WASHINGTON–Frank A. Corvino, the CEO of Greenwich Hospital, is still reeling from the fiscal punch from Hartford, in the form of a proposed new tax on hospitals across Connecticut. Now, he’s girding for a second hit from Washington, where federal Medicare officials are fine-tuning a cut to hospital reimbursement rates.

The two blows, Corvino and other hospital executives say, would ripple across the health care system and take a toll on the quality of care.

“The combination of these two… is going to have a devastating effect on patient care in the state,” Corvino said. “It’s going to pierce the safety net that hospitals provide for their patients.”

Even before Gov. Dannel P. Malloy unveiled a budget plan that included a new levy on hospitals, Connecticut institutions were focused on a federal proposal to pare back Medicare payments. The Connecticut Hospital Association and others have lobbyied against the measure, drafted by the federal Centers for Medicare and Medicaid (CMS).

But they appear to have lost that battle, at least the first round. Last week, CMS released a proposal to slice nearly $500 million from its Medicare payments to hospitals across the country. The Connecticut Hospital Association said it will file a formal protest against the rule in June. And it’s still subject to public comment, and possibly revision. But hospitals failed in their efforts to soften a similar cut imposed at the start of this fiscal year.

CMS officials have said the reduced reimbursements are an effort to make up for overpayments to hospitals, in Connecticut and around the country, in previous years. Prior to 2008, hospitals were paid the same amount for treating an otherwise healthy patient with pneumonia, for example, as they were for a pneumonia patient who had other complications.

Since then, CMS has instituted a more sophisticated system, allowing for more varied levels of diagnosis-and more nuanced payment rates. But before that went into effect, CMS officials say, some hospitals “bumped up” patients’ diagnoses to a more severe category than was necessary, resulting in overpayments. Hospitals have adamantly denied that charge and pressed CMS to abandon the cuts, or at least temper them.

But starting last fall, CMS began recouping half of the alleged overpayments through an initial Medicare payment cut. And this week, CMS issued a fresh proposal to gain back the second half, through $498 million in additional Medicare cuts to 3,400 acute care hospitals around the country.

Kim Hostetler, vice president for administration and communication at the Connecticut Hospital Association, said CHA is still examining the proposal to see how it will impact Connecticut’s 30 acute care facilities. She said they’re seeking clarification from CMS on some elements of the cut.

“But it’s safe to say that Connecticut will be harder hit than the national average,” she said, adding that Connecticut hospitals are already only reimbursed 93 cents for every dollar spent caring for Medicare patients.

The reduction, combined with a lower-than-usual boost for inflation from CMS, will result in an “unprecedented” cut, she said. “This really is a double whammy for Connecticut hospitals.”

For Greenwich Hospital, Medicare patients make up about 30 to 40 percent of the patient population, so any reduction in reimbursements will be hard felt, Corvino said. But he knew they were coming and was prepared to absorb the trim one way or another.

Not so for the budget proposal approved by the Appropriations and Finance, Revenue and Bonding committees in Hartford this week. That budget deal would eliminate $83.3 million in state aid that helps hospitals cover the cost of caring for people who are uninsured or underinsured; it also levies a new tax on hospitals.

“If it was just the Medicare cuts, we could probably live… with a couple of million dollars [in lower revenue] here or there,” Corvino said. “But when you up that on top of this devastating budget, the hospitals are really going to be hard pressed to provide the same level of service that their currently providing.”

By taxing hospitals, the state can capture federal matching funds for its own coffers-and then redistribute the tax revenue back to the hospitals. But to get the federal money, the state can’t simply give each hospital back what it paid. Instead, some hospitals have to get more back than they paid, and some have to get less. The amount returned is based on each hospital’s volume of Medicaid patients and uncompensated care.

Malloy’s original proposal called for raising $266.6 million from hospitals and returning the same amount to them, with the state keeping the $133.3 million in federal funds it brings in. The final plan, agreed to by two legislative committees last week, would raise $349 million from hospitals and give them $399 million. It includes additional funding for five hospitals in higher-cost areas – Stamford, Greenwich, New Milford, Danbury and Norwalk hospitals.

Overall, the plan gives hospitals $50 million more than they pay. But hospital officials say they end up worse off, once the $83.3 million cut is factored in. Between the tax and the cut, 20 hospitals would lose money, while eight would make money, according to calculations by the Connecticut Hospital Association.

“From our perspective, this is still pretty painful,” the CHA’s Hostetler said.

The biggest blow would be dealt to Greenwich Hospital, which would lose $9.6 million from the tax and the cut.

“It will take a small operating gain that we had last year and plunge that into a significant deficit in the coming year,” Corvino said, adding that it could put the hospital $7 million to $8 million in the red.

Other hospitals will see a benefit-or no effect at all–from the proposed tax. St. Vincent’s Medical Center in Bridgeport would gain the most – $3.6 million. Two hospitals–UConn’s John Dempsey Hospital and Connecticut Children’s Medical Center–would not be subject to the tax.

Hostetler said hospitals losing money from the budget will “be back to doing the kinds of things they’ve had to do in the past.” That could mean curbing services, she said, “but more often, it’s delayed investments in equipment, or in technology, in staff.”

That could be particularly difficult for hospitals that need to make significant capital investments, such as in electronic medical records.

“It’s a scary thing when you’re not quite sure what your revenue stream is going to be, particularly when Medicare reimbursement numbers are up in the air too,” Hostetler said.

With the tax and cut going forward, the hospital association has been trying to get legislators and the Malloy administration to make other changes that could help hospitals. They include:

• Creating a $35 million fund to help hospitals losing the most from the budget
• Writing the tax law to raise a set amount from hospitals, rather than taxing them at a rate that could translate to more money if hospital revenues – the basis for the tax – increase
• Making the tax temporary
• Revising the hospital payment system by 2014

But Ben Barnes, secretary of the Office of Policy and Management, the governor’s budget office, said he wasn’t impressed by the proposals.

“I did not find that to be a compelling package,” he said.

Barnes noted that the tax was restructured to leave the hospitals with more money overall. The tax on health care providers–including nursing homes and intermediate care facilities for the mentally retarded–provides an “enormous” net benefit to the state in addressing the budget deficit, he said, and the sacrifices hospitals will make are reasonable.

“I think they’ve overplayed their hand,” he said. “I think the tax proposal that we have is pretty moderate.”