New York Labs Sue State To Overturn Surcharge

Financial consequences of new 8.18% tax on lab tests are expected to be significant

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CEO SUMMARY: With the new laboratory test surcharge in place since January 1, 1997, clinical laboratories already see negative financial effects. Administration and collection of the tax is a nightmare. Some managed care companies moved swiftly to reduce reimbursement to laboratories in order to offset the financial impact of this new surcharge on their company.

CLINICAL LABORATORIES in New York took decisive action against the state’s new 8.18% surcharge on laboratory tests. Suit was filed in Albany on December 30, 1996 seeking injunctive relief from the surcharge.

“A court hearing on this suit is scheduled for March 7,” stated Tom Rafalsky, President of the New York State Clinical Laboratory Association (NYSCLA). “We seek immediate injunctive relief from this surcharge. We believe there are compelling legal grounds for such an injunction.”

The dispute is about the 8.18% surcharge on laboratory tests performed by free-standing clinical laboratories. The surcharge took effect on January 1, 1997 and was discussed in detail in the December 16, 1996 issue of THE DARK REPORT. The surcharge is part of an effort to replace the state’s former method of financing hospital indigent care and healthcare initiatives.

“We believe that legislation authorizing the surcharge for laboratory tests performed by free-standing clinical laboratories violates the Constitution’s guarantee of equal protection under the law,” stated Rafalsky. “Clinical laboratories were not part of the prior hospital financing scheme, called NYPHRM (New York Prospective Hospital Reimbursement Methodology).”

“New York Legislators never realized the impact that 100,000 laboratory bills per day could have upon educating constituents about the issues involving this laboratory surcharge.”
—Pat Lanza

“Not only are clinical laboratories included in this new legislation,” he explained, “but similar healthcare providers are excluded. This encompasses radiology, pharmacy, physician offices and the entire class of healthcare providers who see patients outside the hospital. As written, this legislation violates the equal protection clause.”

Paul Rust, General Manager of SmithKline Beecham Clinical Laboratories’ Long Island laboratory, is actively involved with NYSCLA on this issue. He pointed out a major contradiction in the government’s position. “The surcharge does not cover laboratory tests performed in a physicians’ office laboratory. Yet physicians’ office labs (POLs) do 50% of the clinical testing in New York state!

“Why would POLs be exempt?” Rust continued. “Because legislators did not want to stir up the hornet’s nest of protest from physicians that would result if the surcharge was assessed on tests done in their offices. It is these types of contradictions which give us confidence our lawsuit will succeed.”

Significant Stakes

For clinical laboratories, the stakes are significant. Pat Lanza, President of Sunrise Medical Laboratories in Hauppage, New York explains. “The surcharge on laboratory testing is collected by one of two ways. It is either paid by the insurance plan directly to the state or, if the patient is uninsured, the clinical laboratory is to collect the surcharge and remit it to the state.

“Since January 1, a number of insurance plans already cut reimbursement to us for laboratory tests. They want to offset their 8.18% surcharge payment. At Sunrise, we saw reimbursement reductions of 4% to 10% by individual insurance plans. These insurance plans are passing the cost of the surcharge along to clinical laboratories. This revenue loss is immense and means the difference between survival and bankruptcy for many independent laboratories.”

Lanza explained the other problem for laboratories. “If the patient is self- pay, labs must collect and remit the surcharge. That alone is a costly burden. But if the patient does not pay the surcharge, New York’s Department of Health takes the position that the lab- oratory is guarantor of the surcharge. That creates another financial burden on laboratories already struggling to keep out of bankruptcy.”

“The guarantor issue represents our second reason for an injunction,” added Rafalsky. “We believe the Department of Health is wrongfully interpreting the legislation by defining laboratories as guarantors of the surcharge.”

The lawsuit was funded by a number of smaller clinical laboratories which are members of NYSCLA. SmithKline is the only national laboratory supporting the lawsuit. “We extended invitations to Quest Diagnostics and Laboratory Corporation of America. Both repeatedly declined to provide financial or other help,” stated Rust. “Their attitude is puzzling because these two labs will directly benefit if our lawsuit prevails.”

Along with the lawsuit, NYSCLA members launched a campaign of public education. “Our laboratories now print a notice about the surcharge on patient bills,” said Rafalsky. “Patients learn that this is the first time the state has directly taxed the patient for a healthcare service. They are asked to contact their state senators and representatives. When passing this law, the legislature overlooked the fact that 100,000 laboratory bills are mailed daily to their constituents. The public is responding vigorously and lawmakers are listening. We understand that the Department of Health alone fields 800 to 1,000 calls per day from the public on this issue.”

Other States Watching

Of concern to laboratory executives outside New York is the fact that several state governments intend to copy New York’s taxing scheme if it works. Were that to occur, clinical laboratories in surrounding states may find themselves forced to deal with a similar surcharge or tax.

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