In a case that both sides say could have a big impact on taxpayers, the Supreme Court heard arguments yesterday in a lawsuit brought against the state by the New Hampshire Association of Counties over the way Medicaid bills are shared.

The state's 10 counties sued the state over a 2007 law that required county governments to cover what had previously been the state's share of Medicaid expenses for nursing home and home-based-care patients. Previously, the state and counties split evenly the 50 percent of Medicaid costs that are not covered by the federal government.

A change in the law last year requires the individual counties to cover all of those nonfederal costs; in exchange, the state agreed to cover the counties' share of other health programs. Proponents of the deal say it simplified what had been a burdensome and complicated administrative system.

But representatives for the counties say they're getting the worse end of the deal, since Medicaid and nursing home expenses are expected to increase far more in coming years than other health programs. The counties also argue that the shift in responsibilities was forced on them by lawmakers looking to cut their expenses - and that will mean big increases in county taxes in the near future.

"The question is, who gets to decide whether local property taxes should be used to fund state-mandated programs?" Robert Dunn, a lawyer representing the New Hampshire Association of Counties, told the justices yesterday.

The details of the case may seem obscure and technical, but the underlying questions are important, reflecting both the challenges posed by New Hampshire's aging population and the ongoing tension between the state and smaller municipalities over what the state's financial responsibilities are.

Demographers say New Hampshire's population is aging at a rapid rate that will put increasing pressure on the state's health care costs, especially programs such as Medicaid, which provides health coverage for many elderly and disabled residents.

The case also reflects long-standing fights between state and local officials over issues such as education funding and health care. Cities, towns and school districts say state officials are increasingly "downshifting" their share of those expenses to the smaller municipalities.

Those municipalities, in turn, have no way to cover those additional costs other than increasing local property taxes.

"That's the reason we're nearly in a local taxpayer revolt," said Ted Comstock, executive director of the New Hampshire School Boards Association.

The counties say the new Medicaid arrangement is a violation of the state constitution's provision against unfunded mandates. That provision forbids the state from assigning additional costs to municipalities without the consent of that local body.

Andrew Livernois, the lawyer representing the state before the Supreme Court yesterday, told the justices that the new Medicaid arrangement was not an unfunded mandate since the counties have paid a portion of Medicaid costs for several years - the change simply increased the counties' share.

"The increase of the dollar amount alone does not constitute a new responsibility," Livernois said.

Sen. Kathleen Sgambati, a Tilton Democrat who helped write last year's law that changed the Medicaid sharing arrangement, said the Legislature added a provision to cap the counties' expenses at their current level for the first two years.

"The intent was to ensure the counties that this was not a cost shift," Sgambati said yesterday. "The state assumes all the risk in this situation."

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