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‘Provider Tax’ Prompts Different Reactions

Lebanon — Tax collectors in every state except Alaska scoop up a portion of the revenue that hospitals and other providers collect in exchange for caring for patients.

Hospitals generally aren’t big fans of these so-called provider taxes, but in recent years their political attitudes toward the levies have ranged from grudging acceptance to outraged resistance.

Count New Hampshire hospitals, which paid $185 million in provider taxes in fiscal 2013, among the resisters. In 2011, Granite State hospital managers broke out the pitchforks and 10 hospitals filed a lawsuit challenging the legality of the state’s provider tax, which, with more poetic license than veracity, lawmakers had dubbed the Medicaid Enhancement Tax.

A three-year battle between hospital and state officials ensued. Hostilities ended in July, when Gov. Maggie Hassan signed into law a painstakingly negotiated armistice that preserved the Medicaid Enhancement Tax while gradually ramping it down from its current rate of 5.5 percent of net patient revenue to 4.5 percent in fiscal 2019. It also committed the state to continue to cushion hospitals from the impact of the tax by continuing existing reimbursements to small hospitals and reopening a flow of support to big hospitals that had been squeezed since 2011.

Vermont hospitals, which paid $117 million in provider taxes in fiscal 2013, seem less eager to consign the state’s hospital provider tax to the junk pile of fiscal history.

The provider tax is “a challenge for us but it supports a financial structure … that aligns with our principles,” said Michael Del Trecco, vice president of finance for the Vermont Association of Hospitals and Health Systems. The tax helps ensure access to medical care, create and maintain high quality care and counter premium inflation for employers and consumers, he said. Outside of that context, he added, “we would dislike the tax immensely.”

The provider tax also works for the state as “a funding source that grows at a rate that keeps up with medical inflation,” Del Trecco added, noting that abolition of the provider tax would put financial pressure on Medicaid, employer and consumer insurance premiums and hospitals.

Provider taxes now on the books generate billions of dollars in revenue each year, according to the National Conference of State Legislatures. Most states use the taxes as “a mechanism to generate new in-state funds and match them with federal funds so that the state gets additional federal Medicaid dollars,” the conference of state legislatures said. “In a majority of states, the cost of the tax is paid back to providers through an increase in the Medicaid reimbursement rate for their patient treatment and services.”

Taxing the revenue of health care providers began under the auspices of the 1965 law that created Medicaid by committing the federal government to pay a portion of the costs of state programs that offer medical insurance to low-income families.

In fiscal 2014, the state of Vermont spent about $1.6 billion to provide Medicaid coverage to 180,000 residents. Two years earlier, in the latest year reviewed, the Kaiser Family Foundation estimated that the federal government picked up 57 percent of the state’s Medicaid tab. Officials of the state Department of Health Access said that the federal government typically covers about 55 percent of the state’s Medicaid spending.

New Hampshire, with more than twice as many residents as Vermont, spent $1.4 billion caring for 137,000 residents in fiscal 2011. “At 7 percent, New Hampshire has the lowest average percentage of its population enrolled in Medicaid in the nation,” the state Department of Health and Human Services reported two years later. The federal government picks up 50 percent of New Hampshire’s Medicaid tab, according to Kaiser.

Medicaid is a $420 billion program that paid for health care for 57 million Americans in 2012. The massive job of distributing the federal government’s portion of the tab — $267 billion in fiscal 2013 — and overseeing relations between the federal government and the various state Medicaid programs fell to the Centers of Medicare and Medicaid Services.

Those relations sometimes get prickly. A 2012 report from the Congressional Research Service noted that the federal law that authorizes payment of matching funds to state Medicaid programs requires that provider taxes be broad-based, uniform and genuine rather than pro forma. But, the report cautioned, “Even with the statutory and regulatory limitations, provider taxes continue to cause tension between the federal government and the states.”

New Hampshire tested the limits of those laws and rules with its “Medicaid enhancement” tax, which, as critics pointed out, did little or nothing to enhance Medicaid and wasn’t a real tax, to boot.

The hospitals laid out their view of the deal that begat the Medicaid Enhancement Tax in a 2011 lawsuit. It was an arrangement in which “the state would collect the (medicaid enhancement tax) and immediately return the exact amount of (tax) paid to the hospitals,” the lawsuit said.

In addition, it said, the refund was paid on the same day that the tax was collected “as evidence of the state’s assurance that the hospitals would have no net tax liability and would only be a conduit.”

The hospitals agreed to take on the role of money conduits out of “patriotism and self-interest and self-preservation,” said Frank McDougall, the vice president for government relations at Dartmouth-Hitchcock. McDougall said that while he was not involved in those deliberations, he had talked extensively with several of the principals.

Over a 20-year period, the Medicaid Enhancement Tax channeled $2.2 billion in federal matching funds into the state’s general fund, according to the New Hampshire Center for Public Policy Studies.

But those matching funds weren’t restricted to medical uses and, until a few years ago, the portion distributed to hospitals wasn’t tied to the law’s stated purpose of adding to availability of services to low-income patients

The party ended in 2011, when federal auditors moved to prevent states from using federal matching dollars to unconditionally erase hospitals’ tax obligations. New Hampshire budget makers cushioned small hospitals from much of the financial blow, but large hospitals found themselves holding the bag: $45 million in 2014 at Dartmouth-Hitchcock, according to McDougall.

Just as the puppet maker Geppetto had seen his creation, Pinocchio, changed into a real boy, the big hospitals had seen the harmless money conduit transformed into a genuine financial obligation.

The levy was “never intended to be a real tax,” the New Hampshire Hospital Association declared in 2011. “It was created to generate additional federal revenue for the State while the tax was refunded to the hospitals.”

Abandonment of that arrangement set in motion the dispute that was only recently resolved in a deal that promised to limit the tax liability of New Hampshire’s big hospitals, continue aid to small hospitals and ensure the continued flow of federal matching dollars to help balance New Hampshire’s state budget.

The deal eased the provider tax load of New Hampshire’s big hospitals, which had been socked with big provider tax bills in recent years. Dartmouth-Hitchcock, which has paid a provider tax of about $40 million annually, expected an additional $175 million in state aid over a four-year period, McDougall said.

The deal was a step backward for the small hospitals, which had generally ended up with no net liability or even a surplus due to Medicaid-related payments that offset the provider tax, said Paula Minnehan, the vice president for finance and rural hospitals at the New Hampshire Hospital Association. But the small hospitals had a good reason to get on board.

“Absent that agreement there would have been no (aid) payments at all, as there would have been no” Medicaid Enhancement Tax, and that was the funding source for the state aid, which they depend on, she said.

Rick Jurgens can be reached at rjurgens@vnews.com or 603-727-3229.

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