CONCORD — A legal loophole that taxed hospitals and brought New Hampshire billions of dollars of federal money has been found unconstitutional by a Hillsborough North County Superior Court judge.
In a ruling issued Thursday, Judge Philip Mangones found the Medicaid Enhancement Tax violates the equal protection clause in the state and federal constitutions because its treats hospitals and non-hospitals that provide nearly if not identical services differently.
Budget writers expect the MET to provide about $100 million in revenue for the state's general fund is fiscal year and a like amount next fiscal year. If the state has to return the money collected this fiscal year, the ruling could have a $200 million impact on the state budget this fiscal year.
"The decision clearly will impact the operating budget and it creates a problem that has to be solved," said Sen. Lou D'Allesandro, D-Manchester, who is vice chair of both the Senate Finance and Ways and Means committees. "This decision is critical. Once I read it in its entirety, I'll have a clearer understanding of what we have to do."
The ruling not only effects the state budget, it also will be felt by hospitals that could ask the state to return money paid in November totaling $72.2 million.
"This tax has had a huge impact and continues to have a significant impact on New Hampshire hospitals, our patients and the programs we can deliver," said Alex Walker, senior vice president of operations for Catholic Medical Center, one of three hospitals who sued the state. "It's a broken system and we are gratified that Judge Mangones ruled in the manner he did."
CMC, along with St. Joseph's Hospital in Nashua and Exeter Hospital, sued the state claiming the MET was unconstitutional because it taxed hospitals but not tax other health care providers that provide the same services such as radiology, physical therapy, surgery and urgent care.
The hospitals said they are being unfairly singled out to pay the tax just because they are hospitals and not because of the nature of the services they provide.
The state constitution requires that all taxes be reasonable and proportional, and hospitals argued that is not the case with the MET.
In February, the state lost a similar decision in Rockingham County Superior Court, when Judge Kenneth McHugh found the tax was unconstitutional for outpatient services, but not entirely unconstitutional.
Northeast Rehabilitation Hospital sued the state, claiming its assessment was unconstitutional for similar reasons.
Gov. Maggie Hassan, and the House and Senate all increased money going back to hospitals for uncompensated care in the current two-year operating budget. The prior 2011-2012 Legislature ended the uncompensated care program for the state largest hospitals and drastically reduced the money the smaller hospitals had been receiving.
"That is when the phantom tax became a real tax," said Walker.
The state had returned most of the money the state collected from the MET to the hospitals through the uncompensated care program, which helps repay hospitals for services they provide but are not paid for or for the low reimbursement rates for Medicaid patients.
The hospitals and state negotiated a settlement last year that addressed the state's contention that hospitals were not paying what they should have been under the MET.
The ruling will affect the tax hospitals paid in the current fiscal year and in the next fiscal year, said Walker.
Mangones's summary judgment found the entire tax unconstitutional.
Hassan noted her administration and lawmakers have talked to hospitals and other providers to try to address the issues and included more money in the current budget to help with uncompensated care costs. And she said the recently approved Medicaid expansion law will further help hospitals because it will reduce the free health services they will have to provide.
"Today's ruling on the MET presents additional budget and health care challenges," Hassan said. "My office has been in discussions about MET issues with relevant stakeholders due to previous court rulings, and I will continue working closely with hospitals, providers, legislators and state officials to resolve these challenges in a way that is fair to all parties, protects the state's budget and ensures the health and well-being of Granite Staters."
Both House Speaker Terie Norelli's and Senate President Chuck Morse's offices would not comment, saying they are still reviewing the decision.
Attorney General Joseph Foster said "We are in the process of reviewing and assessing the decision and will make a decision on next steps to take after we have done that."
Walker said that now two superior court judges have ruled the tax unconstitutional.
"This is a major decision with major ramifications for hospitals and the state health care system and the state budget," Walker said. "This is an opportunity for hospitals and for policy makers to try and find a way to deal with these significant issues."
The NH Hospital Association also said the decision should lead lawmakers and hospital officials to set down and talk.
"Today's ruling in the case brought by Catholic Medical Center, Exeter Hospital and St. Joseph Hospital is a significant legal development – and one that builds on another Superior Court ruling in a case involving Northeast Rehabilitation Hospital: a finding that the Medicaid Enhancement Tax is unconstitutional," said Steve Ahnen, president of the NH Hospital Association. "This ruling points yet again to the continuing need for all of us, state officials and hospital leaders, to work together ensure a vibrant, sustainable Medicaid program for our patients and their caregivers."
The MET was instituted in 1991 as a way to match federal money to pay the state's share for Medicaid services.
The state then returned the hospitals' MET money through the Disproportional Share Hospital program to help hospitals that treat large numbers of Medicaid patients and then used the federal money to help balance the state's budget which faced about a $200 million deficit.
In 2011, the federal government said states had to distribute the money based on a hospital's Medicaid costs, not simply return the money.
At the same time, lawmakers stopped reimbursing the state's largest hospitals for uncompensated care, although the program continued for small rural hospitals.
Since then, hospitals have sought to minimize their tax liability, largely by reducing the revenue from outpatient services they report according to state tax officials.
Ten of the state's largest hospitals sued the state over changes to its Medicaid program. The federal suit is pending.
At the same time the three hospitals filed suit in Hillsborough County Superior Court challenging the MET's constitutionality and the rehabilitation hospitals filed suit in Rockingham County Superior Court.
Thursday, Mangones found the tax unconstitutional.
In his ruling he found that hospitals and non-hospitals do in fact provide similar services and taxing only hospitals treats the entities differently.
The hospitals said the reason for the tax has changed over time and the original intent is no longer needed so the state's interest no longer relevant.
The state claimed the money was always used for reimbursing hospitals for the state's share of the uncompensated care the hospitals provide.
But Mangones said the state's claims ignore legislative history, which indicates the tax was used to balance the state budget.
"The Legislative history indicates the primary, if not the sole, purpose of the MET has been to bring federal funds to the state treasury, with the hospitals acting as the pass-through intermediaries," Mangones writes. "The Court finds that the purpose of the MET was to take advantage of a loophole in the then existing Federal-State Medicaid framework."
With the loophole closed, the state is asking the court to ignore the last 20 years, he writes, and notes that 50 percent of the money raised by the tax currently goes into the state's general fund with no way to earmark the money for health care purposes.
"The legislative history is the centerpiece of the courts understanding the reason this tax was implemented in the fist place: a vehicle to leverage federal dollars," Walker said. "Mangones does call out the naked truth about the MET."