Legislators May Repeal New York Lab Surcharge

Six months of hearing from unhappy constituents stimulates state lawmakers to consider repeal

CEO SUMMARY: On January 1, New York State began to tax lab tests performed by free-standing laboratories with an 8.18% surcharge. The New York State Clinical Laboratory Association took its message directly to the public. Laboratories in New York State created enough consumer protest that legislators introduced bills in both chambers to exempt free-standing laboratories from this surcharge.

INDEPENDENT LABORATORIES in New York continue to press the state legislature for repeal of the 8.18% surcharge currently assessed on tests performed by “free-standing” laboratories within the state.

“I’m optimistic that we have turned a corner on this issue,” stated Tom Rafalsky, President of the New York State Clinical Laboratory Association (NYSCLA). “Bills were introduced in both the Senate and the Assembly that would remove this surcharge on laboratory tests. As final budget legislation is enacted during the next 30 days, we believe that independent laboratories will be removed from the surcharge pool.”

Legislation creating the surcharge was passed last summer. The laboratory industry was not aware of provisions in the bill which included independent laboratories in the taxing scheme until after the bill had been enacted into law. In the fall of 1996, lab industry representatives met with lawmakers to present their arguments as to why independent laboratories should be excluded from a hospital financing plan. (See sidebar below.) Lawmakers were both unsympathetic and unresponsive during these meetings.

“We have a variety of constitutional and regulatory objections to this legislation and how the Department of Health is interpreting its implementation,” noted Rafalsky. “This caused us to pursue two remedies. We filed a lawsuit seeking injunctive relief. We also began a campaign to educate both voters and state legislators about the negative consequences this surcharge has on independent laboratories.”

First rounds of the lawsuit did not favor NYSCLA’s position. Lawyers for the trade group filed a notice of appeal with the judge in May and intend to move the lawsuit to the next level in the judicial process.

NYSCLA’s educational campaign proved to be the big winner. “Our member laboratories began printing notices on laboratory test bills sent to patients beginning January 1,” said Rafalsky. “The response from the public was immediate.

“In the early months of this campaign, upwards of 1,000 calls per day were received by the Department of Health alone,” he added. “Similar volumes of constituent phone calls and letters were received by senators, assemblymen and the governor’s office.

100,000 Patient Bills Daily

“When passing the law, legislators overlooked the fact that 100,000 laboratory bills are mailed daily to their constituents,” noted Rafalsky. “Six months later, this effort continues. We know that calls and letters concerning this laboratory test surcharge still flow daily into the state house.”

Independent laboratories in New York State are suffering from the effects of this surcharge. The most immediate consequence has been a reduction in laboratory reimbursement schedules by private payers. Insurance companies are responsible for paying the surcharge. “Some insurance companies are blatantly passing the surcharge on to laboratories in the form of lower reimbursement,” observed Rafalsky. “This was never the intent of the legislation.”

NY’s Lab Surcharge A Result Of Reforms To Hospital Financing

NEW YORK’S LABORATORY TEST SURCHARGE is part of a comprehensive effort to reform hospital reimbursement practices in New York. For many years New York regulated reimbursement under a system known as the New York Prospective Hospital Reimbursement Methodology (NYPHRM).

The advent of managed care caused hospital finances to deteriorate. These developments made NYPHRM out-of-date and ineffective. With hospitals in the state suffering severe losses, New York was forced to revamp hospital reimbursement through the use of market-based reforms.

“The Health Care Reform Act attempts to fund three basic healthcare activities in the state,” explained Larry Siedlick, Chairman and CEO of Sunrise Medical Laboratories. “They are Indigent Care, Health Care Initiatives and Graduate Medical Education (GME). Legislators estimate that HCRA will raise $2.9 billion per year to fund these efforts.

“In simplest terms, hospitals pay a 1% surcharge on inpatient/outpatient revenues. The second category is called ‘Patient Services Payments.’ For services covered in this category, Medicaid and Workers’ Compensation/No Fault surcharges will be 5.98%. Third party and private pay surcharges will be 8.18%.”

Apparently the New York legislature recognized that hospitals were increasingly active in “non-traditional” activities, such as comprehensive clinics, and ambulatory surgicenters. The “Patient Services Payments” category was created to include those hospital business activities in the revenues subject to the surcharge.

“Regardless of what the legislature intended, independent laboratories fall into this second category,” explained Siedlick. “This occurred despite the fact that independent laboratories were never part of the old NYPHRM system. They neither contributed to the revenue pools nor received any benefits from them.”

Additional Costs

Laboratories incur additional costs when collecting, reporting and remitting the surcharge for patients with no insurance. Administrative requirements of the surcharge are difficult to fulfill. The Department of Health interprets the legislation as making the laboratory the guarantor of this surcharge. This is a policy to which NYSCLA vigorously objects.

Laboratories outside New York should understand that they are also threatened by this surcharge. In an inter-view last February, Rafalsky told THE DARK REPORT that other states in the East were studying New York’s laboratory test surcharge with the intent of adopting it.

“I know of several states which seriously looked at how to establish a similar taxing scheme,” explained Rafalsky. “New York showed them a new source of revenue. Laboratories should keep a watchful eye on their state legislatures.”

Massachusetts is one state which quickly noticed the new tax, but dropped the idea. In committee meetings held during February, attempts to introduce a tax on laboratory testing were met with objections that “the nightmare in New York” was not something elected officials in Massachusetts wanted to repeat.

Surcharge Created Chaos

“This surcharge has created chaos for many laboratories,” said Pat Lanza, President of Sunrise Medical Laboratories in Hauppauge. “Despite the fact that the surcharge took effect over six months ago, there are laboratories which still do not collect the tax. Some laboratories don’t have a method to track collections and remit payment. For such labs, the potential problems from non-compliance represent a ticking time bomb.”

“The administrative burdens and costs are only part of the story,” added Lawrence Siedlick, Chairman and CEO at Sunrise. “Insurance companies are required to pay the surcharge on laboratory tests. Since the surcharge took effect on January 1, more than half the insurance companies in the state have arbitrarily reduced their reimbursement schedules for laboratory testing.”

According to Siedlick, Sunrise Medical Laboratories saw declines in laboratory test reimbursement schedules ranging from 4% to 10% during the last six months. “Insurance companies are passing the surcharge down to the laboratories. Obviously the financial impact of this is painful, because independent laboratories already struggle with revenue erosion caused by managed care and changes to Medicare and Medicaid.”

Rafalsky, Lanza and Siedlick all agree that the battle to exclude independent laboratories from the surcharge is still not over. “Public outcry on the laboratory surcharge issue not only surprised our legislature and governor,” explained Siedlick, “but it also created widespread recognition among lawmakers of the need to revisit the surcharge on laboratory testing. For example, all 35 Republican Senators sponsored the Senate’s bill. That is certainly evidence that these Senators know their constituent’s position on the laboratory test surcharge issue.”

“From a practical standpoint,” added Rafalsky, “there are differences in the Senate bill and the Assembly bill. These will need to be worked out and a common bill passed by both houses before we can claim success. People familiar with the legislative process know that many unexpected things can happen before any bill earns final approval.”

NYSCLA’s member laboratories earned the respect of senators, representatives and the governor’s office for the educational program on the surcharge. “In meetings with legislative and executive leaders, all agree on one point,” said Rafalsky. “They say we did a good job of educating the public!

“It demonstrates the power of the public to create action by the government,” he continued. “It also demonstrates that clinical laboratories have the power to educate and motivate the public, if they can act as a united group on industry issues of common concern.”

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