Bristol Hospital Arielle Levin Becker / The CT Mirror

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.

Rep. Jason Rojas, D-East Hartford Keith M. Phaneuf / CTMirror.org

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.”

Rep. Toni Walker, D-New Haven (file photo) Jacqueline Rabe Thomas / CtMirror.org

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.

Bristol Hospital President Kurt Barwis Keith M. Phaneuf / CTMirror.org

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.

This is a photo of Benjamin Barnes, Gov. Dannel P. Malloy's budget director.
Former state budget director Ben Barnes (file photo) File photo / CTMIRROR.ORG

“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. 

Deputy House Minority Leader Vincent Candelora, R-North Branford CTMIRROR.ORG FILE PHOTO

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.”

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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8 Comments

  1. Want to fix ct go to the heart of the problem start with Sebac and the bloated state spending not more taxes ,smoke and mirrors and promises .

  2. Let them PAY! Yale is buying up EVERYTHING in sight and not just in CT! They are also changing all the rules! At one point in time when my 105 year old mother was in the hospital, I kept asking the nurses if my mom’s cardiologist for decades had been in to see her and they kept saying NO! I couldn’t believe that I had not run in to him with all the hours I spent there. Finally, one informed nurse said he is not allowed to see her anymore in the hospital! Yale now has “hospitalists”, so you get WHOEVER is on duty that day! What the hell would they know about my mom’s condition at 105 years old except what was in the computer? At one point in time when my mom’s roommate was leaving I told her what I had just found out. It happened to be the same time the “hospitalist ” was behind the curtain (a rare visit) talking to my mom. I was near the door whispering. My mom’s bed was near the window. After a FEW minutes the “hospitalist” came from behind the curtain and asked me if there was a problem. So much for paying attention to my mom. I told her YES! I said that my mom’s cardiologist of decades is not allowed to see her here. I said nothing against you but what do you know about my mom except what’s in your computer? At that point, she turned and walked out! Screw you! You’re getting paid to help patients and if you can’t take the heat or criticism then go find a new job. With hospitals these days, it’s ALL about $$$$$$$$ and Yale has plenty of it because you don’t buy up everything in sight in CT and other states with no $$$$$!

  3. I don’t understand how the supposedly impoverished hospital systems – Hartford and Yale in particular can keep building these state of the art facilities (the “only Bone and Joint Institute in the State”) when they’re broke. Add that to their high priced TV advertising and it would seem they’re doing just fine.

    1. You don’t understand the dynamic here. The whole point of the health care provider tax was to create a mechanism for the Federal government to INCREASE subsidies to states to expand health care coverage. CT was the ONLY state that didn’t understand how this was supposed to work–and it cost the state thousands to jobs and smaller tax revenue.

      1. My point wasn’t regarding the opaque and complex transfer mechanisms and whether they “work” or not, but that the large health care companies plead poverty while spending tens if not hundreds of millions on new palatial “institutes” and other facilities.

        Like everything else in “healthcare”, there is no transparency as to actual cost to deliver services. All there are are multilayered opaque “prices”.

  4. Puzzled by this article’s heading “hospital tax is a huge challenge”. Other than CT’s Legislators who supports the hospital tax ? Reportedly Yale New Haven is CT’s largest individual tax payer.

    Gov. Lamont had many months to assemble a capable “team” and put forth a well designed plan to resolve CT’s long standing fiscal and economic issues. So far there’s no evidence such a team of well recognized CT professionals have been assembled. Maybe they’re been sequestered.

    A major hospital tax sends a powerful message to the business community and nation that CT is so desperate to maintain spending that its willing to vigorously tax hospitals dedicated to save lives. Taxing groceries in a similar vein.

    Of all the CT taxes requiring remediation the hospital tax ought stand at the head of the table. Rather than a “huge challenge” by the CT Mirror its removal ought be the first order of business. Just ask CT residents. Especially those receiving hospital care.

    Failure to send out a message declaring the hospital tax must go together with proposing a tax on groceries sends out a terrible message. Far beyond CT.

  5. Standby for the hospital commercials on every local media outlet.

    Interestingly attorneys have to pay an occupational tax. I have to wonder whether Doctors, Dentists, PT’s, Chiros, APRNs or PAs pay such a tax?

  6. A tax burden on hospitals would seem to be akin to the application of leeches to cure anemia… The healthcare-provider system doesn’t need another government charge on it that is certainly going to be passed on to the patients in some form — either in the form of bill-inflation and/or cutbacks in treatment services…
    If Connecticut wants an area ripe for taxation, look at the private university system in this state — especially those institutions that have a parasitic relationship with distressed cities to which they don’t lend their name or assets (such as Sacred Heart University with respect to Bridgeport, which hosts a huge amount of untaxed dormitory space for SHU, with all of the associated public safety problems/service needs and uncompensated expense to the city…). (Actually, the state should take a look at certain definitions of property for all non-taxed, private, “non-profit” institutions — much of this property is probably taxable on pragmatic, moral, and constitutional grounds inasmuch as it is an unfair burden to the host community and isn’t directly involved in any constitutionally-protected function, e.g., religion or education…).

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