"This agreement is fair to the hospitals and to New Hampshire taxpayers, bringing stability to our budget while ensuring that our hospitals and the state can continue to provide critical health services to our people," Hassan said in a statement.
Senate President Chuck Morse, who wanted to phase out the tax, said he is concerned the agreement instead increases the state's reliance on the tax.
The hospitals would get more money for the care they provide in exchange for dropping a lawsuit over rates and putting on hold their challenge of the tax's constitutionality.
The tax rate also would drop from 5.5% assessed on net patient revenues to 5.45% in 2016 and to 5.4% in 2017. It could drop to 5.25% in 2018 depending on if the total cost of uncompensated care provided by hospitals drops below $375 million. Uncompensated care currently totals $427 million.
The tax brought in about $185 million this year and was used for Medicaid and other state spending. The agreement calls for all the money to be spent on healthcare after the current budget, sparing the state from making deep spending cuts. The hospitals would get more state aid starting in 2015.
Steve Ahnen, president of the New Hampshire Hospital Association, called the agreement "welcome news for our patients and New Hampshire's hospitals."
Hassan, legislative leaders and the hospitals have been negotiating for several months toward a settlement over the tax and Medicaid rates. The discussions focused on how to boost payments to the hospitals since New Hampshire's reimbursement rate for Medicaid care is about 50% of cost, which the hospitals argue is too low.
Under the agreement, the state's two rehabilitation hospitals would no longer pay the tax. A judge had ruled this winter that applying the tax to them was unconstitutional.
In 1991, hospitals began paying the tax so the state could gain matching Medicaid funds to pay for healthcare for the poor. For many years, they got all their taxes refunded dollar-for-dollar.
In 2011, the federal government said states could no longer refund all the money and, instead, had to apply a formula that reimbursed the funds according to hospitals' Medicaid costs. Three years ago, the Republican-controlled Legislature cut Medicaid funding to the hospitals by more than $130 million, but retained the tax. That prompted hospitals to sue.