growth in the health care industry by reducing what is known as the trend factor, an automatic adjustment in reimbursement rates that helps hospitals, nursing homes, and doctors keep up with the rising costs of doing business.

The reductions won’t translate into an overall lowering of Medicaid spending in absolute terms year to year. State budget officials had predicted that the state would be spending roughly $1.5 billion more out of its operating fund on Medicaid in the upcoming budget. Mr. Spitzer could be scaling back that growth to about $500 million. Taking into account this year’s $2 billion surplus, budget officials have estimated that the governor would need to trim $2 billion from the budget to deliver on his big-ticket campaign promises and balance the books.

A major portion of the budget is mandated spending in which the governor has little power to change. Traditionally, in times of deficits, there are two fatty areas in the budget that New York governors have relied on for emergency trimming: education and Medicaid. In this year’s case, Mr. Spitzer has pledged to increase education spending, which leaves Medicaid on the chopping block.

The state’s major hospital associations, which are already absorbing the probable loss of nine hospitals slated for closure by Mr. Pataki’s health care commission, are aware of the reality. “We know we’re going to fight a battle,” a hospital source told The New York Sun.

Mr. Spitzer has indicated that he would put to rest a lawsuit and complaints from city officials that the state is under-funding the city’s public school system by proposing in his budget a plan to increase school aid by at least $4 billion over the next four years. One education source said Mr. Spitzer is sticking with that figure, even though the state’s highest court ruled last year that the state owed the city less than $2 billion. Mr. Spitzer, however, is still counting on the Bloomberg administration to share the burden of the $4-billion plan and is in talks with the mayor’s office to reach a deal.

To pay for extra statewide school funding, Mr. Spitzer may change how education funding is distributed among upstate New York, Long Island, and the city. The city, which traditionally receives 38.86% of state education funding, and less wealthy districts in upstate areas could wind up with a greater share than usual. The changes could upset what is known as the “shares” system, leaving Long Island with a smaller slice of the pie.

For weeks, Mr. Spitzer has been foreshadowing cuts in the health industry. In his State of the State address that he delivered early this month, Mr. Spitzer made particular note of Medicaid’s explosive growth, saying, “In just the last 15 years, state spending on Medicaid as a share of the budget’s General Fund has increased from 14% to 35%. These are dollars we have made an affirmative decision not to spend on education, tax cuts, infrastructure or the kind of health care investments that are so desperately needed.”

On the campaign trail, Mr. Spitzer said he would find $1 billion in savings from Medicaid, but offered less controversial belt-tightening measures, like added fraud prevention mechanisms and efficiencies through electronic billing.

While Mr. Spitzer will propose other cost-saving measures, it’s likely that any changes to the trend factor will provoke the most uproar in the health-care industry, an influential interest group in Albany that was highly successful in lobbying the Legislature to reverse the bulk of Medicaid cuts that Mr. Pataki proposed in his budgets.

In last year’s executive budget, Mr. Pataki called for a slightly larger reduction in Medicaid. But his threats vanished after hospital groups orchestrated a massive advertising campaign that accused the governor of risking the lives of babies. In the end last year, Mr. Pataki backed down and agreed to restore most of his cuts.

This year, the political equation has changed. With a new, popular governor having supplanted a lame duck executive, hospital sources say they have less power to demand that lawmakers come to their rescue.

Meanwhile, sources say Mr. Spitzer won’t be addressing charter schools or civil confinement in his budget and plans to separately negotiate deals on those two issues. That would represent a change in tactics from the Pataki administration, which sometimes embedded less popular measures in the budget to gain leverage over them.