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June 15, 2015 Other Voices

Hospital tax will cause economic harm

Fred V. Carstensen
By Fred V. Carstensen

Hospitals pay tax, a huge tax: $350 million. Yes, our hospitals pay the state of Connecticut $350 million annually. And the newly adopted state budget increases that tax burden dramatically.

But unlike GE, Aetna, Travelers or other major employers in Connecticut — who face a smaller tax bite — hospitals can't threaten to leave to avoid paying. Hospitals must cut staff, cut services, raises prices, cancel major investments that would improve patient services and health outcomes, or find other ways to pay the tax bill.

UConn's Connecticut Center for Economic Analysis (CCEA) evaluated the impact of the hospital tax: It is at least a three-time loser.

First, the analysis estimates the tax and related policies cascade through the economy, costing Connecticut 4,000 jobs, cutting household income by a quarter-billion dollars, and diminishing tax revenue, worsening the budget deficit. And these outcomes do not include the human cost of possibly degraded or reduced access to health services and resulting patient outcomes, and how weakening our hospital sector undermines the major initiative to build biomedical research (e.g. Jackson Lab) and broadly damages Connecticut's long-term economic competitiveness.

How could the Governor and the legislature choose to impose such a self-destructive tax?

The answer is that simple bookkeeping makes the tax look like a winner: just keep more of the tax from the hospitals and forego those federal dollars. Only when the tax is evaluated dynamically, looking at how it interacts with hospital operations, federal healthcare policies, jobs, household incomes, and ultimately tax revenues coming back to the state do the array of bad outcomes emerge.

Neither the Office of Policy and Management (OPM), which puts the initial budget together, nor the legislature have the ability to do such an analysis. They fly blind; unsurprisingly, they crashed.

The hospital tax began reasonably enough four years ago. The state would tax the hospitals and then return the tax plus $50 million to the hospitals to cover the cost of unreimbursed care. Then the federal government would give the state a 50 percent reimbursement — $200 million.

So hospitals would continue getting help to cover the costs of providing care to everyone who needed it; the state ended the day with $150 million in new revenue. But then OPM, with legislative approval, began cutting support to hospitals — now by more than 75percent — effectively increasing the tax on hospitals 800 percent.

This also meant dramatically reducing the federal reimbursements, which now run at 67 percent, so the current budget foregoes more than $200 million in federal dollars. CCEA put these numbers together — the hospitals bearing a net cost after state transfers of more than $250 million, the state enjoying higher bookkeeping revenue, but securing a paltry $67 million in federal return — to see how they played out in the economy and in net tax revenue. The results are bad across the board: job losses, falling household income, reduced tax revenues.

The damage goes beyond just the economics. This set of policies clearly must impact access to and quality of care hospitals are able to deliver; there is surely a significant and perhaps growing human cost that the economic analysis does not capture.

And weakening our hospital infrastructure feeds back on our major — and thus far successful — effort to make biomedical research a major sector in Connecticut's economy. But this research is fundamentally linked to clinical work; Pfizer moved nearly 1,500 researchers from Groton to Cambridge, Mass., in part because of the need for a close relationship with a large complex of hospitals.

Undermining our hospital infrastructure unavoidably will take a toll on our efforts to build a stronger, more dynamic, biomedical sector. The hospital tax and its associated policies inflict systematic, widespread damage on Connecticut's economy and undermine its competitive health.

The Governor has already indicated the need for a special legislative session to reconsider business taxes that generated unprecedented public criticism; he ought to put the self-destructive hospital tax on the table as well. 

Fred V. Carstensen is a professor of finance and economics and director for the Connecticut Center for Economic Analysis at the University of Connecticut.

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