Federal health officials rejected California's bid to charge Medi-Cal co-payments for everything from drugs to hospital visits, dealing a new blow to the state budget but relief to low-income patients and their providers.

Gov. Jerry Brown and lawmakers relied on mandatory Medi-Cal co-payments to save $511 million in last year's state budget and presumed that the state would continue saving in future years.

The plan to charge low-income Medi-Cal patients and let doctors refuse care for nonpayment was unprecedented for a state on such a wide scale. The charges ranged from $3 for "preferred" drug prescriptions to $5 for doctor visits and a maximum $200 on hospital visits. Medi-Cal serves about 8 million Californians, though patients also eligible for Medicare were exempt from co-payments.

The state was required to obtain approval from the Centers for Medicare & Medicaid Services (CMS) to implement its plan.

But CMS said in a letter Monday that it was "unable to identify the legal and policy support" for the change. Under the Social Security Act, a state must meet several tests in order to charge co-payments, which include "providing benefits to recipients of medical assistance which can reasonably be expected to be equivalent to the risks to the recipients."

Providers, such as physicians and dentists, and advocates for low-income Californians warned that a co-pay plan would hurt low-income patients by cutting access to health care. Providers felt it was a back-door cut in reimbursement rates, on top of a 10 percent reduction that a federal judge recently blocked, because the state put the burden on them to collect the co-pays or make the decision to refuse patients for nonpayment.

Vanessa Cajina, legislative advocate for the Western Center on Law and Poverty, said Medi-Cal patients would have stopped using health care if faced with a payment requirement. She said research shows that underuse of preventive health care, rather than overuse of the system, drives up costs.

"When people with even a nominal co-pay are asked to pay $3 to $5, they're going to write off the health care system writ large," Cajina said. "These are children going in for checkups, elderly people going in for care management. When you really start thinking about a person on Social Security or a mom on CalWORKs bringing in $800 a month, asking them to pay $5 is a much bigger chunk out of their budget than it would be for other folks."

The governor's latest budget, which estimates a $9.2 billion deficit, acknowledges the lost savings in 2011-12. But it is relying on $575 million to help balance next year's budget, according to Department of Finance spokesman H.D. Palmer. The administration will appeal Monday's ruling with Health and Human Services Secretary Kathleen Sebelius, Palmer said.

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Call Kevin Yamamura, Bee Capitol Bureau, (916) 326-5548. Follow him on Twitter @kyamamura.

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