By Giovanna Breu and Margie Bonnett
Updated November 30, 1981 12:00 PM

At home in Cedar Rapids, Iowa, 3½-year-old Katie Beckett sits at a Sesame Street table and plays hostess, daintily serving water in tiny teacups to imaginary playmates. It is a heartwarming scene from every American girlhood, with one cruel difference: Katie is only a visitor at the apartment on Bowling Street. She has never spent the night in her own bedroom. A combination of nerve damage to her diaphragm, which impairs her breathing, and a bureaucratic catch-22 has forced Katie to live in a corner of the pediatrics intensive-care unit at nearby St. Luke’s Methodist Hospital. Next month that will change. But when Katie goes home for good, the reason will not be some new medical miracle but the intercession of a man she has never met, Ronald Reagan.

The President told her story at his recent press conference to illustrate the evils of shortsighted federal regulations. Although Katie’s doctors agreed she could safely go home, Reagan explained, the child was kept in the hospital because of Medicaid rules. They forbid paying for her home care, even though the cost to the government would be one-fifth the current hospital charges of $10,000 to $12,000 per month. “When we see a case of this kind,” Reagan said, “it reveals that hidebound regulations can be a tremendous expense to the taxpayers and do no good for the patient.” After the family’s private insurance coverage was exhausted last April, Katie’s mother, Julie, wanted to care for her daughter at home. The Becketts appealed to their Congressman, Tom Tauke, for help in winning a federal hearing on the case. Tauke referred it to the Department of Health and Human Services, which, after almost six months of delay, said no. The Republican Representative then turned to Vice-President George Bush, who talked with Reagan. Nothing prunes red tape more quickly than an angry President. Two days after Reagan publicized the case, Health and Human Services Secretary Richard Schweiker granted the Becketts an exemption from the Medicaid regulation.

It was none too soon for the family. Katie was a premature baby, weighing slightly over two pounds two ounces, who developed a poliolike disease called viral encephalitis at five and a half months. After 10 days in a coma, the infant regained consciousness but the nerves controlling her diaphragm were paralyzed. Unable to breathe, she was confined to a respirator while she fought what one doctor called “horrendous battles with pneumonia.” Slowly the nerves regenerated, doctors believe, and Katie began to breathe again. She was gradually weaned from the respirator. By last Christmas the doctors were so impressed by her recovery they felt she could return home soon—if she used a ventilator for nighttime breathing and took antiseizure drugs and vitamins. “There are two very important reasons for getting her out of the hospital,” says pediatrician Ken Anderson, “the opportunity to grow up in a more normal environment, and less exposure to so many sick children.” Katie’s hospital bills have totaled more than $500,000, paid for by private insurance and Medicaid. But Julie, a parochial-school teacher, and husband Mark, who works in her family’s lumber business, have assets well above the cutoff point for Medicaid’s home-care program.

Experts believe that 100 to 200 other children are similarly—and needlessly—being kept in U.S. hospitals. Secretary Schweiker’s exemption applies only to Katie Beckett; he has now set up a task force to study the problem nationwide.

Meanwhile the Becketts are busy collecting medical equipment and arranging for baby-sitters for Katie’s homecoming. Katie will need speech therapy but should otherwise develop normally. “She will change our lifestyle a lot,” concedes her father. “She will need special care, but we know that we can handle it.” Julie hopes that her daughter’s victory over bureaucracy will set a precedent. “The regulations have not kept up with medical advances. They became obsolete,” she said. “If the government can save this much money on Katie—and we know there are other cases—they might not even have to cut Medicaid.”