South Carolina stands to lose tens of millions in federal Medicaid dollars as a result of a change in the way the government classifies public hospitals.

The state, which now receives about $375 million annually in "disproportionate share" program funds, distributes the money to hospitals to help them offset the cost of caring for the uninsured and indigent patients enrolled in Medicaid.

Many hospitals throughout the state rely heavily on the funds, including the Medical University of South Carolina, the state's largest Medicaid provider. It received $37 million in disproportionate funds last year, nearly three times its profit. The change could hurt smaller hospitals in rural areas even more.

"We're talking about major hits," said Ken Shull, chief executive of the South Carolina Hospital Association. "All of a sudden, the program would be significantly smaller."

Simply put, the federal government is placing new limits on which hospitals are able to contribute to a pot of money that is used to draw Medicaid matching dollars from the government. The government chips in more than $2 for every $1 the state contributes to the program.

The federal government created the disproportionate share program in 1983 as a way to help hospitals that serve a lot of Medicaid patients. South Carolina has some 900,000 Medicaid enrollees and another 500,000 residents without health insurance of any sort.

The government is making its change to stem what it views as abuse of the program.

Rather than spend the money on offsetting the cost of providing health care to the poor, some states have used the dollars for bridge and road construction. Other states, including North Carolina, have overpaid hospitals hundreds of millions of dollars in recent years and could be forced to pay that back.

Originally, the government placed no restrictions on where states found the dollars they used to draw matching federal funds. That changed in 1991, when the government limited those sources to public funds, meaning broad-based taxes or transfers from other governmental agencies.

South Carolina funds its disproportionate share program almost entirely with transfers from public hospitals. Those hospitals last year sent the state $113 million, most of which came from three institutions: MUSC, Palmetto Health Richland in Columbia and the Greenville Hospital System.

Based on the 2-for-1 formula, the federal government sent the state $262 million last year. The combined $375 million was then distributed to hospitals, regardless of whether they paid into the fund or not, to compensate them for caring for Medicaid and uninsured patients.

MUSC put up $28 million last year. In return, it received $65 million, netting $37 million.

Until now, the federal Centers for Medicare and Medicaid Services has not tried to define what constitutes a "public hospital."

That definition has been left up to the states, which generally have defined public hospitals as facilities established by the government and run by a publicly appointed or elected organization and those that qualify for some measure of government support.

In its latest change, the government wants to start defining precisely what makes a public hospital public. South Carolina is among the first states to draw the government's attention on this issue, though state officials insist their use of the funds has always fallen within federal rules.

CMS has informed as many as 22 hospitals throughout the state that their status as a public hospital is in question.

It already has informed the state that it no longer considers one hospital, Palmetto Richland, public.

In 1998, Richland Memorial Hospital, owned by Richland County, merged with the private, nonprofit Palmetto Baptist in Columbia to form Palmetto Health System. State officials say that at the time, the government agreed Palmetto Richland would still be considered a public facility, the merger notwithstanding.

As a private hospital, Palmetto Richland would no longer be able to contribute to the disproportionate share fund. Shull estimated the hospital's exclusion alone could cost the state $90 million.

Robert Kerr, the state's Health and Human Services director, complained Thursday that CMS' definition of what comprises a public hospital is unclear.

"They've given examples," Kerr said, such as whether the hospital's employees are public workers or whether the hospital has taxing authority, but a better definition is needed.

Kerr is also unhappy that CMS is no longer allowing public hospitals located fewer than 25 miles across state lines to contribute to South Carolina's pool.

That means a facility such as the Medical College of Georgia in Augusta will no longer be able to contribute to South Carolina's match, although it routinely cares for South Carolina residents.

Kerr complained that the government is implementing its new rules without giving states ample warning.

"You've got to give us a transition period," he said. "You can't hold us accountable for things we clearly thought you tacitly approved."

The state is not without some options, including the imposition of a broad-based tax on all hospitals.

"There are some other ways we can skin this cat," Kerr said. "I don't want to paint the picture that the world is coming to an end."

Lisa Montgomery, chief financial officer for MUSC's Hospital Authority, thinks a solution will be found.

"I'm optimistic," she said. "I just think this is so critical to the survival of so many hospitals that there will have to be a plan."

MUSC, in fact, may have the most to lose.

The money it gets from the program helps it cope with cash-flow problems and will become more critical as it moves ahead with plans to build a $292 million hospital, Montgomery said.

Small rural hospitals such as 59-bed Bamberg County Memorial also could be hurt.

The hospital nets $800,000 in annual disproportionate share funds, more than its projected $500,000 profit this year. The program helps the hospital buy equipment, make repairs and even build small additions.

"This has been very frustrating," said Warren Hammett, the hospital's administrator.

The same is true at Williamsburg Regional Hospital in Kingstree, located in the middle of a county that is among the state's poorest and has one of its highest unemployment rates. Nearly a quarter of its patients are Medicaid enrollees.

The hospital, with 78 beds, also receives about $800,000 a year from the program, administrator John Hales said.

"Any reduction would make it that much tougher to survive," Hales said. "Everybody else would be in the same boat. It'll kill some of them, put them under. No question."