Capital Beat: N.H. faces $36 million budget hole after hospital lawsuit

  • The State House dome as seen on March 5, 2016. (ELIZABETH FRANTZ / Monitor staff) ELIZABETH FRANTZ

Monitor staff
Sunday, April 15, 2018

New Hampshire is facing a budget shortfall of up to $36 million following a federal district court decision over hospital payments, setting up a high-stakes scramble among state officials to negotiate a solution ahead of a May 31 payment deadline.

The dilemma is a result of a failure by the Legislature to set aside funding last year in anticipation of the court’s decision. And it comes out of an ongoing, multi-state legal battle over how much state and federal governments must pay hospitals for uncompensated care under the Medicaid law.

Officials in the governor’s and state attorney general’s offices said they’re aware of the problem – which first appeared in early March – and are working with hospitals to craft a way forward. But the shortfall has thrown a political and financial wrench into an already-delicate time in the legislative calendar.

“They did not carry in the budget enough for the obligation,” said Scott O’Connell, an attorney representing a group of hospitals. “So somebody is going to be shorted.”

The issue stems back to the 2017 budget process. Last year, the Legislature set aside $166 million for the state’s uncompensated care fund in Fiscal Year 2018. That figure relied on a new payment formula from the federal Centers for Medicare and Medicaid (CMS) that allowed for lower payouts, even as hospitals warned the formula was improperly established and would be challenged in court.

On March 6, responding to a multi-state lawsuit, the U.S. District Court for the District of Columbia handed down a ruling siding with the hospitals. The decision voided the CMS formula nationwide, putting New Hampshire back on the hook.

Now, the state’s hospitals are pushing for the full sum they say is owed – about $237 million – $71 million more than has been budgeted, according to Senate President Chuck Morse, R-Salem. Roughly half of that would come from state funds, with the rest paid through a federal match.

John Formella, legal counsel for the governor’s office, confirmed Friday that the upper limit that could be owed by the state amounts to “approximately $36-37 million per year in fiscal years 2018 and 2019.”

And in an April 10 letter to the hospitals provided to the Monitor, Deputy Attorney General Ann Rice acknowledged that the March 6 decision created new obligations.

“The state fully intends to follow the law in the amount of DSH payments that will be made by May 31, 2018,” Rice wrote to O’Connell, referring to the “disproportionate share hospital payments” owed by the state. May 31 is the federally-mandated payment deadline to hospitals under the Medicaid law.


But exactly how the state meets those obligations – and how much the state will ultimately pay – is less clear. Speaking Friday, Morse, a party to the negotiations, said that he understands the $71 million to be binding in law, following the district court decision.

Others say the rules are more flexible and that hospitals may be open to agreeing to a lower settlement.

“They’re going to honor the law,” said Steve Norton, senior vice president of strategic planning and government relations at Elliot Hospital, referring to state officials. “They’re not necessarily going to honor what the hospitals want.”

Either way, little is publicly known about the decision-making so far. Negotiations have been held quietly, with parties unwilling to speak at length.

In a statement, Formella declined to comment on exactly how much the state is willing to pay, saying that the “numbers are still in flux due to pending court challenges and appeals.”

But he added that the state would provide its fair share. “If the law requires additional DSH payments beyond currently budgeted amounts, the state will fulfill those obligations in consultation with the Legislature,” he said.

Still, as the Legislature rushes to the end of its session, the margin for error is slim. Whatever extra funding arrangement the states negotiates with hospitals could have knock-on effects for other programs, creating new shortfalls in turn.

And at a time when House lawmakers are already juggling changes to the state’s Medicaid expansion program, lawmakers will need to get creative – with only six weeks left to do it.

“We’re not there yet,” said Morse on Friday.

 A seven-year battle

At the center of the budget dispute is a years-long legal fight over fairness.

Under federal law, hospitals that treat significant numbers of Medicaid or uninsured patients may receive “disproportionate share hospital” (DSH) payments – state and federal funds that help them recoup the higher costs associated with those patients. Exactly how much each hospital receives comes down to how many services it can count as “uncompensated care.”

The idea is simple: Those hospitals taking on more vulnerable and costly populations should be made whole.

But critics have long pointed to what they call an unfair loophole for hospitals: the ability to classify patients who are Medicaid-eligible but receive private care as “uncompensated.” By doing so, critics contend, hospitals are able to reap additional state and federal funding while still receiving private reimbursements – “double billing,” some say.

It’s a practice that both the Obama and Trump administrations have sought to eliminate, the latter through a formal agency rule that took effect in April 2017. That rule, which dramatically reduced calculated DSH payouts to hospitals, was relied upon by the New Hampshire Legislature in crafting its 2018-19 budget.

But hospitals have consistently fought back. Both presidents’ changes to the formula have been challenged on the basis that they defy the underlying Medicaid statute, and that the change must come through Congress. On March 6, the D.C. District Court issued the first significant ruling against the Trump administration’s rule change, with a nationwide application.

For Christopher Marraro, the Washington, D.C., attorney who represented a national group of children’s hospitals in that case, the charges of a loophole are overblown.

“There’s no double billing whatsoever,” he said. “The hospitals are losing money here from treating Medicaid patients.”

The New Hampshire Attorney General’s Office sees it differently. “To put it very plainly, it’s called ‘uncompensated care,’ ” Rice said. “And so that would suggest if (hospitals) have been compensated for the care, it should not be counted as uncompensated care.”

The fight is not over; CMS has until May 6 to appeal, and legal parties on both sides are expecting them to do so. A representative from the agency did not respond to a Monitor query Friday.

Meanwhile, a separate lawsuit on the same question is still working its way through the Federal District Court in Concord, and could, in theory, override the D.C. decision in the Granite State.

But for New Hampshire, any new court developments would arrive too late to avert the coming shortfall. Last year, the Legislature gambled on a court outcome that never arrived. Now, legislators and stakeholders are racing to find their way out.

Finger pointing begins

For some New Hampshire Democrats, the situation is an exercise in “I told you so.”

Throughout the 2017 budget negotiations, House Democrats raised concerns over the amount set aside for uncompensated care, urging leadership to consider the ramifications of a potential loss in courts. Now, some are calling the shortfall a crisis that could have been averted.

“What we said in public during the budget discussions was that this is risky because there’s litigation and we don’t know that we’re gonna win it,” said House Deputy Democratic Leader Cindy Rosenwald of Nashua. “We said that last spring. I still feel like if it were me, and it were my personal financial situation, I would set aside money for the worst case scenario.”

Sen. Dan Feltes, D-Concord, took an opportunity to take a swipe at the budget overall. “This is what happens when your budget prioritizes tax breaks for big corporations,” he said Friday.

But Republicans protested the idea that the situation was foreseeable. The lawsuits directly responsible for the March 6 decision weren’t filed until mid-summer 2017, some pointed out, even if similar issues had been litigated before.

“You budget on the basis of what you know, not on every possible contingency,” said House Finance Chairman Neal Kurk, R-Weare. “If we had to budget based on what we don’t know but what might happen, there’d be very little we could get done.”

A spokesman for Gov. Chris Sununu, Ben Vihstadt, defended the budget, saying it had been made after careful scrutiny of the legal developments, and on the assumption that the April CMS rule was validly passed.

“While the state is reevaluating the DSH budget numbers in light of last month’s court decisions, the governor firmly stands by the budget decisions made last year,” Vihstadt said Friday.

Vihstadt and Formella also criticized Sununu’s predecessor, former governor Maggie Hassan, for negotiating the default funding formula that the state is now bound to.

“This is another example of Democrats misrepresenting key facts and refusing to take responsibility for problems created by the previous administration’s actions,” Vihstadt said.

A spokeswoman for Hassan, Ricki Eshman, pushed back, planting the problems at the present governor’s feet.

“Governor Sununu presented a state budget to the Legislature in February 2017 and signed it into law six months after Maggie Hassan was sworn in as Senator, and any questions about Governor Sununu’s decision-making process are best answered by his office,” she said Friday.

Few ways forward

At the same time, solutions are proving elusive. In a state where $1 million funding decisions can balance on a knife’s edge, $36 million is a formidable sum.

Some legislators have proposed using a recent $26.5 million tranche in federal funding for the Children’s Health Insurance Program, reauthorized by Congress in January. Since the funds lapsed in October, New Hampshire has been covering for its programs with state money, potentially opening the new round of funding for other uses. But Morse said that money will likely be needed to be absorbed back into the Department of Health and Human Services to cover its own budgetary shortfalls.

Kurk has his own idea: an increase in taxes on providers. A proposed amendment to be added to Senate Bill 590 would expand the Medicaid Enhancement Tax, presently paid by hospitals, to a broad category of services, from nursing care to ambulatory services to X-rays.

That tax helps fund the DSH payments to hospitals; on Friday, Kurk said increasing it could help the shortfall. But the amendment, up for a hearing in the House Finance Committee on Tuesday, is expected to be strongly contested by health care representative and Democrats.

What’s left in the air? The status of negotiations between state officials and hospitals. Theoretically, an agreement between both parties could change the uncompensated care calculations to anything else.

Meanwhile, another twist remains: the courts. In her letter to the hospitals this week, Deputy Attorney General Rice made clear that while the state will respect the March 6 district court decision, any future ruling overturning that case could require hospitals to pay back the additional money – all $71 million – likely creating future tensions and headaches.

In the face of that, Morse said lawmakers are hoping to come to a more comprehensive, five-year arrangement with the hospitals, one that could put to rest longstanding problems with volatile payouts and contested funding formulas.

Norton, for one, agrees. “There’s an awful lot of uncertainty in all of this for all parties,” he said. “This is critical to the hospitals, it’s critical to the state and there needs to be some coming together on how to meet the needs of community members.”

Still, the parties remain at odds, and for now, with a deadline coming fast around the corner, the answers remain dim.

(Ethan DeWitt can be reached at edewitt@cmonitor.co or on Twitter at @edewittNH.)