The Public Policy Institute

Misguided Money

Section 5

Keeping the promise of health-care reform

Under Governor Pataki's leadership, New York's antiquated system of state-set hospital rates was wisely replaced by a marketplace-driven system that allows all parties to negotiate a fair price for hospital services. The new system is working, and over time it will produce greater efficiencies for the benefit of patients and those who pay for services. Hospitals are beginning to streamline operations, reduce their longer-than-average lengths of stay and offer new outpatient services. But it's clear that hospitals in New York still have significant excess capacity. Hospital employment fell by about 2,800 jobs between the fall of 1996 and March 1998 in New York State, but the drop represents less than 1 percent of the hospital workforce.(35)

While business leaders supported the HCRA concept of having the marketplace force greater efficiencies in our health-care system, there are growing concerns about the high level of mandated taxes imposed on the privately insured and channeled back to hospitals, particularly for graduate medical education and bad debt reimbursements.

In New York City, where health-care costs are the highest and the uninsured rates are the largest, HCRA taxes are also the greatest. Employers who pay $4,764 for annual family premiums and $1,836 for annual individual premiums for their workers are paying about 11 percent in HCRA taxes. That means an employer group of 50 workers pays about $18,220 in HCRA taxes. An employer group with 1,000 employees pays $364,395 in HCRA taxes. While upstate employer groups face smaller HCRA taxes in comparison, the costs are still substantial, ranging from about 3.7 percent of premium to 7.6 percent.(36)

Table 4
Impact of HCRA Surcharges on Sample Employer Groups
  10 Employees:
50 Employees:
1,000 Employees:
HCRA Taxes as
% of Group
New York City $3,644 $18,220 $364,395 11.0%
Monroe County 2,030 10,152 203,049 7.6%
Nassau County 1,861 9,303 186,070 5.6%
Onondaga County 1,610 8,049 160,971 5.4%
Dutchess County 1,474 7,369 147,376 5.0%
Albany County 1,619 8,093 161,854 4.9%
Erie County 1,354 6,768 135,353 4.9%
Westchester County 1,589 7,946 158,920 4.8%
Oneida County 1,263 6,317 126,346 3.7%
Assumptions: Group rates in effect in August 1998 for popular group policies in different regions of the state (benefits not necessarily identical). 42% of a premium is assumed to be for services taxable at HCRA rate. It is assumed for each group that half of the employees have family coverage, the other half individual coverage.

To help New York businesses be more competitive, government should avoid placing large and unnecessary financial burdens on them that out-of-state competitors don't face. For example, Massachusetts, with the second-highest state ratio of physicians to population and a national reputation for high-quality teaching hospitals, has no private insurer tax subsidizing its graduate medical education programs.(37)

Removing $594 million in HCRA taxes on the privately insured for GME in New York State would not guarantee that the teaching hospitals will lose $594 million. Instead, it would mean the marketplace would be allowed to play a stronger role in determining how much revenue from negotiated rates will flow to the hospitals.

Medical education centers would survive

There is no basis for suggesting that New York's high-quality medical centers would decline, or that billions of dollars in National Institutes of Health medical research grants would dry up. Certainly nothing like that has happened in Massachusetts or in other states without such subsidies. Any such fear would have to be based on the false assumption that hospital administrators would be so short-sighted that they wouldn't see the long-term advantage of providing the marketplace with high-caliber institutions that businesses and insurers want in their networks of providers.

Quality graduate medical education centers that meet the needs of New Yorkers, within their ability to pay for the services, would continue to be major assets that would be compensated fairly. But teaching hospitals are not immune from the need facing the entire hospital industry for reductions in excess capacity and greater efficiencies in operation.

The HCRA surcharge to support GME can be eliminated, replaced by new freedom for the marketplace to set negotiated rates that will balance the needs for GME in New York with the public's ability to pay for it. In addition, surcharges to cover bad debt losses can also be eliminated or reduced to ensure hospitals more efficiently collect revenue from those who are able to pay for services.

Protecting institutions, or people?

In re-evaluating HCRA, it's become clear that while government has stepped aside to let the marketplace determine rates, the state hasn't abandoned its historic reflex to protect institutions with substantial aid. HCRA subsidies that are used to support New York's hospitals, particularly its teaching hospitals, will amount to about $6.5 billion from 1997 to 1999. Over the course of five years, hospitals are also expected to benefit from about $2.6 billion in help through federal subsidies and state tax relief. These $9 billion in subsidies and savings to hospitals come at a price to someone, namely taxpayers and the privately insured.

Reduction of HCRA taxes would contribute to making health-care coverage more affordable in New York. As a start, the state could thoroughly re-examine the value of the various "public goods" that currently benefit institutions to see if there is a more efficient method of addressing the ultimate needs of the uninsured middle class (the New Yorkers who don't qualify for Medicaid but who get no coverage from their jobs and can't afford the full premium price themselves).

A zero-based budgeting approach

The future of HCRA subsidies ought to be examined in a manner consistent with zero-based budgeting. There can be an assumption of no funding unless it is shown that a subsidy would directly reduce our state's uninsured problem, add measurable consumer value to the payor of the subsidy and not adversely affect employer groups' competitive position with businesses from other states.

In addition to questioning the value of subsidizing GME and bad debt, this zero-based budgeting approach could also carefully examine an estimated $477 million in "health-care initiatives" that have been funded annually through the surcharges and Medicaid. For example, about $82 million annually in HCRA funds are diverted to the state treasury to close state budget gaps. This is an inappropriate use of healt-care surcharges on businesses.

Hospital-based grants of $22 million annually are financed from HCRA taxes. These grants used to come from the General Fund, which is supported by broad-based taxes. If the grants are worthy, they should be subject to budget hearings. Other payments from HCRA funds that appear to be unnecessary to continue include a $34.5 million one-time loan repayment and $20 million in annual transition subsidies for hospitals to pay for consultants and other planning services to restructure themselves in a deregulated marketplace.

The state also set aside $217 million over three years in one-time transition funds from the HCRA pools to retrain displaced hospital workers and avert job losses. The three-year transition from one of the last state-set hospital rate systems in the country is nearly complete, and any temporary disruptions to workers have been addressed, so there should be no need to continue HCRA taxes to support continuation of a program that only makes health-care coverage more expensive for workers.

New York's most effective use of HCRA funds to address the uninsured problem has been targeted at individuals rather than institutions, through its Child Health Plus program. This program provides insurance subsidies for the children of families whose incomes make them ineligible for Medicaid but who do not receive health coverage through employment and can't afford to buy it themselves.

While health-care institutions may not benefit as much from this application of public subsidies to individuals, hospitals and physicians clearly become beneficiaries from such an approach by having more patients who are insured New Yorkers rather than uninsured charity cases. The worst result would be to take an approach of extending the surcharges and continue with a lack of accountability on how the funds are spent.

By reducing health-care taxes and rechanneling subsidies to individuals, the new HCRA for the 21st Century would more closely serve the goal of enhancing access to quality care for working New Yorkers.

35. Hammond, William F., Jr. "New York Hospitals Surviving Deregulation," The Sunday Gazette [Schenectady] June 21, 1998.

36. These estimates are taken from popular group HMO products sold in August 1998. Covered lives assessments are set by the state for family and individual policies in every county. For the calculation of the 8.18 percent surcharge, it is assumed that about 42 percent of the premiums is based on services that are taxable. For groups, it is assumed that about half the employees have family coverage and the remainder have individual coverage.

37. "Financing Graduate Medical Education in Massachusetts," Healthpoint. Boston: Massachusetts Division of Health Care Finance and Policy, Vol. 2, No. 4 (June 1997): pp. 1-4.

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