On April 8, the Hillsborough County Superior Court, in response to a lawsuit brought by three New Hampshire hospitals, declared the state’s Medicaid Enhancement Tax (MET) to be unconstitutional. The ruling comes on the heels of a similar decision handed down in February by the Rockingham County Superior Court in a case involving two rehabilitation hospitals operating in the Granite State. While the Attorney General’s office announced that it will likely appeal this most recent ruling – just as it did with the earlier decision – the situation is likely to prompt policymakers to consider possible responses.
Though not widely known or understood, the MET is a critical source of revenue for state government. Indeed, it is expected to yield approximately $185 million in state tax dollars alone in FY 2014; to put that sum into perspective, General Fund appropriations for FY14 are $1.39 billion. Given the vital role it plays, tax and budget writers should rule out repealing the MET and instead seek to reform it in a manner that is consistent with the New Hampshire Constitution and its principles of taxation.
In its present form, the MET imposes a tax on hospitals equal to 5.5 percent of the disputed “net patient services revenue.” Importantly, the state revenue that the MET generates is matched dollar-for-dollar by the federal government if it is used for uncompensated care payments or for certain other Medicaid expenditures. Prior to 2011, half of the total revenue the MET produced was used to provide hospitals with some financial relief for uncompensated care – that is, the losses they experience in providing care for the uninsured and for Medicaid patients. As a result, hospitals received back what they had paid out in MET, while at the same time, the state retained the remaining half for General Fund expenditures. However, the FY 2012-13 budget severed this relationship, reducing funding for uncompensated care and altering the net impact of the tax on the state’s hospital industry.
At issue in the two lawsuits is the application of the MET strictly to hospitals, rather than to all medical entities that provide the same services. In the latest decision, the Hillsborough County Superior Court agreed with the plaintiffs, finding that “hospitals and non-hospitals are similarly situated with respect to the services they perform” and that the state had no rational basis in law for taxing the two groups differently. The Court concluded that such a rational basis was lacking based on the legislative history of the MET, which, in its view, linked the imposition of the MET directly to the provision of funds to hospitals through the Disproportionate Share Hospital (DSH) program. As that linkage is no longer as direct, the Court found the MET to be “unconstitutional on its face and in its entirety.”
Should the two decisions be allowed to stand, the task before policymakers will be to find a replacement for the revenue that the MET produces, while both meeting federal rules for the kinds of “health care related” taxes that states can use to generate matching funds for their Medicaid programs and fitting within any constitutional constraints arising from the decisions. A state commission, comprised of policymakers and representatives of the state’s hospitals, met early last fall to consider reforms to the MET. While it was unable at the time to reach a consensus, there now may be new impetus to find common ground.