Virginia hospitals are facing cuts in Medicaid funding due swelling Medicaid enrollment and rising healthcare costs.

A proposed state budget proposes to freeze Medicaid reimbursement rates for inpatient services, the second consecutive year without an increase in payments.

Over the past two years, Virginia’s share of the Medicaid program has increased $777 million. Annual Medicaid spending by the state currently stands at $2.6 billion.

Even with the increase, hospital administrators say that Medicaid rates are already inadequate to cover the cost of providing services. Further increases in costs, coupled with a reduction in reimbursement, could force hospitals to either increase charges to insured patients, curtail services, or a combination of the two.

The Virginia Hospital and Healthcare Association has estimated that Medicaid reimbursement could drop to 50 percent by 2012 if the General Assembly cuts the budget 15 percent across the board to address revenue shortfalls.

Adding to the state’s woes for the upcoming budget is the loss of $1.2 billion in Federal stimulus dollars that the state has used in the current budget year to cover rising costs and declining revenues.

Historically, the state has attempted to set Medicaid reimbursement rates at 78 percent, with annual adjustments for inflation. But last year the rate stood at 72 percent because they were not adjusted for inflation.

The budget proposal also calls for freezing disproportionate share hospital payments and eliminating supplemental payments to hospitals providing neonatal intensive care, which will put additional pressure on hospital budgets.