CT’s hospital spending and taxes, explained

The ongoing fight over Connecticut’s state budget has centered in part on what Connecticut pays hospitals.

The industry took the biggest hit in the emergency budget cuts Gov. Dannel P. Malloy issued last month, drawing criticism from hospital leaders and legislators from both parties.

In defending the cuts, the Malloy administration has pointed to dramatic increases in government spending on hospitals in recent years and to the industry’s profitability.

Hospital officials, meanwhile, say the administration mischaracterizes state funding for hospitals — the bulk of which covers payments for care or money the industry receives in refunded taxes — and say the cuts hurt.

Here’s a look at what Connecticut spends on hospitals, how it’s changed over the years and what Malloy’s recent cuts affect.

What does Connecticut pay hospitals for?

Last fiscal year, Connecticut hospitals received $1.74 billion in Medicaid payments. (Medicaid is a joint federal-state program, and the federal government reimbursed the state for more than half of that spending.)

How does that spending break down?

Eighty-eight percent of it — $1.53 billion — came in the form of direct payments for care that hospitals delivered to people covered by Medicaid. That is, people covered by Medicaid got care, and the state paid for it.

The rest breaks down into four pools.

One is referred to as retroactive payments. That money is also tied to care delivered to Medicaid patients, but in previous years. The money reflects state payments to settle discrepancies in the amount it paid for care in earlier years. Last fiscal year, hospitals received $85.9 million in retroactive payments.

Another bucket of money comes in the form of a grant to Connecticut Children’s Medical Center, which totaled $25.6 million. The Hartford children’s hospital has received state funding to help cover deficits in recent years.

A $15.1 million pool of money went to hospitals with higher-than-average shares of patients covered by Medicare and Medicaid and lower-than-average Medicaid expenses per case. It’s referred to as the “low-cost-hospital” pool.

The rest, $80.6 million, was paid in what are known as supplemental payments. That money is related to a tax Connecticut levies on hospitals.

Why is the state paying hospitals for a tax?

It’s because federal law allows states to get payments from the federal government if they collect a tax from hospitals or other health care providers, and then redistribute the money to the industry.

The tax on hospitals was instituted in the 2012 fiscal year, and at the time, didn’t function like a typical tax at all: Connecticut collected $349.1 million and returned $399.5 million to the industry. In other words, the hospital industry actually made money on the tax. (The state also made money on this, because returning money to the industry allowed it to capture federal matching funds.)

But in the years since, the state has continued to tax hospitals $349.1 million annually, but has cut back what it returns, thus raising the hospitals’ taxes and also reducing the amount of federal funding the process generates.

The tax on hospitals is increasing again this fiscal year. (More on that below).

How does this compare to previous years?

State spending on hospitals has grown significantly in recent years, although the types of payments have changed.

Direct payments for care grew by 65.8 percent from the 2009 through 2015 fiscal years, from $926 million to $1.53 billion.

What changed during that time? The number of people covered by Medicaid rose dramatically after the state expanded eligibility for the program in 2010 as part of the federal health law. In June 2010, the program covered 457,529 people. As of August 2015, it was 704,316, a 54 percent increase. (The federal government is reimbursing the state for the full cost of covering those who are newly eligible under the health law, although that reimbursement level is scheduled to drop starting in 2017.)

Until the 2012 fiscal year, Connecticut gave hospitals millions of dollars to compensate them for caring for patients who were uninsured or covered by Medicaid, which pays less than it costs to deliver care. (During the 2014 fiscal year, Medicaid paid hospitals, on average, 63 cents for every dollar they incurred in cost, according to the state Office of Health Care Access.)

The Malloy administration eliminated that funding, arguing that as more people gained coverage under the federal health law, hospitals wouldn’t need the extra payments. Instead, hospitals began receiving millions of dollars in refunds on the tax on them that was instituted that year.

This has been a key point of dispute between the administration and hospitals.

The Malloy administration has argued that hospitals now have more paying customers, since the federal health law expanded the number of people with insurance or Medicaid and reduced the number of uninsured, and say hospitals have done well financially since the health law took effect. Hospital officials say that because Medicaid pays them less than it costs to deliver care, treating more Medicaid patients doesn’t help their bottom lines. They also note that even before the health law, people without insurance represented a small portion of their patients. In the 2009 fiscal year, uninsured patients accounted for 5.4 percent of outpatient hospital visits and 2.2 percent of inpatient discharges; that fell in 2014 to 3.6 percent of outpatient visits and 1.3 percent of inpatient discharges, according to figures from the state Office of Health Care Access.

(A couple of technical notes on the figures for direct payments for care: These figures include money the state spent on care for people covered by a program that pre-dated the 2010 Medicaid expansion, known as state-administered general assistance. For the 2009 through 2012 fiscal years, they also include estimated care payments made on behalf of the state by managed care companies, which administered a portion of the Medicaid program at the time.)

What portion of the funding did Malloy’s recent hospital cut affect?

In September, Malloy announced plans to rescind three-quarters of the money hospitals were expecting to receive back from the tax this year, as well as three-quarters of the funding for a pool of money for six small, independent hospitals.

This fiscal year, hospitals are slated to pay $556.1 million in taxes and, according to the adopted budget, were to get back $241.1 million – making their net tax $315 million.

Malloy’s cut reduced the amount hospitals are slated to get back from the tax to $60.27 million, raising the net tax on the industry to $495.8 million.

The small hospital pool was supposed to pay hospitals $14.8 million this fiscal year, but Malloy’s cut reduced it to $3.7 million.

The money Malloy didn’t cut was supposed to be paid during the first quarter of this fiscal year, which ended Sept. 30. But that didn’t happen, and a spokesman for Malloy’s budget office said that decisions about whether that money gets paid will be “based on whether we have enough money to keep the budget in balance.”

More recently, on Oct. 9, Malloy announced that the six small hospitals – Bristol, Charlotte Hungerford, Day Kimball, Griffin, Johnson Memorial and Milford – would receive $14.1 million. That funding comes from the first-quarter payments hospitals were supposed to receive.

How much do hospitals pay in taxes?

In recent years, hospitals have offset some of their tax obligations through the use of tax credits. The budget adopted in June places limits on how much of their tax obligations hospitals can offset through the use of credits.