WASHINGTON (Reuters) - The Supreme Court opened its new term on Monday and considered whether Medicaid recipients and medical providers may sue California for cutting reimbursement rates in the healthcare program for low-income Americans.

The justices heard arguments in a case that centered on the plan by California's lawmakers in 2008 to slash Medicaid payments to doctors, hospitals and other medical providers to help reduce the state's massive budget deficit.

The providers sued to stop the cuts from taking effect on the grounds it would violate federal law. The cash-strapped state said the 10 percent cuts would save more than $700 million.

Washington attorney Carter Phillips, representing those who challenged the cuts, argued before the Supreme Court that an appeals court in California correctly ruled in blocking the cuts for violating federal law.

California Deputy Attorney General Karin Schwartz and Deputy Solicitor General Edwin Kneedler, who argued on behalf of the Obama administration, said only the government can enforce the federal law and private citizens have no right to sue.

After the arguments, the Supreme Court took the case under advisement, with a ruling expected early next year.

Medicaid, administered by the states with partial reimbursements from the federal government, can account for a third of a state's spending. It provides health insurance to more than 55 million people.

The 2009 economic stimulus plan boosted the rates of reimbursements for states, with the caveat that they not cut Medicaid spending. As that money ends, though, so does the requirement and states are eager to find new places for savings as their revenues remain well below pre-recession peaks.

The housing bust, financial collapse and economic recession created the largest drop in states' revenues since the 1980s, and California has been particularly hard hit.

Earlier this month, the state reported its August revenue was $65 million below forecast, which could force California to slash spending more. It recently closed a $10 billion budget gap with cuts and expectations of improving revenue.

Even though the recession officially ended more than two years ago, states had to cut spending and hike taxes to a close a total of about $100 billion in budget gaps for the fiscal year that started in July. Many states targeted Medicaid payment rates.

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