MONTPELIER -- State hospital officials say the Shumlin administration's decision to rescind a slight increase in the Medicaid reimbursement rate doesn't bode well for the governor's signature single payer health care initiative.

Last week a legislative panel approved the retraction of a 1.6 percent increase in Medicaid rates for the first half of fiscal year 2015. The Shumlin administration needed to reduce spending for FY 2015 by $31 million, and the retraction quickly enabled the governor to identify a total of $10.8 million in General Fund spending.

Level funding Medicaid slices $3 million out of the General Fund budget, but also means the state will relinquish $4.1 million in federal match money, for a total of $7.1 million reduction in provider payments.

The total $10.8 million in savings includes the reduced operating costs of administering Medicaid with the reduced provider payments.

Medicaid pays hospitals and doctors significantly less than Medicare and commercial insurance companies -- between 50 percent and 63 percent of a provider costs. Estimates of Medicare payments range from 80 percent of cost to more than 100, but the median estimate is 92 percent, according to figures in a Green Mountain Care Board report.

The board calculated that the amount of costs shifted from Medicaid to commercial insurance has more than doubled in the six years from 2006 to 2012.

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Peter Shumlin has attempted to shore up state funding for Medicaid, in an effort reduce the gap between public and private health care programs. In FY 2013, his administration increased reimbursements by 3 percent, and in FY 2014 it increased them by 2 percent.

Beatrice Grause, CEO of the Vermont Association of Hospitals and Health Systems, says providers banked on the additional money, and the retraction is symbolic. Hospital administrators worry that under a single payer system, health care expenditures would be subject to the political state budgeting process.

The cut for fiscal year 2015, Grause says, underscores the "potential risk to patients of investing more health care financing authority in state government."

The state's two largest hospitals, Fletcher Allen Health Care and Rutland Regional Medical Center, were counting on the 1.6 percent increase in Medicaid reimbursement rates, despite informal guidance from regulators that they should not budget based on the higher rate.

Tom Heubner, CEO of Rutland Regional Medical Center, said the reduction creates a $320,000 hole in the hospital's $244 million budget that was submitted to the Green Mountain Care Board in July.

"There was some communication about that, but we did include it, because at that point it was in the (state's) budget and we were counting on it," Huebner said.

The cost will get shifted eventually to commercial carriers, he added.

Medicaid and Medicare have not been keeping pace with the inflationary increases in medical and pharmaceutical costs. As a result, patients with private insurance pick up the difference. Medicare rates are set federally, and are expected to increase by 1 percent this year.

The state's 14 hospitals submitted historically low budget increases when they made their requests to the board last month. Together, the overall increase in hospital spending is 2.7 percent, or $57 million. The Green Mountain Care Board will vote to approve or change those budgets in September.

Al Gobeille, chair of the Green Mountain Care Board, says leaders in Montpelier tend to see the Medicaid rate in the context of the $31 million General Fund revenue gap and don't seem to grasp the broader impact of low Medicaid reimbursement rates on the health care system.

The board and other stakeholders must do a better job explaining to elected leaders how the cut affects commercial rates as well as many of the social service nonprofits the state relies on to flesh out its system of care, he said.

"It's not thought of as funding health care for all, it's thought of as an incremental increase for a program," Gobeille said.

The cuts have an even deeper impact on nonprofit organizations that rely heavily on grants through Vermont's global commitment Medicaid waiver. The waiver gives Vermont discretion in how Medicaid money is spent.

When nonprofit mental health programs lose money and drop services, patients don't get the preventive care they need. The larger health care system also suffers because more patients seek costly emergency room care.

The Green Mountain Care Board is trying to reduce large inflationary increases in medical expenditures by tying hospital compensation to health outcomes and greater efficiency, but in order to stay competitive, Vermont's health care system must have a reliable cash flow, hospital officials say.

John Brumsted, CEO of Fletcher Allen Partners, wonders how a single payer system will fare in the context of other public priorities such as higher education and transportation.

"It is, in my view, difficult to see a publicly financed system where there isn't so much pressure on the flow of money into the system that it becomes increasingly more difficult to provide care," Brumsted told VTDigger recently.

Lawrence Miller, chief of Health Care Reform for the Shumlin administration, said he believes the Legislature has the discipline to fund health care responsibly as the single -- or largest -- payer.

It will help that the program will have a dedicated revenue source, Miller said. When the administration unveils its financing plan, the taxes that will be levied to come up with that money -- pegged at roughly $2 billion in the first year -- will likely go into a dedicated fund, similar to the Education Fund.

Other state officials have pointed out that the program also requires three-year budgets, which they say will help with fiscal discipline.

Miller said designing a thoughtful governance structure for a single-payer program is critical, but the focus must remain on cutting costs via payment and delivery reforms.