Under a plan crafted by House budget writers, New Hampshire hospitals stand to lose $250 million dollars over the next two years. New analysis shows that if they lose these funds, all but four of the state’s largest hospitals would suddenly plunge into the red. Moreover, hospital leaders are accusing the legislature of imposing a new tax on hospitals. They’re threatening legal action.  

In order to understand the brewing battle between hospitals and state budget writers, we need to take a stroll through New Hampshire history.

What’s happening now revolves around a 20-year old program called the Disproportionate Share Hospital fund, or DSH. During the recession of 1991, like many states, New Hampshire had a then-historic budget deficit, of more than $100 million dollars.

The federal government came up with the DISH program as a way to help states like New Hampshire. About 30 states took advantage of the program. New Hampshire lawmakers saw it as a way for the state to make a pile of money.

Here’s how it worked.

Picture three buckets of money. The first bucket is a provider tax that the hospitals paid the state. For the sake of simplicity, we’ll say it totaled about $100 million dollars a year.

The second bucket came from the state treasury and went to the hospitals. The trick is that the buckets had exactly the same amount of money in them.

And they changed hands every year on October 15th.

“We’d get a wire for $37 million, let’s say.”

That’s Frank McDougall of Dartmouth Hitchcock. Later the same day, he says, “We’d pay a tax of $37 million.”

It didn’t cost anybody anything. It didn’t even show up on a hospital’s books.

Then the state would turn to the federal government and say hey, we just paid the hospitals $100 million dollars to care for needy people. “Will Medicaid match it?”

And every year, the federal government said, “sure.”

And that’s the third bucket of money.

They sent New Hampshire a 50 percent match.

The stated intention was to have those federal dollars go to the hospitals that had the largest number of poor patients. But a loophole allowed it to go straight to the state treasury instead.

“People called it Medicscam, and over 20 years it’s brought in at least 2 billion dollars,” says Steve Norton, executive director of the New Hampshire Center for Public Policy Studies. “It was a big source of revenue for the state, and it really many say, saved the state in the recession of 1990.”

When HHS commissioner Harry Bird and then-governor Judd Gregg proposed the idea, the hospitals were nervous. They didn’t want to be stuck with the tax if the payment ever disappeared.

So Bird wrote a letter to the hospital association – it’s on our Web site -- saying we’ll repeal the tax if that ever happens. But that was 20 years ago.

A "New" Tax?

This spring, legislative budget writers did exactly what the hospitals had feared. They propose ending about $120 million dollars in DSH payments to many hospitals.

Add in the federal match and the hospitals stand to lose $250 million dollars. But the legislature is keeping the tax -- and hoping to raise more than $400 million dollars from it.

 “5.5 percent, BAM! Sales tax on health care.” That’s Tom Wilhelmsen, CEO of Southern New Hampshire Health System in Nashua.

Under a new analysis done by the New Hampshire Center for Public Policy Studies, if Wilhelmsen doesn’t make any changes, his bottom line would suddenly plunge from a $5 million surplus to a $6 million dollar loss.

As Steve Norton says, just like most of the rest of the state’s big hospitals. “For all but four hospitals the operating margins go from positive to negative.

The hardest hit would be those hospitals, like Southern New Hampshire Medical Center and Frisbie Memorial in Rochester, that care for the largest proportion of Medicaid and uninsured patients.”

In fact, the cuts are so great that Governor Lynch doesn’t believe the hospitals can absorb the losses. In his budget, Lynch called for a $20 million dollar reduction to the uncompensated care fund – a full $100 million less than the legislature is demanding. “I believe the hospitals would say they could accept what was in my budget submitted Feb 15,” he says. “But this is just too large a cut for them to accept and ultimately is going to drive the cost of health care up higher in New Hampshire.”

But top budget writer Neal Kurk says hospital execs are crying wolf. “We’re dealing with very large institutions. Only one of those in 2009 lost money. 12 of the 13 were doing very well, thank you…. Seven of them are among the top 20 employers in the state, and they can afford this money.”

Hospitals Begin to Respond

Indeed, the hospitals are already hoping to pass on what they say is a 5 ½ percent tax to health insurance customers. Again.Tom Wilhelmsen of Southern New Hampshire Health System says, “We’re going to try to pass this new sales tax to the commercial insurers, which will only increase premiums.

None of the hospitals want to go public with specifics about cutting patient care. Southern New Hampshire’s Wilhelmsen says he’s considering shrinking the half-a-million-dollar aid that he provides to the local community health center. That would further limit access to primary care for lower income Nashua residents.

And Wilhelmsen says while he doesn’t want to cut services, obstetrics and psychiatry are expensive. At Dartmouth, some neonatal intensive care may be at risk, along with the hospital’s medical helicopter service. Frank McDougall also says the hospital may have to eliminate other pediatric specialty care.

 “The sad reality is that there may be some sick children in New Hampshire, because of this budget, that now are going to have to get their specialized care in Boston rather than in Lebanon,” McDougall says.

To the Courts

With little room to move, many executives – like McDougall -- are also considering suing the state.

 “I think there’s general debate about who’s going to pay the tax, and some hospitals may not have the money or may not pay the tax, or may choose to follow through the courts and see if they can get injunctive relief.”

The federal Medicaid program has recently demanded that states prove that when they reduce rates, patients don’t lose access to health care. Veteran lawmaker Neal Kurk dismisses the idea that hospitals have any legal recourse.

“We are violating no federal regulation or rule in this action, we’ve looked at that,” he says. “My prediction is they’ll fail.”

Even executives at the state’s small rural facilities – called Critical Access Hospitals – are worried. Representative Kurk insists that under the new budget, these hospitals will continue to receive their DSH payments. But Bruce King, president of New London Hospital, says the new rules are so unclear that it’s possible even the critical access hospitals will be hurt.

King says he’d reluctantly consider closing New London Hospital’s nursing home, which loses money. And he says some hospitals – his among them – would even consider selling to for-profit companies.

Right now there are only two for-profit hospitals in the state.The idea that some non-profits are already considering selling out is just one sign that this cut could fundamentally transform the way health care is provided in New Hampshire.