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Medicaid Decision Hits N.H.

Ruling Knocks Hole In State’s Budget

Concord — A second Superior Court judge has ruled the state’s Medicaid Enhancement Tax is unconstitutional, opening a multi-million dollar hole in the state budget.

Known by the acronym MET, the tax has been levied on hospitals, but not other health providers that performed the same services. The state is counting on MET revenue for $145.9 million this budget biennium.

The tax is “unconstitutional on its face and in its entirety,” Judge Philip Mangones wrote, ruling in favor of three nonprofit hospitals – Catholic Medical Center in Manchester, Exeter Hospital in Exeter and St. Joseph’s Hospital in Nashua.

Further, he wrote, “the unconstitutional provisions of the statute are so integral and essential in the general structure of the act that they may not be rejected without the result of an entire collapse and destruction of the structure.”

A for-profit hospital, Northeast Rehabilitation Hospital, won a suit on different grounds in a ruling issued in February. Judge Kenneth McHugh ruled in that case that the tax was unconstitutional because it was applied to revenue from services such as physical therapy if they are delivered at a hospital while they would be untaxed if delivered at an independent office.

The attorney general has not made a determination on whether to appeal either decision, Gov. Maggie Hassan’s spokesman, Marc Goldberg, said in a statement yesterday.

The decisions present “a real opportunity to address and resolve these issues in a meaningful and lasting way that will be fair to all parties and that ensures sustainable and lasting access to quality health care for all New Hampshire,” said Alex Walker, senior vice president for operations at Catholic Medical Center, one of three nonprofit hospitals that sued the state over the tax.

Dartmouth-Hitchcock Medical Center in Lebanon has paid more than $110 million in Medicaid Enhancement taxes over the past three years and is “delighted” by the ruling, said Frank McDougall, the vice president of government relations for the Dartmouth-Hitchcock system.

“I think the fact that you have had two judges rule the tax unconstitutional, in two different courts, for two different reasons, sends a message that something is wrong here,” McDougall said.

But like Walker, he said he hoped to be able to work with state officials to “settle these suits in a reasonable way.”

Both hospital officials said they hoped a resolution can be reached before the next MET payment is due in October.

The tax’s origins in 1991 were key to his decision, Mangones wrote.

Originally, the state taxed hospital revenue under the MET, and sent back half the money as payments for charity care for indigent patients.

The federal government matched that money from the state to the hospitals, and the state put the remaining funding — half of what was collected — into the general fund.

“The primary, if not the sole, purpose of the MET had been to bring federal funds to the state treasury with the hospitals acting as pass-through intermediaries,” Mangones wrote.

“There was significant discussion of how much money the MET would generate for the state, and rather little discussion of Medicaid,” he wrote.

He quoted at length a debate among state senators.

Then-state Sen. Jeanne Shaheen supported the program, but called it “a shell game.” Then-Sen. Otto Oleson said it was just the state’s way of “getting some money back from the feds which they took away from us some years ago.”

Eventually, the federal government began tightening its rules, and in 2010 the state changed the distribution formula so that payments to hospitals were no longer necessarily the same as MET payments by the hospitals.

That year, to fill dramatic funding gaps in the state budget, lawmakers decided to put more than half of the tax revenue into the general fund, which in turn reduced what hospitals also received from the federal government, inspiring the suits.

The decisions, if not overturned on appeal, could have major ramifications for the state budget.

“If the state loses, we’re going to have to do some radical restructuring either of our revenue base or our health care expenditures. Either of those would be painful and difficult,” Rep. Susan Almy, a Lebanon Democrat and the chairwoman of the House Ways and Means Committee, told the Monitor in December.