Hospital lawsuit no longer an obstacle to new state budget deal.

Gov. Dannel P. Malloy’s administration clarified its position Thursday on a new taxing arrangement with Connecticut’s hospital industry — removing a key stumbling block to a new state budget in the process.

The administration said it remains open to the tax changes — which would leverage major new federal aid for Connecticut and its hospitals — even though an industry lawsuit against the state remains unresolved.

But much of this relief would expire after June 30, 2019, and the governor’s office indicated it still believes the lawsuit should be settled before any long-term tax changes are enacted.

“The administration has been very forthcoming that the hospital tax proposal which was included in both parties’ budget proposals in September, remains on the table as an important part of a balanced budget for the biennium,” Malloy spokeswoman Kelly Donnelly said.

But just eight days ago, legislators — who were still gridlocked on the overall state budget — met with the governor to discuss adopting the hospital tax changes as a separate bill.

At that time the governor said he didn’t want the tax changes enacted unless the Connecticut Hospital Association settled the lawsuit it filed in 2015 contesting the hospital provider tax.

“Accessing hundreds of millions of dollars per year in (federal) funds and not settling the overall disagreement would be malpractice,” the governor told Capitol reporters on Sept. 27. “And I don’t intend to do that.”

“No one should assume that I’m going to do things that wouldn’t be comprehensive in nature,” the governor added.

The provider tax has been a source of friction between the state and its hospitals since 2012 — one year after the tax was enacted — when the state began reducing supplemental payments back to hospitals.

But the CHA, which noted Malloy didn’t try to block legislators from voting Sept. 15 on a budget proposal that included the taxing arrangement, continues to insist the two matters are not linked.

“The current hospital agreement with the administration addressing the hospital tax and payments for the 20182019 biennium is separate and distinct from the hospital litigation,” association CEO Jennifer Jackson said on Sept. 27 in response to the governor’s comments.

The association said Thursday only that it remains in negotiations with the Malloy administration.

At issue is a plan that would help draw $365 million in new annual federal aid into Connecticut for the state and its hospitals to share.

To get those federal dollars, Connecticut’s annual tax on hospitals would rise from $556 million to $900 million.

The state would redistribute and return that entire $344 million increase to the industry, along with an additional $326 million.

But Connecticut also would benefit because these payments would trigger a $365 million increase in federal Medicaid reimbursement to the state.

The state would finish $137 million in the black. Democratic and Republican-crafted budget proposals both rely on this revenue gain.

This arrangement also needs approval from the U.S. Centers for Medicare and Medicaid Services, and the Malloy administration says Connecticut’s application must be completed by mid-October.

Connecticut now has gone nearly 14 weeks into the new fiscal year without an approved budget.