To ensure that funds entrusted to the state are used appropriately, the Department of Health and Human Services (DHHS) conducts three levels of quality assurance and program integrity functions for all the public benefit programs it administers, including FANF.

Despite these safeguards, policymakers are considering adding a new layer of enforcement to New Hampshire’s existing eligibility determination system.  More specifically, HB 1658, presently before the Senate Finance Committee, would require DHHS to buy or build a new computerized income and identity verification system.  While policymakers and other state officials should regularly seek out innovations to reduce fraud and to improve program accuracy, HB1658 would create a system that appears to be largely duplicative and potentially less effective than the procedures currently used by the Department.  It also would create additional expenses for the state.  In particular, the Department would be required to seek out information that is irrelevant to eligibility and that could yield erroneous signs of fraudulent behavior or other “false positives”.

In recent weeks, much has been made about the potential value of such a system.  A free test run of a public database search conducted by LexisNexis appeared to flag thousands of Medicaid and Food Stamp recipients as potential fraud risks. However, the summary of the LexisNexis search available from DHHS contains no information on any searches done on FANF recipients.  Moreover, the results of the search included no indication that such information was confirmed or verified. Just as importantly, the results failed to demonstrate that the information compiled in the search would in fact disqualify people from being eligible for these public assistance programs.

HB 1658 Has Broad Application

HB 1658 would require the Department of Health and Human Services to build or buy a computerized income and identity eligibility verification system to “verify eligibility, eliminate duplication of assistance, and deter fraud,” with the broad goal of establishing uniform procedures to identify, investigate, and resolve potential cases of fraud for an array of programs that the Department administers.  While the focus of HB 1658 was originally on New Hampshire’s cash assistance program – Financial Assistance to Needy Families or FANF — the bill has expanded to include in-kind programs such as Medicaid and the federal Supplemental Nutrition Assistance Program (also known as SNAP or Food Stamps).[i]  Medicaid provides health insurance to low-income children, people with disabilities and senior citizens and SNAP provides access to food for those with low incomes.  Critically, the eligibility criteria for each of these programs vary substantially and each program may permit differing levels of income and financial resources.

The state – through the Department of Health and Human Services – currently conducts two levels of eligibility review for the benefit programs it administers.  The initial pre-eligibility review is conducted by the Department of Family Assistance, which cross matches data with nine federal databases and two state databases, in addition to conducting third party verification of income, residence, and financial assets.  The Office of Improvement and Integrity also conducts post-eligibility reviews of randomly selected Medicaid and Food Stamp recipients.  When a recipient is eligible for cash assistance programs as well as for one of these in-kind programs, the eligibility for those cash assistance programs is reviewed at the same time.[ii]  Beyond these initial levels of eligibility review, the Office of Improvement and Integrity also has a Special Investigation unit that pursues allegations that an individual is inappropriately receiving a benefit, saving as much as $2 million per year in total funds in avoiding providing benefits incorrectly.[iii]

The Proposed Database Cross Match is Duplicative of Current Practice

HB 1658 requires that the Department cross match data against 12 specific federal databases, several general purpose national databases, and several state sources as well.  The Department already collects information from the vast majority of these resources in its eligibility determinations.  Some of the databases recommended for use in HB 1658 contain information redundant to one another and some contain information irrelevant to eligibility entirely.

Federal law already requires that states’ Temporary Assistance to Needy Families (TANF) programs – such as FANF in New Hampshire — have an Income and Eligibility Verification System as part of its TANF state plan.  This Income and Eligibility Verification System must coordinate data exchanges with other federal benefit programs and must collect wage information, unemployment information, all Social Security information, and IRS unearned income information.[iv]  Consequently, the New Hampshire Department of Health and Human Services already cross-matches with nine federal databases and two state databases when conducting eligibility determinations.  Purchasing access to the databases identified in HB 1658 is largely duplicative of current practice and is likely to incur additional expenses for the state.

Moreover, some of the databases recommended will produce redundant information.  For example, the bill requires both that the state gather prisoner information from the Social Security Administration and from a nationwide public record data source of incarcerated individuals as well as a record of fleeing felons maintained by the FBI.  Yet, the state currently collects prisoner and fleeing felon data from the Social Security Administration.

HB 1658 also directs the Department to use databases to seek information that is irrelevant to eligibility.  For example, the bill would mandate searches of utility payments under the fuel assistance program, of licenses, permits, or certificates issued by a state agency, and of drivers’ licenses nationwide.  Receipt of fuel assistance, holding a state permit, or having an out-of-state drivers’ license does not affect eligibility for public assistance programs in New Hampshire.

Database Searches Replace Best Practices

The Department of Health and Human Services currently requires real-time evidence of income, residency and financial resources when determining eligibility for FANF, Medicaid, and SNAP.  If an applicant cannot produce specific documents – such as bank statements or pay stubs –  or if the information provided to satisfy these requirements needs further clarification, the Department conducts third party verifications of his or her financial resources, income and residency status.  The Department repeats verification of income, resources and residency at eligibility review periods called redeterminations.

To provide one example, to verify residency for people living in subsidized housing, the Department obtains third party verification of the address, rent amount, and number of people living in the home by the local housing authority, if the information supplied by an applicant requires further clarification.  For those living in unsubsidized housing, the Department confirms information directly with the landlord.  If the applicant owns and lives in their own home, the Department requires applicants to produce mortgage statements and tax documents.  The Department requires similar documentation and third party verification of income and financial resources through the presentation of wage stubs, income tax returns, and bank statements and employs direct confirmation with employers and financial institutions when further information or clarification is needed.

The real-time information the Department currently requires is likely more rigorous and accurate than using blunt database searches.  For instance, HB 1658 requires searching a national database for an individual’s best address.  Such a search may not produce the most recent information available.  HB 1658 also requires a nationwide search of drivers’ licenses.  Such a search may turn up the presence of an out-of-state driver’s license.  This is not per se evidence of residency in another state:  a person can legally have a valid out-of-state driver’s license for years while residing in New Hampshire.   Confirmation from a current landlord – which the Department of Health and Human Services regularly obtains – is one example of a much more reliable and accurate method for confirming state residency.  Broad database searches will ultimately be less effective than the real-time confirmation of residency, income, and resources Department staff currently perform and will not remove the need for staff to obtain this confirmation directly.

Broad Data Searches May Prove Ineffective

In addition, the formulae – or algorithms – used in the sort of database searches specified in HB 1658 may produce false positives.  This is likely to happen because the algorithms are too general to accurately characterize activity identified by the search.  For example, one well-publicized result of the LexisNexis free trial identified a current Medicaid recipient as having been dead since the 1980s.  In reality, she is alive, but has been in a nursing home since that time. [v]  The formula used in this search looked for indicators of “being alive”, such as owning a home or earning wages, and when those activities disappeared from public records – likely because the woman in question entered a nursing home – it incorrectly concluded that she was deceased.

Such algorithms may also produce information that is irrelevant to eligibility determinations.  For example, the LexisNexis free trial identified several Food Stamp and Medicaid recipients as being owners of real property and thus being potential fraud risks.  Under both of these programs, owning a home or car is not necessarily counted against one’s assets when determining eligibility.

Conclusion

The Department of Health and Human Services performs three levels of program integrity and quality assurance reviews to ensure that funds to support Medicaid, Food Stamps, and FANF benefits are used appropriately.  While policymakers and other state officials should regularly seek out innovations to reduce fraud and to improve program accuracy, HB 1658 would create a system – with an unknown cost to the state – that appears to be largely duplicative of and potentially less effective than the current eligibility determination and review processes used by the Department.

As this Issue Brief explains, due to a federal law that pre-empts some states’ taxing authority, New Hampshire is one of only nine states in the country that is permitted to tax Internet access services.  While it may be in a distinct minority, its policy is nevertheless the correct one.  States that impose taxes on telecommunication services should not distinguish between communications accomplished over the telephone and those achieved via email or video chat.  Moreover, while some may maintain that barring this form of taxation is necessary to provide telecommunications companies a competitive environment, the industry appears to be flourishing in New Hampshire.  Finally, more targeted options for reducing the taxes paid by working families are available should policymakers wish to pursue that goal.

New Hampshire Can and Should Tax Internet Access

Under current law, New Hampshire imposes a 7 percent Communications Services Tax (CST) on the gross charges for intra- and inter-state communications services.  Importantly, the law defines “communications services” as:

services for transmitting, emitting, or receiving signs, signals, writing, images, sounds or intelligence of any nature by any electromagnetic system capable of 2-way communication and includes, without limitation, messages or information transmitted through use of local, toll and wide area telephone service…cable television; computer exchange services; mobile telecommunications services; facsimile services … or any other form, whether stationary, portable or mobile, of 2-way communications; or any other transmission of messages or information by electronic or similar means, between or among points by wire, cable, fiber-optics, laser, microwave, radio, satellite or similar facilities.[i]

Consequently, the law has been interpreted to include Internet access as a means of “2-way communication.”[ii]

The CST is projected to generate approximately $80 million in General Fund revenue in fiscal year (FY) 2012 and has produced in excess of $75 million per fiscal year (in constant FY 2012 dollars) over the last decade.  While the Department of Revenue Administration (DRA) does not maintain data on the amount of revenue produced by the inclusion of Internet access among the services taxable under the CST, it is likely substantial.  Data from the Federal Communications Commission indicate that, at the end of 2010, there were approximately 697,000 Internet connections in New Hampshire through various technologies (e.g. DSL, cable, mobile wireless).[iii]  If one assumes that the CST is imposed upon the gross charges for each of these connections and that consumers pay an average monthly charge of $20 for each connection, the annual revenue produced would on the order of $12 million.[iv]

At present, only nine states — Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Texas, Washington, and Wisconsin – impose some form of taxation on charges for Internet access.[v]  This situation has arisen, not because New Hampshire and this select group of states have chosen to act where others have refrained from doing so, but because most other states are actively prohibited by federal law from levying taxes on Internet access.  Originally enacted in 1998 and subsequently renewed through 2014, a federal law known as the Internet Tax Freedom Act (ITFA) effectively bars state and local governments from imposing taxes – whether general sales taxes or more narrow communications taxes – on Internet access services.  However, ITFA permits those states – like New Hampshire – that taxed Internet access prior to 1998 to continue to do so.

As a matter of policy, New Hampshire’s approach to telecommunications taxation is sound.  Substantively, there is no reason to distinguish between communications accomplished over the telephone and communications achieved via email or video chat.  Indeed, technologies like Voice over Internet Protocol (VoIP), services along the lines of Skype, and still newer advances such as Apple’s Face Time and Google+ Hangouts have certainly blurred, and may ultimately erase altogether, the distinction between voice- and data-based communications.  To cite one example of this trend, an April 2011 survey by the Pew Research Center’s Internet and American Life Project found that 24 percent of internet users – and 19 percent of all adult Americans – have placed a phone call online, up from 10 percent and 5 percent in April 2000.[vi]

Exempting Internet Access from Taxation Would Add to Current and Future Fiscal Stress

An analysis from the DRA of the impact that exempting Internet access services from taxation would have on state revenue is not yet available.  However, as noted above, the inclusion of such services in the base of the CST likely accounts for a substantial fraction of the revenue the tax produces.  As a result, removing them from the base would add significantly to the budgetary strains New Hampshire already faces.

While the state did end FY 2011 with a surplus of $17.7 million, a number of claims against those funds already exist.  For instance:

• According to the Office of the Legislative Budget Assistant, the current budget, as initially adopted by the Legislature in June of last year, was expected to end the current fiscal year – FY 2012 – with a deficit of $14 million.[vii]

• Through March, actual revenue collections within the General and Education Fund were roughly 1.8 percent below projections, due largely to disputes surrounding the Medicaid Enhancement Tax (MET) and to declines in tobacco tax revenue arising from a 10 cent reduction in the cigarette tax rate.[viii]  While New Hampshire may ultimately receive additional MET revenue, it is not yet clear that it will realize all of the remaining $37 million in outstanding collections.

• Due to a federal audit of New Hampshire’s disproportionate share hospital (DSH) program dating to 2004, New Hampshire must refund $35 million in federal Medicaid funds; $9 million of that obligation will fall in FY 2012 and another $18 million will occur in FY 2013.[ix]

What’s more, policymakers have already enacted multiple changes in tax policy this session – with several more presently making their way through the legislative process – that will reduce tax revenue in future biennia without a clear indication that economic growth will be sufficient to compensate.  More specifically:

• Last June, the Legislature chose to allow taxpayers to carry forward, for ten years rather than five, a credit for any Business Enterprise Tax (BET) that they may have paid that they can use to reduce their Business Profits Tax (BPT) liabilities; the change will take effect on July 1, 2014.[x]  Analysis from the DRA indicates that the revenue loss arising from the change could range from $32 M to $47 M annually, once fully implemented.[xi]

• As part of the FY 2012-2013 budget, the Legislature elected to increase the limit – from $1 million to $10 million — on the net operating losses (NOL) that businesses may carry forward from one year to the next in order to reduce their BPT liabilities.  That change is currently scheduled to take effect on July 1, 2013, but legislation now before the Senate – HB 242 – would move its implementation to January 1, 2013.  The DRA anticipates that this increase in the NOL limit will reduce BPT revenue by as much as $20 million over 10 years, for each year that the increase is in effect.

• Other legislation now under consideration would reduce revenue even further, including:
• SB 295, which would increase the limit on the Research and Development Tax Credit from $1 million to $2 million annually (effective July 1, 2013);
• SB 155, which would increase the amount of expenses businesses are allowed to deduct under the BPT (effective January 1, 2014, as approved by the Senate), and;
• HB 1418, which would increase the threshold at which business entities begin to owe BET from $150,000 to $200,000 worth of gross receipts (effective December 31, 2013).

In other words, exempting Internet access services from the CST could trigger additional spending cuts to keep New Hampshire’s budget balanced over the FY 2012-2103 biennium and would dig still deeper the revenue hole the next Governor and Legislature will have to fill as they craft the FY 2014-2015 budget.

Telecommunications Industry Appears to be Thriving in New Hampshire

Proponents of exempting Internet access from the Communications Service Tax have suggested that such a move is essential to “maintaining our New Hampshire Advantage” and, by implication, creating economic conditions favorable to Internet service providers and other telecommunications companies.[xii]  Yet, data from the U.S. Bureau of Economic Analysis (BEA) indicate that the telecommunications industry has fared relatively well in New Hampshire in recent years.

As the figure at left illustrates, the telecommunications industry in New Hampshire has outperformed national and regional benchmarks on two important measures since the late 1990s.  Between 1997 and 2009, gross domestic product (GDP) attributable to the broadcasting and telecommunications sector in New Hampshire has grown by more than 10 percent per year on average, after adjusting for inflation. In contrast, it has grown by 7 percent per year on average for the nation as a whole and by just over 6 percent within New England. [xiii]  In addition, while data for corporate profits are typically unavailable on a state-by-state basis, one common proxy is a measure known as gross operating surplus.  After adjusting for inflation, the gross operating surplus for New Hampshire’s broadcasting and telecommunications sector grew by 6.6 percent per year on average between 1997 and 2009; within New England, it grew at less than half that rate over the same period – 3.1 percent per year on average.  For the entire US broadcasting and telecommunications sector, it grew by 3.8 percent during that timeframe.[xiv]

In short, even while Internet access has been subject to taxation, the industry responsible for delivering that service appears to be thriving in New Hampshire.

Exempting Internet Access is Poorly Targeted Tax Reduction

Others may support exempting Internet access services from the CST on the grounds that it provides a tax reduction to working families.  Yet, only a portion of the revenue lost to such a proposal would accrue to low- and moderate-income households, for at least two reasons.  First, some fraction of the revenue loss would flow to commercial customers; after all, nearly 1 in 7 Internet connections in New Hampshire are for businesses.[xv]  Second, as the figure at right illustrates, upper-income households are far more likely than low-income individuals and families to have Internet access.

While tax reductions of any kind would add to the fiscal stress New Hampshire now faces, other, potentially cheaper or more targeted options are available to policymakers.  For instance, New Hampshire’s Low Income Property Tax Relief program now offers tax rebates to certain homeowners for some or all of the statewide property tax they owe; in 2009, a total of $3.1 million in rebates were distributed under the program.[xvi]  The program could be enhanced in a variety of ways:  it could be extended to renters (who pay the statewide property tax in the form of higher rent); it could be expanded to include a portion of all the property taxes a household may owe, or; it could be enlarged to include families with incomes above the current eligibility ceiling of $40,000.

Alternatively, New Hampshire could follow the lead of more than twenty states and establish its own version of the federal Earned Income Tax Credit (EITC).  The EITC is a refundable tax credit that individuals and families who have earnings from a job can receive if their incomes are sufficiently low.[xvii]  According to the Brookings Institution, in 2007, some 76,000 individuals and families, representing a total of more than 214,000 people, were eligible to receive the federal EITC in New Hampshire.[xviii]  At a cost of approximately $12 million per year, New Hampshire could create its own EITC equal to 10 percent of the federal credit, but potentially reaching the same number of taxpayers.  Such a credit would deliver more than 90 percent of its benefits to taxpayers with incomes below $44,000 per year.[xix]

Conclusion

As part of its FY 2012-2013 budget, New Hampshire reduced funding for critical public priorities such as higher education, health care, and human services by hundreds of millions of dollars.  A proposal now before the Legislature could lead to still deeper spending cuts in order to exempt Internet access from the state’s Communications Services Tax.  The proposal could produce such an outcome even when there is no substantive reason to tax communications achieved over the Internet differently than those accomplished over the telephone and even as the telecommunications industry in New Hampshire appears to be flourishing relative to national and regional standards.  What’s more, should the Legislature decide to pursue further tax cuts this session, other, potentially cheaper or more targeted options for reducing taxes for working New Hampshire families are readily available.

While managed care holds the promise both to improve the quality of care Medicaid members receive and to reduce the costs the state incurs in administering the program, numerous questions associated with the contract must be answered in order for New Hampshire to achieve those goals.  This Issue Brief does not offer a comprehensive list of such questions, but instead focuses on two areas: ensuring access to care for Medicaid members and assessing the effectiveness of managed care over time.

Contract Appears to Lack Important Safeguards to Preserve Access to Care

Medicaid managed care, under which states make prospective payments to managed care plans to provide or arrange for all services for enrollees, attempts to ensure the provision of appropriate health care services in a cost-efficient manner. However, because plans are paid a fixed amount regardless of the number of services they provide, managed care programs require safeguards against the incentive for some plans to underserve enrollees, such as by limiting their access to care.  Access may also be affected by other factors, such as physicians’ locations and their willingness to participate in managed care plans.  Safeguards to ensure enrollees have access to care may include requiring plans to maintain provider networks that provide enrollees with sufficient geographic access to providers or to monitor certain quality indicators through enrollee satisfaction surveys or grievance systems.

Geographic Requirements

At present, the contract requires the provider networks established by managed care organizations (MCOs) to have “providers in sufficient numbers and with sufficient capacity and expertise for all covered services and for timely provision of services and reasonable choice by members to meet their needs,” as is required under federal regulation.[i]  The contract goes on to outline a minimum standard of geographic access to care, requiring that there be a certain number of providers within a specified distance or travel duration from each enrollee in the network.[ii]  While those geographic requirements seem to ensure that members will not need to travel undue distances,   there does not appear to be a corresponding requirement that that the providers within these regions have open panels and actively accept patients.  If a provider does not have an open panel, then his or her relative distance to an enrollee has little meaning because the provider cannot be accessed for care.  The geographic requirements in the contract should therefore be refined to clarify that the providers available within the described geographic requirements have open panels.

Member-to-Provider Ratios

In contracting for managed care as part of their Medicaid programs, states often use more than one measure to assess adequate access to health care, for instance, by establishing a minimum member-to-provider ratio requirement in addition to geographic distance or travel time requirements.  Importantly, there is no uniform member-to-provider ratio requirement stipulated in New Hampshire’s existing managed care contract.  Rather, each proposal submitted by the three MCOs suggests a different member-to-provider ratio.  For example, Meridian Health Plan’s proposal states that it intends to have one adult and pediatric primary care provider (PCP) for every 2,000 members or two per county, whichever is greater.  For high volume specialists, it plans a ratio of one for every 3,000 members.[iii]  In contrast, the suggested member-to-provider ratio in Boston Medical Center’s proposal is one adult PCP for every 200 adult members per region and one pediatric PCP for every 300 pediatric members per region, with continuing distinctions made for specialists and hospitals within urban and rural counties.[iv]  For Centene’s proposal, the ratio is one PCP to every 1,000 members per county.[v]  As a result, access to care could vary significantly among the three MCOs, effectively reducing meaningful choice among MCOs for Medicaid members.  The contract should establish one, uniform member-to-provider ratio that applies to each of the three MCOs.

Selection and Assignment of Primary Care Providers

State officials have frequently asserted that ensuring that every Medicaid member has a primary care provider is vital to producing efficiencies.  Primary care providers are central to accessing care, care coordination and care management for all members, which increases their significance and reinforces that a successful relationship with a primary care provider is critical.   The contract fails to stipulate certain details regarding the choice of primary care providers by members (or the assignment of providers to them); the definition of what constitutes a primary care provider; and the responsibilities and activities the MCOs may require of them.

For example, the contract states that each:

MCO shall implement procedures that ensure that each member has an ongoing source of primary care appropriate to his or needs and a person or entity formerly designated as primarily responsible for coordinating the health care services furnished to the member in accordance with 42 CFR 438.208.[vi]

It further provides that:

The MCO shall allow each member to choose his or her health professional to the extent possible and appropriate.[vii]

These passages, in turn, give rise to several questions that appear to go unanswered elsewhere in the contract.  Among them:

• How will the state ensure the provision of primary care for each member?
• What objectives must a MCO fulfill to demonstrate to the state that each member has an ongoing source of primary care appropriate to his or her needs?
• What will the process be for the selection or assignment of primary care providers?  Will this process be different for each MCO?
• Will the MCOs engage members in selection of a PCP within a certain time frame?  If the member does not choose a PCP within that time frame will one be assigned to them by the MCO?
• Can members be locked into a PCP assignment for a particular period of time? Alternatively, will members be allowed to change their PCP without cause at any time?
• The provision of primary care for people with complex medical needs or disabilities may be most appropriately provided by a specialist or physician not typically considered a primary care provider.  Can people with disabilities or others with complex medical needs select practitioners who are board certified or eligible for certification in other relevant specialties as their primary care providers?

Enforcement of Network Adequacy

The contract further requires the MCOs “to submit documentation to DHHS to demonstrate that it maintains a network of providers that is sufficient in number, mix, and geographic distribution to meet the needs of the anticipated number of members in the service area.”[viii]  There is no description as to what type of documentation will be required by the MCOs to demonstrate network adequacy.  Adequate access to care is a fundamental, threshold concern and should be rigorously monitored.  The contract should require that each MCO produce geographic reports for both adult and pediatric primary care providers demonstrating access by region.  Similarly, the contract should require member-to-primary care provider ratio reports documenting open and closed panel adult and pediatric primary care providers per number of enrollees.

Price Limitations and Capitation Rates

As written, the contract sets the price New Hampshire will pay for the purchase of acute care services for its Medicaid population at a fixed sum of $382 million for fiscal year 2013.  Setting the price as a fixed sum may, however, create pressure on managed care organizations to manage their financial risks by limiting services for Medicaid members and thus ultimately threaten access to care.

Under federal law, Medicaid is an entitlement; any individual deemed eligible for the program must be served.  Consequently, if Medicaid enrollment grows beyond projected levels, the MCOs would still be required, under the contract, to cover the costs associated with those additional enrollees, even if their total costs exceed the price limitation of $382 million.  Under such circumstances, the MCOs may attempt to manage their financial risks by limiting access to services for Medicaid members.   Establishing monthly capitated payments per Medicaid member may bring predictability to state budgeting for Medicaid, but such an approach is distinct from establishing a total capped cost for Medicaid services.

Moreover, according to the Department of Health and Human Services’ Annual Report on Medicaid, the total cost of acute care services was $408 million in FY 2010.[ix] In other words, the current contract would pay $26 million less in FY 2013 than what the state spent two year ago on the same set of services.  While Medicaid enrollment may fall in the future and thus produce a drop in costs, the contract fails to explain adequately this difference in actual costs for FY 2010 and anticipated costs for FY 2013.  More specifically, the contract should detail its assumptions about the number of enrollees, how that number is expected to change in the years ahead, and the eligibility categories into which enrollees will fall.  Further, if a decline in enrollees or a change in their composition does not fully account for the $26 million decline, the contract should present additional information that permits policymakers and stakeholders to understand how the fixed price for the contract was derived.

Step 2 Program Implementation

The contract contemplates that Medicaid members who receive long-term care services – either home and community based care or care in institutions like skilled nursing facilities  – will begin receiving coverage for those services through a capitated risk-based plan by July 1, 2013.[x]  Safely and effectively transitioning this population of individuals with complex medical needs to such an arrangement will be difficult.  Only 11 states offer long-term care supports and services in capitated, risk-based arrangements.[xi]  The contract’s deadlines for submission of plans for this next phase of managed care implementation are extremely aggressive.  Moreover, the contract does not require that MCOs seek stakeholder input in developing their Step 2 implementation plans.   The process of designing and developing Step 2 should be given at least a year and should involve all interested parties – providers, MCOs, Medicaid members and their advocates, and state policymakers -  in a long-term, integrated, and ongoing planning process to ensure that access to effective care is maintained.

Contract Struggles to Establish Structures for Assessing Effectiveness of Managed Care

Contract management and oversight are essential to the success of Medicaid managed care.  The contract should therefore clearly express the outcomes the state is managing toward and the standards for evaluating whether those outcomes have been achieved.

In general, the more specific the state is with respect to the objectives of the program and the standards that will be used to verify that those goals have been met, the more successful these arrangements will be.  While those objectives and standards should be uniform for all three vendors, the MCOs will still have the flexibility to employ their own strategies to achieve the objectives set out by the state.  Below are select areas in which the contract could establish uniform and specific objectives for the MCOs, but this principle is relevant to contract provisions relating to utilization management, quality management, and care coordination as well.[xii]

Medical Loss Ratios and Allowable Administrative Costs

A medical loss ratio (MLR) is a requirement that a health insurance carrier spend a certain proportion of the premiums it collects on medical care and health care quality improvement, rather than on administrative costs.  Federal and New Hampshire law relative to MLR requirements do not apply to Medicaid managed care organizations.[xiii]  Consequently, the contract should have a standard MLR requirement for each MCO.  The imposition of such a requirement would ensure that federal and state funds are used chiefly for the benefit of Medicaid members and the state will benefit from any cost containment gains that the MCOs can achieve.

Payment Reform

Payment reform seeks to align health care reimbursement structures with desired health outcomes, by introducing incentives to improve quality and to reduce the use of unnecessary or costly services.  New Hampshire has made payment reform a component of the Medicaid managed care contract, but appears to have left what will constitute payment reform and what efforts are sufficient with respect to implementing payment reform to the discretion of the MCOs.

In particular, the contract states that:

The MCO shall submit thirty days from the contract effective date or 90 days prior to start of each Agreement yr, whichever is later, its plan to engage its provider network in health care delivery and payment reform activities, subject to review and approval by DHHS.  These activities may include, but are not limited to, pay for performance programs, innovative provider reimbursement methodologies, risk sharing arrangements and sub-capitation agreements.  The payment reform plan shall contain information on the anticipated impact on member health outcomes of each specific activity, providers affected by the specific activity, an implementation plan for each activity, and an implementation milestone to be met by the end of each year of the Agreement for each activity.[xiv]

Thus, the contract mandates only that the MCOs “engage” their providers in payment reform plans, without defining engagement or specifying a minimum percentage of providers that MCOs must include in such efforts.  In addition, the contract does not appear to contain any specific baseline elements that each of the payment reform arrangements must include.  Under the current language, one MCO could, under payment reform, reimburse providers for preventable readmissions or for “never events” – which in general refer to shocking medical errors, such as leaving foreign objects in patients following a surgery – while another MCO would not.

In fact, under the current version of the contract, MCOs are permitted to establish both their own goals for payment reform and the milestones by which to judge whether they have achieved those goals.  This is especially surprising, since MCOs will earn a payout of withheld capitation amounts if they meet the implementation milestones they establish in their payment reform plans.[xv]

Encounter Data

In order to assess the effectiveness of managed care and to understand whether it is achieving the goals set out for it, state policymakers will have to rely upon data reported by the MCOs.  More specifically, they will require thorough and accurate encounter data – which record the health care services provided to each individual patient – and utilization data – which show the services provided to an entire population.  While the contract does include an extensive list of data elements to be reported, the full extent of the data MCOs will be required to provide – as well as the format in which they will provide it – is not finalized in the current contract.[xvi]

What’s more, the contract leaves unclear the outcomes towards which the state is managing.  In the first year, it may be establishing a care management plan and a utilization plan that meets some threshold goals of the state.  Does the state want to reduce length-of-stay in hospitals or hospital readmission rates?  Will the state generate the baseline and target data against which to compare the encounter data it receives?

The state should identify the minimum performance standards it expects of the MCOs and align its data reporting requirements with those standards.  The existing requirement for broad based reporting of encounter data will only be useful if the state has a clear expression of what its goals are and how it is going to measure those goals.

Conclusion

Managed care holds the promise both to improve the quality of care Medicaid members receive and to potentially reduce the costs New Hampshire incurs in administering the program.  However, numerous questions associated with the contract must be answered in order for New Hampshire to achieve those goals.  Ensuring access to care for Medicaid members and assessing the effectiveness of managed care over time are vital to the success of this undertaking.

I am here today to offer testimony on CACR 13, a measure that would amend the New Hampshire Constitution to prohibit any new tax on a person’s income, from whatever source it may be derived.  At first glance, the intent of the amendment seems straightforward enough:  it seeks to ban a broad-based personal income tax.  In reality, though, CACR 13 would go well beyond that apparent aim.

Most notably, CACR 13 would lead to a major expansion of the judicial branch’s role in setting tax policy in New Hampshire, shifting critical decisions from the State House to the Supreme Court.  Words and concepts such as “new,” “person,” or “income” may appear quite clear, but, should CACR 13 be adopted, the courts would likely be called upon to interpret them and their implications any time New Hampshire attempted a meaningful modification to its current tax system, thus setting the stage for decades of litigation.

As a result, CACR 13 would largely freeze that tax system — and its shortcomings – in place for years to come and would make it far more difficult for policymakers to alleviate the system’s dependence on certain forms of taxation, such as business and property taxes.  CACR 13 could even exacerbate those shortcomings over time, as it would likely mean that, should policymakers need to generate revenue to meet important public priorities, they would look first to increasing the rates of the state’s existing revenue sources, such as its tobacco or motor fuel levies.

To expand upon my first point, Marcus Hurn, Professor of Law at the University of New Hampshire School of Law and the author of several scholarly articles on the New Hampshire Constitution and the state’s taxing authority, has conducted an analysis of some of the problems associated with the adoption of CACR 13.  He asked that I share the results of that analysis with you today; I have attached a copy of Professor Hurn’s analysis of CACR13 to my prepared testimony.

In brief, Professor Hurn argues that, should CACR 13 be incorporated into the New Hampshire Constitution, it would “start a cascade of constitutional questions that could take years to settle” and “inescapably require the Supreme Court to develop whole new bodies of constitutional law and … to make judgment calls where clear or even workable definitions are probably impossible.”  Consequently, it would “require the Supreme Court continually to be much more involved in reviewing tax laws and proposals than it already is.”[i]  He notes, by way of precedent, that the last major change to New Hampshire’s Constitution regarding taxation — in 1903 – led to “at least 40 years of legal confusion and uncertainty” and prevented the state from devising a modern business tax until 1969.

Such difficulties arise, in his view, both from the interaction of the proposed amendment with the Constitution’s existing constraints on taxing authority and differences between the presumed meaning of certain words and concepts in the amendment and their potential legal definitions.

Take, for instance, the reference to a “person’s” income.  As Professor Hurn points out, from a legal standpoint, “corporations are persons,” but he goes on to observe that attempts to differentiate between natural persons and corporations could create additional difficulties, since the New Hampshire Constitution bars discrimination among persons in levying taxes.  Similarly, he notes that the New Hampshire Supreme Court has “never been required to define income,” one of the key concepts in the proposed amendment.  Thus, adoption of CACR 13 would force the Supreme Court to “develop a constitutional definition and to hold the Legislature to it.”

Much the same could be said about the term “new.”  In Professor Hurn’s view, the Supreme Court would have to decide, on a case by case basis, how much variation in a tax makes it “new.”  As a result, he asks, “Do we want to get an advisory opinion every time House or Senate thinks some change in the [Business Profits Tax] is desirable?”

Looking back over the past legislative session, it is easy to see how such concerns could come into play.  For instance, earlier this session, the Senate passed SB 168, which seeks to bring New Hampshire’s interest and dividend tax into conformity with federal law.  While the bill would result in larger tax liabilities for some taxpayers and smaller liabilities for others, a case could be made for adoption of the bill on the grounds that it would ease compliance and administration.  However, if CACR 13 were in place, New Hampshire would not be able to pursue this reform, no matter its merits, since it would likely amount to a new tax on a person’s income from whatever source derived, as it would tax sources of income not currently taxed under New Hampshire law.

Similarly, as the Members of the Committee know, last month, the House of Representatives considered legislation – HB 593 – to permit video lottery and table gaming in the state.  Under one version of that bill, New Hampshire would have required 40 percent of the “net machine income generated by video lottery machines” to be paid to the state and certain municipalities.  Those funds, in turn, would have been used to reduce the Business Profits and Business Enterprise Taxes.  It does not seem unreasonable to expect that, if CACR 13 were incorporated into the constitution, such a requirement might be subjected to a legal challenge.  If such a challenge were successful, it would deny New Hampshire one of the principal justifications for allowing casinos in the first place – to provide a new source of revenue for the state.

Under CACR 13, therefore, policymakers would find it far more difficult to enact meaningful reforms to the state’s tax system, even reforms that were intended to be revenue neutral or that did not contemplate a broad-based personal income tax.  In fact, the threat of prolonged litigation could deter policymakers from simply considering such reforms, let alone actively pursuing them.

As a result, CACR 13 would effectively freeze in place New Hampshire’s existing tax system.  NHFPI examined that system in its December 2010 report, An Overview of New Hampshire’s Tax System, and highlighted two chief shortcomings, both of which CACR 13 would sustain for years to come.

First and foremost, New Hampshire’s tax system helps to perpetuate the state’s long-standing structural budget deficit.  Structural budget deficits arise when the growth in state revenues fail to match the natural growth in state expenditures.  Indeed, a February 1992 study by KPMG Peat Marwick found that:

New Hampshire can be characterized as having a long-term structural deficit in the sense that for a given scope of programs and revenue system, expenditures grow automatically faster than revenues.[ii]

States can forestall the emergence of structural budget deficits by ensuring that their tax systems produce a stream of revenue that grows along with their economies.  Yet, in recent years, New Hampshire’s tax system has failed to meet that standard.   Data from the Office of the Legislative Budget Assistant indicate that, after adjusting for rate changes and inflation, General Fund tax revenue in New Hampshire grew by just 0.6 percent per year between FY 1994, when the Business Enterprise Tax took effect, and FY 2011.  In comparison, personal income in New Hampshire, a common proxy for the size of the state’s economy, rose by 2.4 percent per year on average, after adjusting for inflation, over the same period.

Second, New Hampshire’s current tax system is regressive.  It requires low- and moderate-income individuals and families to dedicate much larger shares of their incomes to meeting their tax responsibilities than it demands of upper-income taxpayers.  More specifically, an analysis conducted by the Institute on Taxation and Economic Policy found that, in 2007, the individuals and families that comprised the poorest fifth of taxpayers in New Hampshire, on average, paid 8.3 percent of their incomes in state and local taxes.[iii]  In other words, these taxpayers – whose average income was $14,100 – faced an effective state and local tax rate of 8.3 percent.  Meanwhile, taxpayers in the middle of the income distribution – individuals and families with incomes ranging from $40,000 to $65,000 – paid a somewhat smaller share of their incomes – 6.3 percent – in taxes that same year.  In stark contrast, the most well-off Granite Staters – those that constituted the very richest 1 percent of taxpayers – experienced an effective tax rate of just 2.0 percent on average.  Taxpayers in this category had an average income of close to $1.65 million in 2007.  In short, at a time when the typical New Hampshire household has seen its income decline in real terms, New Hampshire’s tax system impairs working families’ ability to make ends meet.

These two shortcomings arise in large measure because of the taxes on which New Hampshire currently relies.  For instance, levies on cigarettes, gasoline, or beer, hold a prominent place in New Hampshire’s tax system.  In fact, according to data from the US Census Bureau, these three excise taxes accounted for close to 7 percent of state and local tax revenue in FY 2009, the 10^th highest concentration in the country that year.  (What’s more, they comprised nearly 16 percent of state tax revenue.)  Unfortunately, these sources of revenue not only fail to grow along with the New Hampshire economy, but also impose a much greater burden on low- and moderate-income families and individuals.  In comparison to other states, New Hampshire also tends to rely disproportionately on property taxes and on business taxes, such as the Business Profits Tax (BPT) or Business Enterprise Tax (BET).

If CACR 13 were to become part of the New Hampshire Constitution, the state would find it far more difficult to shift away from its dependence on business, excise, or property taxes.  In fact, adoption of CACR 13 would help to ensure that, in order to generate additional revenue in the future, New Hampshire policymakers would have to look first to raising rates on the taxes that are in place today, thus potentially exacerbating the shortcomings previously described.

Finally, it is worth noting that the move to create a constitutional prohibition against any new tax on income enjoys relatively low support among the general public.  The WMUR Granite State Poll conducted in February by the University of New Hampshire Survey Center asked over 500 New Hampshire adults whether they would vote for such an amendment to the constitution.  Just 39 percent of respondents indicated that they would, in fact, support such an amendment, while 41 percent stated that they would vote against it.

In sum, the public already appears to understand the point that I wish to convey today.  CACR 13 simply goes too far.

Once more, I thank you for the opportunity to testify and would be more than happy to answer any questions the Committee may have.

In March of last year, the House of Representatives passed CACR 6, an amendment to the New Hampshire Constitution that would require a three-fifths supermajority vote on any future tax or fee increase.  Just last month, the Senate adopted an entirely different version of the amendment, one that would prohibit any increase in the state budget that exceeded the rate of inflation, unless approved by a similar three-fifths supermajority of both chambers of the Legislature.

While the approaches the House and Senate have taken in their respective versions of CACR 6 differ significantly, their consequences for local communities would be similar.  If either version becomes part of New Hampshire’s Constitution, state government would find it increasingly difficult – if not impossible – to deliver the programs and services it does today.  Under such circumstances, policymakers would likely reduce spending in a range of areas, including aid to cities and towns.  In turn, municipalities and school districts would be forced to compensate for the losses and raise property taxes further to provide necessary services.

Indeed, data from the US Census Bureau suggests that, on average, those states with constitutional limits on taxes or spending have seen substantial growth in property taxes over the past decade.  At present, twenty-one states have supermajority requirements for tax increases, strict limits on the rate of growth in the amount of funds they expend, or some combination thereof enshrined in their constitutions.[i]  As the graph above indicates, between fiscal year 2000 and fiscal year 2009, state and local property taxes in those states with constitutional limits rose nearly 39 percent on average, after adjusting for inflation.  Over the same period, state and local property taxes climbed 28 percent on average in states without such constraints.

Additional pressure on local property taxes would only deepen New Hampshire’s reliance on that source of revenue.  As the graph above illustrates, New Hampshire counted on local property taxes for nearly 40 out of every 100 dollars it generated in state and local revenue in FY 2009.  Nationally, the comparable figure was just 21 out of every 100 dollars.  Perhaps even more telling, only three other states relied on local property taxes to provide even 30 out of 100 dollars in state and local revenue, but none of them exceeded the 35 dollar mark.

In sum, the national recession that began in 2007 led state policymakers to shift a variety of costs onto New Hampshire’s cities and towns, placing greater pressure on local property taxes.  The state’s ability to contribute to priorities like education and public safety will only deteriorate further if efforts to amend the New Hampshire Constitution are successful in imposing inflexible limits on taxes or spending.