The State Budget Just Developed a $400 million hole

Charlie Arlinghaus

April 16, 2014

As originally published in the New Hampshire Union Leader

A Superior Court ruling just created a $400 million hole in the state’s budget.  A fake tax little understood by most policymakers and almost unknown to the public started as a scam to leverage more money from the federal government, turned into a clearly unconstitutional real tax, and has created New Hampshire’s own fiscal cliff. Lawmakers will deal with it the way they deal with most big problems: put it off until after the next election.

Ironically, the state’s Medicaid Enhancement Tax (MET) was created in 1991 to fix a budget hole. Lawmakers learned of and copied other states’ efforts  to create a pretend hospital tax and, by giving it back to the hospitals, have it matched by the federal government in a way that diverted half of it to the state’s general operating budget. Critics on both the right and left called the shell game “Medi-scam.”

The scheme is best illustrated graphically in a chart Grant Bosse developed for the Josiah Bartlett Center in a paper called “Meet the MET.” In the original two decades,  hospitals would pay the state let’s say $200 million in MET. The state would give $100 million to the general fund for other state expenses and spend $100 million on the same hospitals in an only technically unrelated program called DSH for unreimbursed Medicaid expenses. Because DSH was “Medicaid spending,” the feds would match it with another $100 million for the hospitals.

The hospitals paid $200 million and got $200 million back – usually on the same day. The state, however, got an extra $100 million to balance the rest of the budget.

Hospitals were content to go along with this because the agency that regulated them, the state HHS department, told them they would be doing the state a favor and the tax would never be real. Then commissioner Harry Bird assured hospitals that if the federal government ever disallowed the arrangement, the “tax” would go away.

In the 2009 budget, some tweaks were made to satisfy federal regulators who insisted on some effort at masking the fiction. Hospitals no longer got back penny for penny what they paid but for most hospitals it was close. In 2011, legislators went further and completely decoupled MET and DSH. The fake tax became a real tax and most DSH payments were suspended. Rather than a net zero, hospitals lost $125 million each year.

Under New Hampshire law taxes can’t be discriminatory. It’s all right to tax soda if you tax any soda. But you can’t tax soda bought at the grocery store but not at the convenience store. The MET is discriminatory. We tax certain procedures if they’re done at a hospital but not if they’re done somewhere else. The court, quite rationally, ruled the tax unconstitutional.

The state will appeal the decision and that appeal will take until after the next election – conveniently. But it’s hard to see any hospital come November making their MET payment – why would they pay a tax that has been ruled unconstitutional? The damage isn’t just the $72 million used by the general fund, it is much greater.

The MET raises about $175 million from hospitals. In rough terms, about $75m goes directly to the general fund, about $75m supports Medicaid payments that used to be made from the general fund, and about $25 of it is given back to hospitals and matched by the federal government (those numbers are not precise and vary year to year). So, in total the state loses the 175 and the 25 match – about $200 million each year.

Each hospital has reserved its right to have their October 2013 payment refunded and no hospital is likely to pay their October 2014 payment so we will suddenly see a $400 million budget hole. Given how much fighting happens over $15 million which may or may not be put in the rainy day fund, I would expect the $400 million hole to be like an earthquake.

The preferred solution of most “leaders” in Concord is to appeal the sensible and very obvious lower court decision. The advantage of appeal is that it will take a year so the final decision won’t occur until after the next election. Sure, we’ll have a cash flow problem at some point but that too won’t occur until after the November election.

1 reply
  1. Doug Hall says:

    Actually there was a little more to it in the beginning. I was among a handful of representatives who took primary responsibility to put the original plan together in the NH House. We knew that there was a potential constitutional question from the beginning. Therefore, to keep the hospitals satisfied we originally paid the hospitals 103% of the tax they paid, not 100%. The extra 3% was enough to buy off any potential lawsuit. The reduction from 103% to 100% was done somewhat later.

    Governor Judd Gregg pleaded with us to pass the tax. I still have his communications in that regard. It rescued his governorship. Had it not passed and the budget had crashed around him in his first term, he may never have become a US Senator.

    Then we doubled the tax one year to raise an extra $100 million that went into a new “Health Care Transition Fund ” This was at the time President Clinton was trying to get Congress to pass a health care reform measure and the idea was to have set aside money to use because the state would have its share of new costs. When Congress never passed the reform measure, the $100 million in the Health Care Transition Fund began to be used by later Governor’s to spend on things that they wanted to do but did not want to budget for in the General Fund. Among other things, it included a large expenditure for computer systems in Health and Human Services that should really have been part of the capital budget.

    When we passed the original plan in the House in 1991, I also created a petition to Congress asking that it close the loophole that had allowed the nonsense we were engaged in. I spoke about the petition on the floor of the House and quite a few members signed it. In paraphrase, it stated that we were addicted to the free federal money and wanted our pusher to cut off our supply. Sen. Warren Rudman, however, helped open up the supply even further.

    Shortly after the beginning, we also added the New Hampshire Hospital to the mix. We claimed that it too was serving a disproportionate share of uninsured (which was certainly more true than for the general purpose hospitals). Our scheme there actually recovered 5 times the total expenditures of that state facility. The feds paid NH 5 times the cost of providing all care to all patients at that hospital. Of course, that meant that the 400% above actual cost was free to be used to pay for other general fund activities – everything from inspecting dams, marketing NH as a place for film-making, supporting family planning clinics, to buying books at the state library.

    It was clear that this was a scam from day 1. Governors Gregg, Merrill, and Shaheen all were scared to death it might be ended. They knew it was a scam to get the federal government to pay for state services that they were unwilling to either (1) cut or (2) raise real tax revenue to support. It even allowed them to crow about cutting taxes.

    In some ways, it is sad that it took 22-23 years until the basic constitutionality of Mediscam was called into question and will hopefully bring it down. It should have ended after only one or two years. It could have if any governors had been brave and honest and said “enough already!”

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