Opinion: Colorado’s Health Care “Affordability Act” should be repealed

By Dr. Linda Gorman

This year’s budget hearing documents show that officials at the Colorado Department of Health Care Policy and Financing rate a piece of legislation, the 2009 Colorado Health Care Affordability Act, as their most effective program. Official response to HB11-1025, a bill introduced to repeal the tax levied by the act, will make it clear whether state officials seek to serve Colorado citizens or special interests seeking to prey upon them.

If truth in advertising applied to legislation, the act’s title would have landed someone in jail. In its first year, it raised health care costs by levying $340.9 million in new taxes on nursing home and hospital bills. State agencies claim that the tax revenues reduce health care costs by increasing federal Medicaid matching funds for the state. But the state only pays for about 12 percent of total Colorado health care spending according to the Colorado Blue Ribbon Commission on Health Care Reform. If the state gains, it is at the expense of the other 88 percent, the people who pay the bills for everyone else.

The act specified that the funds collected by the new tax be used to increase reimbursement for hospitals treating clients on state health coverage programs. Unfortunately, it reimburses hospitals according to their costs. This blunts the incentive for hospitals to search for ways to minimize costs. Under the act’s rules, hospitals that are inefficient but cooperate with Colorado Medicaid could even be rewarded with higher payments.

Tax funds remaining after hospital reimbursement must be used to expand Medicaid and children’s health insurance eligibility further into the middle class. This will likely cause even more people to drop private insurance and enroll in tax-funded programs.

The repeal bill does away with the tax and the potential for corruption in the act’s cumbersome reimbursement scheme. It would require the state to copy Medicare and private insurers in reimbursing hospitals with prospective payments. In a welcome change for taxpayers, it also requires the development of a new method to measure family income.

In addition to being bad policy, the hospital tax appears to violate the Colorado constitution. The constitution clearly states that voter approval must be secured for any new tax. The department and its allies in the legislature knew that they were instituting a provider tax, but they did not want people to have the opportunity to vote on it. They called it a “fee” instead.

In a letter from John Bartholomew, director of the department’s Budget and Finance Office, to Richard C. Allen of CMS (Centers for Medicare and Medicaid Services) on March 26, 2010, the state assures CMS that “the non-federal share of the proposed Medicaid inpatient hospital and DSH (disproportionate-share hospital) payments will be funded solely with fees assessed on hospital providers, which is designated as a provider tax under 42 CFR §433.68.”

A later letter from the Centers for Medicare and Medicaid Services approves the state’s application to make the higher health costs generated by the “fee” eligible for Medicaid matching funds. It approves the form of the “tax on certain inpatient hospital patient days,” discusses the “tax structure,” which Colorado will be allowed, and refers to section 1903(w)(3)(C) of the  Social Security Act, which discusses the conditions that a tax must fulfill in order to qualify for Medicaid matching funds.

Media sources were also clear about the fact that Colorado was enacting a provider tax. The headline for an April 28, 2010 article on amednews.com refers to “Colorado’s tax on inpatient and outpatient revenue.” The article discusses the benefits that the special interests represented by the Colorado Hospital Association and the Colorado Medical Society will gain from the tax.

In addition to raising health care costs and violating Colorado law, the act is a blatant example of successful special interest legislation. Staff at the joint budget committee have concluded that in the absence of repeal or other reform, there is “no existing statutory authority for the department to negotiate with the hospital association to provide the state with $50.0 million from the funds raised by the hospital provider fee to offset general fund” expenses. In other words, the act ensures that hospitals get their subsidies regardless of the state’s budgetary circumstances. The department is said to be “working with” the Hospital Association on statutory changes to “allow” $50 million of the tax to be diverted to the general fund to support the Medicaid program.

With both the Health Care Expansion Fund and the Children’s Basic Health Plan Trust Fund projected to insolvent by next year, Colorado officials can no longer afford to continue expanding state health coverage programs in order to enrich hospitals and state agencies at other people’s expense. This goes double when they violate the Colorado Constitution and the English language in order to do it.

About the writer: Dr. Linda Gorman is the director of the Health Care Policy Center at the Independence Institute, a free-market think tank in Golden. She holds a Ph.D in economics.