The D.C. government is making 20 to 25 percent cuts in various community health service contracts this year and plans to end all funding next year for two free clinics run by Children's Hospital, city officials and health-care providers say.

As the city searches for budget savings both this year and next, cuts already have been made in contracts for drug and alcohol-abuse programs, counseling for homeless men, and transitional programs for adults coming out of mental institutions.

The reductions, coupled with severe cuts in federal funding, have seriously upset private contractors of both health care and social services--most of them charities or other nonprofit groups--that are worried about the future of other contracts and programs. The federal and local governments are calling on charities to provide more services, but this private-sector volunteerism cannot work if programs run by nonprofits are eliminated, these groups argue.

"You can't castrate the nonprofits and then expect to rely on volunteers," said Donald Roose of an agency called Andromeda, which runs programs for refugees and other programs on alcohol and drug abuse.

But D.C. Department of Human Services (DHS) officials say that the reductions will be made largely through management efficiencies and competitive bidding, which should not affect services.

"We are asking contractors to absorb some of the inflation, some of the management overhead," said Dr. Ernest Hardaway, the city's commissioner of public health. "I'm forcing upon them some of the critical decisions I'm going to have to make myself."

The cuts in health contracts generally are being made across the board, to spread the reductions equally among all groups, Hardaway said. A few contracts will be eliminated completely when the group is not doing a good job or if the service is a low priority, he said. No new initiatives will be possible because of the budget crunch, he added.

Two free children's clinics funded solely by $648,000 in city contracts with Children's Hospital, one in Adams-Morgan and the other near Howard University, are not to be funded next year, Hardaway said.

This decision came as a surprise to Children's Hospital officials, now operating the clinics under an interim agreement, when they were informed of Hardaway's remarks this week.

"I am stunned," said Dr. Frederick Green, chairman of ambulatory services at Children's. The city gradually has been decreasing funding for the clinics for years and had tried before to eliminate the contract, but this was the first indication that this again is planned next year, Green said.

No other sources are available for funding and the clinics would have to close without the city money, Green said. About 24,000 medical visits a year are made to the two clinics, which mainly serve the Hispanic population, he said.

DHS Director James A. Buford confirmed the decision to cut the Children's Hospital contracts and said that the services would be picked up by some of the 15 clinics run by the city.

The public health commission this month abruptly canceled all funding for contracts with groups that provide adult day-care services for patients making the transition from St. Elizabeths Hospital to the outside world. But after an outcry by the four groups involved, the contracts for more than $300,000 annually were extended to March 1 and are being reconsidered, DHS officials said.

DHS officials claim that the concerns of private providers are exaggerated. They say that contractors will have to start providing more for each city dollar as individual contracts are cut back, but that the total amount of dollars going to private providers will be greater this year than last and then will level off.

DHS currently contracts with hundreds of private groups for a variety of social and health services. In fiscal 1982, the total amount of contracts was $71 million, of which about $47 million was with nonprofits, according to department figures.

Buford said that about 80 percent of the city's contracts now are noncompetitive, and his department plans to put as many as possible on a competitive basis in the future.

"This will mean better quality and reduced costs," he said.

But some groups contend that their services and programs will have to be reduced. The Washington Area Council on Alcohol and Drug Abuse had two contracts cut by 20 percent in January, said the council's executive director, Mary Kidd.

She said that one of the contracts is for a 24-hour drug hotline, which requires four positions if it is to be open around the clock. She said that the cut leaves the group with only enough funds for three hotline jobs.

The other contract is for developing a drug and alcohol program for grade-schoolers and Kidd insisted: "All the extras have been pulled out of it already."

"It's easy to cut us. We're not organized like the labor unions," Kidd said. But, she added,"we do the dirty work" that the city cannot or will not do.

Another example is Lutheran Social Services, which provides a shelter for homeless women and counseling for homeless men in the basement of the city's Blair School shelter. The agency is redirecting its funds because of contract cuts, planning to maintain the number of beds for women but cutting some of the counseling, said Arthur Rabenhorst, in charge of finances for the organization.

While health program contracts are being reduced, DHS plans an expansion of contracts for some social services but plans to monitor the privately run programs more closely than in the past.

More contracts will be needed in the area of youth services, said Audrey Rowe, the city's commissioner of social services. This is because the city plans eventually to close both the Forest Haven home for the mentally retarded and the Cedar Knoll facility for juvenile offenders and to place some of the residents in community group homes.

But Rowe said she also is scrutinizing contracts now, looking for places to cut. "There are a number of services I seriously question, both in the dollar amount and in services delivered," she said.

Some groups have already been hit with federal cuts and are waiting to find out if the second ax will drop.

Andromeda recently had to lay off seven people, cut salaries and put some employes on part time, largely because of the end of federal funding for a counseling program for Cuban refugees, Roose said. City contracts recently were extended through September for drug and alcohol abuse programs and for Ethiopian and Indochinese refugees.

But Roose doesn't know yet whether a contract for rehabilitation for Hispanics with drug problems, now serving 80 to 85 persons, will be renewed when it ends in April.

"We're not going to go under or go out of business," Roose said. "But we're getting squeezed from all angles."