Fearing major economic consequences from Gov. Angus King’s proposal to tax hospitals and reimburse them with Medicaid money, Maine’s hospitals say they would agree to give the state $3.5 million toward the budget deficit to forestall discussion of the proposal until January.

The $3.5 million assessment would be hard to take, but it’s far less troubling than the alternatives, said Maine Hospital Association President Steven Michaud.

The governor’s “tax-and-match” proposal would hurt more than half of the state’s hospitals when many are already operating at a deficit, Michaud argues.

It may be “horrific public policy,” but it is “the lesser of all evils,” Michaud said. He explained that it’s better to pay the $3.5 million outright than to see tax-and-match or other cuts, such as the state trimming Medicaid programs by $3.5 million, which would hurt hospitals more since they also would lose an additional $7 million in federal money.

The state is facing a $240 million dollar deficit in the fiscal year ending July 1. Next year, the gap will be far wider.

The tax-and-match proposal developed by the Department of Human Services would impose a tax on the gross receipts of every hospital and nursing home. The facilities then would put in to Medicaid for reimbursement for the cost of the tax.

Medicaid is one-third state funds and two-thirds federal funds. So when Medicaid money comes back to the state, DHS said the facilities would be reimbursed for the tax, plus the state would get extra money available for the budget and improved reimbursements for some medical specialties.

Michaud said MHA had many questions when the plan was proposed, so it hired an outside specialist to analyze the plan’s impact. The findings were quite different than those of DHS, he said. Among them were that 24 hospitals would be financial losers, not the seven identified by DHS.

In a letter to lawmakers, MHA said the flaws in the tax-and-match proposal include:

. Underestimated tax liability for hospitals;

. Overestimated reimbursements considering Medicaid caps;

. Improper consideration of cost-of-living adjustments in state calculations.

“The claims they make in the letter are not true,” countered Newell Augur, a DHS spokesman. He said MHA’s criticisms of how the numbers were calculated are inaccurate.

DHS correctly based its calculations on the latest complete and available fiscal year results (1999), Augur said.

Augur said nursing homes talked with DHS on numerous occasions about the plans but “unfortunately the hospital association was unwilling to enter into that kind of discussion with the department.”

For its part, MHA officials said DHS was uncooperative during the process.

In making his proposal last month, DHS Commissioner Kevin Concannon said similar proposals are in place in other states. But Michaud said the plan developed for Maine is significantly different from other states.

“We don’t know of any other state that did it that way,” Michaud said.

Douglas Jones, CEO of Maine Coast Memorial Hospital in Ellsworth, said that under the DHS proposal the hospital would face an $82,000 hit, not the $100,000 gain estimated by DHS. For a hospital with a profit of just $250,000 last year, the loss would be considerable, he said.

It was only last year that Maine Coast Memorial Hospital came out from under a lien imposed by the state related to a similar tax-and-match plan developed in 1991 during the state’s last budget crisis. Cutbacks in reimbursements from Medicaid and insurance carriers put hospitals in a pinch. The previous plan was repealed during the mid-1990s.

Michaud said MHA is willing to work with lawmakers to find a way to tap federal dollars without harming Maine’s hospitals. But he warned that enacting a plan in which hospitals have new unreimbursed expenses “is nothing different than taxing commercial health insurance.”

When hospitals incur costs that aren’t reimbursed, they typically increase fees that wind up being paid by those with private insurance. This “cost-shifting” is one reason cited for the rising price of health insurance policies.

William Cohen, a spokesman for Anthem Blue Cross Blue Shield, said Maine’s largest health insurer opposes all cost-shifting in the health care system. But the company hasn’t taken a formal position on the King tax-and-match proposal, Cohen said.

DHS also had proposed a tax on nursing homes. Richard Erb, president of the Maine Health Care Association, which represents nursing homes, said the problems cited by hospitals won’t apply to nursing homes because the reimbursement mechanisms differ.

“We are somewhat reluctant supporters of [the plan] only because of the federal Medicaid dollars it would generate,” he said.