One of the more difficult items on Gov. Ned Lamont’s initial to-do list is to craft a new taxing arrangement with Connecticut’s hospitals — and the stakes are huge.
Lamont must contend with an industry that insists it was misled, overtaxed and otherwise abused by his predecessor.
He must explain that Connecticut can’t afford to deliver most — or all — of the tax relief that legislators pledged to hospitals this year because the state’s coffers stand to lose more than $400 million if adjustments aren’t made.
And he must deal with conflicted lawmakers who face increasing pressure to help hospitals from back home, where these facilities usually are among the largest employers.
“We are developing a budget that will put the state’s finances on a stable trajectory over the biennium and into the future,” Chris McClure, spokesman for the governor’s budget office, said Friday. “Disruption of recurring revenue sources, such as the current hospital tax arrangement, creates additional challenges to meeting this goal.”
Sources say the Lamont administration and the industry have been discussing options in preparation for the governor’s first, two-year budget proposal, which is due to the General Assembly on Feb. 20.
Connecticut Hospital Association spokeswoman Michele Sharp declined to comment for this article, noting that it involves pending litigation hospitals brought against the state over the provider tax.
But the CHA launched a new advertising campaign earlier this month, reminding the general public — and, more importantly, legislators — that the industry employs an estimated 103,000 people with an annual, collective payroll of $7.6 billion.
In addition, the economic activity generated by hospitals supports another 101,000 jobs with a projected payroll of $7.7 billion.
“I think everyone wants to find another compromise,” said Rep. Jason Rojas, D-East Hartford, co-chairman of the tax-writing Finance, Revenue and Bonding Committee. “We know the hospitals were not treated as fairly as they should have been and I think (a compromise) would be an ideal situation.”
“My hope is that we will come to an agreement on the taxes and that the lawsuit will go away,” said Rep. Toni E. Walker, D-New Haven, co-chairwoman of the Appropriations Committee. “When things change every year it’s hard for them to manage their hospitals. And we know the hospitals are a major part of our economy.”
“Fiscal stability will allow our residents and stakeholders to have confidence we are moving forward without the type of arrangement that results in jarring shocks to our budget,” McClure added. “In order to accomplish this, we will continue to work with everyone to achieve the best possible outcomes.”
At issue is a tax which began only as a tool to draw more federal dollars into Connecticut — but ultimately became a huge source of friction between the industry and Gov. Dannel P. Malloy.
Having inherited an unprecedented $3.7 billion deficit, Malloy proposed the hospital provider tax one month after taking office in January 2011.
It was to be a tax in name only.
The industry would pay $350 million per year to the state, which would redistribute and return every penny back to hospitals — plus $50 million more.
This back-and-forth arrangement — which is common in most states — would enable Connecticut to qualify for huge federal reimbursements through the Medicaid program.
But things began eroding almost right away. As state government struggled frequently with budget deficits over the next six years, the tax grew while the payments back to the industry shrank — despite an increase in the federal reimbursement rate.
Hospitals also could not even rely on the shrinking payments they would see in the adopted state budget. Legislatures routinely ordered Malloy to achieve massive savings once the fiscal year was underway — often with little guidance as to how those targets were to be met. And, at times, the administration would order emergency reductions to the hospital payments.
After four years, the frustrated industry struck back with a lawsuit arguing Connecticut’s budgetary policies violated federal Medicaid rules. Hospitals also routinely have filed appeals with the state Department of Social Services, which administers the Medicaid program, contesting rates paid to hospitals for treating the poor and uninsured.
“We are outraged by the governor’s refusal to pay hospitals for care provided to patients,” Jennifer Jackson, the Connecticut Health Association’s CEO, said when Malloy suspended $140 million in payments to hospitals in March 2016. “His actions are breaking the health care system and increasing costs for patients.”
By the 2016-17 fiscal year, hospitals were paying $514 million to the state and getting a collective $78 million in return.
Kurt Barwis, president and CEO of Bristol Hospital, said the biggest challenge posed by the unstable provider tax is the restraints it has imposed on hospitals’ ability to make capital investments.
Whether it involves something basic, like building elevators, or renovations to emergency and pharmaceutical departments, the haphazard nature of the hospital tax has made it increasingly challenging to make these improvements when planned.
“When you get into a prolonged period of your cash flow being tied up by the state, one of the things you don’t do is make the required investments in your facility,” he said.
These arguments did not move Malloy, who countered that industry executives were receiving ridiculously high salaries while their hospitals did plenty of business as the Affordable Care Act expanded coverage, funneling more patients than ever through their doors.
[Hospital officials long have argued they lose money on Medicaid patients because state rates don’t cover the full cost of treatment.]
Malloy’s budget director, Ben Barnes, angered hospital officials during a 2015 legislative hearing when he defended the growing tax burden placed on hospitals, cementing the animosity between the industry and the administration.
“Why do you rob banks? “Barnes said. “It’s where the money is.”
Legislators tried to smooth things over when adopting a new taxing arrangement in November 2017.
That arrangement dramatically raised the annual hospital tax, from $514 million to $900 million. But it increased even more the funds being paid back to the hospitals, from $78 million to $671 million.
In other words, the industry went from losing $436 million per year down to $229 million.
The state made out as well. The extra payments to hospitals triggered additional Medicaid payments from Washington. Still, hospitals were wary that state officials might again maintain or increase the tax while reducing payments back to the industry.
Fast forward to 2019.
A final component of the November 2017 agreement was that starting July 1, 2019 — the upcoming fiscal year — burdens on hospitals would be lowered even more.
Connecticut would drop the tax greatly, from $900 million to $384 million, while payments to the industry would shrink from $671 to $342 million. While that’s still a lot of money, this would mean hospitals would pay just $42 million more than they get back.
For the state, though, this would be a big challenge. Not only would Connecticut finish just $42 million ahead — instead of $229 million — after payments to hospitals, but those reduced payments mean the state also would lose $222 million in matching federal aid.
Add up the pluses and minuses and that’s a $409 million hit to the state’s coffers next fiscal year.
And that’s just one part of a much larger deficit forecast. Nonpartisan analysts say state finances, unless adjusted, are on pace to run $1.5 billion in deficit in 2019-20, and $2 billion in the red in 2020-21.
Deputy House Minority Leader Vincent J. Candelora, R-North Branford, said he would like to see the lawsuit resolved this year but would settle for a provider tax arrangement the industry could support.
“The past administration doesn’t have a good track record at negotiating with the hospitals,” Candelora said. “To try to get the hospitals back in the room right now and saying ‘you need to come to the table and try to solve these problems yet again, is a tall task, and I wouldn’t be surprised if that alone is going to take some time.”