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N.H.’s Medicaid Enhancement Tax remains headache for lawmakers, lawyers heading into 2014

New Hampshire’s Medicaid Enhancement Tax is going to have a busy 2014 – two lawsuits are seeking to have it declared unconstitutional, and three bills to reform it are on tap at the State House.

The tax on hospital revenue, known by the acronym MET, was created in 1991 as a stopgap solution to a budget crisis but has endured as a source of revenue for the state government. It was traditionally linked to the state’s payments back to hospitals for their uncompensated care costs, but those payments have been cut in recent years, angering hospitals and causing revenue to slump.

A study commission set up this year by the Legislature didn’t produce any “grand bargain” to rebuild or replace the tax. But officials agree the MET’s problems are real, and a lot of money is at stake: officials are counting on it for $145.9 million this budget biennium to help fund state government operations through the general fund.

“I think the crisis is here,” said Sen. Bob Odell, a Lempster Republican and chairman of the Senate Ways and Means Committee, who plans to file legislation next year to broadly reform the tax.

But Rep. Susan Almy isn’t optimistic. A Lebanon Democrat and the chairwoman of the House Ways and Means Committee, she and Odell both served on this year’s MET study commission.

She hopes a separate bill, which would make a technical change to the tax, will make hospitals’ payments easier. But she doubts lawmakers can accomplish any larger reform without some impetus or catalyst, such as the Supreme Court ruling that the tax as now written is unconstitutional.

“The fix is going to be quite painful, if we have to do it,” Almy said. “And we’re not going to start trying, I think, until we have to do it.”

A taxing problem

The MET was created in 1991 as New Hampshire officials struggled to fill a big hole in the state budget. It took advantage of the federal government’s Disproportionate Share Hospital, or DSH, program, which matched payments made by states to hospitals that were intended to help them pay for charity care.

The concept was simple: The state taxed hospital revenue under the MET and sent back half the money as DSH payments. That money was matched by the federal government, leaving the hospitals whole and allowing the state to pocket some much-needed cash.

The system – sometimes called “Mediscam” – changed over time, especially as the federal government began tightening its rules, and in 2010 the state changed the distribution formula so that DSH payments to hospitals were no longer necessarily the same as MET payments by the hospitals.

A bigger change came in 2011, when an especially tight state budget led lawmakers to divert MET revenue to help fund state payments to Medicaid providers, leaving less for DSH payments to hospitals.

That angered the hospitals, which became more careful about how they calculated their MET payments, which in turn meant less revenue for the state.

“The MET has become a very real tax,” said Steve Ahnen, president of the New Hampshire Hospital Association.

Projecting revenue from the MET was a heartache for budget-writers this year, and the Legislature established a special study commission to examine the MET and propose solutions.

“We need to find a way to get rid of the MET or use it the way it was supposed to be used – instead of using it as a general fund enhancement tax, really using it to enhance the Medicaid program,” Ahnen said.

That commission got under way in August and wrapped up its work in October. It recommended that hospitals should be allowed to make their MET payments on a quarterly basis, but reached consensus on little else.

Almy said a fully rounded reform proposal for the MET wasn’t necessarily the goal of the commission, and that lawmakers, state officials and hospital executives now have a better sense of how the MET works, what it taxes and how it’s calculated.

But Odell said he was “surprised that we didn’t come out with a resolution or some, at least, opinions.”

Court fights

One complication, Almy noted, is that the commission met this year even as two lawsuits against the state that challenge the constitutionality of the MET are pending in court.

One, filed by Northeast Rehabilitation Hospital, will be argued in Rockingham County Superior Court on Jan. 8. The second, filed by three hospitals – Catholic Medical Center in Manchester, Exeter Hospital in Exeter and St. Joseph’s Hospital in Nashua – will be argued in Hillsborough County Superior Court in Manchester on Feb. 10.

The lawsuits make a number of arguments, but are largely similar in arguing the MET singles out hospitals for taxation and, in the process, violates the state Constitution.

“The MET . . . taxes hospitals but not other medical providers who perform the very same services. Through this classification, the MET accords a tax advantage to non-hospital providers,” lawyers for the three hospitals argued in one court filing, adding that the state constitution “strictly forbids this type of discrimination and, in light of the MET’s fatal constitutional defects, the court should declare the MET invalid on its face.”

The Department of Revenue Administration, for its part, argues that the Legislature acted within its legal authority when it created the tax.

“The MET imposes a tax on revenue derived from the provision of inpatient hospital services and outpatient hospital services,” wrote the attorney general’s office in one filing, adding that “such revenue is sufficiently distinguishable from revenue derived from the provision of other types of medical services such that it may be classified separately for taxation without violating” the Constitution.

Regardless of how the superior court judges rule, both cases are expected to go before the state Supreme Court. That process could take several years.

A ruling against the MET, Almy said, would put the Legislature in a tough spot. It would be left with such options as applying the MET to all medical providers, or doing away with it – and the revenue it provides – altogether.

“If the state loses, we’re going to have to do some radical restructuring either of our revenue base or our health care expenditures,” she said. “Either of those would be painful and difficult.”

Legislative action

Meanwhile, based on bill-drafting requests, at least three pieces of legislation will be filed at the Legislature in January to make changes to the MET.

One would implement the quarterly-payments schedule recommended by the study commission, Almy said. It’s being introduced by Rep. Mary Jane Wallner, the Concord Democrat who chaired the study commission.

A second bill, to be introduced by Odell, would exempt specialty rehabilitative hospitals from the MET, an issue discussed during the commission’s meetings.

Details of the third bill, also from Odell, are still being worked out. But he said it would seek to reduce the rate of the MET, or even end it altogether, and plug the hole with extra revenue from the state’s insurance premium tax.

The MET has become a bona fide tax on hospitals, Odell said, and “some of us think that that tax is a burden that needs to be reduced or replaced.”

But there’s a catch. That additional premium-tax revenue is projected to materialize only if New Hampshire accepts federal funding under the Affordable Care Act to expand heath coverage, through the Medicaid program or some private-insurance model.

And Medicaid expansion has divided the Legislature along party lines, with Democratic Gov. Maggie Hassan and the Democratic-controlled House unable to reach an agreement with the Republican-controlled Senate during last month’s special session.

House Speaker Terie Norelli, a Portsmouth Democrat, is open to a deal that would address both Medicaid expansion and the MET.

“While a number of ideas were brought forward by the MET commission, at this point there is no consensus on how to address the problem,” Norelli said in a statement Friday. “The House remains open to innovative ideas and would expect that any real solution includes taking advantage of the vast benefits of Medicaid expansion.”

But, Odell acknowledged, it won’t be easy.

“We’re going to have a full debate, and I expect that this will not be over until the end of May,” he said. “This will consume a lot of energy and a lot of time, and it’ll be one of the signature issues of 2014.”

(Ben Leubsdorf can be reached on Twitter @BenLeubsdorf.)

Legacy Comments2

tax...giveback half , get federal government to pitch in and the pocket funds???? sounds like fraud to me! Bernie Madoff did exactly the same thing ...if you really think about it!

Eliminate the tax and cut spending. I challenge any of the liberals to tell us all exactly how may years it took to double the NH budget. I am sure they can do it as it can be done using their fingers to count

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