COLUMBIA -- The 820,000 residents on Medicaid in South Carolina are breaking the bank and state officials are now facing a big decision: allow the program to run $228 million in the red or cut off coverage for everyone.

The state Department of Health and Human Services announced Tuesday that it is facing a budget crisis. The agency, which oversees government-run health insurance for poor people and children, will have to ask the state Budget and Control Board on Dec. 14 to run a deficit, a move that is expected to ignite a firestorm among politicians over what South Carolina should be expected to pay for in the face of federal health care reform.

Without approval to run a deficit, the agency proposes to stop paying doctors, hospitals and other health care providers who treat Medicaid patients on March 4. The claims would be received and processed but not paid until there is more cash in the bank.

The agency says it is backed into a corner. The state's dramatic economic downturn has forced more than 100,000 people in three years onto the Medicaid rolls, which now carry 43 percent of the state's children. And when the state accepted federal cash from the stimulus package,

South Carolina agreed not to kick anyone off of Medicaid by changing eligibility standards. What's more, state lawmakers further bound the agency by limiting places to trim expenses, such as by barring the agency from dropping the rates it pays the doctors who treat Medicaid patients. South Carolina is the only state that has prohibited its Medicaid agency from lowering the provider reimbursement rates, while at least 40 other states have done just that to manage budget shortfalls.

Jeff Stensland, director of communications for the Health and Human Services Department, said the agency has fewer resources to meet a tremendous growth in demand. The agency saved $22.9 million with cost-cutting measures, including laying off and not replacing staff. That's combined with facing $228 million in budget cuts in the past three years and having $550 million from its savings account transferred to plug budget shortfalls in other government programs.

"The challenge we have is simply paying for health care services for all the people who qualify for Medicaid," he said.

Decisions about what South Carolina will do to manage the budget crisis come with high stakes that include issuing IOUs to doctors or outright rejecting participation in the Medicaid program, resulting in a loss of coverage for the 820,000 people and $4.1 billion annually from the federal government that keeps the health care industry -- doctors, nursing homes and hospitals -- in business. Some programs on the chopping block also would affect services the state's elderly and disabled receive.

The five-member Budget and Control Board is expected to take up the matter at its December meeting. From there, lawmakers and Gov.-elect Nikki Haley will have to make decisions about what South Carolina will do to address the budget crisis going forward.

Haley said she will fight the new health care reform law all the way to the U.S. Supreme Court. Meanwhile, newly elected members of Congress, including 1st District U.S. Rep.-elect Tim Scott, a Charleston Republican, have vowed to make its repeal a top priority.

Ben Fox, communications director for Gov. Mark Sanford, said the governor's office still is in discussions on the developing issue that came to a head Tuesday. Sanford oversees the Health and Human Services Department as part of his Cabinet and is chairman of the Budget and Control Board. The board has control of much of the state's purse strings and manages financial crises when the state Legislature is not in session. Lawmakers will convene again in January.

State Rep. Dan Cooper, a Piedmont Republican who chairs the House Ways and Means Committee, said that given the consequences he is not sure the Budget and Control Board members will be left with a choice. He serves on the board with Sanford, the state treasurer, comptroller general and Senate Finance Chairman Hugh Leatherman, a Florence Republican.

Cooper said the impact on withdrawing from the Medicaid program cannot be overstated. Workers across the state, from the doctors and nurses and dentists to the medical suppliers and offices professionals, risk losing their livelihood, worsening the state's already bad economic situation and high unemployment rate, Cooper said.

"We're certainly trying to explore all the options out there," Cooper said, adding "I don't know what that all means yet."

Likewise, Deputy State Treasurer Scott Malyerck said late Tuesday that outgoing Treasurer Converse Chellis is mulling over the situation. Chellis is reviewing information from the Health and Human Services Department and crunching the numbers.

Comptroller General Richard Eckstrom, who just won re-election to another term, said the state constitution makes it clear that the state cannot spend more than it takes in. He sees the only option as working with the agency to find ways to push the spending back into the black.

"This is going to require us to make tough choices because spending beyond our means can't be an option," Eckstrom said, noting that the federal stimulus money that he opposed was never "free."

Reach Yvonne Wenger at 803-926-7855.