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Odell: N.H. Should Fix Medicaid Tax

Concord — The state Senate’s chief tax bill writer said lawmakers need to come up with a fix to replace a state tax on hospitals found last week to be unconstitutional.

A Hillsborough County Superior Court judge’s decision threatens to blow an $185 million hole in the state budget with the declaration that the Medicaid Enhancement Tax unfairly targeted hospitals.

State prosecutors intend to appeal that ruling, along with an earlier, isolated one that found it was improper to tax rehabilitation hospitals under this tax scheme legislators first devised in 1991.

Sen. Robert Odell, R-New London, said it’s too early to identify the right solution to fix or replace the MET with a long-term health care financing plan that stabilizes state revenues.

But the six-term senator and chairman of the Senate Ways and Means Committee said he doesn’t believe inaction is an option, even as state lawyers hold out hope that the state wins the case on appeal.

“I think we should not leave here in June without having a fix,” Odell said. “I would hope we have a fix that solves the problem that the court has identified.”

Odell said simply applying the MET to non-hospital providers would legally work, but in an election year, it looks to be a non-starter.

“That would be one option, but I am not sure that is politically viable,” Odell said.

The decisive finding from Hillsborough County Justice Philip Mangones strikes a big victory for St. Joseph Hospital of Nashua and two other hospitals that had alleged the MET was patently unfair.

Mangones said the state was unable to rebut the claim of hospital lawyers that they had to pay the 5.5 percent tax on hospital services when other providers doing the same thing were not taxed.

“In essence, the MET imposes a tax on hospitals simply because they are hospitals, not based on the nature of the services they provide,” Mangones wrote. “Looking to the practical reality of the circumstances, the Court finds that hospitals and non-hospitals are similarly situated with respect to the services they perform. Therefore, because the MET applies to revenue generated solely from hospitals, the law treats these two entities differently.”

The tax generates about $185 million a year for Medicaid and other state spending. The state kept $72 million of it this year to balance the budget, used $82 million to make payments to health care providers and returned $31 million to hospitals to offset some of the cost of uncompensated or free care.

The Senate panel on Tuesday took testimony on an incremental bill (HB 1613) that would let hospitals in the future pay this tax on a quarterly basis rather than in a lump sum once a year.

New Hampshire Hospital Association President Steve Ahnen said this would help hospitals, particularly the smaller ones operating on a tight cash flow.

“This is something the hospitals have long sought to smooth things out,” Ahnen said.

The Senate already has passed its own bill (SB 369) to make this change and also to exempt rehabilitation hospitals from having to pay the tax in the future.

Odell said his panel will hold on to this bill to craft an alternative or partial replacement for the MET.

“The session is coming to an end. Whatever remedy we have needs to take into consideration the impact on our budget, impact on our providers,” Odell said. “Given the limited amount of time, we need to take that time to do the best job we can.”

House Ways and Means Chairman Susan Almy, D-Lebanon, also said it’s too early to weigh in on what lawmakers will do about this.

“That is something I am not prepared to talk about yet,” Almy said.

Lawmakers and then-Gov. Judd Gregg created the hospital tax in 1991 as a way to legally leverage more federal Medicaid money to balance its state budget.

Until two years ago, this tax was not at all in controversy since the state — once it received extra Medicaid match money by imposing the tax — always refunded to hospitals what they paid out.

The 2011 decision of the Republican-led Legislature to end that 20-year practice of repaying hospitals led to hundreds of layoffs and closure of services at hospitals across the state.

Last summer and fall, a commission of key legislators including Odell and Almy, state officials and hospital executives met to study the issue and come up with potential alternatives.

The team of hospital leaders on the commission proposed to bring health care expenses paid to care for those on Medicaid under the existing 2 percent insurance premium tax.

Supporters said broadening those who pay the insurance levy would allow policymakers to lower, if not eventually eliminate, the MET that hospitals pay the state.

Presently, the insurance tax is only levied on the purchase of private health care coverage.

This would expand the tax to include all transactions for the care of the poor, disabled and senior citizens who get coverage under Medicaid.