Sen. Alan Bates, an Ashland Democrat who was part of the bipartisan group that worked on the plan, said it would help with the program's difficult budget outlook.

The proposed budget called for a $324 million cut in provider payments to help offset the Oregon Health Authority's $697 million budget shortfall, said Patty Wentz, an agency spokeswoman. The cut in provider payments would have also result in a loss of about $676 million in federal matching funds, Wentz said.

The plan raises the provider tax to about 4 percent. Oregon receives $1.60 from the federal government for every $1 it pays.

The extra "60 cents can go to address the budget shortfall and ensure we don't need to cut people off," Wentz said.

Hospitals will serve as a conduit for federal funds and allow for the decrease in proposed cuts. About 15 percent of hospital patients are in the Medicaid program, Bates said.

"They'll put the money up, but they'll get every penny back," said Republican Rep. Tim Freeman of Roseburg, who was also a part of the work group. Freeman said the plan was a good first step in dealing with the proposed budget cuts.

The decision came after roughly a month of discussion with the Oregon Association of Hospitals and Health Systems, which represents 58 community hospitals in the state.

The association's Board of Trustees planned to meet Wednesday night to discuss the agreement, said Andy Van Pelt, a spokesman for the association. He said the association would not comment on the plan until after the meeting.

Hospitals are also looking at increasing their tax by another 1.29 percent so as to raise even more revenue and reduce the 11.5 percent cut even more, Bates said The extra tax would need federal approval before it could go into effect, Wentz said.

The provider tax was created by a law in 2003 and extended another four years in 2009 to help raise money for the state's Medicaid program. About 60,000 Oregonians have health insurance because of the extra revenue from the provider tax, Wentz said.