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For-profit hospital contests application of Medicaid Enhancement Tax

Lawyers yesterday presented oral arguments in the first of many battles set for this year over the state’s Medicaid Enhancement Tax.

The issue has a complex history, but in part comes down to whether Judge Kenneth McHugh rules that rehabilitative therapy is the same service whether delivered in a hospital or a doctor’s office.

Hospitals – in this case, the for-profit Northeast Rehabilitation Hospital, and in another suit, three nonprofit hospitals – claim the tax targets them but not other providers who perform the same services.

“It’s highly offensive to the hospitals,” said Northeast Rehab’s attorney, Martin Honigberg. “If this tax rate is something other than zero, take it off the books.”

Senior Assistant Attorney General Mary Ann Dempsey countered that therapy at a hospital is different from therapy at an office, because the two services are reimbursed differently through different programs.

“If the court says therapy is therapy, it would be a great injustice. That’s just not the way it operates,” she said.

Dempsey said the tax was based on revenue from inpatient and outpatient services. By definition, she said, only hospitals provide those services, which is why only hospitals are subject to the tax.

That definition was only added to the tax law in 2011, Honigberg countered.

The tax, known by the acronym MET, was created in 1991. For years, 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, until 2011.

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.

There’s a lot of money at stake: The current biennial budget anticipates $145.9 million in revenue from the MET.

The second suit challenging the tax argues much the same point, but was brought by Catholic Medical Center in Manchester, Exeter Hospital in Exeter and St. Joseph’s Hospital in Nashua – three nonprofit hospitals.

That case is due to be heard in Hillsborough County Superior Court North in February.

All four hospitals challenge the tax on the outpatient portion, Dempsey said, telling McHugh that if he agreed that was an improper tax, “the remedy is to sever out that portion,” adding that the state doesn’t expect him to rule that any portion is improper.

Honigberg also argued that because Northeast Rehab is a for-profit facility, it pays tax twice on the same revenue since it is subject to the state business profits tax.

Dempsey countered that the two taxes affect different pots of money, since only one is subject to deductions.

“There are enough gymnastics done to that money, enough adjustments and changes made that it is no longer looking like the same dollar,” she said.

McHugh asked Honigberg if the hospitals would be happy if they only had to pay the higher of the two taxes.

“Happier than we are today,” Honigberg said, “but we don’t think that’s the legal answer to this situation.”

Dempsey stressed after the hearing that the burden of proof is on the plaintiffs to show that the tax is unconstitutional.

(Sarah Palermo can be reached at 369-3322 or spalermo@cmonitor.com or on Twitter @SPalermoNews.)

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