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Charles Arlinghaus: Making sense of a mediocre Medicaid deal

June 04. 2014 12:26AM

THE BROKERED deal on the Medicaid enhancement tax and the hospitals’ lawsuit regarding it is a partial solution to an imperfect situation, and it could still be the right choice to make. The complexity of the tax and the schemes surrounding it make evaluating and understanding the tax, the choices and the possibilities difficult, but let’s give it a try.

The Medicaid enhancement tax (MET) was a convoluted scheme developed in 1991 to borrow from the hospitals and leverage money from the federal government at no cost to the hospitals. In the first decades, it wasn’t a real tax. It imposed no cost on hospitals, and they could hardly refuse to go along with it. It took almost 20 years, but the folly of trusting a money-hungry government finally hit them like a 2x4 to the face.

The hospitals did the state a favor that allowed the state to collect hundreds of millions of dollars from Washington. In 2009, the state took some money off the top. In 2011, the state kept a lot of money, and hospitals were hit with a de facto tax increase of $250 million. When your taxes go up that much, you take action.

The hospitals stopped being cooperative doormats, hired good lawyers, and (despite the famous lyrical prediction to the contrary) fought the law and the law lost. That put the state in an odd spot. If the state took no action, about $370 million for the current budget would either not be collected or would be refunded, while only $50 million of spending would go away.Your perspective on what should happen next might depend on your thoughts about the lawsuit. If you believed the state would win an appeal to the state Supreme Court, you might not think any action necessary. But few believed such a thing. Most people, including me, believe the state would lose an appeal and the tax would remain unconstitutional, which would confirm a $320 million budget hole.This put hospitals in the driver’s seat. They were willing to negotiate a settlement that included more money for the state, but in exchange they insisted on some reversal of the earlier $250 million tax hike. There is no possible settlement that will not create a spending problem of some sort.Theoretically, the tax was always collected to fund uncompensated care (largely free charity care that hospitals provide low-income patients) and for Medicaid underpayment. Remember that Medicaid is not the government paying for health care. It is the government paying about a third to a half of what private insurance pays the same provider for the same service, with the provider expected to eat the rest of the cost. In theory, the MET is to help cover some of those underpayments.The MET deal before the Legislature mandates that a minimum portion of the tax collected to fund uncompensated care actually does so. Those payments are made proportional to the charity and Medicaid care actually provided. Even after we made a fake tax a real tax, some money went to such payments, but that amount will probably rise by $125 million, half of which would be paid by the federal government.

There is a substantial difference between how much we will collect and how much we will return to hospitals. The remainder must be used, as it is used now voluntarily, to support regular Medicaid provider payments, which we have to make. That additional amount can be thought of as the portion of the scheme that is a real tax. That amount is likely to be around $80 million-$100 million less in the next budget than it is today. That’s a big hole, but it’s after the election so politicians are happy.

The precise language of the law is being tweaked to eliminate drafting errors and some inconsistencies, so it is a bit of a moving target. To make matters worse, there is not yet a publicly available fiscal note attached to the bill. I remain convinced that no legislation should be passed that does not include a fiscal note (the official financial analysis) that is available to the public for a week before the vote.

All that having been said, something has to be done or the state will have a huge financial hole. If lawmakers are confident the state would win an appeal to the Supreme Court, they might vote against this incomplete agreement. However, I think the state would lose an appeal, and so do most lawyers I know. In the contest between a crap shoot and a beat up used car, the jalopy wins.

Charles M. Arlinghaus is President of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.

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