Battle Emerging Over Proposed Tax On Nonprofit Hospitals

In times of economic distress, is it all right to rob Peter to pay Paul?

Several Connecticut hospitals and legislators think that’s exactly what Gov. Dannel P. Malloy is proposing with his call for a 5.5 percent tax on nonprofit hospitals. But Malloy’s office counters that hospitals would recover the projected $266.6 million in tax revenues,  because by taxing and redistributing the money, the state could get matching federal funds.
 
The tax would jump to 5.71 percent after Sept. 30, 2011. That, coupled with an $83 million cut in uncompensated care and other funding, could tip some hospitals over the edge, opponents of the proposal say.

“We won’t turn away anyone but it hurts an industry already on the brink of financial trouble,” said Bill Stanley, vice president of development and community relations at Lawrence and Memorial.

During the 2010 fiscal year, Lawrence and Memorial saw just over 84,000 patients in the emergency room, and less than 10 percent were self-pay. The imposition of the tax coupled with the elimination of reimbursements would create a $2.8 million loss for the hospital, Stanley said.

Backus Hospital stands to lose almost $1.5 million from its operating funding if Malloy’s proposal is implemented, according to testimony submitted by David Whitehead, hospital president and chief executive officer.

Connecticut’s hospitals employ more than 53,000 people, treat about 1.6 million in the emergency room, and admit more than 430,000 patients each year. Lawrence and Memorial employs more than 2,500 full and part-time employees, and Backus Hospital employs more than 1,700.

Both hospitals oppose the tax because of the potential negative impact on community healthcare.

“We are very concerned about what the budget will have on our region’s safety net,” said Shawn Mahwiney, a spokesman for Backus Hospital. “The emergency department is where a lot of people end up when they don’t have health insurance.”

Backus Hospital provided more than $65 million in uncompensated care and $2.8 million in charity care in 2010, according to a testimony written by David Whitehead, president of the hospital.

“We’re a non-profit. We have slim operating margins as it is,” Mahwiney said. “Any new tax coupled with rising uninsured people in our region...any cuts would shred the safety net in Eastern Connecticut.”

“To me, it’s not the best policy,” said state Sen. John McKinney, R-28th District. “We don’t know if the federal dollars will always be there and once there’s a tax increase it tends not to go away, even if it’s not needed anymore.”

Many of McKinney’s constituents go to Danbury Hospital, one of the few fiscally sound hospitals in the state. But if the tax passes, the hospital would lose about $9 million annually.

That means it must find $9 million in internal savings, said Michael Daglio, Danbury Hospital’s Senior Vice President of Operations.

As such, the hospital just started compiling a list of options, he said.

First, the hospital, Danbury’s largest employer, will soon begin work on a $150 million tower. That means the hospital will start making significant interest payments, Daglio said.

“Staffing is our biggest expense and our biggest asset,” he said. “It’s a difficult thing to think about. But yes, we have to consider it. We have to think of how to get there without laying people off.”

Then there are community clinics.

“We provide a $60 million community benefit in uncompensated care, and bad debt,” Daglio said. “The community clinics (cost) significant money, but it’s the right thing to do.”

Stanley said Lawrence and Memorial Hospital provides $35 million in education, outreach, programs and unsubsidized and charity healthcare.

Backus provided more than $5 million in community outreach and health improvement initiatives on top of the money spent on unsubsidized and charity health care, according to Whithead’s testimony.

Malloy’s proposed cut to the uncompensated care worries many local hospitals.

“These aren’t money-making machines,” state Rep. TR Rowe, R-123rd House District. “Many are scrambling to make ends meet. I haven’t heard one hospital who is in favor of the tax.”

“It would be a reach-back,” said Stanley of the tax.  “So, money we counted on would be affected. It has the potential to be very damaging.”

If the tax passes, many employees could lose their jobs, said Rowe.

“A number of constituents work at Yale-New Haven Hospital, St. Vincent’s Hospital, and Bridgeport Hospital. They are cafeteria workers, and pharmacists, and health care providers. The tax would affect the whole operation,” he said.

Lawrence and Memorial has approved a master facilities plan that will result in unprecedented growth, according to Stanley. The hospital bought property for a new facility in Waterford, it’s planning to expand its clinic in Groton and it's planning to build a new tower on its main campus in New London.

“If we lose $2.8 million, it’s going to make it that much harder to fund the expansion,” he said. “Construction jobs and the long-term jobs created by the new facilities would be affected.”

Stephen Frayne, the Connecticut Hospital Association’s Senior Vice President for Health Policy, called the proposal potentially devastating.

“Let’s be clear that this tax is a also a cut to hospitals – it takes $267 million from hospitals and will, as the administration asserts, ‘in the aggregate return all the money,” Frayne said. “However this assertion misses the obvious – hospital care for patients occurs locally, not in the aggregate – and when funding for services at the local level is cut, that cut hurts the ability to provide hospital care in that community."

“You could argue that the hospital has helped to ease the (economic) crisis by serving the uninsured and the under-insured,” said Stanley.

If the tax passes, Connecticut would give some hospitals more money than they paid and some hospitals less than they paid.

For example, Stamford Hospital would lose about $9.5 million annually, while Norwalk Hospital would gain $1.9 million. Both Lawrence and Memorial and Backus Hospital would lose money.

"There will be some winners," said Stanley. "But mostly losers."

“It would be a net gainer for Norwalk Hospital,” said state Sen. Bob Duff, D-25th Senate District. “Nobody wants to impose more of a burden on hospitals, but a lot of it comes down to the overall budget and what the revenue picture looks like.”

Norwalk Hospital wouldn’t comment at this time, said Maura Romaine, the hospital’s director of community relations.

State Rep. Jason Perillo, a Republican who represents Shelton in the 121st House District, said neither taxes nor fees are the answer. Instead, the state needs to cut government spending.

"Our non-profits are the solution, not the problem. Most specifically, the Governor's proposed hospital tax is a serious concern,” said Perillo, ranking member on the Public Health Committee. “Hospitals are our public health safety net and the proposed hospital tax will have a significant negative impact on most of them.”

In the next few weeks, Malloy will hold several more budget hearings. Meanwhile, lawmakers are holding their own gatherings for constituents. And it’s likely the General Assembly will go into special session to finalize the budget, said some lawmakers.

“We have a responsibility to contribute to closing the budget gap,” Danbury Hospital’s Daglio said. “But what we were hoping for was more of a dialogue.”