WASHINGTON (AP) – Many rural hospitals and nursing homes would get fewer federal dollars under a proposal to save Medicaid almost $4 billion over the next five years. The change would have “a significant economic impact on a substantial number” of health care providers, the Bush administration acknowledges.

At issue are financing arrangements between states and local governments. These deals tend to increase Washington’s share of spending in Medicaid, the joint state-federal program covering 55 million poor and disabled people, even when a state’s share is unchanged or drops.

The federal share of the program ranges from 50 percent to 76 percent, depending upon the state. Poor states receive a greater federal share.

In many states, financing arrangements between health care providers and the state result in the federal government paying more than the law says it should. Dennis Smith, director of the federal Center for Medicaid and State Operations, said the proposed rule made public late Friday would put a crimp on that practice.

“This is about the match rate, and states have demonstrated they’re willing to fund their share of the program,” Smith said in an interview Saturday. “It’s just that for many years previous to us, they were not paying their share.”

The Kaiser Family Foundation, which conducts health care research, said some of these arrangements have helped states maintain important services, such as nursing home care, during tough economic times.

The proposed rule says that Medicaid payments to health care providers operated by local governments such as counties cannot exceed costs. The rule says health care providers – not a state or local government – must get all of the reimbursement they are entitled to get when they treat a Medicaid patient.

“We expect this rule to have a significant economic impact on a substantial number of small entities, specifically health care providers that are operated by units of government,” the proposed rule says.

According to federal data, there are 1,153 hospitals operated by local governments or hospital districts; 822 nursing homes with such ownership; and 113 intermediate care centers for the mentally retarded.

The Health and Human Services Department did not estimate how many of those facilities would be affected by the rule.

Smith, however, sought to play down the economic effect, saying he did not believe the rule would have a dramatic impact on providers.

He framed the savings, estimated at $3.9 billion over five years, in the context of the $200 billion that the federal government spends annually on Medicaid.

Smith cited an example of improper financing: A hospital gets paid $100 – half from Washington and half from the state – but then gives $10 back to the state and the state spends the money as it wants.

Smith said the federal government is saying that the true cost of the procedure should have only been $90, shaving Washington’s true match to $45.

The Government Accountability Office said in a 2004 report that some of the financing arrangements that states use to increase federal funding undermine the program’s integrity. Some of its key recommendations are in the proposed rule.

Rachel Klein, deputy director of health policy at Families USA, said she agrees with the need for an evenhanded and efficient program, but limiting how states come up with their Medicaid match also puts the squeeze on states.

“It affects their ability to fund the Medicaid program,” Klein said. “In turn, that makes it harder for people to get the critical health care services they rely on.”

Families USA promotes policies it believes will increase health coverage for the poor.

The public has 60 days to comment on the proposal. The department will subsequently issue a final rule that would have the force of law.