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New Hampshire judge: Hospital tax unconstitutional

New Hampshire should have stopped collecting a Medicaid Enhancement Tax from hospitals three years ago, a state judge ruled this week, calling the tax unconstitutional.

In a ruling released Friday, Hillsborough County Superior Court judge Philip Mangones says the state should have stopped collecting the tax in 2011 when a loophole in the Medicaid reimbursement system closed.

Catholic Medical Center, St. Joseph Hospital and Exeter Hospital sued in 2011, challenging the $31 million they paid in the tax that year.

Read More Before 2011, hospitals paid the tax and the state paid them back plus 3%—the enhancement—using federal Medicaid dollars. The state was reimbursed by the federal government and that money went into the state's general fund.

Mangones said the tax is unconstitutional because it treats hospitals differently from other healthcare providers such as clinics which perform many of the same services. The state's Department of Revenue Administration had argued that hospitals and clinics were different because hospitals perform both inpatient and outpatient services. Mangones disagreed.

"In essence, the MET imposes a tax on hospitals simply because they are hospitals, not based on the nature of the services they provide," he wrote.

He also noted the "candid" debate in the state Senate when the tax was established, in which some senators gleefully acknowledged the state would be taking advantage of the loophole the way other states had done. When the state began exploiting the loophole nearly two decades ago, the New Hampshire Department of Revenue Administration wrote that if the federal money was ever cut off, the department would recommend the tax be eliminated.

"This legislative history indicates the primary, if not the sole, purpose of the MET had been to bring federal funds to the State treasury, with the hospitals acting as pass-through intermediaries," Mangones wrote in his 12-page ruling.

There has been at least one other lawsuit against the tax, also decided in the hospitals' favor at the trial court level. Appeals are expected.

Gov. Maggie Hassan said the ruling will present budget and healthcare challenges in the state.

"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," she said in a prepared statement.

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