New Hampshire budget writers grapple with a brand new tax that’s been around for 20 years
By Grant D. Bosse
SUMMARY: New Hampshire adopted the Medicaid Enhancement Tax as a means to leverage federal matching funds without imposing any real tax liability on state hospitals. After two decades, budget writers finally ended the practice of MediScam by turning this phantom tax into a real one. Faced with a new multimillion dollar tax liability, New Hampshire hospitals took the state to court and started paying closer attention to how much they owed. As the Legislature struggles to understand a huge source of state revenue that went without much oversight for twenty years, how they change the Medicaid Enhancement Tax will have expensive implications for the state budget and state hospitals for years to come. This paper will outline the history of the Medicaid Enhancement Tax in New Hampshire, describe how the complex tax works in conjunction with the Disproportionate Share Hospital Program, and dispel some of the many misunderstandings that trip up budget writers trying to incorporate this brand new, 20-year old tax into the FY14-15 State
Under the Federal Medicaid program, participating states split the cost for providing health care to low income recipients with the federal government. Most states, including New Hampshire, elect to reimburse hospitals for treatment based on a fee-for-service model. Reimbursement rates are set by state officials, but must be approved by the Centers for Medicare and Medicaid Services.
Reimbursement rates under fee-for-service plans are not sufficient to pay for the hospitals’ costs to treat Medicaid patients. The program relies on hospitals to be an implicit third partner, along with states and the federal government, in financing Medicaid. Losses incurred through treating Medicaid patients are offset by patients paying through private insurance, or in rare cases out of pocket.
Throughout the 1980’s, Congress sought ways to encourage states to provide additional funding to hospitals who served a disproportionate number of low-income patients through Medicaid, and thus had fewer privately funded patients on which to shift costs. Beginning with the Omnibus Budget Reconciliation Act of 1981, Congress established the Disproportionate Share Hospital program. DSH allowed states to provide higher payments to hospitals serving more low-income patients, but states were slow to adopt the program. Congress increased state flexibility throughout the 1980s, and states began turning to DSH as a way to leverage federal matching grants to help balance their general fund budgets.
Under DSH, states could exceed the caps on assistance to hospitals under Medicaid, and receive federal matching funds for every dollar. The matching grants range from 50% for wealthy states such as New Hampshire to 75% for the poorest states. On average, the Federal Medical Assistance Percentage (FMAP) is 57% nationwide.
State budget writers now had great flexibility to increase state assistance to hospitals. In states like New Hampshire, every dollar in DSH payments would receive a matching dollar in federal spending. The program was designed to help reduce the hidden subsidies built into the Medicaid program. But nothing in federal law prevented states from recapturing this new pot of money through taxes on the very hospitals the DSH program was meant to help.
State payments under DSH exploded from $1 billion in 1990 to $17.4 billion in 1992, accounting for 15% of total state medical expenditures. New Hampshire quickly became one of the most aggressive states in implementing DSH payments as part of its state Medicaid program. DSH accounted for 35.8% of New Hampshire’s total Medicaid spending by 1992, just two years after adopting it.
ENTER THE MET
New Hampshire began making DSH payments in Fiscal Year 1992, at the same time it imposed a new revenue stream to pay them. The Medicaid Enhancement Tax was a 6% levy on hospitals’ gross patient service revenue, essentially every dollar charged for patient care at all 28 New Hampshire hospitals. The rate is currently 5.5%. The first payments were made in August 1991, and were credited to FY1991, which had ended on June 30th.
Every hospital in the state was designated a Disproportionate Share Hospital, and captured under both MET and DSH. Upon making its MET payment, the State would refund an often identical amount to the hospital under the DSH program. The State would then apply for 50% reimbursement from the federal government.
For example, if a hospital owed $10 million under the MET, it would send its payment to the State, which would send a $10 million DSH payment to the same hospital later that same day. The federal government would soon get an application for a $5 million DSH matching grant, which would be deposited directly into New Hampshire’s General Fund.
Though the DSH program was meant to help narrow the gap between what hospitals spent to treat Medicaid patients and the low reimbursement rates they received, DSH and MET cancelled each other out for New Hampshire hospitals. It resulted in a windfall in unrestricted revenue for the New Hampshire General Fund.
While many states passed new revenue sources like the Medicaid Enhancement Tax to claw back some or most of the new DSH matching grants, New Hampshire was particularly aggressive, recapturing all of its DSH spending through the MET.
The following chart shows DSH and MET payments tracking each other until very recently (Blue and Red Columns), with approximately half that amount making its way into the New Hampshire General Fund (Green Line). Net MET revenues were not always credited in the same Fiscal Year that gross MET revenues were paid.