On Jan. 1, the federal government will begin funding a massive expansion of health insurance coverage.

At the same time, if Gov. Dannel P. Malloy gets his way, Connecticut will scale back what it pays for poor people to receive health-care coverage and mental-health and hospital services.

The state administration says this won’t leave anyone without insurance because new federal coverage options will become available. But patient advocates and mental health providers say the cuts will mean that thousands of state residents will have a harder time accessing and affording health care, just as a law meant to expand coverage takes effect.

“The irony would be that at the same time, we could be creating a situation where actually people who currently have health coverage and access lose it,” said Sharon Langer, interim executive director of Connecticut Voices for Children.

“Clearly that’s not the intention of the Affordable Care Act,” said Janet Davenport, vice president for communications of the Universal Health Care Foundation of Connecticut, using the formal name of the federal law often referred to as Obamacare.

Under Malloy’s spending plan, more than 35,000 parents of minor children would lose Medicaid coverage, saving the state close to $65 million over two years. The parents will gain the option of buying insurance with federal subsidies made available through Obamacare. But advocates worry that even subsidized coverage will be unaffordable to poor parents.

Malloy’s proposed budget would also cut grants meant to cover the costs of outpatient mental health and substance abuse treatment for people who are uninsured, saving $21 million in the first fiscal year of the budget and $42 million in the second. And it would cut more than $134 million in funds hospitals now get for treating uninsured patients.

The administration says those funds won’t be necessary once nearly everyone in the state has health insurance. But hospitals and mental health care providers say it’s not that simple, and that the cuts could lead to job losses and program cuts.

Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, said the cuts won’t leave people without care.

“I would strongly reject the idea that access is going to be compromised,” he said.

Barnes acknowledged that it will be a challenge to ensure that the parents losing Medicaid coverage will be able to afford to buy insurance, but he noted that the federal law will limit how much they people have to pay.

“It will be hard enough to balance our budget as it is,” Barnes said. “At least we’re able to do that at a time when we are in fact growing coverage and expanding access to health care for so many needy residents of the state.”

Medicaid or private coverage for poor parents?

Under Obamacare, Connecticut will expand Medicaid to cover adults earning up to 133 percent of the poverty level. People with higher incomes will have the option of buying insurance through a newly created marketplace known as an exchange.

Ben Barnes, the governor’s budget chief: ‘I would strongly reject the idea that access is going to be compromised.’

Connecticut’s Medicaid program, known as HUSKY, currently covers parents of minor children at higher income levels than will be required under federal reform — up to 185 percent of the poverty level. That’s $36,130 for a family of three.

Under Malloy’s proposal, the state would tighten the income limit for Medicaid to 133 percent of the poverty level — the minimum allowed under the Obamacare expansion. That means that an estimated 37,500 parents would lose Medicaid coverage.

Right now, a family with one child and two parents who work fulltime earning minimum wage would qualify for HUSKY, which is free. Under Malloy’s proposal, that family would not.

Instead, they would get federal subsidies to buy insurance through the state’s exchange, which is called Access Health CT. Their premiums would likely be capped at around $150 per month. The federal law also limits the out-of-pocket costs they’ll face.

“Health insurance is going to be far less than a cable bill, far less than a cellphone bill, and it’s terribly important to people,” Barnes said. “Whereas if you buy it now in an unsubsidized environment, it’s like a mortgage.”

But advocates like Langer fear that the premiums, deductibles and copayments for those plans would be unaffordable. Those costs would average $1,800 a year, according to projections by researchers at the University of Massachusetts Medical School Center for Health Law and Economics.

And an estimated 7,500 to 11,000 parents cut off from Medicaid would likely forego insurance because of those costs, the researchers wrote in a report prepared for the Connecticut Health Foundation.

The researchers also warned that low-income children would be less likely to have health insurance if their parents are uninsured or in a different health plan.

Langer said it’s likely that those losing Medicaid, nearly all of whom are working parents, will likely be putting their limited dollars toward rent, food and their children’s medical care before they take care of themselves.

“Even if they have to pay what middle class or upper middle class people think is nominal amounts, they’ll forego that in order to protect the basic needs of their children,” she said.

In the past, restricting Medicaid eligibility would have almost certainly meant leaving people uninsured. But now they have the option of getting “high-value, low-cost” insurance through the exchange, Barnes said.

“I think now that that option is available, the argument that you somehow need to provide Medicaid-level subsidies to people in those income bands because of the need to have them be insured as their children are, I think that argument no longer has the power that it did when HUSKY … was first put in place,” Barnes said. “Those individuals have access to heavily subsidized affordable coverage through the exchange, and we should rely on that.”

Mental health cuts called “catastrophic”

Malloy’s budget uses the premise that nearly everyone will have insurance beginning in January to reduce grant payments for outpatient mental health and substance abuse services for uninsured clients.

But providers of mental-health and substance-abuse services warn that the cuts could lead them to reduce services, take fewer clients or close.

“I frankly am scared to death of what will happen to the system if these stay in place,” said Diane Manning, president and CEO of United Services, which provides mental health and substance abuse treatment in northeastern Connecticut. “It’s catastrophic.”

One concern providers have is the timing. The grants will be cut Jan. 1, but they say it’s unrealistic to expect that everyone will have insurance by then.

“I think that there’s tremendous risk that they’re going to further destabilize a very fragile system because everybody’s not going to have insurance as of January 1 of 2014,” said Joseph J. Sullivan, president of MCCA, a Danbury-based provider of substance-abuse treatment.

Barnes agreed that not everyone will have insurance by Jan. 1, but disagreed about how problematic that will be. Providers who see clients eligible for Medicaid can help them get signed up, or direct them to organizations that can, Barnes said. People can be retroactively covered for Medicaid, he said.

“Certainly on the Medicaid side, it doesn’t really matter,” Barnes said. “If you’re eligible, then we’re going to ultimately pay the bills.”

Beyond the timing, providers say the grant cuts will hurt because Medicaid, the program that will likely cover most of their now-uninsured clients, pays low rates that cover about half the cost of care.

“It doesn’t matter if everyone’s covered,” said Raymond J. Gorman, president and CEO of New Britain-based Community Mental Health Affiliates. “If the reimbursement rate doesn’t cover the costs, it doesn’t matter if everyone’s covered.”

Gorman, who predicted his agency would lose $1 million in grants under the proposed budget, said he’d have to consider closing two sites if the cut goes through.

The grants help cover things that Medicaid and private insurance don’t cover, Manning said, like dealing with probation officers or family members of clients who help them take their medications, filling out forms to help clients maintain their benefits, or, if a client ends up in the hospital, coordinating plans for discharge so the person can go home smoothly.

And they offer more flexibility. Sometimes clients don’t show up for appointments, Manning said, and she has her staff try to reach them. Without the grants, the agency would only get paid for that time if the client showed up so they could bill Medicaid, Manning said. Most likely, in that situation, the agency would have to drop “higher-risk” clients who aren’t as likely to show up, she said.

“I could not afford to keep doing the outreach to people who I’m not getting paid to see,” Manning said.

In a statement, the Department of Mental Health and Addiction Services said it had been working with providers for several years to prepare for federal health reform and would continue to do so. It noted that the department had managed similar conversions from grant funding to fee-for-service systems in the past, and that many services will remain grant funded even after the Affordable Care Act takes effect.

“The department believes the behavioral health system can be sustained under ACA,” the statement said.

Barnes said he doesn’t believe the grant cut will lead to problems with access to mental health care. He acknowledged that Medicaid rates are lower than what Medicare and private insurers pay, but he noted that Medicaid is generally considered to provide better coverage for mental-health services than commercial insurance.

He also noted that the proposed budget provides $10 million for a separate care coordination initiative that could help the clients the providers serve.

“I think the Affordable Care Act creates a lot of opportunities for us,” he said. “I really think that the providers who are most dynamic and able to best adapt their service-delivery model to the post-ACA world will prosper and we certainly want them to.”

“But we definitely need to begin to change how we pay for services because of the act and because of the budget constraints that we face.”

Follow Mirror health reporter Arielle Levin Becker on Twitter @ariellelb.

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Hospitals warn budget cuts will cut jobs and services — maybe close doors