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Health care advocates are opposing a provision in Gov. Martin O’Malley’s 2013 budget bill that, for the first time, would tax medical adult day care centers.

The advocates contend that the tax jeopardizes the financial viability of the centers, an opinion shared by some legislators.

“This is an idea that needs rethinking,” said Sen. Delores G. Kelley, a Baltimore County Democrat and member of the Senate Finance Committee, referring to the provision.

“Too many adult day care centers are hanging on by a thread,” said Kelley (D-Dist. 10) of Randallstown. “Taxing them may force them to close, and some already have in my district.”

Del. William J. Frank (R-Dist. 42) of Lutherville, a Baltimore County Republican and member of the Public Health and Long-term Care Subcommittee, said the proposed tax would have a major impact on the bottom line of adult day care centers.

The centers serve clients with chronic conditions and diseases, mental illnesses and developmental disabilities. Increasingly, they also serve clients who need transitional care from hospital discharges and short-term respite care.

The tax provision in the bill imposes a levy of up to 5.5 percent on the total operating revenue for all adult day care centers, based on an amount per non-Medicare day of service provided by the center.

The use of the word “non-Medicare” is misleading, contended Danna Kauffman. “It mirrors the state’s nursing home assessment. There are no Medicare clients (in adult day care centers), because Medicare does not reimburse for adult day.

“They are basically talking about all the clients,” said Kauffman, vice president of public policy for LifeSpan Network, a provider association of senior care facilities, who is serving as spokeswoman for the Maryland Association of Adult Day Services in its opposition.

Kauffman explained the provision this way: “The state would assess a 5.5 percent tax on each client day, based on a total operating revenue aggregate of all centers,” she said of the 125 state-licensed adult day care centers, typically privately owned and state-regulated.

The state’s centers have an allowable capacity of 7,925 clients per day, although anecdotally, Kauffman hears some are running at one-half to two-thirds occupancy.

The state already places a “provider tax,” in the jargon, on nursing home facilities’ revenue, hospitals’ revenue and insurance carriers’ premiums, with certain exceptions. For example, nursing home facilities are taxed on private pay and Medicaid patients; Medicare patients are exempted.

In Maryland, adult day care centers are the last provider type that is eligible to be taxed under federal law, said Charles Milligan, deputy secretary for health care financing in the Maryland Department of Health and Mental Hygiene.

“They have been excluded in the past,” said Milligan, who is responsible for the state’s Medicaid program. But with “the state facing a significant budget challenge, it is a way of generating revenue” and at the same time “holding the product (adult day care centers) harmless.”

Milligan said the state estimates that the adult day care tax would bring in $6.8 million annually. Of that figure, $3.4 million would remain in the state treasury to help address the deficit, and $3.4 million would be returned to Medicaid as an appropriation. That $3.4 million would be matched by federal funds for a total of $6.8 million, which would be returned to the centers, but only on their Medicaid clients.

Besides the adult day care tax provision in the budget bill, the governor is proposing, in a separate appropriations bill, to increase Medicaid rates by 1.5 percent for all community-based providers, including adult day care centers. The centers not only would get back the money they paid in the tax, Milligan said, but they would benefit from “enhanced reimbursement” on Medicaid clients.

“By our analysis, facilities that have 64 percent or more Medicaid beneficiaries would have net gains by virtue of this approach,” he said.

Kauffman had different figures — from 111 adult day care centers — that were based on 2009 financial data, the most recent available.

“The problem is, you pay the tax on every client but you only get the enhanced reimbursement on Medicaid clients,” she said, noting that by her calculations a center would need to have 80 percent or more of its clients on Medicaid to benefit from the arrangement.

“If you have less than 80 percent on Medicaid, you lose. You will pay more in taxes than you get back,” she said.

As the owner of an adult day care center, which her son operates, Del. Shirley Nathan-Pulliam (D-Dist. 10) of Baltimore brings a unique perspective.

Center clients pay in a variety of ways — Medicaid, private, private pay/insurance, federal (through the Veterans Administration) and some state programs. At Nathan-Pulliam’s center, located in Baltimore, the mix is approximately 80 percent Medicaid and 20 percent private, VA and a state/city program.

“If the [level of reimbursement] is 80 percent, then I would not be a loser” in taxes, she said, although she still had several questions about the proposal.

“Who keeps track (of the different payments)? Is it the center? Because if so, that is a burden and the centers will end up with more regulations than you can imagine,” said Nathan-Pulliam, who also is unclear whether the tax applies to VA and state/city payment methods.

For a number of reasons, Nathan-Pulliam does not intend to recuse herself from voting on the matter. A disclaimer in her ethics file states that she can participate fully; it would be a conflict if she were the only person to benefit from the legislation, and legislators can always vote on operating and/or capital budgets.

“I’ve received a tremendous number of letters on the tax — all opposed,” she said.

Dr. David Stewart, chairman of the department of family and community medicine at the University of Maryland School of Medicine, said the centers “help maintain people in their communities, in their homes.”

They also provide a needed respite for family members and others who are taking care of them. “The benefit of the centers is that they’re extremely useful to communities and to family members,” he said.

Kauffman finds it ironic that the state, which has been encouraging community-based services as a cost-effective health care measure, is jeopardizing the centers’ finances. She also worries that the tax will be passed on to the non-Medicaid center clients.

By the state rate, centers are reimbursed for Medicaid clients at $71.08 per day (for a minimum of four hours), a figure that is typically equivalent to the rate for private-pay clients as well. A center cannot charge less for private-pay clients than for Medicaid clients.

“They will see an increase in their rates,” she predicted of private-pay clients.

Kim Burton, co-chair of the Maryland Senior Citizens Action Network, a public policy coalition, expressed a similar concern. The tendency in other health care industries is to pass on the provider tax to private-pay clients, said Burton, director of older adult programs at the Mental Health Association of Maryland.

“We’re still trying to figure out what [the tax] means, especially for centers in rural counties where there are fewer Medicaid and more private-pay clients,” she said, noting that with the rising cost of meals and transportation, for example, many centers already are operating on a “shoestring budget.”

Maryland AARP is studying the tax provision before taking a stand. The bill has been sent to its national office for review.

“I can’t say what the impact will be until we run the numbers,” said Tammy Bresnahan, associate state director of advocacy for Maryland AARP. “But we support home- and community-based services, and (adult day care centers) are one of them.”

The General Assembly has the option of removing the provision. However, this would create a $3.4 million hole in the governor’s budget, which would have to be filled in some way.

Del. Tom Hucker (D-Dist. 20) of Silver Spring, a member of the Consumer Protection & Commercial Law Subcommittee, called the tax “definitely unfortunate” and said it was an example of the “unnecessary taxes that are on the table” this legislative session because of the state’s “failure to pass combined reporting and other tax fairness measures.” (Combined reporting closes a tax loophole by requiring businesses to file taxes at the state and federal levels together, so they cannot report different write-offs twice.)

Sen. David R. Brinkley (R-Dist. 4) of New Market, a member of the Budget and Taxation Committee, criticized the governor’s budget bill in general, calling it “a wild card that makes a lot of assumptions” that results in policy changes.

“I oppose the [adult day care center] tax, and I oppose the bill as a whole. There are 200 substantive policy changes in the bill, and this is one of them,” he said of the tax on the centers.

Hearings on the companion budget bills that contain the provision for the adult day care center tax are scheduled for next week in House and Senate committees.