Reductions in hospital services, staffing and new programs are all possibilities in the weeks ahead as Lawrence & Memorial Hospital and The William W. Backus Hospital figure out how to cope with sudden multi-million-dollar reductions in expected state revenue.

"A cut of this magnitude is going to have a major impact on our ability to serve as the region's safety net and reinvest in programs and services for the community," said Backus spokesman Shawn Mawhiney, referring to a $3.8 million cut in state revenues to the Norwich hospital.

In New London, L&M is facing a $2.8 million loss of expected state revenue, funds it had included in the budget for its current fiscal year. Both Backus and L&M will have to absorb the cuts by June 30, the close of the current state fiscal year.

"The potential here is devastating," said Mike O'Farrell, spokesman for L&M, which in November averted a potential budget crisis with cost-cutting moves and layoffs of 22 employees to close a $3.2 million budget gap. "We can't absorb this without having services or people affected. Everything's on the table."

As part of a state budget deficit reduction measure, the state legislature on Dec. 19 approved $103.7 million in cuts to payments to the state's 30 hospitals. The funds were reimbursements for care the nonprofit hospitals are required to provide to uninsured and underinsured patients, as well as to partially compensate for the difference between the amount reimbursed by Medicaid and the actual cost of care for Medicaid recipients. The cut to hospitals was the largest portion of $252.3 million in budget reductions lawmakers approved to close a state budget gap. A previous set of cuts announced by Gov. Dannel P. Malloy in November reduced state spending by an additional $170 million.

"We're somewhat stunned," said Stephen Frayne, senior vice president of the Connecticut Hospital Association. "This is an enormous sum of money. It's 10 percent of all the funding we get from the state."

Hospitals, he said, "will continue to take care of everybody that comes through the door," but will have to take some painful steps to keep their budgets sound.

"The hospitals are going to do what they need to do to try to maintain fiscal health by modifying services and eliminating positions," he said. "They have an obligation to maintain financial stability."

While hospitals figure out how to deal with the revenue cut, the hospital association will lobby lawmakers and Malloy's office to reduce or rescind the cut once the legislature convenes this week, Frayne said.

In approving the cut to hospitals, lawmakers argued that the loss would be offset by an increase in Medicaid reimbursements to hospitals that occurred after a change in the state program for low-income adults in 2010.

Despite the higher reimbursement, there is still a gap between Medicaid reimbursement rates and the actual cost of care, O'Farrell said.

"Every time we see a Medicaid patient, we're losing money, and we're seeing more and more," he said, adding that since 2008, the percentage of L&M patients covered by Medicaid has increased from about 13 percent to about 17 percent.

O'Farrell said L&M continues to move forward with its major projects including the new Dana-Farber cancer center under construction in Waterford and the pending purchase of The Westerly Hospital. The $34.5 million cancer center is being funded with donations raised specifically for that project, and the $69 million Westerly Hospital purchase will be funded by loans and managed under a different financial structure from the operating budget for L&M, he said.

"Those investments have the ability to strengthen us long term," O'Farrell said.

The state hospital association's Frayne said he believes hospitals are being asked to bear an unfairly high proportion of the deficit reduction package - about 30 percent - when state funding to hospitals only constitutes 5 percent of the entire state budget. He added that the cut seems particularly unfair in light of the $380 million in new revenues to the state generated by a tax on hospital patients enacted 18 months ago. A tax of 3.8 percent is added to bills for outpatients bills and 5.5 percent on inpatient bills.

j.benson@theday.com