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Research & Commentary: Colorado’s Hospital Provider Tax and TABOR Collide

February 8, 2016

Funding Medicaid programs has proven to be an increasingly difficult task for many states.

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Funding Medicaid programs has proven to be an increasingly difficult task for many states.

In 2009, the Colorado General Assembly passed legislation creating a hospital provider fee (HPF) as part of its effort to provide health care for those Coloradoans who cannot afford private medical coverage and do not qualify for Medicaid. The HPF is assessed on hospitals based on the number of patients they treat and the number of outpatient services provided.

Each hospital pays a different amount for the tax, ranging from millions of dollars to nothing at all. The Denver Post reported preliminary state figures estimate the state’s hospitals paid $688.5 million in fees from October 2014 through September 2015. The federal government matched the fees, paying $1.2 billion.

The provider tax became a more important issue in Colorado after the Affordable Care Act (ACA) was passed in 2010. The Colorado legislature added an expansion of Medicaid to the hospital provider fee program in 2013, growing the program to roughly $2.4 billion during the state’s 2014–15 fiscal year. The fee is matched by the federal government, and it is used to provide expanded Medicaid coverage and increased enrollment in Colorado’s Child Health Plan Plus program.

The amount of revenue generated by HPF has grown rapidly over the past year. Revenue in 2015 increased by around 30 percent compared to the previous year, because the state’s Medicaid program is only now appearing in fee revenue. All told, the program funds an expanded Medicaid population of around 300,000 people.

Linda Gorman of the Independence Institute argues HPF has generated controversy ever since its inception. The original legislation creating the tax attempted to hide the true nature of the tax by calling it a “fee.” Even the federal government referred to the provider fee as a tax in a letter approving its payment.

Lawmakers are trying to keep hospital provider tax revenues from falling under Colorado’s Taxpayer Bill of Rights (TABOR) by using a loophole in the original legislation. TABOR bars both state and local governments from raising tax rates without voter approval and also prevents them from raising revenue in excess of the rate of inflation and population growth. Any surplus revenue must be refunded to taxpayers, but TABOR also allows tax revenues to be exempted from these revenue limits if the funds are used to pay for a standalone enterprise, which is when funds are used for a specific program that receives less than 10 percent of its revenues from tax dollars.

While supporters argue reclassifying the tax would free up dollars for other services, such as transportation and education, critics say it would sidestep TABOR, which was passed directly by taxpayers, thus putting more money in government coffers at the expense of taxpayers. Gorman says allowing the new designation would move almost $1 billion out of the state’s budget. “Under TABOR restrictions, the state then could requisition and spend an additional $1 billion in taxes and fees from the private sector. As Colorado collected about $12.2 billion in total taxes and fees in [fiscal year] 2014, this first ‘solution’ constitutes about an 8 percent raise for state bureaucracies,” wrote Gorman.

Redefining the provider tax as an enterprise may also be unconstitutional. Healthcare Dive reported in January a memo written by Colorado’s Office of Legislative Legal Services said it would be “unconstitutional for state legislators to exempt the current hospital provider fee program from the revenue limits of the TABOR by turning it into an enterprise fund.”

HPF is a tax that presents a significant disruption of the health care market. It channels limited dollars to an expensive Medicaid program that fails to provide quality care. Medicaid is a flawed model that is unnecessarily costly, delivers subpar health care, and shifts more power to the national government. When Colorado voters approved TABOR as a new amendment to the state’s constitution, they sent a clear message to government officials: State tax revenue should be limited so that as much money as possible is kept in the pockets of Coloradans. The state should not be allowed to sidestep these laws.

The following documents examine Medicaid expansion and the Taxpayers Bill of Rights in greater detail.

Ten Principles of Health Care Policy
http://heartland.org/policy-documents/ten-principles-health-care-policy
This pamphlet in The Heartland Institute’s Legislative Principles series describes the proper role of government in financing and delivering health care and provides reform suggestions to remedy current health care policy problems. 

Research & Commentary: States Should Innovate, Not Expand Medicaid
http://heartland.org/policy-documents/research-commentary-states-should-innovate-not-expand-medicaid 
Matthew Glans of The Heartland Institute discusses how expanding Medicaid can cause problems extending beyond state budgets and the health care industry, and he notes better options are available: “It is important to remember government spending creates little or no income or economic growth; it is merely the redistribution of tax dollars taken from the pockets of taxpayers.”

Explaining the Hospital Provider Fee Proposal
http://thetaborfoundation.org/explaining-the-hospital-provider-fee-proposal/
The Tabor Foundation discussed the proposed changes to the Hospital Provider Fee and the effect it would have on TABOR refunds. “But lowering that amount also would cut into any TABOR refunds, which are projected to be about $352 million by the 2017-18 fiscal year.”

Hospital Provider Fee is a Dillion-Dollar Political Fight in Colorado
http://www.denverpost.com/news/ci_29207869/hospital-provider-fee-is-billion-dollar-political-fight
John Frank and David Olinger of the Denver Post examine the debate over the Colorado Hospital Provider Fee and TABOR. Frank and Olinger speak with both the proponents and critics of the proposal, which could affect how millions of taxpayer dollars are used.

Provider Taxes: A Revenue Source for Health Care
http://knowledgecenter.csg.org/kc/content/provider-taxes-revenue-source-health-care
The Council of State Governments examines health provider taxes and outlines what other states are considering on the issue.

Health Provider and Industry State Taxes and Fees
http://www.ncsl.org/research/health/health-provider-and-industry-state-taxes-and-fees.aspx
State provider taxes generate billions of dollars in revenue each year. In almost all states, the policy decisions tied to these taxes affect health policy as well as fiscal policy. In particular, the rate of taxation and the allocation or earmarking of the revenue can have far-reaching impacts on state health programs and on overall state budgets.  Many recent legislative proposals for state health  coverage expansion or reforms may rely on or reference use of these taxes. This information from the National Conference of State Legislatures integrates fiscal statutes and revenue figures with health program information to assist state policymakers in understanding and evaluating both areas.

An Unlawful Swipe at TABOR on Hospital Provider "Enterprise"
http://www.denverpost.com/opinion/ci_29404361/guest-commentary-an-unlawful-swipe-at-tabor-hospital
Penn Pfiffner, chairman of the TABOR Committee argues against the proposal to redefine the state's hospital provider charge as an "enterprise." Pfiffner argues “If the hospital provider program's costs are no longer counted as part of the state budget, then the limits established by TABOR will be ignored. The new budget ceiling, and your taxes, would effectively jump by about $800 million, to be spent on other government programs. The legislature would keep the over-collection of taxes from going back to you, without you getting the final approval at the ballot.”

Budget Chicanery with Colorado Medicaid, Hospital Provider ‘Fees’
http://healthcare.i2i.org/2015/11/16/budget-chicanery-with-colorado-medicaid-hospital-provider-fees/
Linda Gorman of the Independence Institute discusses how the Hospital Provider Fee, or tax as she calls it, was flawed from the beginning and the current proposal would funnel taxpayer dollars back into the government instead of back to taxpayers. “Allowing government to evade the plain meaning of language in 2009 has encouraged it to further flout the law by pretending that a group collecting mandatory taxes from sick people is a “business enterprise.”

What You Need to Know about Colorado’s Biggest Political Battle
http://www.coloradoindependent.com/157054/hospital-provider-fee-explained
Corey Hutchins of the Colorado Independent examines the hospital provider fee, how it works, where the money goes, why it may be changed and how various groups are responding to the proposal.

A Cure for What Ails Us: State-Led Healthcare Solutions to Fix Washington’s Botches
http://heartland.org/policy-documents/cure-what-ails-us-state-led-healthcare-solutions-fix-washingtons-botches
This report from the Beacon Center of Tennessee outlines problems facing the health care system, offering in-depth policy discussions and recounting real-life experiences of Tennesseans who are already coping with and preparing for the effects of PPACA.  

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Health Care News at http://news.heartland.org/health, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.

If you have any questions about this issue or the Heartland Institute Web site, contact Heartland Institute Government Relations Director John Nothdurft at jnothdurft@heartland.org or 312/377-4000.

Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR