AUGUSTA, Maine-As state legislators wrangle over Maine's fiscal 1996 budget, a conflict over a 4-year-old hospital "sick tax" has become the biggest obstacle to finalizing the state's financial plan.
Maine hospitals are bracing for the state to take away the "match" part of a "tax-and-match" program July 1. With it will go $116 million in Medi-caid disproportionate-share payments to hospitals over the next two years, the Maine Hospital Association claims.
The state began to tax its 42 hospitals in 1991, during a major budget crisis, to garner a two-for-one match in federal Medicaid funds. The tax was based on 6% of hospitals' gross patient-service-revenue limit, the charge limit for each hospital calculated by the Maine Health Care Finance Commission.
For every dollar taxed, Maine reimbursed one to hospitals in the form of disproportionate-share payments and kept one for its general fund.
To increase the amount of tax the hospitals could be reimbursed, the state qualified all hospitals for disproportionate-share payments. Before tax-and-match, only six Maine hospitals qualified for about $6 million in annual disproportionate-share payments.
"The deal was that we would get back our tax, and the state would get some matching dollars to address its shortfall," said Ray Davis Jr., chief executive officer at Calais (Maine) Regional Hospital. "And we agreed to it, most of us holding our noses."
The tax has brought in about $350 million for the state's general fund since its inception, according to the MHA. In addition, hospitals have received approximately $49 million in disproportionate-share payments beyond the amount they have been taxed.
But Maine hospitals' salad days are over. Earlier this year HCFA cracked down on states that used such tax-and-match schemes to funnel federal dollars into their Medicaid programs (Jan. 9, p. 16).
Maine, along with eight other states, violated a 1991 federal law restricting states from raising Medicaid matching funds through provider taxes, according to HCFA.
The agency had begun to chip away at the tax-and-match loopholes the same year Maine started its matching program. During the past two years, HCFA set a cap on disproportionate-share payments for each state.
Hospitals have already started to get back less than they contributed.
This fiscal year, hospitals will pay $121 million and get $111 million back, according to Fran Finnegan, director of Maine's Bureau of Medical Services. The state will make $80 million, he said.
Maine's budget has grown to depend on the tax; and despite pressure from hospitals and the public, state legislators are hesitant to eliminate it.
If the tax is removed after the next two years, the state argues it will lose $243 million in 1998-1999, according to Finnegan.
Lack of federal matching funds could end up costing Maine hospitals $116 million more than they get back in disproportionate-share payments over the next two years, according to a MHA-commissioned study conducted by Ernst & Young, a national consulting firm. The state has estimated the hospitals' two-year loss at $110 million.
"We've had, historically, a very good working relationship" with the state, Davis said. "We agreed to help them, and now it's coming back to haunt us."
The issue has prompted a partisan split in the Legislature as it hammers out next year's $3.4 billion budget, with Republicans demanding more money for hospitals and Democrats scrutinizing state healthcare costs.
Democrats have allied themselves with Gov. Angus King, an independent, in favor of keeping the tax as long as any federal matching funds are available.
"I need to know to what extent are we talking about hospitals really being at risk because of the remaining burden of the tax, and to what extent are they crying wolf?" King told the Bangor Daily News.
King offered a compromise that would cut the hospital shortfall by half, with the state giving back $51 million over the next two fiscal years. That amount would be generated through $19 million in state funds matched with $32 million in federal Medicaid funds.
The state's latest proposal would also commit $140 million from general funds in 1998-1999, Finnegan said. A small number of particularly distressed hospitals would receive extra help from a $4 million state fund.
In addition, the tax would be lowered to 3.5% from 6%. The state claims that settlement would put three out of four hospitals within $200,000 of breaking even.
King pledged to eliminate the tax if the federal government cuts off disproportionate-share payments or matching funds, Finnegan said.
While disproportionate-share payments are dropping, total Medicaid payments to hospitals are not rising significantly.
Total Medicaid payments to Maine hospitals were $285.3 million in fiscal 1994, rising 2% to an estimated $291.5 million in fiscal 1995. In the next fiscal year, they are predicted to drop slightly to $289.6 million, according to the Bureau of Medical Services.
Maine hospitals earned $36.2 million on total revenues of about $1.2 billion in fiscal 1993, according to the latest figures from the American Hospital Association. That represents a 3% profit margin, well under the 4.4% margin for hospitals nationally that year.
Hospital administrators are shoring up against potential losses by planning rate increases.
"No matter what happens, this is a cost that's going to be passed on to consumers," said John Wipfler, Maine Health Care Finance Commission executive director.