Virginia hospitals lose $1 million a week on care provided to Medicaid patients, according to the Virginia Hospital Association, which has sued the state for higher reimbursements.

State officials, from governors to state legislators, meanwhile have been warning for years of a pending Medicaid funding crisis, fueled by sharply rising medical costs and federal mandates to cover more people under the federal-state program.

This is the crux of a dilemma being faced by states all over the country, which find themselves having to squeeze more and more Medicaid dollars out of their budgets at the expense of other programs.

But litigation initiated in Virginia will weigh arguments of both sides: either states will come under more pressure to finance Medicaid programs or hospitals and other health care providers will have to find ways to care for Medicaid patients at rates they say do not cover costs.

The Virginia case, scheduled to be heard in December before U.S. District Judge Robert R. Merhige in Richmond, was brought against the state by the Virginia Hospital Association and looks at essentially the same issue as the Michigan case: whether the state should pay more for hospital care for poor people.

Virginia went to the U.S. Supreme Court last year and asked that the hospital association's suit be dismissed, arguing that health care providers cannot challenge a state's reimbursement plan in federal court. If the Supreme Court, which is expected to issue a decision any time now, rules in the state's favor, the decision could not only knock out the Virginia case but also overturn the Michigan ruling, according to spokesmen on both sides of the issue.

"We are a landmark case," said Bruce U. Kozlowski, director of the Virginia Department of Medical Assistance Services, which administers Medicaid.

Supporting Virginia's view that providers cannot challenge the state's payment plan in federal court, a friend-of-the-court brief filed by a number of state and local government associations warns that if the hospital association wins in the Supreme Court, the federal courts will be flooded with similar suits.

"The current number of cases, itself impressive, would be just the beginning," the brief said, counting at least 23 pending cases challenging state reimbursement rates appeals systems.

Virginia's Medicaid program does not cover as much as most other states, but its cost has skyrocketed. In proposing his outgoing 1990-92 budget in January, then-Gov. Gerald L. Baliles said that Medicaid spending in Virginia had doubled since 1985 and by 1995 is projected to total more than four times the 1980 level.

The biennial budget for Medicaid, including the half paid by the federal government, now totals $2.6 billion, Kozlowski said.

Hospitals, however, say they are being asked to foot more than their share of the costs of providing health care to the poor. Virginia's private acute-care hospitals get back 71 cents for every dollar spent on Medicaid patients, according to the hospital association, which says the shortfall has risen from a total of $2.3 million in 1982 to a projected $52.5 million this year.

The General Assembly has recognized the Medicaid funding problem but has done little to address it. In 1988, the legislature enacted a moratorium on new nursing home beds and hospital facilities, until a legislative subcommittee could find ways to restrain Medicaid expenses. In this year's legislative session, the moratorium and the study were extended.