At issue is the state's system for distributing money to the 15 regional coordinated-care organizations under the reforms.
Oregon's sweeping reforms were supposed to create the flexibility to invest in creative programs and services to improve health and reduce costs.
Rather than tracking individual procedures and paying a doctor for each service performed, the state gives regional coordinated care organizations a budget of Medicaid funds.
For example, using the budget, an organization could buy an air conditioner for an elderly woman with congestive heart failure, sparing the woman a costly trip to a hospital emergency room in hot weather.
The model has been championed by Gov. John Kitzhaber, a Democrat, and is unique to Oregon.
But the federal government now says the state should go back to the traditional way of budgeting and tracking for each service provided.
Care executives say that means services deemed not medically necessary by the federal government, such as an air conditioner, likely would not be possible. That could mean the woman who lacks the air conditioner might end up in an emergency room, which would ultimately cost the state a lot more money.
The problem, officials say, is that the federal office is enforcing regulations that have not been changed to allow the Oregon reforms.
After learning of the federal letter in a meeting with the state on Wednesday, care leaders said the new directive was alarming.
Several said the federal position could lead to unsustainable cost hikes that could eventually force the state to reimburse the federal government much of the $1.9 billion it awarded in 2012 to support Oregon's reforms. The money was conditioned on the state curbing cost increases.
"It sounds to me that the global budget is dead," said Kevin Campbell, CEO of Greater Oregon Behavioral Health, who works with several of the care organizations.
Oregon Medicaid Director Judy Mohr Peterson acknowledged that a gulf remains between federal and state officials but said the state will find a political solution to the new federal.
"I think the conversations will be challenging," she told The Oregonian. "We're still working on it."
The Oregon Health Plan serves nearly 1 million low-income people, a quarter of the state's population