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The tax that pays for MinnesotaCare is set to expire at the end of the year. So far, legislators can’t agree on a plan to replace it

The provider tax was supposed to become unnecessary as people covered by MinnesotaCare were covered by Obamacare’s Medicaid expansion. There was one small problem.

doctor's office
Since 1992, funding from the provider tax has paid for health care for around 80,000 Minnesotans through subsidized insurance for those with incomes between 138 percent and 200 percent of the federal poverty level.
REUTERS/Mike Blake

Most everyone seems to like what the Minnesota “provider tax” buys.

The 2 percent assessment on medical bills and hospital stays was created 27 years ago by Minnesota state legislators from both parties to pay for a health coverage plan for the working poor called MinnesotaCare and other health care programs for low-income residents. Republican and Democratic lawmakers want to continue spending on those programs that impact around 1.5 million Minnesotans.

Where bipartisanship breaks down, however, is over the tax itself. Republicans are likely to use their control of the state Senate to block any attempt to continue the tax beyond its statutory sunset at the end of 2019. DFLers, who have the governor’s office and the state House, want to lift that sunset — in effect, repeal the repeal — as a way of not pitting health care programs against other mainstays of the general fund budget.

The debate is highlighted by how they frame the issue. Democrats will say that since the tax is already collected, the action they favor is not a tax increase. Republicans respond by noting that doing nothing means the tax dies and medical bills will no longer include a 2 percent assessment. Doing something, therefore, is a tax increase.

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The impasse was set up before the 2019 session began, but it was illustrated by dueling press conferences in just the second week.

“You don’t reduce the cost of health care by increasing the cost of health care,” said House Minority Leader Kurt Daudt in front of a banner that read “Don’t Raise Our Healthcare Costs.”

“We don’t want to make this political,” the Crown Republican said. “But we will keep track of the promises that people made on the campaign trail and if you said you were going to reduce the cost of health care and reduce the cost of health insurance and you vote to put in place a 2 percent tax on every health care procedure, we think that’s a broken promise and we will remind people of that.”

As is common in St. Paul during sessions, the other side was in the back of the room during the GOP press conference and took to the podium in rebuttal.

“I think the talk on the campaign trail was to address health care costs and bring them down, not to address health care costs by kicking people off of health care programs,” said House Majority Leader Ryan Winkler of Golden Valley. “We are very comfortable with our approach to solving this issue.”

Added Rep. Tina Liebling of Rochester: “Either the repeal of the sunset or some other mechanism to replace that revenue is essential for the stability of the state.”

Gov. Tim Walz supports repeal of the sunset and campaigned on that issue. He would sign a bill if it got to him. Opposition by Senate GOP leadership, however, makes that ending unlikely.

“That is definitely something that would be damaging to all Minnesotans and to being able to get affordable, high-quality access to health care,” said Sen. Carla Nelson, R-Rochester, one of the budget leads for the Republican caucus.

Senate Majority Leader Paul Gazelka made the caucus position clear on the session’s very first day.

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“The provider tax has already been signed and meant to go away,” he said. “For it to not do that we have to do legislation to do something different, which we’re not really favorable towards.”

The issue is separate from but linked to another health care debate that has divided the parties: letting more people buy their insurance through MinnesotaCare. DFLers support it as a state-version of the national Medicare For All debate. Republicans oppose MinnesotaCare expansion because they believe — as does the state Hospital Association — that the low reimbursement rates providers get to provide service for the poor would be unsustainable if they were extended to wealthier patients with insurance that currently reimburses at higher rates.

The arguments over the provider tax don’t necessarily implicate MinnesotaCare buy in. But losing the tax makes it even more difficult for DFLers to make buy-in pencil out.

Provider tax provides

The provider tax was created in 1992 as the result of the kind of bipartisan problem solving that those who have been around the state Legislature for a while mourn the loss of. What was called the Gang of Seven and then-Gov. Arne Carlson pulled the votes together for a health plan to cover in-betweeners — those who had too much income to qualify for Medicaid and but whose jobs didn’t offer health insurance. Initially called HealthRight, the insurance plan was renamed MinnesotaCare a few months later.

Two of the biggest opponents at the time were the Minnesota Medical Association and the Minnesota Hospital Association because of the source of funding: the provider tax.

House Minority Leader Kurt Daudt
MinnPost photo by Peter Callaghan
House Minority Leader Kurt Daudt: “You don’t reduce the cost of health care by increasing the cost of health care.”
Since then, however, the funding has paid for health care for around 80,000 Minnesotans through subsidized insurance for those with incomes between 138 percent and 200 percent of the federal poverty level. It has also provided funds for the expansion of Medicaid coverage under the Affordable Care Act and most recently paid for a 2017 GOP-led reinsurance program that gets some or much of the credit for reducing premiums for the 9 percent of residents who buy through the individual market or benefit from policies purchased through the small group market.

The Hospital Association now favors reinstating the provider tax. “MHA supports a dedicated, sustainable funding source for MinnesotaCare and for a portion of the costs for people who would have been enrolled in MinnesotaCare but now qualify for Medicaid expansion coverage,” says its legislative priority statement.

The hospitals do support a slight reduction in the tax rate — from 2 percent to 1.5 percent — to match revenues more closely with the needs. The Health Care Access Fund into which tax proceeds flow has been running a surplus, something that can tempt lawmakers but that also will ease the impact of an end of the provider tax. The full impact of the sunset might not be felt until the end of the upcoming two-year budget cycle.

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“The Minnesota Hospital Association has, in many ways, has come full cycle,” said Mary Krinkie, the vice president of government relations for the hospital association. That is, they were previously more aligned with other provider groups opposed to the provider tax.

“But it has been in place now for 27 years and our members by and large have come to appreciate all the good things the provider tax has been able to do,” she said, especially MinnesotaCare and medical assistance. That money followed a population that had been relying on MinnesotaCare but became eligible for Medicaid due to the expansion under Obamacare.

“We’ll probably be in a different spot than some of the other provider groups,” Krinkie said.

The Medical Association agrees that the programs need to retain funding. But instead of supporting reinstating the provider tax, the association has proposed what it calls a Claims Expenditure Assessment. Rather than being assessed on each bill for medical care, this assessment would be collected by insurers, health plans or third-party administrators. The latter are the companies that administer insurance for larger businesses that are self-insured.

“If we want to keep funding those programs, it requires that we find an additional source of revenue, either from a replacement tax or other resources like the income tax, said Dr. Doug Wood, a Mayo Clinic cardiologist and the current president of the medical association. The tax at the claims level of health care transactions is more fair and more sustainable, he said.

A tax of less than 2 percent could replace what is needed annually for MinnesotaCare and medical assistance without running surpluses.

“There are a lot of ways you can finance this and the Senate majority may look at other ways of financing,” Wood said. “We were simply trying to help with a better way of identifying a need and finding a better way to finance that need. If we want to maintain our commitment to our fellow citizens, we have to find a way to pay for those things.”

Why a sunset?

The pending end of the provider tax illustrates a common phenomenon of legislating: If the consequences of an action are far enough in the future, it is easier to take that action now. And the consequences of ending the provider tax at the start of 2020 seemed far away when then-Gov. Mark Dayton and then House and Senate GOP majorities were negotiating an end to a bitter, 19-day shutdown of state government in 2011.

The end of the provider tax was a last-minute insertion into a complex deal to get out of a $6 billion state budget deficit. It got in there despite not being a major issue of the session that year.

At least one group saw the cliff in the distance. “The federal Affordable Care Act is expected to begin paying for many of the health care services currently funded by the HCAF, but not all of them,” wrote the Minnesota Budget Project in August, 2011. “There is no plan for how the state will continue to fund these other important public health functions once the provider tax is gone.”

Former Rep. Matt Dean, R-Dellwood, was House majority leader during the shutdown and said he pushed for the sunset. At the time, there was a belief that if Minnesota expanded Medicaid under the Affordable Care Act, something Dayton wanted, the population served by MinnesotaCare would move to that program. He doesn’t recall a lot of pushback from Dayton or Democrats.

“We felt the federal government is going to say, ‘Nice job Minnesota, step aside, we can take care of these folks federally, we got this from here on out,’” Dean said. Rather than end the tax immediately, negotiators set up a phase-out that would reduce the tax rate over time before ending it.

Dean said the rate reductions never happened because subsequent legislators used surpluses for additional programs not intended when the tax was first imposed.

“I wanted to get rid of it because it I thought the tax was onerous, was punitive and would create a slush fund, which in fact it did and has, which gets raided all the time for other stuff,” Dean said.

Tony Lourey
MinnPost photo by Peter Callaghan
Tony Lourey
ACA funding did not materialize in any way close to replacing the provider tax though some of those covered by MinnesotaCare did qualify for expanded Medicaid. There were no significant attempts to repeal the sunset when the DFL held both the House and Senate under DFL Gov. Dayton in 2013 and 2014. Then-Sen. Tony Lourey, DFL-Kerrick, said his language to do so was sent to the Taxes Committee but did not emerge in the committee bill. No floor votes were ever taken.

Recalls Liebling: “I don’t remember there being any discussion of it at that time. In fact I don’t remember there being much discussion of it when it was initially proposed. I can only surmise that this was one of those backroom deals that a lot of members aren’t aware of.”

In 2013 and 2014, DFLers were implementing Obamacare, she said.  “I know our agenda was rather full and had we stayed in control, it was on our agenda to address it the next year.”

“There’s always a tendency to kick the can down the road, and at that time 2019 seemed a long way away,” the Hospital Association’s Krinkie said.

The DFL didn’t stay in control, losing the House majority to the Republicans in 2014 and the Senate majority in 2016. And while it has been a topic on the minds of some legislators, no further action was taken.

Now, in 2019, reinstatement or replacement has become one of the major issues of the session and is top of mind for social service advocates and social justice activists.

“Allowing the health care provider tax to expire would create an annual revenue shortfall of $680 million,” stated a letter to Walz and legislative leaders from 75 organizations including AARP, Isaiah, the state AFL-CIO, the state Farmers Union and the Minnesota Nurses Association.

If not the provider tax, then what?

That state senator who tried in vain to repeal the repeal is now the person who has to manage through the consequences. Lourey is now Walz’s commissioner of human services.

“I’ve been working on the spreadsheet around provider tax and around health and human services more broadly for a lot of years,” Lourey said. “The fact of the matter is, the provider tax generates about $700 million a year. It doesn’t matter who’s in charge. If you erase 1.4 billion from a biennium in the middle of the HHS spreadsheet, we’re not going to be able to keep the promises that we’ve collectively made to the people around the state of Minnesota.”

Lourey wants to focus on what the tax pays for, programs that he said “have paid tremendous dividends.” And he notes that there are very few voices left who oppose the programs like MinnesotaCare and the expansion of Medicaid. Even the reinsurance project designed to stabilize the individual market will need money at least over the short term until other steps at stabilization can be taken.

“I’d like the Senate Republican caucus to put together their health and human services spreadsheet minus $1.4 billion and take a good look at what that looks like,” Lourey said.

Republicans make the case that the programs are important enough that they deserve funding from general taxation via the state’s general fund. Rep. Joe Schomacker, R-Luverne, calls the provider tax the “sick tax.”

“We have a $1.5 billion budget surplus,” said the House GOP lead on the the Health and Human Services Finance Committee. “That should be our first stop before we ask Minnesotans to pay higher taxes on their own health care.” He also said there should be more effort toward finding waste and abuse in health and social service spending including already identified problems with benefits going to those who either never were or are no longer eligible.

“If the DFL is ready to get serious about eliminating waste, fraud and abuse in public programs … I’m confident that we can come up with a substantial portion of the revenue needed to continue the MinnesotaCare program.” Schomacker said. Of the medical association’s alternative, he said the caucus would look at it, “but we still think its a tax on people trying to get health care.”

“How do we actually drive down the cost of health care and affirm that Minnesota will take care of people with preexisting conditions?” Gazelka asked before the session began. He said he expects more work by an existing subcommittee on costs co-chaired by Republican Sen. Scott Jensen of Chaska and DFL Sen. Matt Klein of Mendota Heights. Both are doctors.

But what to do next about the end of the provider tax is, Gazelka said, “one of the great discussions of this session.

“We believe it should go away, but we also know there are some things we have to solve as a result of that,” he said.