Director of Communications

ALBANY — "Temporary" taxes totaling $1.38 billion a year that were intended to support New York State medical institutions undermine the competitiveness of New York business, make it harder for businesses to afford health insurance, and fail to deliver many of the intended benefits, according to a new report from The Public Policy Institute of New York State.

These taxes should be reconsidered before their scheduled expiration in December 1999, said Misguided Money: A reexamination of the $2.6 billion subsidies provided by taxpayers and insurance surcharges to help finance New York's medical institutions. The new report was released today by The Institute, which is the research affiliate of The Business Council of New York State.

The history of the temporary taxes

The taxes, which are paid by employers who buy health insurance for their employees and New Yorkers who buy their own health insurance, were created by the Health Care Reform Act of 1996. That law was passed when New York decided to join 48 other states in deregulating its hospital rate-setting system to let market forces help contain escalating costs of health care.

Before the deregulation, New York had per capita hospital costs among the highest in the nation. It also had the nation's highest number of hospital beds per person, the longest average lengths of stay in the country, and excess capacity of about 20 percent of all beds, the report noted.

HCRA reduced and restructured some surcharges used to finance various programs for graduate medical education, bad debt and charity care at hospitals, and other health-care initiatives, the report noted. However, it also created temporary taxes to ease hospitals' transition to the deregulated, market-driven system.

These surcharges—a "covered lives assessment" on each person covered by private insurance and an 8.18 percent tax on hospital, laboratory and diagnostic and treatment center services—add $1.38 billion a year to health-care costs in New York State. That amounts to a tax averaging $360 per year tacked onto the health insurance bill for a typical four-person family, the report noted.

This tax is especially daunting in New York City and in Monroe and Nassau counties, the report noted.

"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," the report said. "This is sometimes referred to as the '13-month premium' that employers pay for the annual health coverage of their workers."

These tax revenues, coupled with other funds, were designed to supply $2.6 billion a year for what HCRA called "public goods," including graduate medical education, uncompensated hospital services and dozens of health-care initiatives, including hospital grants, loan repayments, hospital consultants and planning services.

The negative effects on businesses, workers and the uninsured

The impact of these taxes has been negative—on New York's economy, on the businesses and workers who bear the costs and on the uninsured, the report said.

"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," Misguided Money added. "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."

The taxes hurt business and undermine the state's competitiveness "because out-of-state businesses don't pay anything like them in their states—not even in Massachusetts, with its prestigious medical centers," the report said.

The taxes also hurt the uninsured—because they drive up health-care costs, which the uninsured cite as the main reason they don't have insurance, the report said. It noted that some 3.17 million New Yorkers, or 17.5 percent of the state's population, went without health-care coverage in 1997; the national uninsured rate is 16.1 percent.

Moreover, New York's uninsured problem has worsened with rising health-care costs. "From 1991 to 1996, the proportion of New Yorkers without insurance rose 34 percent, while the national uninsured rate had risen 8.3 percent," the report said.

Personal Health-Care Expenditures Per Capita, 1993 Rank State Amount Rank State Amount 1 Massachusetts $3,892 27 Colorado $2,821 2 Connecticut 3,727 28 Maine 2,771 3 NEW YORK 3,693 29 Texas 2,760 4 Pennsylvania 3,451 30 Kentucky 2,738 5 Rhode Island 3,431 31 Kansas 2,726 6 New Jersey 3,275 32 Nebraska 2,726 7 Florida 3,266 33 South Dakota 2,724 8 Delaware 3,233 34 Nevada 2,705 9 Tennessee 3,181 35 Arizona 2,697 10 North Dakota 3,173 36 Oregon 2,636 11 Minnesota 3,137 37 Alaska 2,630 12 New Hampshire 3,074 38 North Carolina 2,623 13 Maryland 3,060 39 Vermont 2,602 14 Missouri 3,047 40 Iowa 2,601 15 Louisiana 3,034 41 Virginia 2,576 16 Ohio 3,025 42 Arkansas 2,520 17 California 3,017 43 Montana 2,501 18 Hawaii 2,989 44 South Carolina 2,489 19 Illinois 2,972 45 Oklahoma 2,488 20 Georgia 2,913 46 New Mexico 2,400 21 Alabama 2,884 47 Mississippi 2,344 22 Washington 2,879 48 Utah 2,214 23 Wisconsin 2,875 49 Wyoming 2,123 24 Indiana 2,874 50 Idaho 2,068 25 Michigan 2,869 U.S. Average $3,020 26 West Virginia 2,859 N.Y.S. % above average 22.3% Source: U.S. Department of Health and Human Services, Health Care Financing Administration.

"Spending on hospitals, doctors' services, home health care, drugs and other personal health-care services and products averaged $3,693 per person in New York in 1993, the latest year for which nationwide statistics are available," about 22 percent above the national average, the report said.

The questionable utility of the taxes

The taxes should also be reconsidered because their effects are of waning or dubious value, the report said.

The temporary taxes were created to help hospitals make the transition to market-driven rates—and hospitals have been very successful in making that transition, the report said. It noted that both state officials and hospital executives have successfully negotiated adequate rates for their services. In addition, since HCRA was passed, hospitals in New York had received billions of dollars in federal subsidies and beneficial tax cuts that were not anticipated at the time HCRA was enacted.

For example, New York State hospitals are receiving $1.25 billion in unusual federal assistance over five years to help them adapt to the state's plan to place 2.4 million Medicaid recipients into managed-care programs. Major beneficiaries of the $1.25 billion subsidy are teaching hospitals. Hospitals also received federal money from a children's health program and enjoyed a reduction in the gross receipts tax on hospitals (supported by The Business Council) in 1997.

Training physicians for other states

The report also noted that the U.S. government has provided $400 million dollars to 41 New York hospitals to train fewer doctors — even though HCRA subsidizes hospitals to train more doctors.

"New York State already has far more physicians compared to the number of residents than any other state in the country," the report noted. "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.

"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?" Misguided Money said.

"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," the report said. "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."

The report also criticized the $738 million in HCRA aid that hospitals currently received to recover some of their costs for treating patients who declined to pay their bills (bad debt cases) and those who couldn't pay their bills (charity cases). "Compensating hospitals for real charity cases, subject to audits, makes more sense because hospitals are required to serve anyone needing emergency care," the report said.

The report said all aid should "directly reduce the 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."

"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 report concluded. "The new system is working, and over time it will produce greater efficiencies for the benefit of patients and those who pay for services."

"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."

The Business Council is New York's largest broad-based business group, representing more than 4,000 member companies large and small across the state. Based in Albany, it lobbies for a better business climate and offers cost-cutting services to its members.

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Read the report