Tennessee Hospitals to State: Tax Us, Please!

(MoneyWatch)  Have you ever heard of hospitals asking to be taxed? That's what's happening in Tennessee, where proposed cuts in the Medicaid program known as TennCare have hospitals begging the state legislature to enact a new tax on hospital revenues. The reason is this: With the federal government paying for 65 percent of Medicaid costs in Tennessee, the providers stand to lose two to three times as much as the state would save through the budget cuts. If Tennessee, like 44 other states, taxed providers, the hospitals would expect to receive significantly more in Medicaid reimbursement than they paid in taxes.

Here's how the math breaks down: The 9 percent cut in TennCare's 2011 budget would save the state about $380 million, but the loss to the healthcare system would be nearly $1 billion, according to an analysis by the University of Tennessee Medical Center. A funding reduction of that magnitude would "devastate" the system and could lead to the closures of some facilities, says Craig Becker, president of the Tennessee Hospital Association. That's why the association's board of directors has approved the idea of a one-year assessment that they hope will raise $200 million.

A sales tax on Tennessee hospitals, imposed in 1992, was repealed in 1994 after vociferous complaints from the healthcare industry. But the situation of the hospitals is apparently different now. Back then, too, the sales tax was 6.75 percent, whereas the new hospital tax could not be higher than 5.5 percent under federal regulations. Under the hospital's association's proposal, it would be between 1 and 2 percent of revenues. The hospitals would like the state to guarantee that the additional Medicaid spending would go to them, but that is against federal law. The legislature last year approved a 15 percent cut in TennCare, but the program was spared for 12 months because of the federal stimulus program, which is providing extra Medicaid funds to all of the states through the end of 2010. President Obama has proposed extending that bonus for six more months.

Last year, as the recession dragged down state budgets across the country, five other states enacted statutes related to new provider taxes. Among them were Colorado, which expected to generate as much as $1.2 billion in state and matching federal money; Arkansas, which imposed a 1 percent hospital tax anticipated to garner $105 million; Oregon, which figured its new provider tax would net $700 million; Arkansas, which broadened its existing provider assessment; and Iowa, which repealed a law that barred the state from imposing a provider tax.

It's entirely reasonable for states and hospitals to take advantage of the multiplier effect of federal contributions to state Medicaid programs. But one wonders where the buck will stop. Tennessee has already cut TennCare from one-third to one-quarter of the state budget since 2004, and it still can't afford its Medicaid program. Many other states are in the same position, and the federal government cannot afford to plug their shortfalls for too much longer. If national healthcare reform were passed, there would be new sources of funding for Medicaid expansion. But if that doesn't happen, the poor will once again see their access to care diminished as fewer providers than ever are willing to take care of them. Those who do-or who are legally required to-will see their revenues decline further.