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February 11. 2014 10:49PM

State hospital tax ruled unconstitutional by superior court judge

BRENTWOOD — A superior court judge has ruled that the Medicaid Enhancement Tax on New Hampshire hospitals is unconstitutional in a case brought by Northeast Rehabilitation Hospital in Salem.

The state was ordered to refund $1.4 million that the for-profit specialty hospital paid in 2010-11.

The ruling issued on Monday by Judge Kenneth R. McHugh in Rockingham County Superior Court is likely to be appealed to the state Supreme Court, with millions of dollars in state revenue at stake.

McHugh’s decision came a day after three of the state’s largest hospitals argued their case against the MET in Hillsborough County Superior Court before a different judge. Catholic Medical Center, St. Joseph Hospital in Nashua and Exeter Hospital, which together paid $31 million, are challenging the tax on similar grounds.

Alex Walker, senior vice president for operations at CMC, said the ruling in the Northeast Rehabilitation case bodes well for the hospitals challenging the tax as a matter of fairness. Hospitals are taxed on patient service revenues, while non-hospital providers of identical services — such as independent doctors, surgical centers and rehab centers — are not similarly taxed.

In his ruling, McHugh wrote that the MET created an “unconstitutional classification of taxpayers,” and that hospitals cannot be separated from other similar businesses for purposes of taxation.

Although the tax has been on the books since 1991, it was never viewed as an actual tax because hospitals were always refunded the full amount of MET they paid. The payment of the tax and full refund by the state was a gimmick designed to attract additional federal Medicaid money that the state used to balance its budget — until the rules were changed in 2011 to restrict such practices.

Since the MET became an actual tax three years ago, the state has collected $538 million, about half of which was refunded to hospitals based on their volume of Medicaid patients and uncompensated care.

The 5.5 percent tax on patient services revenue generated $181 million for the state last year, making it the fifth largest source of revenue for the General Fund, behind the Business Profits Tax, Business Enterprise Tax, Rooms and Meals Tax and Tobacco Tax.

Senior Assistant Attorney General Mary Ann Dempsey said the state is likely to appeal McHugh’s decision.

“From the outset of this litigation, all parties recognized that the matter would be resolved by the New Hampshire Supreme Court,” she said. “So the state anticipates appealing, though no final decision has been made.”

Judge Phillip Mangones is expected to issue his decision in the lawsuit brought by the three hospitals in the next 60 days.Northeast Rehabilitation Hospital prevailed on two of the three of the issues it raised with Judge McHugh. He agreed that the state unconstitutionally discriminated against the hospital, and that the MET sets up an “irrational and unsustainable” classification of taxpayers, in violation of the Equal Protection Clause of the U.S. Constitution.

“The petitioner is forced to pay the MET on its outpatient therapy services while other, non-hospital providers of identical services are not,” McHugh wrote. “There could be two identical physical therapy offices next door to each other, providing identical services, and if one was owned by a hospital and the other was not, they would be taxed differently. This is an unconstitutional classification of taxpayers.”

He did not agree that the MET constitutes double taxation on the for-profit rehabilitation center, which also pays the state’s Business Profits Tax.


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