Key budget revenue-raiser faces looming expiration date

Raising taxes on hospitals to leverage more federal dollars, a key component of all plans to solve Connecticut’s budget crisis, could be in jeopardy if legislators don’t reach agreement by week’s end.

Gov. Dannel P. Malloy and the hospital industry — which agreed to endorse the tax hike under very specific conditions — urged state officials Monday to act quickly.

At issue is a complicated deal Malloy negotiated earlier this month with the Connecticut Hospital Association to raise the annual tax on the industry from $556 million to $900 million.

That’s part of a larger plan that calls for the state to redistribute and return that entire $344 million annual increase back to the hospitals this fiscal year — along with another $326 million in other payments.

This, in turn, would qualify Connecticut for an additional $365.5 million in federal Medicaid reimbursement.

Add up the pluses and minuses, and the hospital industry — which currently pays $439 million more in taxes than it receives back in payments from the state — would see this annual loss scaled back to $210 million.

State government, which already comes up $520.5 million ahead, would jump to $657 million in the black.

But some of the state payments to hospitals involve rate increases that still require approval from the U.S. Centers for Medicare and Medicaid Services, commonly known as CMS.

And it remained unclear Monday whether Connecticut could secure those rate hikes if the requests are not filed before Sept. 30, the last day of the federal fiscal year.

Sources said legislative leaders, who are meeting Tuesday with Malloy to discuss the state budget impasse, are expected to discuss this impending deadline.

The administration hinted Monday that it wants the legislature focus on resolving the entire budget immediately, and not just the hospital financing situation.

“The state needs to remain focused on getting a comprehensive biennial budget, and we should be cautious about piecemeal efforts that would undermine or distract from that important goal,” Malloy spokesman Chris McClure said. “Nevertheless, we continue to work with hospitals to find a mutually beneficial long-term arrangement. Such an arrangement would help us get to a budget agreement and could provide long-term predictability for both state government and one of our most important industries. If we can get to such an arrangement by October 1 we will all be better off.”

“We appreciate that legislators recognize the importance of moving forward the hospitals’ agreement with the administration,” the hospital association wrote in a statement Monday. “By moving quickly to make the federal deadline at the end of the month, we’ll be able to maximize federal funding, which will help patients, communities, our hospitals, and the state.”

The last budget proposal developed by Republican legislative leaders and the plan developed by Malloy and Democratic legislative leaders both rely heavily on this hospital tax hike.

Many legislators from both parties have said they only agreed to another tax hike on hospitals because it had earned the CHA’s endorsement.

And the industry said it only had done so because this new plan effectively cuts the burden placed on Connecticut’s hospitals in half.

The state has gone more than 12 weeks without a new budget since the fiscal year began on July 1.

A GOP-crafted budget, which narrowly passed earlier this month in the Senate and House, is expected to be vetoed this week by Malloy.

While it includes the hospital tax plan the administration negotiated, the governor has said the Republican budget cuts too deeply into funding for public colleges, provides too little emergency aid for distressed municipalities and also orders some spending cuts that the state may not be able to achieve.

The CHA has been wary of the hospital provider tax since Malloy and legislators first imposed a $350 million levy on the industry in 2011.

At that time it also was a legal maneuver to qualify Connecticut for additional federal assistance, and the industry got back $400 million in supplemental payments.

But things began eroding almost right away. And as state government struggled frequently with budget deficits over the past six years, the tax grew while the supplemental payments shrank — despite an increase in the federal reimbursement rate.

Hospitals paid $556 million in total last fiscal year and received $118 million back as Connecticut passed up hundreds of millions of dollars in potential federal reimbursement.