The Public Policy Institute

Misguided Money


A system of subsidies that needs to be reexamined

State health-care surcharges that add $1.38 billion a year to health-care costs in New York State are set to expire at the end of 1999—forcing reexamination of whether these temporary taxes are still needed in any form. The question is an important one, both because of the impact of high health-care costs on our state's economy, and because of the role that high costs play in making access to health care more difficult for our citizens to obtain.

Health-care costs in New York State are estimated to be more than 22 percent above the national average, and climbing. Beyond what employers and consumers pay for their own health-care needs and health-insurance costs, state taxpayers support the richest Medicaid benefit package in the country. Thus the high cost of health care in New York adds to the state's competitive economic disadvantage.

High health-care costs also add to the ranks of the uninsured. Some 3.17 million New Yorkers, or 17.5 percent of the state's population, went without health-care coverage in 1997, according to Census Bureau data. Our state surpassed the national uninsured rate of 16.1 percent. And the increase in the proportion of uninsured residents was worse in New York, during the latest period studied by the Census Bureau, than it was nationwide.

For most uninsured families and individuals, in New York as in other states, the most common reason for lacking coverage is the high cost. Thus, the 1.1 percent increase in New York's uninsured from 1995-96 to 1996-97 may indicate that health-care costs in the Empire State—already higher than those in most other states—grew even further from the norm in 1997.

Against that backdrop, policy makers must carefully examine whether to continue a set of health-care surcharges that add significantly to health-care costs—surcharges that were adopted on a "temporary" basis, under circumstances that have since changed substantially.

The surcharge system

Under New York State's Health Care Reform Act of 1996 (HCRA), three-year "temporary" annual surcharges totaling $1.38 billion a year were built into insurance premiums. In effect, these surcharges are a tax, averaging some $360 a year on the health insurance bill for a typical four-person family.

Coupled with other funds, these surcharges were imposed to supply a total of $2.6 billion a year for what are loosely defined as "public goods," such as graduate medical education, uncompensated hospital services and dozens of "health-care initiatives," including hospital grants, loan repayments, hospital consultants and planning services.

The two surcharges yielding the $1.38 billion a year are:

While these "temporary" taxes may have helped hospitals make the transition from New York's former state-set hospital rate system to the deregulated system of negotiated rates adopted in 1996, it is time to reexamine whether these taxes are still necessary. Hospitals, according to both state officials and hospital executives, have been successful in negotiating adequate rates for their services. In addition, hospitals are receiving billions of dollars in federal subsidies and beneficial state tax cuts that were not anticipated at the time HCRA was enacted.

The temporary HCRA taxes are scheduled to expire on December 31, 1999. Some hospital representatives are already pressing to have the surcharges continued—or even increased—in order to guarantee future revenue streams for their institutions.

But hospital subsidy revenues represent someone else's expense. New York businesses and their employees pay the lion's share of private health-care coverage (and therefore the bulk of the surcharges). These taxes hurt working New Yorkers. And they are anti-competitive for our economy because out-of-state businesses don't pay anything like them in their states—not even in Massachusetts, with its prestigious medical centers.

If ranked with state taxes that support New York's general fund, HCRA taxes 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, gas tax, alcoholic beverage tax, container tax, auto rental tax, real property gains tax and pari-mutual taxes—combined.

The costs add up quickly

Employers in New York State are raising serious questions about the level of health-care taxes being paid.

For example, a New York City employer pays the highest HCRA taxes in the state. Through the covered lives assessment, $385 a year is paid for every employee's family health-care policy, primarily used as a subsidy for graduate medical education programs at teaching hospitals. The tax is nearly the equivalent of a full month's premium for the employee. Added to this assessment is the 8.18 percent tax placed on many health-care services covered by insurers and HMOs.

When both taxes are combined, a New York City employer spends about 11 cents for every health coverage premium dollar to pay for HCRA taxes. Purchasers of health insurance in Monroe and Nassau counties also pay especially high HRCA taxes; in other areas of the state we reviewed, the impact varies in the range of 3.7 percent to 5 percent.

With health-care cost inflation exacerbated by state taxes, a logical question is: What are we getting for the money? In many cases, it's not at all clear that HCRA spending levels were appropriate or that they were targeted correctly.

The temporary public goods subsidies under HCRA guarantee our teaching hospitals almost $1.4 billion annually from 1997 through 1999. New York State already has far more physicians compared to the number of residents than any other state in the country. We have about 6.8 percent of the nation's population and we educate about 15.1 percent of the country's physicians. About half of these doctors leave the state after their training. No other state provides such a subsidy to its teaching hospitals.

The public policy question then becomes: Does it make sense to have a shrinking base of insured New Yorkers paying what amounts to a national subsidy to train more doctors than we need? More perplexing is the fact that the federal government provided the same teaching hospitals with a $400 million subsidy to train fewer doctors. If New York State recognizes it has more physicians than it needs and the federal government is rewarding hospitals to train fewer doctors, then why would the state want to impose taxes on the privately insured to provide subsidies for training physicians?

In addition to graduate medical education subsidies, hospitals also directly receive another $738 million in HCRA aid to recover some of their costs for treating both patients who declined to pay their bills (bad debt cases) and those who couldn't pay their bills (charity cases). About two-thirds of the hospitals' reported costs related to these uncompensated care cases are for bad debt. Two findings here are troublesome: First, the hospitals' reported costs for these cases have not been audited for accuracy in more than a decade; and second, from a business perspective, it makes little sense to subsidize hospitals for inefficient bill collections. Compensating hospitals for real charity cases, subject to audits, makes more sense because hospitals are required to serve anyone needing emergency care.

Elimination or reduction of HCRA taxes would contribute to making health-care coverage more affordable in New York. At a minimum, the state should thoroughly re-examine the value of the various "public goods" that currently benefit institutions to see if there is a less costly but more efficient method of addressing the ultimate needs of the uninsured.

As with subsidies in other fields, these taxes could be reexamined in a manner consistent with zero-based budgeting.

There should be an assumption of no funding unless it can be shown that a subsidy would directly reduce our state's uninsured problem, add measurable consumer value to the payer of the subsidy and not adversely affect employer groups' competitive position with businesses from other states.

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