Few are ever fully satisfied when it comes to crafting a state budget, but few were more critical of Gov. Ned Lamont’s budget proposal issued last week than the Connecticut Hospital Association (CHA), which immediately issued a press release calling the governor’s plan “devastating to hospitals, their workforce, and their patients.”

Weeks prior to Lamont’s budget address, the CHA appeared more optimistic, bolstering the 2025 Healthcare Cabinet Report that said the state should increase its Medicaid reimbursement rate – one of the primary issues facing Connecticut hospitals, according to an independent report issued by Kaufmann Hall in December. That report found that Connecticut’s hospitals, as a whole, experienced another year of operational losses in 2023, while other state hospital systems experienced net gains.

One of the primary factors in that loss – and one that affects healthcare costs across the board – is Connecticut’s reimbursement rate for Medicare and Medicaid – which has not been increased in eighteen years, according to the Healthcare Cabinet report. The low Medicare and Medicaid payments result in a loss of $2.8 billion per year for the hospitals, which is then made up for by commercial insurance payers, contributing to the overall cost of health insurance.

Lamont’s budget does not call for raising Medicare and Medicaid reimbursement overall, instead focusing on a few key areas, including increasing reimbursements to Medicaid providers by $10 million in 2026 and $25 million in 2027, and $4.5 million for birth-to-three providers – drops in the bucket of the overall billions spent on Medicaid each year, meaning hospitals will continue to face the same $2.8 billion loss from government payments.

But the governor’s proposal also increases taxes on hospitals in the second year following the end of a settlement agreement reached between Lamont and Connecticut’s hospitals in 2019 – part of a historically troubled relationship between the state and its hospitals under Gov. Dannel Malloy’s administration.

As Connecticut dealt with wave after wave of budget crises during the previous administration, Gov. Malloy worked out a deal with Connecticut’s hospitals: raise taxes on hospital services, which would generate more Medicaid dollars flowing into the state, and then repay the hospitals that increased tax amount in the form of higher supplemental payments. 

The plan worked for a year or two, before the state started keeping the money to plug budget holes. In the end, the hospitals had to file a lawsuit, which Lamont settled for $1.8 billion. Part of the settlement froze the tax rate on hospitals to 2016 levels throughout the duration of the settlement. 

That settlement, however, is coming to an end in 2026 and Lamont is essentially proposing the same scheme.

Starting in 2027, Lamont proposes to increase the hospital tax by $140 million – from $820 million per year to $960 million and then increase the tax by $25 million every year after. The $140 million will purportedly be returned to the hospitals via supplemental payments and generate additional federal Medicaid reimbursement of roughly $94 million to help with Connecticut’s ballooning Medicaid costs.

The governor’s budget also dangles $10 million in increased supplemental payments as a bargaining chip for the hospitals to lower hospital costs for state employees by $100 million, and the corresponding supplemental payments will purportedly generate another $73.7 million in federal Medicaid dollars.

While Connecticut certainly isn’t facing the same budget challenges today as it did ten years ago, there is a history here that gives the CHA pause, according to Paul Kidwell, senior vice president of policy for CHA, who believes the governor’s proposals are short-sighted, focusing only on the year following the settlement expiration, rather than looking forward ten years to craft long-lasting policy.

“It’s just moving money around and provides no sense as to what is going to happen in 2028 and 2029,” Kidwell said. “It’s potentially a net $10 million increase in Medicaid, if you just look at the state employees and the tax rebasing.”

“If you think about the policies in totality, we have a $1.4 billion Medicare deficit every year and we have hospitals operating at about a negative .5 percent margin,” Kidwell said. “So, we are making up the difference, to some degree, with commercial rates.”

But the potential costs to hospitals are not just comprised of Medicaid and taxes; Lamont proposes capping hospital prices for out-of-network services at 240 percent of Medicare, which Kidwell says could result in a revenue reduction of $400 to $500 million for hospitals. Kidwell says they are unsure of the exact figure as they are conducting an analysis at this time, but that it would be a “significant reduction in revenue.” 

“They’re getting federal revenue that they’re not investing in the $1.4 billion Medicaid deficit, they’re reducing our commercial payments from state employees and trying to make that back up via Medicaid with a net $10 million, and then they’re trying to take our commercial rates down by creating a price ceiling,” Kidwell said. “It basically puts the thumb on the scale for the commercial insurer who is the only person we can actually negotiate with – we can’t negotiate with Medicaid or Medicare. That’s not a good outlook for us.”

Just a couple days following Lamont’s budget proposal, the Office of Health Strategy (OHS), which was created by Lamont to help control the cost of healthcare, released a report that found hospitals’ non-operating revenue tied to investments and joint ventures increased by $357 million and that 56 percent of hospitals achieved a profit in 2023. 

The report also found that “Medicaid payments cover a higher proportion of the cost of care than in previous years,” saying Medicaid covered 87 percent of costs rather than the 62 percent cited by the hospitals and OHS’s own report from last year. However, the method by which OHS calculated the Medicaid Payment to Cost Ratio was changed, and the CHA argued the agency was manipulating the numbers “to make the Medicaid underpayment appear far less than it is in reality.”

“Changing the math does not change the problem,” CHA wrote in their press release. “Medicaid rates are unsustainable at current levels. Medicaid underfunding not only leads to cost shifts that increase costs for families with private insurance, but it also deprives people who are medically underserved of access to needed care and social supports. Hiding the problem means worse access for all patients.”

Lamont’s budget proposal, however, is only a starting point, and CHA was certainly not the only organization or association who was unhappy with the proposals. 

The budget will eventually be crafted by the legislature whose members will have to contend with escalating Medicaid costs even without increasing the rate, while some Democrats look to expand Medicaid coverage for undocumented immigrants and Republicans try to claw back previous years’ expansion that covers undocumented children up to age fifteen.

Although state lawmakers make lowering the cost of healthcare a priority seemingly every year, Kidwell says there’s no way to talk about lowering the cost of commercial health insurance costs without addressing the Medicaid and Medicare underpayments, and CHA hopes to have those big picture conversations with lawmakers in the coming months.

“It’s not pretty under this scenario. We can’t keep going this way,” Kidwell said. “What people are really feeling – the pinch of high deductible plans – it’s impossible to solve that problem without solving the public contribution, too. I think that’s the conversation we’re looking for.”

“The governor said during his speech that if you’ve got a better idea, come talk to me about it,” Kidwell said. “We think we’ve got a better idea, let’s talk about it.”

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