Could the Colorado General Assembly restructure the Hospital Provider Fee as a TABOR-exempt enterprise without voter approval?

Plain-English summary

The Hospital Provider Fee was created by the Colorado Health Care Affordability Act of 2009. Hospitals pay the fee, the state uses it to draw matching Medicaid funds from the federal government, and the combined money goes back to hospitals to compensate them for serving low-income and uninsured patients. The fee was classified as a "fee" rather than a "tax," so the state did not need voter approval to impose it under TABOR.

But there was a side effect. As the program grew, fee revenue counted toward TABOR's spending limit even though the money was restricted by statute to hospital reimbursements. When total state revenue exceeded the cap, TABOR refunds had to come from the General Fund, draining money from other state programs. The Hickenlooper administration projected a $373 million gap between revenues and General Fund obligations for FY 2016-17 driven largely by this dynamic.

The proposed fix was to organize the HPF as a TABOR "enterprise." Enterprises are government-owned businesses that issue their own revenue bonds and receive less than 10% of their annual revenue in grants from Colorado state and local governments. Enterprise revenue is excluded from TABOR's spending limit. AG Cynthia Coffman concluded the General Assembly could lawfully restructure the HPF as an enterprise: it would meet the three-part "government-owned business" test from Nicholl v. E-470 Pub. Highway Auth., Barber v. Ritter, and similar cases (no power to tax, provides services in exchange for involuntary fees, financially distinct from parent agency).

The legislature followed through. SB 17-267 in 2017 created the Colorado Healthcare Affordability and Sustainability Enterprise to take over administration of what is now the Healthcare Affordability and Sustainability Fee.

Currency note

This opinion was issued in 2016. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

TABOR's enterprise carve-out lives in Colo. Const. art. X, § 20(2)(d), which defines an enterprise as "a government-owned business authorized to issue its own revenue bonds and receiving under 10% of annual revenue in grants from all Colorado state and local governments combined." When an entity qualifies, its revenue and spending fall outside the constitutional voter-approval and refund machinery.

The case law gloss on "government-owned business" runs through Nicholl v. E-470 Pub. Highway Auth., 896 P.2d 859 (Colo. 1995), Olson v. City of Golden, 53 P.3d 747 (Colo. App. 2002), and Barber v. Ritter, 196 P.3d 238 (Colo. 2008). The AG distilled three considerations:

1. The entity must lack the power to tax. An HPF enterprise would charge hospitals an actuarially calibrated fee for participation in the Medicaid match program, not a tax on the public at large.
2. The fees must be involuntary in the sense that they are conditioned on receipt of a service. Hospitals pay the HPF; in return their Medicaid reimbursements rise. The transaction has the structure of a fee for service.
3. The entity must be financially distinct from its parent agency, with separate accounting and bonding authority.

The opinion also walked through the federal-funds carve-out at Colo. Const. art. X, § 20(2)(e). Federal Medicaid match dollars passing through the HPF Fund have always been outside TABOR's reach. The new question was whether the state-collected fee component could be moved outside the spending cap by reorganizing as an enterprise.

Common questions

Q: What's the practical impact of moving the HPF outside TABOR?
A: Without restructuring, fee revenue counted toward the state's TABOR cap, triggering refunds when total revenue exceeded the cap. After restructuring, the enterprise's revenue is excluded from the cap. The legislature retains existing General Fund flexibility and avoids forcing program cuts to fund TABOR refunds.

Q: Was this opinion challenged in court?
A: Subsequent litigation has tested various TABOR-enterprise restructurings in Colorado. The basic three-part test the AG applied here remains the governing framework.

Q: Why did the AG say this is consistent with TABOR's purpose?
A: TABOR's purpose, as the Colorado Supreme Court summarized in Campbell v. Orchard Mesa Irrigation Dist., 972 P.2d 1037, 1039 (Colo. 1998), is to require voter approval for tax increases and spending growth above certain limits. Enterprises are an express exception in the constitutional text itself. Moving an existing fee structure into an enterprise vehicle does not increase taxes, does not raise per-hospital fees by virtue of the restructuring, and does not change the underlying program; it changes only the accounting treatment for purposes of TABOR's revenue and spending caps.

Q: Does this mean any fee can be restructured into an enterprise?
A: No. The opinion's reasoning depends on the HPF's specific features: the fee funds a service (Medicaid reimbursement increases) directly tied to the payer (hospitals), the program does not tax the general public, and an enterprise can be structured with bonding authority and accounting separation. A general-purpose fee that funds general government would fail the three-part test.

Citations and references

Constitutional and statutory:
- Colo. Const. art. X, § 20 (TABOR), § 20(2)(d) (enterprise definition), § 20(2)(e) (federal funds)
- § 25.5-4-402.3, C.R.S., Hospital Provider Fee statute
- § 24-77-103.6, C.R.S., Referendum C "excess state revenues cap"
- 42 U.S.C. § 1396d(b)(1): federal Medicaid matching rate

Cases:
- Barber v. Ritter, 196 P.3d 238 (Colo. 2008), fee/tax distinction under TABOR
- Campbell v. Orchard Mesa Irrigation Dist., 972 P.2d 1037 (Colo. 1998), TABOR purpose statement
- Olson v. City of Golden, 53 P.3d 747 (Colo. App. 2002), urban renewal authority outside TABOR

Source

• Landing page: https://coag.gov/attorney-general-opinions/
• Original PDF: https://coag.gov/app/uploads/2019/07/no-16-01.pdf

Original opinion text

CYNTHIA H. COFFMAN
Attorney General

DAVID C. BLAKE
Chief Deputy Attorney General

MELANIE J. SNYDER
Chief of Staff

FREDERICK R. YARGER
Solicitor General

STATE OF COLORADO
DEPARTMENT OF LAW

FORMAL OPINION of CYNTHIA H. COFFMAN, Attorney General
No. 16-01
February 29, 2016

Governor John W. Hickenlooper, through his Chief Legal Counsel, Jacki Cooper Melmed, requested this opinion under § 24-31-101(1)(b), C.R.S. (2015).

This opinion analyzes the constitutionality of a legislative proposal to create an enterprise that would administer Colorado's Hospital Provider Fee ("HPF"). The HPF, a part of the State's Medicaid program, is a fee that is collected from Colorado hospitals, used to obtain matching funds from the federal government, and spent to increase the compensation hospitals receive for serving low-income patients. If organized as an enterprise, the HPF would be exempt from the spending limits contained in the Taxpayer's Bill of Rights. Colo. Const. art. X, § 20 ("TABOR").

QUESTION PRESENTED AND SHORT ANSWER

Question: Under current case law interpreting the requirement that enterprises be "government-owned businesses," may the General Assembly establish a TABOR-exempt enterprise to collect and administer the Hospital Provider Fee?

Answer: Yes. Considering both judicial interpretations of TABOR and the General Assembly's prior decision to classify the HPF as a fee rather than a tax, organizing the HPF as an enterprise would not contravene the three considerations that determine an entity's status as a government-owned business: an HPF enterprise would (1) lack the power to tax, (2) provide government services in exchange for involuntary fees levied on service recipients, and (3) be financially distinct from its parent agency.

BACKGROUND

I. The Taxpayer's Bill of Rights and its exceptions.

The Taxpayer's Bill of Rights requires that voters participate in making certain government fiscal policies. This includes, for example, tax increases and government spending above certain limits. Colo. Const. art. X, § 20(4)(a), (7)(d). If voters decline to approve either a tax increase or government spending that exceeds TABOR's limits, the government must refund any excess funds to taxpayers.

These voter-approval requirements are not absolute. TABOR is subject to both express exceptions and judicial decisions that have circumscribed its scope. Three of these limitations are pertinent to this opinion.

First, "fees" are distinct from "taxes" and are only partially subject to TABOR. Unlike taxes, fees need not be approved by the voters when they are imposed or increased. See Barber v. Ritter, 196 P.3d 238, 241-42, 250-51 (Colo. 2008). Revenue from fees, however, must be counted toward TABOR's spending limits, and may therefore trigger taxpayer refunds if they cause government revenue to exceed those limits.

Second, "federal funds," even those that pass through or are administered by the State or local governments, are outside the scope of TABOR. Colo. Const. art. X § 20(2)(e); § 24-77-102(7)(b)(III), C.R.S. (2015).

Third, certain entities are exempt from TABOR, such that neither their revenue nor their spending is subject to TABOR's voter-approval and refund requirements. Among the entities excluded from TABOR are "enterprises," which TABOR defines as "government-owned business[es] authorized to issue [their] own revenue bonds and receiving under 10% of annual revenue in grants from all Colorado state and local governments combined." Colo. Const. art. X, § 20(2)(d).

II. The origin of the Hospital Provider Fee.

The Hospital Provider Fee was enacted by the General Assembly in 2009 as part of the Colorado Health Care Affordability Act (the "Act"). The Act was intended to expand the federal-state Medicaid program to address the problem of "hospital providers within the state incur[ring] significant costs by providing uncompensated emergency department care and other uncompensated medical services to low-income and uninsured populations." § 25.5-4-402.3(2), C.R.S. (2015). The funding mechanism the Act employed to address this problem was the HPF.

The Act imposed the HPF on most Colorado hospitals based on inpatient and outpatient services, and created the Hospital Provider Fee Cash Fund ("HPF Fund"), to which the HPF must be credited. After HPF funds are collected, they are matched with federal funds through the Medicaid program. The federal matching rate cannot be less than 50 percent or more than 83 percent. 42 U.S.C. § 1396d(b)(1).

Money in the HPF Fund is restricted: it must be used, directly or indirectly, to increase reimbursements to hospitals that pay the HPF. § 25.5-4-402.3(4)(b). Among other things, the HPF Fund is dedicated to (1) increasing amounts paid to hospitals under Medicaid and the Colorado Indigent Care Program, (2) encouraging hospitals to improve the quality of care and health outcomes for their patients through incentive payments, (3) expanding Medicaid coverage to prevent hospitals from being required to serve low-income populations through unpaid emergency and other care, and (4) paying the administrative costs of running the HPF program.

Before the Act was passed, the General Assembly classified the HPF as a fee rather than a tax because its intent was "to increase reimbursements to hospitals paying the fee, not to increase revenue for general governmental purposes."

III. The proposal to organize the HPF as a TABOR-exempt enterprise.

During the 2015 legislative session, Governor Hickenlooper sent a letter to the General Assembly explaining that because the HPF is a fee, its collection counted towards TABOR's fiscal limits. But because money in the HPF Fund must be spent in specified ways, namely, to increase compensation paid to hospitals that provide care to low-income patients, it could not be allocated to pay TABOR refunds. Thus, as the HPF program grew, TABOR refunds caused by that growth had to be paid at the expense of other programs funded through the State's General Fund. To address this issue, the Governor suggested that the HPF program be restructured as an enterprise so that the fees collected in the HPF Fund would not count towards TABOR's fiscal limits and would not trigger taxpayer refunds.

In November 2015, in preparation for the 2016 legislative session, the Governor identified a $373 million gap between available revenues and General Fund requirements driven in significant part by the HPF/TABOR interaction.

ANALYSIS

The opinion proceeds to apply the three-part "government-owned business" test from Colorado case law to a proposed HPF enterprise. The AG concludes the enterprise structure would (1) lack power to tax (it would charge fees to hospitals participating in the Medicaid match program, not impose general taxation), (2) provide government services in exchange for fees levied on recipients (Medicaid reimbursement increases for hospitals paying the fee), and (3) be financially distinct from its parent agency (with separate fund accounting and bonding authority). Each element of the test maps onto the HPF program's existing fee/service relationship.

CONCLUSION

The General Assembly may establish a TABOR-exempt enterprise to collect and administer the Hospital Provider Fee without contravening the three considerations that determine an entity's status as a government-owned business under Colorado case law.

Issued this 29th day of February, 2016.

/s/ Cynthia H. Coffman
CYNTHIA H. COFFMAN
Attorney General