The Public Policy Institute

Misguided Money

Section 3

Piling on: 'Temporary' taxes that add to health-care costs

Adding to the cost hurdle of health care in New York are the $2.6 billion in annual subsidies financed by the private insured and through add-ons to Medicaid costs.(11) New York's privately insured are assessed annual state surcharges of $1.38 billion that are built into their premiums. Under the Health Care Reform Act of 1996, the three-year “temporary” surcharges were imposed to pay for what are loosely defined as “public goods” such as graduate medical education and uncompensated care. These surcharges are scheduled to expire on December 31, 1999.

Often forgotten in health-care debates is the fact that every bit of revenue for a health-care provider is someone else's expense. New York businesses pay the lion's share of private health-care coverage and therefore the bulk of the surcharges. These taxes are anti-competitive for our economy, because out-of-state businesses don't pay anything like them in their states.

If the HCRA surcharges were ranked with state taxes that support New York's general fund, they would be the third largest business tax, or our state's second largest user tax. In fact, the shrinking base of privately insured New Yorkers now pay in HCRA taxes more than the state collects from its tobacco tax, alcoholic beverage tax, container tax, auto rental tax, real property gains tax and pari-mutual taxes--combined.(12)

The “13-month annual premium” for graduate medical education

One of the most controversial “public goods” supported by HCRA taxes is graduate medical education (GME) at the state's teaching hospitals. With about 6.8 percent of the nation's population, New York State helps finance the training of 15.1 percent of the nation's medical residents--and about half of the doctors leave New York after training.(13) There were 14,841 resident physicians in New York State in 1997. California, with the next largest number, had 8,431. New York had 82 resident physicians per 100,000 population, more than twice the national average ratio of 37. Massachusetts had the next closest ratio to New York's with 70 residents per 100,000 population.(14)

When HCRA was enacted in 1996, the Department of Health noted, “New York will be the only state with negotiated rates to contribute to training doctors.”(15) From a review of the literature on the financing of GME, it appears no other deregulated state has followed New York's direction of mandating a tax on the privately insured to provide additional support for the training of more physicians than its population needs. Instead, the other 48 states with deregulated rates--and far fewer surplus physicians and specialists--have allowed the marketplace to determine appropriate charges for services at teaching hospitals.

Under HCRA, Medicaid taxpayers and the privately insured are assessed about $1.4 billion annually to subsidize GME from 1997 to 1999--$4.155 billion for the three-year period. While this level of support is lower than the $1.7 billion raised for

Table 3
New York State Subsidizes the Nation's
Supply of Surplus Physicians: 1997
Top 5 States
in category
Total Number of
Top 5 States
in category
Physicians Per
100,000 Population
California 8,431 Massachusetts 70
Pennsylvania 6,484 Rhode Island 68
Texas 6,025 Connecticut 55
Illinois 5,549 Pennsylvania 54
National Total 98,143 National Average 37
Neighboring States Total Number of
Neighboring States Physicians
Per 100,000 Population
Pennsylvania 6,484 Massachusetts 70
Ohio 4,725 Connecticut 55
Massachusetts 4,264 Pennsylvania 54
New Jersey 2,507 Ohio 42
Connecticut 1,801 Vermont 39
Vermont 226 New Jersey 32
Source: “Programs and Resident Physicians on August 1, 1997, by Number per 100,000 and by Region and State,” Appendix II, Table 2. Journal of the American Medical Association Vo. 280, No. 9 (1998): p. 838.

GME through the former rate-setting system, it far surpasses any other subsidy in the country, according to a study by the United Hospital Fund.(16)

Of the $1.4 billion, state-set Medicaid rates provide over $790 million annually, state-set workers' compensation and no-fault insurance rates raise some $50 million, and $544 million is paid from surcharges on the privately insured.(17) These amounts do not include the additional revenue that teaching hospitals get from the higher rates they negotiate from third-party payers who want these prestigious institutions in their networks.

To raise the $544 million for GME and another $121 million for smaller programs that help finance AIDS medicines and workforce retraining, those who purchase private health-care coverage pay an annual surcharge that is based on the number of people covered by their health plan. Because employers typically purchase the bulk of health-care coverage as a benefit for their employees, they bear the financial brunt of these surcharges. Employers and workers also pay $50 million towards graduate medical education through their workers' compensation and no-fault coverage. Employers and workers also are the ultimate payers of the taxpayer-financed Medicaid contribution toward GME.

The impact of the covered lives assessment on family health-coverage premiums ranges from $15.48 per year in the Utica and Watertown areas, where there are no teaching hospitals, to $385.29 per year in New York City, where the bulk of teaching hospitals are located.(18)

In New York City, the annual GME tax of $385.29 is nearly equivalent to what a small business pays to insure an employee's family for a month.(19) This is sometimes referred to as the “13-month premium” that employers pay for the annual health coverage of their workers.

According to the Governor's Ad Hoc Task Force, about 60 percent of the state's uninsured population resides in New York City.(20)

Business leaders across the state, who already pay among the highest health-care premiums in the country, have major concerns about the surcharge paid for GME because their out-of-state competitors don't have this added health-care cost, and the surcharge pays for a program that generates more specialists than New York needs.

Uncompensated care and other “public goods” subsidies

Of the remaining HCRA public subsidies for bad debt and charity care, hospital associations say about $738 million annually benefits the hospitals directly, or $2.214 billion over three years.(21) Not counted in the total are other direct grants to hospitals amounting to hundreds of millions of dollars under the title of “Health Care Initiatives” over the three years.

Also not counted by the hospital associations are indirect revenues hospitals receive from such subsidized programs as Child Health Plus, which insures the children of low-income families. The children are provided free or low-cost health-care coverage, including hospital services. According to some estimates, about 26 percent of a Child Health Plus premium pays for hospital services (with the GME surcharge folded in). The HCRA subsidy used to finance Child Health Plus is estimated to produce approximately $105 million in revenues for hospitals from 1997 to 1999.(22)

The surcharge used to pay for uncompensated care at hospitals and other health-care initiatives, such as Child Health Plus, is in addition to the GME tax. A state surcharge of 8.18 percent on the costs of patient services delivered by hospitals, diagnostic and treatment centers and clinical laboratories is imposed upon non-Medicaid and non-Medicare payers of health-care services; it is imposed, in other words, on all those who have health insurance we or our employers buy. The 8.18 percent tax is designed to raise about $666 million from the privately insured. If a hospital bill for services is $1,500, the 8.18 percent tax amounts to $122.70 on top of the total hospital bill.(23) The additional costs due to the tax are reflected in the calculations of insurance and HMO premiums.

In 1996, hospitals reported that they had provided more than $1.5 billion in services to patients who failed to pay their bills (bad debt) or were charity care cases who couldn't pay their bills. The hospitals reported that $391 million was for inpatient bad debt, $604 million was for outpatient bad debt, $158 million was for inpatient charity care and $393 million was for outpatient charity care. HCRA subsides of $738 million annually are provided directly to hospitals for both bad debt and charity care services. Other than the hospitals' own statements to the Department of Health as to what their expenses were for bad debt and charity care, there are no requirements to document their costs or services, such as claim forms, and no audits of their bad debt and charity care costs have been conducted since 1985.(24)

With support from The Business Council, some HCRA funds are being targeted to hospitals that are serving poor urban and rural communities and to finance individual insurance programs that benefit needy children. Those subsidies may still make sense. However, it's less clear why subsidies are warranted for inefficient bill collection in bad debt cases.

11. The Healthcare Association of New York State. “Public Goods Financing.” The New York Health Care Reform Act of 1996, Summary. World Wide Web Page. Albany: Healthcare Assoc. of NYS, July 1996. http://www.hanys.org

12. New York State Division of the Budget. 1998-99 Enacted Budget Report. “Current State Receipts, General Fund.” Table. Albany: NYS DOB.

13. New York State. Department of Health. “Why New York Needs to Restructure Graduate Medical Education.” New York Health Care Reform Act of 1996. Slide Presentation. Albany: NYS DOH, 1996.

14. “Programs and Resident Physicians on Duty August 1, 1997, by Number per 100,000 and by Region and State.” Appendix II, Table 2. Journal of the American Medical Association Vol. 280, No. 9 (1998): p.838.

15. New York State. Department of Health. “Refocusing Graduate Medical Education.” New York Health Care Reform Act of 1996. Slide Presentation.

16. Salsberg, Edward. State Strategies for Financing Graduate Medical Education. New York: United Hospital Fund of New York, 1997.

17. The Healthcare Association of New York State, July 1996.

18. New York State Department of Health, 1997 GME Surcharges.

19. New York State Department of Insurance. Community-rated, small group HMO premium rates in New York City were provided to the Healthcare Association of New York State for its “Healthy Competition” campaign, which was announced Nov. 10, 1997. Among the three lowest family monthly premium rates provided to HANYS were: $315.56 in Queens, $406.40 in all five boroughs of the city, and $409.92 citywide. The annual GME surcharge for a family is $385.29.

20. Governor's Ad Hoc Task Force on New York's Prospective Hospital Reimbursement Methodology, December 1995.

21. The Healthcare Association of New York State, July 1996.

22. State allocations for Child Health Plus, which are financed from the Health Care Initiatives Pool, were $109 million in 1997, $150 million in 1998, and $207 million in 1999, according to The New York Times. (“New York Health Insurance Plan for Children Draws Wide Attention,” April 27, 1997, Ester B. Fein.) Hospital inpatient services were offered as a benefit as of the fall of 1997. Other hospital services have been part of the benefit package for years. When asked, the New York State Conference of Blue Cross and Blue Shield Plans estimated that about 26 percent of Child Health Plus premium is likely to be spent on hospital services as a program benefit, including inpatient care, ambulatory surgery, emergency room services, etc. The conference represents several major participating insurers in the program. We applied the 26 percent to the full allocations for 1998 and 1999 and a partial allocation for 1997 to reflect the addition of inpatient services as a benefit.

23. New York State. Department of Health. “Billing Examples.” Health Care Reform Act of 1996. Albany: NYS Dept. of Health. http://www.health.state.ny.us/nysdoh/hcra/hcrahome.htm

24. Department of Health officials.

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