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Editorial: Taxing Questions

A few facts to keep in mind about New Hampshire’s “Medicaid Enhancement Tax”: It doesn’t have much to do with Medicaid. It doesn’t enhance health care for the poor and disabled. And though long used as a mechanism to raise revenue, it doesn’t pass constitutional muster — at least according to two recent court rulings.

Assuming the rulings stand, New Hampshire faces another pressing fiscal challenge. The Medicaid Enhancement Tax levied on hospitals is expected to bring $145.9 million to the general fund in this two-year budget cycle, for example, according to the Concord Monitor. If hospitals ask for their money back, the state could owe more than $70 million and would be forced to scramble to fill the budget hole in the future. No wonder the state is appealing to the New Hampshire Supreme Court.

The tax has been problematical almost since its inception in 1991, when legislators seized on a provision in federal law allowing states to capture federal matching money if they generated funds to help hospitals recover costs for uncompensated care. By taking advantage of a federal loophole, the Legislature for decades leveraged federal Medicaid funds and diverted some or all of those funds to the state treasury rather than using them to enhance Medicaid. The sorry history too long to recapitulate here is that New Hampshire for years exploited Medicaid’s uncompensated care program for its own purposes, as Judge Philip Mangones of Hillsborough Superior Court noted last week in a ruling favoring three nonprofit hospitals, Catholic Medical Center in Manchester, Exeter Hospital and St. Joseph’s Hospital in Nashua.

The hospitals argued that the Medical Enhancement Tax violates the equal protection clause of the state and federal constitutions because it applies only to hospitals and not to health-care facilities that provide the same services as hospitals, such as physical therapy and radiology, for example. In a judgment similar to one handed down by another judge in February, Mangones said that the hospitals had suffered discriminatory treatment by having to pay the tax. He further noted that the sole purpose of the tax was “the collection of money for the state general fund,” not for Medicaid. Deeming the legislative history germane to the question of constitutionality, the judge pointed out that state lawmakers barely discussed the implications of the tax on the state Medicaid program when they approved it.

New Hampshire wasn’t the only state to take the federal Medicaid money and run, but it was among the most brazen. Eventually the feds ordered the state to modify its uncompensanted care program, known as “Mediscam,” and closed the loophole. The Legislature’s changes, however, only made matters worse for some hospitals, which actually paid more in taxes than they ever received in compensatory payments. Then, in 2011, the Legislature got really bold — or desperate — and decided not to distribute any federal matching funds to the state’s largest hospitals, a decision that led to a raft of state and federal lawsuits and adversely affected facilities such as Dartmouth-Hitchcock, which has paid more than $110 million in Medicaid Enhancement taxes over the past three years without receiving payments for uncompensated care.

The legal troubles shouldn’t come as a surprise to the Legislature, which misapplied the Medicaid Enhancement Tax from the get-go, as the record makes clear. Jeanne Shaheen, speaking as a state senator in 1991, commented: “I would hope that we would all admit to ourselves that this really is a silver bailout. It’s more of the shell game that we are playing with the state budget, because we aren’t yet willing to face up to the fact that we have got a tax structure that doesn’t work anymore . … This is a legal loophole, and we ought to go along with it.”

Twenty-three years on, the silver bailout has turned to lead and the tax structure still doesn’t work — thanks to a stream of lawmakers, Democrat and Republican, who have failed to address the problem. This constitutionally suspect tax is a good example of the New Hampshire disadvantage.