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From Thompson Publishing Group's Employer's Guide to Self-Insuring Health Benefits

New York Surcharge on Health Care Services Could Affect Health Plans Nationwide

Summary: As of Jan. 1, 1997, health plan sponsors and TPAs across the country face new surcharges on health care services provided to plan participants within New York State.

(Dec. 9, 1996) Insured and self-insured plan sponsors and third-party administrators (TPAs) across the country could face surcharges on health care services provided to plan participants within the state of New York -- even if a participant is not a New York resident -- under a new New York State law that goes into effect Jan. 1, 1997.

The New York Health Care Reform Act of 1996 (HCRA) creates two new taxes, one to fund a pool to cover uncompensated and indigent health care and the other to provide grants to teaching hospitals to offset graduate medical education (GME) costs.

The law will become effective Jan. 1, 1997, when the New York Prospective Hospital Reimbursement Methodology (NYPHRM) system expires. Under NYPHRM, non-Medicare payers are required to reimburse inpatient hospital services as well as GME expenses through various surcharges. The proceeds from the surcharges are pooled and distributed to subsidize hospital indigent care and fund health care initiatives.

"Since the state government doesn't want to pay the cost of uninsured and indigent care, and since it doesn't have the guts to raise taxes, this is a sneaky way to shift it off to the employers," said Fred Hunt, president of the Society of Professional Benefits Administrators (SPBA).

"People have been paying these costs invisibly for years . . . it seemed fairly standard that 30 to 40 percent of the cost of care given was uncompensated care costs," Hunt added. "There are some big hidden profits. Now you're going to have the loaded rate plus the tax."

Patient Services, GME Taxes Will Be Levied

Under HCRA, all non-Medicare payers will be hit with two new taxes, a patient services tax and a GME tax, which will be used to continue subsidizing indigent care and health care initiatives. The taxes will be higher if they are paid to the New York Department of Health (NYDH) on an "encounter" basis -- at the time services are provided to patients -- as opposed to being paid periodically.

The patient services tax will be imposed on every payment made on inpatient and outpatient hospital services, as well as diagnostic centers, treatment centers and certain laboratories. The tax is 8.18 percent if paid quarterly to the NYDH. However, the tax is 24 percent more -- for a total of 32.18 percent -- if paid when services are rendered.

GME taxes, which will vary from region to region, will be imposed either through surcharges on inpatient hospital services or by payors voluntarily electing to pay a covered lives assessment on New York residents directly to the NYDH on a monthly basis. Announced tentative regional rates for inpatient services include 25.09 percent for New York City, 11.96 percent for Long Island and 9.05 percent for Westchester County.

Thus, the amount of the surcharge will generally vary depending on how the taxes are paid and where services are provided. In the worst case scenario, an entity that, for example, pays on an encounter basis both New York City's GME tax of 25.09 percent and the 32.18-percent patient services tax would face a 57-percent surcharge on health care services.

Under the HCRA, the patient services and GME taxes will not affect laboratories that test samples that are drawn or collected outside of New York.

Who Must Pay

Self funded plans -- both within New York and out of state -- must pay the patient services and GME taxes on certain health care services provided to any plan participant, regardless of where he or she lives, if the participant uses a provider located in New York State. As noted above, the patient services tax will only be 8.18 percent if paid directly to the NYDH. Otherwise, a higher tax of 32.18 percent will be applied to health care services. Regarding the GME tax, regionally based surcharges on inpatient hospital services can be avoided if a covered lives assessment is paid to the NYDH. Note that this assessment is only charged against New York residents.

Under no circumstances will insured plans not licensed in New York be required to pay the GME tax. However, they will be required to pay the 8.18-percent patient services tax and unless they make direct payments to the NHDH, the 24-percent surcharge.

TPAs are subject to the taxes regardless of whether or not they're located in New York.

The Direct Payment Process

Under the HCRA, organizations that chose to directly pay the surcharges to the NYDH were required to file a state-approved election form, along with census data for the first six months of 1996, with the department by Dec. 2, 1996, so that the election would become effective for health care services commencing on Jan. 1, 1997. However, payors that did not meet the Dec. 2 deadline can elect to begin direct payments effective April 1, 1997; July 1, 1997; or Oct. 1, 1997; as long as an election form is sent to the NYDH 30 days prior to each date. Payors that have not elected direct payments before Dec. 1, 1997, or Dec. 1, 1998, will forfeit direct payments for 1998 and 1999. Once an election is made, it will remain in effect until Dec. 31, 1999.

If payors choose direct payments, they must: (1) provide monthly reports to New York of its expenditures for hospitals, diagnostic and treatment centers and laboratories; (2) certify the accuracy of data used to compute the taxes; (3) allow the state access to expenditure data for audit verification; and (4) agree to the jurisdiction of New York State courts, not the federal courts, to enforce the HCRA.


Mark Ugoretz, president of the ERISA Industry Committee (ERIC), criticized the short deadline. "The timing for compliance is so short that many employers will be forced into a choice that will cost them a lot of money," he said. "Many employers may not be aware that they have to make a choice."

Ugoretz also noted that enforcement of the law is a major issue that will have to be resolved. "We have to wait and see how far the state is going to go in its enforcement," he said. "The narrower the enforcement, the more it's confined to what employers have agreed to pay and the less likely it is that ERISA will come into play."

To receive copies of a 200-page package that includes the eight-page election form and background materials, fax your request on letterhead to Jerry Alaimo, NYDH, 315/448-6786. Questions should be directed to Richard Pellegrini, director of the NYDH's Bureau of Financial Management and Information Support, Room 984, Corning Tower, Albany, N.Y. 12237-0719, 518/473-4653.

Excerpted from the December supplement to Employer's Guide to Self-Insuring Health Benefits, ©Thompson Publishing Group, 1996. All rights reserved.
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