Opinion
216-2011-CV-00955 216-2011-CV-0085G 218-2011-CV-01394 (ROCKINGHAM, SS)
04-08-2014
CATHOLIC MEDICAL CENTER v. N.H. DEPARTMENT OF REVENUE ADMINISTRATION ST. JOSEPH HOSPITAL v. N.H. DEPARTMENT OF REVENUE ADMINISTRATION EXETER HOSPITAL v. N.H. DEPARTMENT OF REVENUE ADMINISTRATION
ORDER
The petitioners, Catholic Medical Center, St. Joseph Hospital and Exeter Hospital, have brought these consolidated actions seeking review of an order of the Hearings Bureau of the respondent New Hampshire Department of Revenue Administration ("NHDRA") denying their request for a refund of the Medicaid Enhancement Tax ("MET"). The petitioners assert that the MET is unconstitutional on its face. The parties have filed cross-motions for summary judgment. The Court held a hearing on February 10, 2014.
The parties have submitted an Agreed Statement of Facts ("ASF"), which the Court hereby incorporates by reference. The respondent, NHDRA, has also filed a motion to strike, challenging facts asserted by the petitioners in their motion for summary judgment but not included in the ASF. Because the Court did not rely on the challenged facts in drafting this order, that issue is moot.
Generally, in determining summary judgment matters, the Court considers the parties' pleadings, affidavits, and other evidence, as well as all inferences properly drawn from them, in the light most favorable to the non-moving party. Purdie v. Att'y Gen., 143 N.H. 661, 663 (1999). "[S]ummary judgment may be granted only where no genuine issue of material fact is present, and the moving party is entitled to judgment as a matter of law." Id. (quoting Goss v. City of Manchester, 140 N.H. 449, 450-51 (1995)); see also RSA 491:8-a, III (1997). Here, however, the parties have submitted an agreed statement of fact concerning the underlying factual issues. Accordingly, the issue before the Court for determination is a legal one, that is to say whether, based on the facts set forth in the agreed statement of fact, the petitioners or the respondent are entitled to judgment as a matter of law.
The petitioners raise two primary facial challenges to the constitutionality of the MET. First, they assert that the MET violates the equal protection clause of the State and Federal Constitutions. Second, they assert that the MET impermissibly classifies taxpayers. The Court will address the petitioners' equal protection argument first.
"The equal protection provisions of the State Constitution are designed to ensure that State law treats groups of similarly situated citizens in the same manner." McGraw v. Exeter Rea'l Coop. School Dist., 145 N.H. 709, 711 (2001). In reviewing whether a particular law violates the equal protection provisions of the State Constitution, the Court must determine whether persons similarly situated are being treated differently under that statutory law. State v. Callaqhan, 125 N.H. 449, 451 (1984) (quoting Gazzola v. Clements, 120 N.H. 25, 29 (1980)). "Holding that persons who are not similarly situated need not be treated the same under the law is a shorthand way of explaining the equal protection guarantee." In re Sandra H., 150 N.H. 634, 638 (2004). If persons are not similarly situated, then no equal protection problem is presented. McGraw, 145 N.H. at 712 (quoting LeClair v. LeClair, 137 N.H. 213, 222 (1993)).
This analysis is consistent with equal protection analysis under the Federal constitution. In Re Sandra H., 150 N.H. at 638; see also Keevan v. Smith, 100 F.3d 644, 648 (8th Cir. 1996) (finding that "the initial inquiry in any equal protection claim is whether the plaintiff has established that she was treated differently than others who are similarly situated to her"). "To be sure, the constitutional demand is not a demand that a statute necessarily apply equally to all persons. The Constitution does not require things which are different in fact to be treated in law as though they were the same." Rinaldi v. Yeager, 384 U.S. 305, 309 (1966) (internal quotation omitted).
Within the tax law context, "Part II, Article 5 [of the New Hampshire Constitution] requires that all taxes be proportionate and reasonable, equal in valuation and uniform in rate, and just." Appeal of Town of Bethlehem, 154 N.H. 314, 322 (2006). "The equal protection clause protects [an entity] from state action which selects [it] out for discriminatory treatment by subjecting [it] to taxes not imposed on others of the same class." Verizon New England, Inc. v. City of Rochester, 156 N.H. 624, 630 (2007). In evaluating an equal protection challenge to a tax classification, the Court applies the rational basis test. See id. at 628.
The petitioners argue that the MET is unconstitutional because it taxes hospitals but not non-hospitals, despite the two providing oftentimes identical medical or health services. Respondent NHDRA objects, arguing that inpatient and outpatient hospital services constitute distinct classes of health care services, and are thus not similarly situated with non-hospital providers. NHDRA places significant weight on federal definitions and regulations in placing inpatient and outpatient hospital services in their own class. For example, the respondent cites to regulations where the terms are defined and placed in two separate classes among nineteen others. See 42 C.F.R. § 433:56(a); 42 C.F.R. § 440.10; 42 C.F.R. § 440.20; see also New Hampshire Admin. Rule Rev. 2301.06, .08. In addition, the respondent argues that hospitals require special certifications and follow separate regulations in order to operate as hospitals. A functional analysis of the petitioner entities' practices, however, outweighs reliance on Federal and State administrative nomenclature.
As indicated by the uncontested facts of this case, both hospitals and non-hospitals perform a wide range of identical health services, including, but not limited to, physical therapy, diagnostic radiology, urgent care, emergency care, speech therapy, and occupational health care. In essence, the MET imposes a tax on hospitals simply because they are hospitals, not based on the nature of the services they provide. Looking to the practical reality of the circumstances, the Court finds that hospitals and non-hospitals are similarly situated with respect to the services they perform. Therefore, because the MET applies to revenue generated solely from hospitals, the law treats these two entities differently. Accordingly, the MET must pass muster under the rational basis test in order to not violate the equal protection clause.
Under the rational basis test, "legislation is presumed to be valid and will be sustained if the classification drawn by the statute is rationally related to a legitimate state interest." North Country Envt'l Servs. v. State, 157 N.H. 15, 25 (2008). The petitioners assert that there is no legitimate state interest in RSA 84-A as the original purpose behind its enactment, as evidenced by its legislative history, is no longer in existence. The State has objected to the use of legislative history, on grounds that the interpretation of the language of the statute is not at issue here.
"The constitutionality of a statute is to be decided by an examination of its real purpose and actual effect." Opinion of the Justices, 87 N.H. 496, 497 (1935). Under the circumstances of this case the Court finds that the legislative history of RSA 84-A constitutes an operative fact and is germane to the present analysis. See Nash Family Inv. Properties v. Town of Hudson, 147 N.H. 233, 235-36 (2001) (looking at legislative history during rational basis review of excavation activity tax).
The debate on RSA 84-A on the Senate floor had been rather candid, and appears to have reflected an understanding by the legislators that the purpose behind the proposed law was the collection of money for the State general fund from the federal government. The senators' discussions merit quoting at length:
SENATOR MCLANE: I love the name of this bill. The medicaid enhancement tax. It is money that we cannot afford to refuse. The money is going to amount to $117,000,000 to balance the state budget. ... Thirty-one other states have taken advantage of this Medicaid entitlement program. It is time that New Hampshire did as well. ... The hospitals would pay money to the state, the state would pay it right back again and would inform the federal government that it had paid the money to the hospitals and the federal government would match it. It sounds so simple, and it can be done. Fifty percent of the money would go back directly to the hospitals, the amount that they paid. And also 3 percent as an enhancement. That 3 percent would be issued to the hospitals based on the hospitals' prorated Medicaid utilization. It will be used by the hospitals to support services to Medicaid and other low income patients. That would amount to about $5,000,000. So with that money we have bought the cooperation of the hospitals. ... Many people have said that this seems an unfair way of getting money. But I would point out that the states that have taken this money, this $5,000,000,000 raid upon the federal treasury, that is about equal to the cost shift that has come from the feds to the state. ... Doug Hall referred to it as a Medicaid bootstrapping and that is just about what it is except that it is a lot of money. It is important and it will, in some small measure help the hospitals and help the poor, but it will also mean that our budget can be passed in the next couple of days.1991 N.H.S.J. 2292-2299.
SENATOR BASS: Senator McLane, this is $5,000,000 that the hospitals in their essence are
attempting to extort from the state in return for processing something by electronic transfer.
...
SENATOR MCLANE: ... I guess the problem is that we cannot guarantee that that money goes into a direct stream to the poor. But the fact that more of it goes to the poor, I think, is probably the best guarantee, plus the trust of the hospitals.
...
SENATOR OLESON: ... So might it not be that this isn't a free ride, but we might be getting some money back from the feds which they took away from us some years ago?
SENATOR MCLANE: Absolutely.
...
SENATOR MCLANE: Well, I think that this is the unique part of this tax. You pay the tax. you get it all back, and you get 3 percent more. That is the sort of tax that any one of us would vote for.
SENATOR HEATH: Doesn't something ring with a dull thud about this whole deal, in your mind?
SENATOR MCLANE: I understand your point, but I think that Senator Oleson has a better point. That this is money that the state of New Hampshire has sent to Washington, and now finally it's coming home to us.
SENATOR W. KING: ... I think it would be foolish for any of us today to vote against this bill, given the fact that the alternative for all of us is that we would have to raise taxes on citizens in the state of New Hampshire as opposed to accessing federal dollars that as Senator Oleson has said, represent dollars that we have sent to Washington....
...
SENATOR SHAHEEN: ... I could not in good conscience vote against this funding and go back to the people in my district and say to them, I am going to raise your taxes because I didn't think that we should accept this money from the federal government. On the other hand, I would hope that we would all admit to ourselves that this really is a silver-bail-out. It's more of the shell game that we are playing with the state budget, because we aren't yet
willing to face up to the fact that we have got a tax structure that doesn't work anymore. ... This is a legal loophole, and we ought to go along with it.
SENATOR HUMPHREY: ... I think everyone agrees [that this is a cop-out] except it's such an expedient cop-out that it's hard to resist when your sister states are breaking into the store fronts and running off with the merchandise. ... [W]e have found a silver-bail-out as some call it, a fraudulent scheme as others, a scam as others yet call it.
This legislative history indicates that the primary, if not the sole, purpose of the MET had been to bring federal funds to the State treasury, with the hospitals acting as pass-through intermediaries. Hospital participation was necessary, thus the reference to encouraging their cooperation with the three percent "enhancement." Id. at 2292-93. There was significant discussion of how much money the MET would generate for the State, and rather little discussion of Medicaid, DSH payments, or other matters relating to the State's presently asserted purpose for the legislation. Accordingly, the Court finds that the purpose of the MET was to take advantage of a loophole in the then-existing Federal - State Medicaid framework.
This purpose appears further underscored by a letter from then Commissioner Bird of the New Hampshire Department of Health and Human Services and then Commissioner Arnold of the New Hampshire Department of Revenue Administration to the president of the New Hampshire Hospital Association. In that letter, the commissioners state that "[i]t is our intent that, should Federal Disproportionate Share funds become unavailable, we would no longer require the State revenue and we would recommend that the rate of taxation drop to zero." ASF, Exhibit A. They also refer to the MET as a "critical State revenue source." Jd. The letter acknowledges that the MET was designed with federal matching in mind, and once the federal money became unavailable, the MET would be eliminated.
For nearly two decades, the MET operated as a pass-through mechanism to bring federal money into the State's general fund, while holding the hospitals harmless, thus ensuring their continued compliance. Now that the federal loophole has been closed, however, the State asks the Court to essentially ignore everything that had occurred earlier and accept the State's representation that the purpose of the MET is and always had been to raise funds to cover the State's portion of uncompensated care payments to hospitals. Even were the Court to disregard the apparent legislative history and assume the State's position to reflect the actual purpose underlying the MET, the Court finds the respondent's argument without merit.
In support of its argument, the State argues that there is a legitimate purpose for imposing the MET on hospitals because the funds raised are intended to cover DSH payments, which by definition only go to hospitals. While this may be true, a large portion of the money raised by the MET, approximately 50%, lapses into the State's general fund at the end of the fiscal year. RSA 167:64, III. The respondent argues that money from the general fund also funds healthcare, as, for example, the Department of Health and Human Services budget is paid from the general fund. However, the general fund is also used for many other areas not related to healthcare, and there are no provisions that MET revenue be specially earmarked for a particular purpose.
The issue is highlighted when looking to other healthcare laws, cited by the respondent, that perform similar functions to the MET in other areas. For example, RSA 84-C:5 requires nursing facilities to pay Nursing Facility Quality Assessment payments into a fund established under RSA 151-E:14. Unlike the MET, however, RSA 151-E:14 explicitly provides that "[a]ll of these funds shall be credited to and for the purpose of the nursing facility trust fund and shall not be used for any other purpose." Likewise, RSA 151-E:15-a, which creates a fund for ICF Quality Assessment funds collected under RSA 84-D:5, states that if any funds are remaining after disbursement, "the ICF rate setting system shall be adjusted to insure that all moneys are expended for ICF care."
In contrast, the MET does not limit expenditure of funds collected from hospitals on uncompensated care payments to hospitals. Instead, it calls for approximately 50% to lapse to the general fund to be spent as the legislature determines. The Court has already found insufficient justification for distinguishing between hospitals and non-hospitals in this case, and the respondent has failed to articulate a sufficient basis for requiring hospitals, but not non-hospitals, to pay a tax on their net patient services revenue where only a portion of the money is reserved for hospital-related purposes. The provision allowing money to lapse into the general fund in RSA 167:64 appears to constitute a remnant of the MET's original purpose that undermines the respondent's position. The Court thus finds that there is an insufficient government interest that supports the MET.
The respondent argues that the petitioners only challenge the MET with respect to outpatient hospital services, and not inpatient hospital services, and thus the Court may consider declaring the MET unconstitutional only as it applies to outpatient hospital services. Contrary to the respondent's assertion, however, the petitioners have maintained a facial challenge to the MET, and do not restrict themselves solely to outpatient hospital services.
Nevertheless, even were the respondent to be correct, the Court finds insufficient grounds to declare the MET unconstitutional only as to outpatient hospital services. The Court did not find that the inclusion of outpatient hospital services in the MET is an offending provision that may be excised, but rather that the underlying purposes of the MET were constitutionally infirm. The nonexistence of the original purpose of the legislation and the general fund lapsing provision both work to render the MET unconstitutional as to both inpatient and outpatient hospital services. It is not clear that "the legislature would have enacted the statute without the offending provision" in this case. State v. LaPorte, 134 N.H. 73, 78 (1991).
It would be inconsistent for the Court to find no rational basis for the general fund lapsing provision with respect to outpatient hospital services, but find no fault with the provision with respect to inpatient hospital services. The Court thus concludes that "the unconstitutional provisions of the statute are so integral and essential in the general structure of the act that they may not be rejected without the result of an entire collapse and destruction of the structure." Carson v. Maurer, 120 N.H. 925, 945 (1980) (quotation omitted).
The Court concludes that hospital and non-hospital health service providers are similarly situated taxpayers that impermissibly receive discriminatory treatment under the MET. Further, there is no rational basis to support the imposition of the MET on hospitals but not non-hospitals. Finally, the Court will not sever any portion of the MET, but finds it unconstitutional on its face and in its entirety. Because the Court has found the MET to be unconstitutional under the equal protection clause, the Court need not address the petitioners' remaining arguments.
SO ORDERED.
__________
Philip P. Mangones
Presiding Justice