The Obama administration has declared Indiana's new law that withholds some public funding for Planned Parenthood of Indiana illegal and is warning other states that some of their Medicaid funding will be in jeopardy too if they pass legislation barring any qualified health care provider.

In a letter sent to Indiana's Medicaid director, Medicaid Administrator Donald M. Berwick said Indiana's plan will improperly bar beneficiaries from receiving services. Federal law requires Medicaid beneficiaries to be able to obtain services from any qualified provider.

"Medicaid programs may not exclude qualified health care providers from providing services that are funded under the program because of a provider's scope of practice," Berwick wrote in a letter to Patricia Cassanova, the director of Indiana's office of Medicaid Policy and Planning. "Such a restriction would have a particular effect on beneficiaries' ability to access family planning providers."

Indiana's law bars Planned Parenthood offices in the state from receiving federal money because it provides abortions, among other services.

Indiana should change its plan to conform with federal law, or the state could face penalties, the letter said, noting that Indiana has 60 days to appeal. In the past, state Medicaid plans that did not conform with federal law have been changed by states before HHS enforced any penalties.

In addition to Berwick's letter, the Department of Health and Human Services also posted a notice on Wednesday to other interested parties that sought to make clear that the department would take a dim view of similar efforts to ban specific providers from federal funds.

Indiana officials should have expected the proposed changes to the state's Medicaid plan would be rejected, Berwick wrote.

"We assume this decision is not unexpected," Berwick wrote. "As the Indiana Legislative Services Agency indicated in its April 19, 2011, fiscal impact statement, `While states are permitted to waive a recipient's freedom of choice of a provider to implement managed care, restricting freedom of choice with respect to providers of family planning services is prohibited."'

The HHS notice, written by Cindy Mann, the director of the Center for Medicaid, CHIP and Survey & Certification, emphasizes that states may bar providers from participating in Medicaid in certain circumstances, such as if a provider is committing fraud or criminal acts.

"States are not, however, permitted to exclude providers from the program solely on the basis of the range of medical services they provide," Mann wrote.

Medicaid is a federal-state partnership that nationwide now covers more than 60 million low-income children and parents, seniors, including most nursing home residents, and disabled people of any age.

Federal law prohibits using any federal funds, including Medicaid funding, to provide abortions. While Planned Parenthood provides abortion services, it also provides other services such as preventative care, cancer screenings, and family planning and is eligible to receive Medicaid funding for its other services.

Planned Parenthood operates 28 clinics in Indiana, four of which perform abortions. The state chapter has said federal funding makes up about 20 percent of its annual budget.

Rep. Marlin Stutzman, R-Ind., expressed disappointment over the administration's announcement.

"I take it very seriously when any administration tells a state that it cannot administer its own programs," he said in a statement. "Health and Human Services should respect the will of Hoosiers who simply ask that their tax dollars do not subsidize an entity that maintains an abortion clinic."

The Susan B. Anthony List criticized the administration's decision.

"Secretary Sebelius is strong-arming states like Indiana to protect the administration's powerful ally Planned Parenthood," said SBA List President Marjorie Dannenfelser. "Women can and do have access to health services across the state of Indiana, and other states considering defunding Planned Parenthood of taxpayer dollars should work boldly to do so."

In recent days, HHS has come under lobbying from both Democrats and Republicans on the issue. Last week, a group of Democratic senators called on HHS Secretary Kathleen Sebelius to inform Indiana that its ban didn't comply with federal law.

In response, eight Republican members of Indiana's congressional delegation sent Sebelius a letter calling on her to support the state's law.

The Associated Press contributed to this report.