In early June, Connecticut instituted a $375 million hospital tax increase, adding near-50% to its last reported hospital tax net revenue of $790 million in fiscal 2024. Mostly likely, the increase violated the One Big Beautiful Bill Act, or pre-existing federal law, or both.
The state has offered a confusing and unconvincing defense, claiming to have the approval of Center for Medicare and Medicaid Services (CMS), whose role in the matter is also suspect.
The OBBBA prohibits increases in so-called health care provider tax rates. Even before the OBBBA’s enactment, increases over a threshold of 6% of net patient revenues required explicit CMS approval.
According to the Kaiser Family Foundation, a well-respected organization which tracks health care, Connecticut’s hospital tax has consistently exceeded 5.5% of net patient revenues. Yet, the state did not obtain a waiver for the June increase. A state spokesman said “The state has not submitted [applied for] a new waiver. The state has an existing agreement that runs through 7/1/26.”
How does a 50% increase over a pre-existing tax level of at least 5.5% not exceed the 6% threshold requiring a new waiver?
How could an old waiver cover a 50% increase? CMS does not issue sky’s-the-limit approvals to exceed the safe-harbor threshold. It approves taxes to specific over-threshold levels. For example, in 2016-2017, Connecticut obtained a waiver for a 9% rate (specifically more than 10% on hospital net outpatient revenue and more than 6% on net inpatient revenue).
The ”existing agreement” refers to a 2019 settlement agreement reached between the state and its hospitals. The hospitals sued the state, because Connecticut used much of the tax revenue and associated matching federal funds from the over-threshold tax rates in 2016-17, not to fund health care, but rather to close a large part of its huge budget deficit that year.
Under the settlement agreement, the annual tax payments by the hospitals were to decline slightly from $890 million in 2020 to $820 million in 2026. Naturally, actual hospital revenues have grown robustly since then, so the effective tax rates have declined significantly – but not below 5.5%, according to Kaiser.
While both the actual effective tax rates and the actual hospital net revenues (the tax base) have changed dramatically, the state is taking the position that only the tax base has changed, implicitly ignoring the associated change in effective tax rates. According to the state’s spokesman, “The recent update in state law [budget] is to rebase the tax based on most recent revenues, which had been restricted by the hospital settlement until 6/30/26.”
Wait, if the settlement is still in force, why isn’t the “restriction” also still in force?
If the June increase actually pushed the state over 6%, as it probably did, the state would need explicit CMS approval; and it would have needed approval before last July 4th to avoid violating the OBBBA which prohibits any rate increase thereafter.
The state is shifting from a fictitious tax base number assumed in the settlement agreement to a real tax base number, while implicitly claiming that tax rates assumed in the agreement have not changed. That is pure sleight of hand. The state wants to live half in the fictitious world and half in the real world.
In response to the further question of whether the actual new tax amount of $1.165 billion ($790 million plus the $375 million) remains below the 6% safe-harbor rate based upon current real-world net patient revenues, the spokesman stonewalled “The tax has been and remains compliant with federal law (including as amended by OBBBA), and Connecticut’s approved federal waiver.” As if saying so makes it so.
What happened to the settlement agreement which was to limit hospital tax payments until July 1, 2026? Apparently, the state is going to delay collecting the tax increase until July of 2026, after the settlement agreement has expired.
The real purpose of the increase is to siphon more money from Uncle Sam by employing the classic shell game of imposing a provider tax, immediately returning the tax money labelled “supplemental payment” which triggers federal matching money. The long-standing 6% safe-harbor threshold was meant to keep a lid on this scheme; the OBBBA shrinks the shell game by scaling the threshold down gradually to 3.5% in 2032.
Connecticut’s June increase looks like a reversion to the regular abuse of its hospitals that led to the settlement agreement, which the Connecticut Hospital Association described as follows “For many years, Connecticut used the tax primarily to bolster the state budget – resulting in revenue gains for the state, and overall net losses for hospitals.”
CMS was asleep at the switch concerning Connecticut’s past abuse of its hospitals. Is it turning a blind eye yet again as Connecticut employs the shakiest of rationales for its latest assault on its hospitals?
Red Jahncke is a nationally recognized columnist, who writes about politics and policy. His columns appear in numerous national publications, such as The Wall Street Journal, Bloomberg, USA Today, The Hill, Issues & Insights and National Review as well as many Connecticut newspapers.
