A proposed $20 million reduction in Medicaid payments for care provided by physicians who work in hospital-owned practices brought both doctors and hospitals to the State House on Friday.

The pay cut – about $7 million from the state’s General Fund and more than $12 million in matching federal Medicaid funds – is included in the supplemental budget bill proposed by Gov. John Baldacci in response to an expected $95 million shortfall in tax revenues over the current biennium.

Commissioner Brenda Harvey of the state Department of Health and Human Services told lawmakers that the pay reduction would “level the playing field” and bring reimbursement for primary care services in hospital-affiliated clinics in line with payments made to doctors who work in private medical practices.

But a parade of speakers at a public hearing before lawmakers on the Appropriations and Financial Affairs Committee and the Health and Human Services Committee said the changes would discourage doctors from practicing in Maine and would actually drive up the cost of health care for all Maine residents.

Mary Mayhew, vice president of governmental affairs for the Maine Hospital Association, noted that 42 percent of all licensed physicians in Maine are now employed by hospitals. The “vast majority” of them, she said, work in hospital-owned primary care practices, delivering front-line and preventive medical care regardless of patients’ insurance coverage.

More and more doctors, including new medical school graduates as well as more seasoned providers, are choosing to work for hospitals instead of setting up or joining free-standing practices, Mayhew said. It’s a trend that’s playing out nationally, she said, driven in large part by declining reimbursements, especially in areas such as rural Maine with a high percentage of patients covered by Medicare and Medicaid.

Hospital-based health clinics get paid at a higher rate, Mayhew said, in exchange for agreeing to see all patients regardless of payment source.

“Nobody’s making money there,” she told committee members. “We should be out to advance this model.”

There is general agreement within the health care community that every patient should have a primary care “medical home” to improve wellness, detect problems early on and decrease emergency care and hospitalizations, Mayhew said, but the proposal to reduce hospital payments for physician services will move Maine away from that goal.

Dr. James Raczek, chief medical officer at Eastern Maine Medical Center in Bangor, testified that hospital-based practices, in part because of their higher reimbursement structures, have been successful in bringing doctors to rural areas of Maine. If hospitals must pay doctors less than they do now, he said, fewer doctors will want to work here. Not only primary care but also medical subspecialties could be affected, Raczek said, including obstetricians who manage high-risk pregnancies, pediatric specialists, trauma surgeons and others.

The hospital now employs 169 physicians, he said. Without local access to a range of specialists, Raczek said, EMMC could lose its ability to accept complex cases from outlying hospitals in rural areas.

Reminding Raczek that the many unpopular budget cuts under consideration in Augusta are necessitated by insufficient tax revenues, Sen. Joseph Brannigan, D-Portland, co-chairman of the Health and Human Services Committee, asked whether the doctor would support a tax increase to maintain current funding.

“Speaking only for myself, I would,” Raczek said.

“So would I,” said Brannigan.

Another Bangor physician, Dr. Frank Bragg, also testified against the proposed cuts, pointing out that higher payments to hospital-affiliated practices offset a “widget-making” environment that rewards practices for seeing as many patients as possible each day. The additional funding allows practices to devote staff to necessary tasks such as maintaining patient records, filling out insurance forms, refilling prescriptions and other activities that generate no revenue at all, he said.

Dr. Kevin Flanigan of Pittsfield, immediate past president of the Maine Medical Association and a physician in private practice, told lawmakers that the trend toward hospital employment has benefited Maine communities by making it possible for primary care doctors to continue to practice in the most rural areas of the state. If proposed cuts go through, he said, the resulting loss of access to preventive care will increase health care costs dramatically in the long run.

Work sessions on the roughly $62 million in DHHS cuts are scheduled for next week, with a committee vote on the department’s portion of the supplemental budget expected on Friday.