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With revenue down, Medicaid Enhancement Tax creates headaches

Twenty-two years ago, New Hampshire officials were scrambling to fill a hole in the state budget and seized on an unexpected solution, a way to collect hundreds of millions of dollars from the federal government through accounting sleight-of-hand.

“I love the name of this bill. The Medicaid Enhancement Tax,” said then-Sen. Susan McLane, a Concord Republican, as the Senate debated the idea in June 1991. “It is money that we cannot afford to refuse.”

The MET – sometimes called “Mediscam”– took advantage of a loophole in a federal law intended to subsidize charity health care for low-income patients. In short, the state taxed hospitals, kept half the money and wired the rest back, picking up federal matching dollars along the way so the hospitals were reimbursed for what they had paid. It’s been tweaked and changed, but over time the MET has become a pillar of the state budget, bringing more than $2.3 billion into the state’s general fund since 1991.

But now, the MET is causing headaches for budget writers.

Two years ago, the state cut its payments to hospitals while continuing to tax their revenue. That helped balance the budget but angered hospitals by, in a sense, turning the MET into a real tax.

Revenue from the MET is down, a trend that could blow a hole in the next state budget. At the same time, the hospitals want their payments restored, and they may have leverage: The state needs their cooperation to implement a managed-care system for Medicaid, which Gov. Maggie Hassan has said is critical if New Hampshire is going to expand the Medicaid program under President Obama’s 2010 health care reform law. That’s a priority for Hassan, a Democrat who says Medicaid expansion will extend health coverage to tens of thousands of residents at minimal cost to the state.

As the Senate starts work this month on the budget, it will seek to provide fair payments to hospitals and still balance the state’s books, said Sen. Bob Odell, a Lempster Republican and chairman of the powerful Ways and Means Committee.

But beyond the next two months, the MET may require more significant reform.

“I think, as an income and as a payment system, it is broken, and we need to address that,” Odell said.

‘A silver bailout’

June 1991 was a tough month in Concord. In the shadow of a recession, lawmakers struggled to pull together a budget for the two fiscal years beginning July 1. They faced an estimated $150 million gap between revenue and spending – not to mention an estimated $40 million deficit for the fiscal year about to end.

The House and the Senate couldn’t agree on a solution. The state’s bond rating was downgraded. Gov. Judd Gregg prepared to shut down the government if a budget wasn’t in place at month’s end.

“State budget sinks deeper into morass,” declared the Monitor’s June 13 edition.

But 24 hours later, the newspaper offered a different headline: “Uncle Sam may break the state’s budget deadlock.”

The solution: Medicaid, the joint federal-state program that provides health coverage to low-income Americans. The federal government in the 1980s introduced an incentive called Disproportionate Share Hospital, or DSH (pronounced “dish”): If states gave money to hospitals to help them cover the cost of providing charity care to low-income patients, the federal government would match those payments.

States soon learned to collect donations from hospitals, or simply tax them, in order to collect money that would then be used to get the federal DSH match. That way, no “real” state money was at stake. Florida was the first, in 1984, and six states had tax or donation programs by 1990. Two years later, 39 states were doing it, according to the Urban Institute, a think tank.

States also found they could legally siphon funds off to help balance their budgets, which is why Gregg and legislators embraced the scheme in 1991. A bill creating the Medicaid Enhancement Tax was rushed through the Legislature in a single day, June 20, amid relief that a solution was at hand.

But there were misgivings, too. As then-Sen. Roger Heath, a Republican from Sandwich, put it: “Doesn’t something ring with a dull thud about this whole deal, in your mind?”

Then-state Sen. Jeanne Shaheen, a Madbury Democrat and future governor and U.S. senator, said she would vote for the bill. But she described it as “a silver bailout,” not a real solution.

“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,” Shaheen said.

A few days later, negotiators reached a compromise on the rest of the budget, and the immediate crisis was over.

What went right, and wrong

At the time, the MET seemed almost too good to be true.

“My bet is that it’s only going to last a year,” said then-Rep. Doug Hall, a Chichester Republican who worked on the plan. “It’s a neat idea, but it’s also a legal scam.”

But it worked better, and for far longer, than many expected. The state’s general fund collected $166.5 million in 1992, $180.1 million in 1993 and a whopping $250.4 million in 1994, representing more than a fifth of total state revenue in each of those three years, according to the New Hampshire Center for Public Policy Studies.

The numbers were more modest in subsequent years as federal officials tightened the DSH program’s rules. But too many states depended on it for the federal government to shut off the spigot entirely. And few states matched New Hampshire’s success in maximizing its take from Medicaid: Through 2012, the MET gleaned more than $2.3 billion for the general fund.

“This has essentially been a central part of the state’s budget since 1991,” said Steve Norton, the center’s executive director.

There were tweaks over time. A 2004 federal audit led to changes in how the tax was calculated. And in 2010, the state changed the distribution formula: DSH payments would now be sent to hospitals based not on what they had paid for the MET, but based on the charity care they provided.

In practical terms, it wasn’t a huge change. Some hospitals got back more than they paid, and some got back less. But it was a warning sign, said Steve Ahnen, president of the New Hampshire Hospital Association.

The other shoe dropped in 2011, when the Republican-led Legislature made deep spending cuts to assemble a state budget with no tax or fee increases.

To help balance the budget, lawmakers earmarked some MET revenue for an expense previously covered by the general fund: payments to Medicaid providers, including hospitals. They also drew a distinction between small, rural “critical access” hospitals and the larger “non-critical access” hospitals – the former continued to receive some uncompensated care payments, while the latter were effectively cut off.

For the first time, hospitals were paying the 5.5 percent tax on net patient services revenue and getting much less, or nothing, back from the state. Ahnen said that hurt hospitals: Some laid off employees, cut services or stopped accepting non-local Medicaid patients.

A month after the 2011 budget became law, 10 of New Hampshire’s largest hospitals filed a federal lawsuit against the state. That case is still in court.

“It was clearly sparked by this change,” Ahnen said. “It was certainly very much the tipping point on a whole host of issues.”

The current mess

Meanwhile, revenue from the MET has slumped – from a total of $195.6 million in 2010 to $188.4 million in 2011, $175.5 million in 2012 and $179.4 million so far in fiscal 2013.

In large part, that’s because hospitals are being more careful about how they calculate their MET payments.

“If I was a hospital, I would be working very hard to reduce my tax liability,” Odell said. “In the past, they were held harmless, so why worry about it? But if I were them, I’d try to avoid taxes, and there’s a lot of ways they can do that.”

The shortfall has created a potential deficit for the current fiscal year and could create a bigger problem in the next two-year state budget. Hassan’s budget, and the version passed by the House this month, both assumed the MET would bring in about $482.3 million over the next biennium.

“I don’t think it’s going to go up by that amount of money,” said Sen. Chuck Morse, a Salem Republican and chairman of the Senate Finance Committee.

Odell said the Ways and Means Committee will work out its own estimates for MET revenue, which he said might come out $70 million lower.

But even with a smaller pie, the hospitals want their share: the uncompensated care payments they used to get from the state.

“We’re going to work as hard as we can to restore as much as we can in this budget,” Ahnen said.

Hassan included more money for uncompensated care payments in her budget, but the House cut them by $33 million – and both plans used the revenue estimates that Ahnen called “simply unrealistic.”

Odell said uncompensated care payments, especially for the non-critical access hospitals, could be a priority for the Senate, which will finalize its version of the budget by early June.

“I think there’s a level of fairness involved here. . . . I think to have one segment of our provider group have to go cold turkey, with no payments for uncompensated care, is not fair,” he said.

Expansion implications

The hospitals aren’t without leverage.

In 2011, New Hampshire decided to move to a managed care system for Medicaid, which seeks to control costs by emphasizing preventative care. But implementation has been delayed because hospitals have declined to sign on.

In addition, Hassan has made expanding Medicaid a priority. But she and other state officials have said the managed care system needs to be in place before the expansion can happen.

Rep. Mary Jane Wallner, a Concord Democrat and chairwoman of the House Finance Committee, acknowledged the hospitals’ clout when the House debated the budget earlier this month.

“In order to make managed care work, we need the hospitals working with us, and if we’re not reimbursing them for their uncompensated care, we probably will not find a partner who will want to work with us closely,” Wallner said.

Ahnen was circumspect about any leverage that managed care gives the hospitals.

“I wouldn’t say that’s how folks would be looking at it,” he said. “We’re certainly trying to find ways to work together to serve our patients in better ways.”

Broader reform

The immediate problems in the state budget won’t be easy to solve.

“The Senate could increase the funds that go to hospitals for uncompensated care. But if it does so while assuming less revenue from the Medicaid Enhancement Tax, then there will be a hole to fill. This means either less money from the MET for the state general fund or less money for provider payments,” said Deb Fournier, policy analyst for the New Hampshire Fiscal Policy Institute. “These pieces of the budget are all connected.”

But beyond the next two months, many think the MET needs broader reform.

That includes Hassan. Her budget included a study commission for the MET, which this summer would begin to study ways to make uncompensated care payments sustainable, revenue more predictable and the tax easier to calculate, as well as how to deal with the federal government’s plan to reduce DSH payments in the coming years.

Reform of the MET could come as part of a larger reform of the state’s Medicaid system. A number of states have received “Section 1115” waivers from the federal government, which allow broad and sometimes unorthodox changes to their Medicaid programs.

“There are many states around the country that have been trying to find new and innovative approaches to serve patients in their Medicaid programs,” Ahnen said, adding, “We think there’s some real opportunities that we ought to be moving quickly to explore and develop.”

(Ben Leubsdorf can be reached at 369-3307 or
bleubsdorf@cmonitor.com or on Twitter @BenLeubsdorf.)

Legacy Comments2

Thank God that we have Responsible Republicans running the Senate as opposed to the dependable tax and spend democrats.,.....the only solution the democrats ever ever offer to any of their perceived problems is to tax and spend more

OK, I know that everyone is entitled to their opinion whether right or wrong but this whole scam was started by GOP Gov. Gregg and cronies. "States also found they could legally siphon funds off to help balance their budgets, which is why Gregg and legislators embraced the scheme in 1991. A bill creating the Medicaid Enhancement Tax was rushed through the Legislature in a single day, June 20, amid relief that a solution was at hand. ...." So please stop with the canned reply's that are the same for every subject, just where do you get the justification to push this on the democrats. It makes no sense. Please enlighten me.......

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