It’s complicated. That’s the best way to describe the ongoing relationship between Gov. Dannel Malloy and Connecticut’s hospitals. Malloy has significantly changed the rules of their game since he took office five years ago – and the changes show no signs of slowing down.

The past two weeks brought significant announcements highlighting these changes. First, Malloy intervened to prevent further hospital consolidation, a trend that raises concerns about increased costs and fewer choices. Then, worsening deficit projections led the administration to halt $140 million in payments to hospitals.

What are these millions being withheld in limbo? Does the state have the power to stop paying for things when money gets tight? I say it again: It’s complicated.

In 2011, the Malloy administration changed how Medicaid paid hospitals, eliminating some of the grant-like payments they received. This change, anticipating related changes at the federal level, clarified that the state pays hospitals to provide service, not just for being hospitals.

The administration, with the support of the General Assembly, also started taxing hospitals to artificially inflate federal reimbursements. This is a common practice across 49 states (although Alaska has plans to join the crowd), but a bad policy.

Federal reimbursements drive hospital taxes. Medicaid reimburses Connecticut for about half the cost of services provided through the program. The state artificially inflates the cost of these services by adding a “tax” on covered services in order to get more reimbursements.

Imagine a hospital procedure that costs $1,000. The federal government would normally give Connecticut $500 to cover its share of the cost. But if the state adds a 10 percent tax, it now gets $100 in tax revenue plus $50 in additional federal payments. Even if the state were to use the tax revenue to support hospitals, it could use the new federal money to support increased spending.

And that’s the argument for the hospital tax, sometimes also called a provider tax: free money from the Washington. Even seemingly free money – or perhaps especially that – comes with strings attached.

The federal government limits what states can do with the tax revenue. They cannot simply refund the tax back to the hospital that paid it. That would reveal these taxes for the sham that they are.

States however can refund the money to hospitals – as long as the amount refunded does not equal the amount paid. In other words, as long as the tax hurts some hospitals and helps others refunds are allowed.

This arrangement is troubling, especially since a provider receiving state reimbursements who inflated them in the way the state does would be prosecuted, not rewarded.

Initial promises that the hospital tax would really be a new funding stream for the hospitals have proven emptier and emptier. Instead, the Malloy administration and lawmakers have taken not only the increased federal reimbursement but also the tax revenue itself and used it to balance Connecticut’s perpetually off-kilter budget.

Seeing the treasury running low, the Malloy administration suspended the payouts of hospital tax revenue back to its sources. The administration has succeeded in meeting the federal requirement to make sure all hospitals aren’t made whole. It seems that none are.

Over the past five years, Connecticut’s hospitals have responded by investing more in politics and lobbying to protect their interests and oppose the tax. The hospitals are a special interest and regularly engage in special pleading at the capitol. They argue for special treatment and government favor, but rebel at the notion that any other group’s similar pleading could turn the tables and injure them.

But in this case the hospitals are probably closer to the right side of the issue. While they want the money they’ve been promised, they actually don’t want the system that creates these extra funds.

And why should they or the people of Connecticut. We’ve built up a bureaucratic white lie similar to money laundering because we can’t stop spending. It may be a fraud, but up to this point the victims, American taxpayers, have been willing.

A year ago, state intervention killed a private-sector plan to invest more than $500 million in four Connecticut hospitals. It would have expanded for-profit healthcare in Connecticut a model that most of the state has little experience with since most hospitals are nonprofit. In two weeks, Sharon Hospital provides a window into what the state can expect.

This article first appeared in the Lakeville Journal.


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