Taxes on health care facilities have become medicine to treat state budget ills in recent years, as states look at ways to generate additional revenue for Medicaid programs and to reimburse providers for uncompensated care. Forty-nine states and D.C. impose at least one health provider tax, up from just 21 states back in 2003, according to the National Conference of State Legislatures. Alaska is the only state that does not impose any. But are healthcare facility taxes really a budget cure?
Provider taxes increase the amount of revenue states can use to pay for Medicaid programs and qualify for matching federal funding through the Federal Medical Assistance Percentage (FMAP). Receiving matching funds generally allows the state to increase reimbursement to Medicaid providers, with any revenue left over going to other state expenses. Many federal regulations come into play and provider taxes must be approved by the Centers for Medicare and Medicaid Services (CMS). States also cannot have “hold harmless” agreements with providers, meaning that states cannot guarantee direct or indirect reimbursement for provider taxes. Usually, as long as a tax does not exceed 6 percent of provider revenues, and if less than 75 percent of taxpayers are reimbursed 75 percent or more of their total tax costs, no “hold harmless” agreement will be found.
Theoretically, these taxes sound like a good way for a state to make money while incentivizing facilities to provide Medicaid services.
Nevertheless, as Connecticut’s hospital tax illustrates, provider taxes may not be the best prescription for state budgets.
The hospital tax was enacted in 2011. Inpatient services were taxed at 5.5 percent of net patient revenue and outpatient services were taxed at 3.83 percent, generating approximately $349 million annually beginning in 2012, according to the Connecticut Department of Social Services. The state reimbursed hospitals approximately $400 million that year for their Medicaid expenses, qualifying for FMAP funds of $200 million. When all was said and done, hospitals received a “subsidy” of $50 million and the state had $150 million left over to use to reduce the deficit.
But after the first year, the formula changed and providers have been receiving less reimbursement. Reimbursements have dropped each year and providers are estimated to receive only about $96 million for fiscal year 2015, according to a hospital tax analysis from the Connecticut Center for Economic Analysis (CCEA). In turn, because reimbursement is lower, FMAP funds are also lower, with the state receiving only about $64 million from the federal government for 2015. Even though the tax results in a benefit to the Connecticut general fund of approximately $318 million, hospitals have a loss of $254 million.
Additionally, the hospital tax increased to 6 percent for both inpatient and outpatient services beginning July 1. The higher rate is estimated to generate $556 million a year, with reimbursement set at $241 million for 2016 and 2017, with FMAP funds of $162 million. Even with the higher level of reimbursement, hospitals will continue to have a loss of $269 million, while the state will enjoy a $430 million benefit.
That may sound like a good thing for Connecticut, but the increased tax will have an adverse impact on the state because of job loss, lower income levels and other budget shortfalls, according to the CCEA report. The state also runs the risk of hospitals making changes that could have a negative impact on healthcare. For example, some hospitals have already been eliminating programs, reducing staff salary and benefits and making other changes to reduce costs.
Legislative efforts proposing a gradual phase-out of the hospital tax have not gained momentum. The latest bill, H.B. 7058, had a public hearing in April, with testimony by the Connecticut Hospital Association (CHA) describing the effects the tax has had on Connecticut hospitals, but the bill did not advance during the remainder of the legislative session.
Connecticut’s budget placed limits on the amount of tax credits allowed against the hospital tax, and enacted a new 6 percent tax on ambulatory surgical centers that begins Oct. 1.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should Connecticut change its hospital tax to increase reimbursement?
With a free trial to Premier State Tax Library, practitioners have a single trusted resource that provides all of the tools and information they need to develop and implement the right tax strategies.
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