Colorado lawmakers used deep cuts to hospital funding — $528 million when federal matching dollars are included — to balance the $26.8 billion state budget that was introduced in the Senate Monday. This outcome was the result of years of inability to reckon with some fundamental contradictions in Colorado’s budget process, and it endangers the financial stability of as many as a dozen hospitals around the state, with some facing possible closure, according to the Colorado Hospital Association.
In response to the impact on hospitals, particularly in rural areas, and to the push to place a sales tax increase for transportation on the November ballot, Republican state Sen. Jerry Sonnenberg has introduced a bill to do something Democrats have wanted and most Republicans have resisted for several years now — changing the hospital provider fee, the source of this contested hospital funding, into an enterprise fund separate from the rest of the budget.
Reclassifying the hospital provider fee as an enterprise would allow Colorado to collect and distribute this money without pushing the state over the revenue limits imposed by the Taxpayer’s Bill of Rights. But this fix to a vexing problem comes at a price: a $670 million reduction in that revenue limit. Every department would be asked to submit budgets for the 2018-19 fiscal year that are 2 percent smaller than their budgets for 2017-18. More significantly, future budgets would grow from this smaller base.
This gets complicated fast — Sonnenberg’s bill also includes a different transportation funding mechanism from the sales tax increase working its way through the House and more funding for rural schools — and it’s not clear how viable it is as the legislature takes up the budget produced by a grueling months-long process in the bipartisan Joint Budget Committee.
Let’s start with the hospital provider fee, because it’s a key puzzle piece here.
Colorado implemented the hospital provider fee in 2010 as part of the state’s participation in the Medicaid expansion under the Affordable Care Act. It’s collected on patient revenue and gets matched nearly dollar for dollar by the federal government before being redistributed to hospitals based on how many Medicaid patients they see, how much uncompensated care they have and other factors. Reimbursements for Medicaid patients are low. Julie Lonborg, vice president of communications for the Colorado Hospital Association, puts them at about 52 cents on the dollar. Thanks to the hospital provider fee it’s closer to 75 cents on the dollar. That’s allowed hospitals to hire and keep doctors, buy new equipment and invest in upgrades.
“It’s really clear that the provider fee is the lifeblood of rural hospitals, and a solution is critical,” Lonborg said.
The problem that needs a solution: For several years running now, the hospital provider fee has put Colorado over the spending limits imposed by TABOR, even though it doesn’t involve any direct tax money.
To avoid reductions in other areas of the budget or giving refunds to taxpayers, the state has reduced the amount of the provider fee that it collects, forgoing federal matching dollars and reducing funding for hospitals.
For two years, Gov. John Hickenlooper and Democrats in the legislature have sought to turn the hospital provider fee into an enterprise fund — a sort of stand-alone business that’s exempt from TABOR — so that it wouldn’t affect the rest of the budget. With a few exceptions, Republicans have not been interested. (They didn’t want the fee or the Medicaid expansion in the first place, and they thought the fee was a tax that should have gone to the voters.) So it hasn’t gone anywhere.
Enter the 2017-18 budget.
The reduction in the provider fee is dramatic this year. There are a lot of competing pressures on the budget. The state has a hard cap on what it can spend, thanks to TABOR, even though a booming economy means the state is taking in more money. Legislators were looking at $264 million in TABOR refunds. There isn’t enough money to meet all the statutory obligations for K-12 education, transportation and other needs. Based on the March forecast, budget writers needed to cut nearly $700 million to get to a balanced budget.
So the Joint Budget Committee decided last week to reduce the hospital provider fee in the 2017-18 budget by $264 million. With federal matching money left on the table, that’s $528 million that won’t go out to Colorado hospitals. The governor’s proposed budget had already called for a $195 million reduction. The Colorado Hospital Association said that put eight hospitals “at risk” to varying degrees, and now that the number is so much higher, it’s likely that a dozen hospitals will face serious financial hardship, Lonborg said. Without naming names, Sonnenberg told the Colorado Independent that two hospitals in his northeast Colorado district could close.
Colorado Republicans don’t like talking about the budget in terms of “cuts.”
The total budget is larger than last year’s budget by about 4 percent.
“A lot of people are just not aware that Colorado has a balanced budget requirement,” Senate Majority Leader Chris Holbert said. There is “$697 million that we had to curtail, remove, not spend, but I’m reluctant to use the word ‘cut’ because we are allocating every dollar every year.”
“If we had $75 million more, then we could spend $75 million more, but we are spending more than last year on K-12,” he said.
Almost 5 percent more. Per-pupil spending is up slightly too. Higher ed is going up about 4 percent. Total transportation spending is going up 12 percent, and human services 6 percent. State employees are getting modest raises of up to 2.5 percent. At the same time, the budget also increases the “negative factor” by $48 million, for a total of $879 million. This is money the state owes schools by law but can’t afford to pay them. The $79 million general fund transfer to transportation needs was supposed to have been $110 million.
Rep. Dave Young, a Greeley Democrat who serves on the Joint Budget Committee, said the budget does more to fund K-12 and higher education than it had seemed would be possible at first. It wasn’t easy to get to this point.
“We have a very difficult budget situation,” he said. “We have a lot of obstacles that we overcame in a very bipartisan way to produce this budget. Based on where we started with the governor’s budget and the cuts he suggested, I think we did a pretty good job coming up with a balanced budget.”
In a press release last week when the draft budget was finalized, House Democrats highlighted the “arbitrary” predicament in which the state finds itself due to TABOR.
“There are a few things to like, but a lot that I’m hoping we can improve on during the remainder of the legislative session. Our cuts to hospitals, especially rural hospitals, and growing the negative factor are tough to stomach,” Democratic state Rep. Millie Hamner, vice chair of the Joint Budget Committee, said in that release.
The Senate will debate the budget this week, and the House will take it up next week. Both sides will have plenty of amendments, and once they cancel each other out, Senate President Kevin Grantham said he wouldn’t be surprised if the budget looks a lot like what was submitted.
So here’s what we’re watching for now.
But also in the remainder of the legislative session is Sonnenberg’s SB 267, “Sustainability of Rural Colorado,” which would reclassify the hospital provider fee. The bill is co-sponsored by Republican state Rep. Jon Becker of Fort Morgan, as well as Senate Minority Leader Lucia Guzman, a Denver Democrat, and House Majority Leader K.C. Becker, a Boulder Democrat.
“I appreciate that Sen. Sonnenberg is stepping forward and recognizing this provider fee is a real negative for rural hospitals and for the budget,” Young said. “It’s a real positive sign that he’s carrying this bill. The Democrats have been working on it the last couple years. I think it’s always better when we work in a bipartisan manner.”
Guzman dropped her own effort to reclassify the hospital provider fee last week to sign on to Sonnenberg’s bill.
Lonborg said it’s vitally important to get the fee in an enterprise fund not just to avoid this year’s cuts but to ensure stability for hospitals going forward. If the fee is reclassified, it stops being a bargaining chip in each year’s budget.
Sonnenberg previously opposed reclassifying the hospital provider fee, while other rural Republicans have been more supportive. In a YouTube video explaining the bill, he cast the issue as an “unintended consequence” of federal mandates rather than a result of the politics of Colorado’s complex budget process. Sonnenberg told the Colorado Independent that he was persuaded by the dire situation faced by hospitals.
It’s not clear if this alternative plan will have enough support. Before the bill was introduced Monday afternoon, Grantham said he wasn’t sure that it would be “palatable” to Democrats in the House, an apparent reference to the reduction in the revenue cap. “It might not be acceptable in the Senate either,” he added. Holbert said he would start as a “no” vote if the bill didn’t ask for voter permission to reclassify the fee.
But Michael Fields, state director for the influential Americans for Prosperity, was receptive on Twitter.
He also called it a “big blow” to the transportation funding bill backed by Grantham and Speaker of the House Crisanta Duran that would ask voters to approve a 0.62 percent sales tax increase that would raise $700 million a year.
The transportation bill is the other thing in the mix.
It’s not part of the budget. If it passes the House and Senate, it still needs voter approval and wouldn’t go into effect until next year. Even in the legislature, many Republicans object to the tax increase. Sonnenberg’s bill would reallocate $100 million a year of existing revenue to support $1.2 billion in bonding for transportation projects, with a quarter of that dedicated to rural Colorado roads. That’s a much smaller package than the $3.5 billion the sales tax would support, but using existing revenue is an easier sell with conservatives than new taxes.
This would have to come out of a state budget that, despite the removal of the provider fee, would be forced to shrink from this year.
Tim Hoover, a spokesman for the Colorado Fiscal Institute, declined to comment on Sonnenberg’s bill, but he called the overall state budget situation “tragic” and unnecessary. Just last week, a Senate committee killed a Republican-sponsored bill that would have asked voters to change the formula that determines the revenue cap so that it would grow with the state’s economy and rising incomes, rather than just population and inflation. If it had passed, it could have meant an extra $133 million to work with in next year’s budget and more going forward.
“You don’t need to make these kinds of fake choices, between whether you have nice schools or nice roads,” he said. “It’s a fake choice because we have a law that creates a fake surplus and forces tax rebates when there isn’t enough money to do the things that we all agree we should do. It creates these dilemmas: Do you fund long-term care for the elderly or do you fix roads? Do you fund more transit or do you try to keep tuition affordable? We can afford to do all those things if we just fix our tax code.”