State rejects challenge to the hospital tax

MidState Medical Center in Meriden

MidState Medical Center in Meriden

Two state agency heads have ruled against Connecticut hospitals’ claims that the state tax on hospitals is illegal, clearing the way for the industry to take the state to court.

Hospitals have long bristled at the tax, imposed during a budget crisis in 2011 and increased by hundreds of millions of dollars since then. Last year, 24 hospitals and the Connecticut Hospital Association challenged the tax, seeking declaratory rulings on its legality from the departments of social services and revenue services.

On Thursday, Social Services Commissioner Roderick L. Bremby and Revenue Services Commissioner Kevin B. Sullivan issued a 179-page ruling rejecting the hospitals’ arguments that the tax violated the Connecticut and U.S. constitutions, as well as state statute.

The hospital association called the ruling “unfortunate but not unexpected,” and said it and the hospitals “intend to pursue every legal option at our disposal as we continue our efforts to challenge the tax.”

Department of Social Services spokesman David Dearborn said the commissioners “found that the legislated measure was legally and properly implemented.”

“We are appreciative of the exhaustive review by DRS and DSS in issuing their declaratory ruling that the provider tax was properly implemented,” Chris McClure, a spokesman for Gov. Dannel P. Malloy, said. “Over the past few months, we have had very productive and tremendously helpful conversations with hospitals, and we look forward to continuing those discussions to improve health care delivery across the state.”

The Malloy administration proposed the tax in 2011, characterizing it as a way to bring the state more federal funding. By taxing hospitals and redistributing money back to the industry, states can generate federal matching funds through the Medicaid program.

In the first year the tax was imposed, fiscal year 2012, hospitals paid $349.1 million and received $399.5 million back – a net gain for the industry. But since then, the state has reduced what hospitals get back (which also reduces the amount of federal funding the move generates, since the federal government only matches the money paid to hospitals).

More recently, the state has also increased the amount collected. In the 2013 fiscal year, hospitals paid $26.3 million more than they received back. This fiscal year, the tax on hospitals is expected to total $566.1 million, although the amount the state expects to collect is lower because hospitals use tax credits to reduce their payments. Hospitals are slated to receive $117.6 million as part of the tax – a net tax of $448.5 million.

“The hospital tax, which now totals a staggering $556 million a year and is nearly 30 times what any other organization pays, is bad public policy,” the hospital association said in a statement. “The tax results in the loss of hospital services and staff, increases the cost of healthcare, and damages the state’s economy.”

The Malloy administration has argued that hospitals have benefited from a significant growth in Medicaid spending since the implementation of the federal health law, although hospitals say that, since Medicaid pays less than it costs to care for patients, treating more Medicaid patients doesn’t help their bottom lines. The administration also has pointed to hospital executive pay and the industry’s overall profitability in defending the tax, while critics say focusing on total industry performance obscures the fact that many hospitals have struggled financially.

The hospitals challenged the tax on several grounds. They argued that the tax violated the Connecticut Constitution’s separation of powers doctrine by having the Department of Social Services impose the tax, a legislative power. But Bremby and Sullivan disagreed, writing that the department did not set the tax or the tax rate, but simply calculated it based on a formula.

The hospitals also argued that the tax violated the Equal Protection Clause of the U.S. Constitution because it was imposed on hospitals but not on other health care providers.

But Bremby and Sullivan wrote that there are key differences between hospitals and other health care providers. Hospitals, they wrote, are authorized to provide a wider range of services, are compensated differently by programs including Medicaid and Medicare, are subject to different regulatory requirements, and are better able to handle the burden of being taxed.

The hospitals also challenged the way the tax had been implemented, arguing that some of the services included by the state were not eligible to be subject to provider taxes. But Bremby and Sullivan said that was not the case.

Four hospitals have left the group challenging the tax. Yale-New Haven, Bridgeport and Greenwich hospitals – all part of the Yale New Haven Health System – withdrew from the challenge earlier this month. Lawrence + Memorial Hospital, which subsequently received regulatory approval to join the Yale New Haven system, withdrew soon after the other Yale hospitals.

Why did the hospitals withdraw?

“Our decision to withdraw our legal action was predicated upon the fact that we have been working in a collaborative fashion with the administration to see if we can find common ground to address longstanding challenges in the state’s Medicaid program,” Yale New Haven spokesman Vin Petrini said in a statement. “We are hopeful that by exploring innovative approaches we can address hospital needs while securing the long-term viability of coverage for the state’s most vulnerable patients without litigation.”

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