Article by Erik Smith. Published on Tuesday, July 19, 2011 EST.

Files Lawsuit Challenging Raid on Hospital Funds – Will Other Lawsuits Follow?

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, July 19.—The Washington State Hospital Association has filed its long-awaited challenge to the Legislature’s raid on hospital funding this year, a lawsuit that could blow a $110 million hole in the state budget.

            That’s enough right there to spell trouble for the governor and the Legislature. The current spending plan for 2011-13 leaves only $163 million in the bank, and all it would take is a hiccup to put the state in the red. But it may not be the only blast. The Retired Public Employees Council will decide next week whether to sue the state for canceling cost-of-living increases for the retirees in the state’s oldest pension plans. That one could cost the state $344 million.

            The Hospital Association lawsuit, filed Monday in King County Superior Court, says the Legislature violated the state constitution when it balanced the budget by taking money from a special hospital assessment it passed last year. Hospitals had essentially agreed to tax themselves in order to goose additional money from the feds. But after what the Legislature did this year, the association says some hospitals will get back only 80 cents for every dollar they pay in.

“It only lasted for a year,” said Hospital Association president and CEO Scott Bond. “We feel [the fund] was raided for purposes that were not intended when the hospital safety net assessment was passed. So many of our members feel betrayed.”

            The mechanism is complicated but the legal principle is simple. The state constitution says that when the Legislature passes a tax, it has to state the purpose in the legislation and cannot use the money for another purpose. The hospitals say that’s exactly what happened here.

            Really an I-1053 Issue

Although the lawsuit doesn’t come right out and say it, there’s another issue involved. Lawmakers could have passed a bill this year reenacting the hospital tax and diverting a portion of the money, and there wouldn’t have been any question that they could do it. But they didn’t do that. Initiative 1053, approved by voters last fall, requires a two-thirds vote of the Legislature for new taxes – a practical impossibility in a Legislature where Republicans have enough votes to block it.

Though the lawsuit represents a potential $110 million hit on the state budget, what is really at stake is a $260 million cut in Medicaid funding for the state’s hospitals. The state slashed payments to hospitals in 2009 as recession hit. The hospitals maintain they could have sued, but instead they came to the Legislature with an idea that has been employed in other states.

The simplest way to explain it is this. If hospitals boosted rates for everyone, they could submit bigger bills to the state, and the state would be eligible for a larger Medicaid reimbursement from the federal government. The federal money was supposed to flow back to the hospitals.

As for other hospital customers, they didn’t see an increase in their bills. The hospitals absorbed the additional charges.

Worked fine the first year. Hospitals paid out nearly a quarter-billion dollars but got back even more. But this time out, the budget gloom continued. A study commissioned by the state concluded the hospitals would make more money than the state was absolutely required to pay. And so lawmakers took $110 million of the proceeds and diverted them to the state general fund. The state lost out on $110 million in matching money that would have gone to hospitals. It also decided to keep $40 million in surplus money that had piled up in a trust fund managed by the state treasurer. That’s how a $110 million diversion became a $260 million hit to hospitals.

The association’s brief is written by Phil Talmadge, a former Supreme Court justice with a rep for intricate and original legal arguments. For the legal argument to succeed, it is necessary for the hospitals to say the “safety net assessment” is a tax. That’s because Article 7, Section 5 of the state constitution refers only to taxes. It says “every law imposing a tax shall state distinctly the object of the same to which only it shall be applied.”
           Whether it was a tax when the law was imposed in 2010 is a potential question. When the assessment was passed, the Legislature had just gotten done suspending Initiative 960, which had imposed a similar supermajority requirement for tax increases. So they could pass it with a simple majority vote and not have to worry about whether it was a tax.
            Yet at the time it was passed, nobody called it a tax. Because of the Legislature’s reluctance to raise taxes, the measure was presented to lawmakers as a fee on hospitals. In fact, the Legislature approved an almost identical measure this year for nursing homes, at a time when a two-thirds requirement did apply, and lawmakers and advocates alike were careful every step of the way to call it a fee – that way they didn’t have to worry about the supermajority requirement. The distinction between taxes and fees is important, because there is nothing in the constitution that imposes a similar requirement on the legislation used to enact fees. 

            The legal brief bases its argument on the language contained in the 2010 legislation, which spelled out exactly how the money is to be used.
            So was it a tax at the time the law was imposed?  “A lot of our members called it that,” Bond said. But he said it really doesn’t matter whether the assessment was a tax or a fee in 2010, because the Legislature’s action this year clearly changed the purpose of the assessment. If it wasn’t a tax then, it is now. The way it works now, a specific class of payers – the hospitals – is paying the money and the money is being used for the benefit of a larger class – the entire state. That’s the definition of a tax.

The hospitals’ brief says that when the Legislature passed House Bill 2069 this year, diverting the money, it violated the state constitution. Or else the constitution renders House Bill 2069 invalid. But either way, it doesn’t fly.
            There’s an argument the brief appears to dodge. It doesn’t argue that the assessment became a tax this year when the purpose of the assessment was changed, and that a two-thirds vote should have been required. Opponents of the supermajority requirement have been itching to get the Supreme Court to rule on a two-thirds case – they maintain that supermajority requirements are unconstitutional. By leaving that out, the hospitals avoid stepping onto a minefield.

Devastating Effect

The state’s budget cuts have wreaked havoc on the safety net, Bond said, not just at hospitals but for the Basic Health Plan, community health clinics and mental health programs – that’s the important thing to keep in mind. The $260 million loss “is going to have a devastating effect on hospitals,” he said. “It isn’t the only cut. It’s a cut on top of cuts.”

Bond said he is hoping the issue will be heard in the courts this fall.

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