Backus Hospital in Norwich Arielle Levin Becker /

A bitter, longstanding conflict between state government and Connecticut’s hospital industry stood on the brink of a resolution Tuesday afternoon.

Gov. Ned Lamont and the Connecticut Hospital Association announced the settlement of a 2015 industry lawsuit contesting a provider tax that has extracted billions of dollars from facilities since 2011.

The administration also confirmed last week that it has begun supplemental payments to hospitals to resolve a $200 million-plus dispute involving payments for treatment of Medicaid patients.

“The beginning of my administration marked a reset of the relationship between the State of Connecticut and its hospitals,”  Lamont said. “I was clear that this ongoing litigation benefitted neither party, and certainly not the taxpayers of our state.”

“We are grateful for the leadership and support of Governor Lamont, his administration, and the legislative leaders and legislators of both parties,” Jennifer Jackson, CEO of the hospital association, said. “This agreement represents a path forward for hospitals and the state that recognizes the important role hospitals play in providing patients with quality health care and in strengthening our state’s economy.”

Neither side disclosed details of the tentative settlement Tuesday afternoon. Both the administration and the CHA said the deal would have to be approved by the General Assembly, the state attorney general’s office and the member hospitals of the association before any provisions could be implemented.

The agreement could have ramifications for the next state budget. That’s because hospitals are scheduled, under current law, to receive a provider tax cut starting July 1. But both Lamont and a key legislative panel have said the state cannot afford to provide that relief. Analysts say state finances, unless adjusted, will run more than $3 billion in deficit over the next two fiscal years combined.

“Both sides came to the table and negotiated a good faith settlement that will provide predictability and stability for both the state and the hospitals, and reduces the losses the state would have incurred in the absence of this agreement,” Lamont added. “This is a path forward that provides fiscal stability for the hospital industry and marks a new chapter in our state’s relationships with the hospitals.”

Lawsuit was centered on 2011 provider tax

Former Gov. Dannel P. Malloy mark pazniokas /

A frustrated hospital industry sued the state four years ago arguing that Connecticut’s budgetary policies violated federal Medicaid rules.

At issue was a levy established by Gov. Dannel P. Malloy and the 2011 General Assembly, something designed to be a tax in name only.

Under that original agreement, 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 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.

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.” Barnes and Malloy often also noted the high salaries top hospital executives continued to receive, even as tax payments rose.

By the 2016-17 fiscal year, hospitals were paying $514 million to the state and getting a collective $78 million in return.

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 sent 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.

Connecticut Hospital Association CEO Jennifer Jackson (file photo) Keith M. Phaneuf / file photo

Hospitals were supposed to get another tax break next fiscal year, which begins July 1.

But Lamont and the legislature’s Finance, Revenue and Bonding Committee both have said Connecticut cannot afford to provide that relief now.

Solving the ‘grouper’ mess

The tax hasn’t been the only sticking point between Connecticut and the hospital industry, however.

The state’s Diagnosis Related Grouping system for processing hospital services and corresponding payments — commonly called “grouper” — was improperly calibrated, hospital officials charged last fall.

The result, the industry says, was that between October and May hospitals were short-changed more than $230 million for care provided to Medicaid patients and to the under-insured.

Lamont administration officials pledged shortly after the new governor took office in January to negotiate a resolution.

When the governor proposed a budget on Feb. 20 for the 2020 and 2021 fiscal years, he recommended separate payments of $60 million and $62 million to offset a portion of the industry’s “grouper” loss.

Lamont’s communications director, Maribel La Luz, confirmed late last week that the state also began making payments to the industry earlier this spring to resolve another portion of the loss.

“Rate increases to account for the restoration are already being reflected in claims payments and we have submitted state plan amendments to CMS (U.S. Centers for Medicare and Medicaid Services) to affect those changes,” La Luz said.

It was not clear late Tuesday how much already has been paid to hospitals.

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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  1. What’s been so discouraging about CT’s hospitals taxes is first that our hospitals are heavily dependent on donations for both operations and constructing new facilities/updating. Those of us making contributions know that some portion likely winds up in CT’s tax coffers. And for those of us making major contributions or establishing legacies the reality that not all our funds are used for their intended purpose is unsettling.

    Second, its not widely appreciated that hospital ER’s are often the primary medical facility used by many of our most needy citizens. Taxing hospitals here hurts those least able to find alternatives for medical care.

    Finally there is something just thoroughly mean spirited for a wealthy State to tax hospitals dedicated to saving and extending lives. I’m not aware that any of the nations where I worked abroad ever taxed hospitals. Even in Africa. It’s just nasty.

    1. Moreover, the State actually lost revenue because of its backward tax/returns. CT was the only state in the nation that didn’t understand the structure of the tax and the federal reimbursement. By cutting the return to the hospitals, the state lost huge amounts of federal reimbursements–and the result was State tax revenues actually declined. Connecticut rarely does sophisticated dynamic analysis and, as is so often the case, flies blind. In this case it also flew into a fiscal cliff.

  2. You mean our poor for-profit hospitals that are buying up doctors offices and building facilities on every corner of the State? The ones imposing facility charges and controlling access that previously doctors could benefit from?

    1. The declining economics/profitability of maintaining individual/group doctor offices, especially with burgeoning insurance costs and restraints on 3rd party payments, is the driving force to sell out to hospitals and major groups and become de facto “employees”. The days of solo medical practitioners seem numbered. America’s medical practitioners are subject to powerful forces of consolidation. As are hospitals themselves.

      The costs/benefits of doctors providing direct patient care are changing. And not to the doctors’ advantages. More than a few surveys suggest that doctors in private practice well into their 50’s and 60’s would not recommend the profession to their youngsters. The costs of getting established are steadily increasing while the “returns” are diminishing.

  3. There is a “moral dimension” here. Hospitals together with Houses of Worship and Universities traditionally have received very major donations from the public with the expectation that such funds will be used for their intended purpose. Not taxed away to serve other purposes. That CT Gov’t in its thirst for new funding would tax hospitals dedicated to saving and extending lives is more than anguishing.

    To be sure executives of hospitals, just like those of universities and ministers of Houses of Worship oft receive salaries that strike many of us as “excessive”. But that’s another issue. One could include salaries of certain “public servants” such as School Superintendents.

    Maybe most CT residents don’t mind taxes on Hospitals. The numbers of large donors is fairly modest and reportedly most hospital patients respond with “thank you’s” rather than donations for hospital services. And for many hospital services are paid by 3rd parties. But for those of us who make sizable contributions it certainly is “upsetting”.

    Taxes on hospitals remind me of our major impoverished CT cities. And a certain “lack of enthusiasm” by our elected State officials to ask what can be done to re-create viable cities bringing in new industries providing jobs, housing, etc. Maybe these are just isolated cases. Maybe its part of the same larger issue. Including giving “State Aid” to some of our wealthy towns -among the wealthiest in the nation – while shortchanging those who desperately need assistance.

    It’s oft been said the mark of a society is how it treats its least fortunate. CT has work to do.

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