The hidden health tax that brought down a speaker
ALBANY—For almost 20 years, New Yorkers have been paying what amounts to a secret tax on their health care.
What started out as a small, off-budget, temporary surcharge on insurance to help pay for charity care, hospital debt and graduate medical education as New York hospitals deregulated in the late 1990s, has ballooned over 19 years into a multibillion-dollar all-purpose revenue fund that supports dozens of public health programs, and plugs billion-dollar holes in the state’s general budget.
The tax brings in so much money every year that millions of dollars collected by way of the tax were used as a virtual slush fund by the leaders of the Assembly and State Senate.
Business groups estimate the Health Care Reform Act (HCRA) assessments, if they were counted as normal state taxes, are the third highest tax the state levies after personal income and sales and use taxes, and the single biggest business tax.
But the state’s budget is now so reliant on the money from HCRA that there’s no way it could be replaced, or scaled down.
Former state health care officials said that to understand HCRA, you have to understand the state’s unusually active and expansive role in the provision of health care.
“You look at New York and you say, what’s unique about New York?” said Jim Tallon, the longtime Assembly health committee chairman who is currently president of the United Hospital Fund. “And it’s [that] New York plays a pretty big role in the financing and delivery of health care services, especially in the current day.”
This activism on the part of state government arguably reached its height in 1983, as New York City and the state’s hospitals faced an economic downturn, and the Legislature took a role in determining the fate and finances of hospitals it deemed too big to fail. Governor Mario Cuomo and the Legislature passed a law called New York Prospective Hospital Reimbursement Methodology (or NYPHRM), which allowed the state to set the rates at which all insurers would reimburse hospitals for their services.
Thirteen years later, the mood had changed, nationally and in New York State. Then-first lady Hillary Rodham Clinton’s push for national single payer health care had fallen apart, and states were deregulating their hospital systems. George Pataki, an upstate Republican, had been elected governor on a platform of cutting taxes.
Pataki wanted to find a way to get the government out of the business of telling insurers how much they could pay hospitals. He set up a commission to examine the issue. The recommendation born out of the commission’s work was the Healthcare Reform Act.
The act would deregulate hospitals, allowing each health care system to negotiate its own rates with insurance companies. But from the perspective of Albany’s liberal lawmakers and the hospital industry, deregulation posed a significant problem.
Under state regulation, lawmakers had included money for programs they deemed important in the rates they set for insurance companies. This money helped pay for graduate medical education, and helped hospitals cover bad debt and charity care—services for patients who were too poor to pay or simply failed to pay their bills, for whatever reason.
The compromise solution was the HCRA tax: a series of taxes including a surcharge that insurers would pay on “covered lives,” or the number of people covered under their policies. It started off small, and was described as “temporary”—a three-year program.
But then the money started coming in. Lawmakers and interest groups saw an opportunity. And as one former state health department official said, “It eventually got loaded up like a Christmas tree.”
Lawmakers began funding dozens of different programs with money from HCRA, paying for worker retraining (which pleased health care unions) and rural health grant programs that were good for residents—and lawmakers—in rural districts.
The state inched up the amount of tax insurers had to pay, little by little. The insurance companies complained, always, saying they would have to pass on the costs of the tax to their customers. The tax was taking in $3.7 billion a year by 2003.
What was bizarre about the HCRA tax was that all this money, billions and billions of dollars flowing into the state and flowing back out again for more than 20 different public health programs by the early 2000s, almost none of it was on the books. When lawmakers passed HCRA, they thought that collecting and spending the money outside of the state’s budget would help protect important revenues for public health programs from the vagaries and fluctuations of the annual state budgeting process.
So the money was both collected and disbursed outside of the budget, by a plan administrator, Excellus Blue Cross Blue Shield, with whom the state had signed a contract that was never even let out for a bid.
Almost none of the spending from HCRA went through typical oversight and procurement reviews.
And for roughly five years, from 2000 to 2005, there is no official record of how all of the money was spent.
Rapidly, HCRA money “started to become really tangential to what had always been the payer-hospital relationship,” said one former D.O.H. official.
Initially, some of the money collected under HCRA was available for the state health department (and by extension, the governor’s office) to spend on discretionary grants on health care-related items.
But the legislative leaders objected—Senate Majority Leader Joe Bruno and Assembly Speaker Sheldon Silver wanted their own discretionary funding.
The Legislature passed an amendment to HCRA that granted the leaders of each house the ability to spend up to $8.5 million on discretionary grants, none of which had to be disclosed or explained or go through a review process in the state’s budget.
This pot of money ”became this secret tax even for republicans who said they didn’t want to tax anything,” said one former D.O.H. official. Lawmakers could dip into the pot to pay for anything they wanted.
“It started being this whole laundry list,” one official said. “For example, Joe Bruno didn’t want to do a mandate on insurers to cover fertility medication, so he created a fertility grant program out of HCRA.”
Lawmakers could also use the money for conveniently timed grants.
“In the fall of even-numbered years a bunch of money would go out and it would be for facilities in marginal members’ districts,” one former health official said.
The HCRA tax also made a cameo appearance in the recent criminal complaint filed against now-former Assembly speaker Sheldon Silver by the U.S. attorney’s office.
As the criminal complaint against Silver alleges, he used his authority to disburse HCRA grants to enrich himself, directing hundreds of thousands of dollars to renowned Columbia University physician Dr. Robert Taub for the completion of a center to study mesothelioma, a rare cancer that can be caused by asbestos exposure, in exchange for Taub’s agreement to direct clients with cancer to Silver’s law firm Weitz & Luxenberg, which specializes in lucrative asbestos lawsuits.
“As with other disbursements from the HCRA-Assembly Pool, DOH did not review the merits of the grant but simple processed the grant-related paperwork, including the grant contract and vouchers seeking payment against the grant,” the criminal complaint said.
In the sworn complaint, the U.S. attorney’s criminal investigator Robert Ryan said he’d uncovered no evidence Silver had ever asked Taub how the state funds he’d granted for the mesothelioma center were used.
“I have been unable to locate a public announcement or disclosure by Silver of the State disbursements to the mesothelioma center,” Ryan wrote. “As set forth above, Silver was not required to disclose disbursements from the HCRA-Assembly Pool because the fund was, during its existence, off-budget or budgeted as a lump-sum appropriation whose ultimate beneficiaries were not required to be publicly disclosed.”
The former state comptroller Alan Hevesi began raising alarms about the billions of dollars in HCRA money flowing outside of the state budget in 2003, in a series of damning reports questioning the way the funds were being managed. By 2005, the off-budget practice had been eliminated.
At least $200 million had been spent without any official accounting for its whereabouts.
Health industry officials freely admit that HCRA taxes helped make the price of private insurance in New York state the highest in the country over a decade.
A 1997 report by the Public Policy Institute, underwritten by the state’s anti-tax Business Council, estimated that if HCRA were “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.”
“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 report said.
In 2014, HCRA’s special revenue fund took in $4.29 billion in revenue. This year, it will take in $4.46 billion in revenue, and in 2016 it is estimated to take in $4.59 billion, nearly a quarter of all the miscellaneous receipts the state receives from special revenue funds each year.
Money from the fund supports some of the state’s most important safety net programs—”the State’s Medicaid program, Family Health Plus, workforce recruitment and retention, the Elderly Pharmaceutical Insurance Coverage (EPIC) program, Child Health Plus (CHP), Graduate Medical Education, AIDS programs, disproportionate share payments to hospitals and other various public health initiatives,” according to the state’s financial plan.
Money from the fund is poured into the state’s budget to fund Medicaid, triggering 50 percent federal matching funds that are essential to fund the massive $54 billion program that now provides insurance for nearly a third of all New Yorkers.
The tax itself is also taking on increasing importance. Over the past 15 years, the state began using money from cigarette tax revenues to fund HCRA programs too. But as smoking declines and illegal cigarette smuggling increases, the revenue from cigarette taxes is expected to wane. Other HCRA taxes will have to make up a larger share of the fund.
Insurers estimate the tax will raise $5.5 billion this year, almost 60 percent of which will be used to fund the state’s general Medicaid program, in order to trigger federal matching funds.
“$5.5 billion in assessments on health insurance is not something to chew on and it doesn’t do anything to promote affordability of health care premiums,” said Leslie Moran, senior vice president of the Health Plan Association, the trade group representing insurance plans.
The state’s budget also paints a murky picture of how exactly HCRA money is spent, sketching only broad strokes of where the money should go, instead of itemizing it.
“It’s hard to parse out exactly how this money is being spent,” Moran said.
And Obamacare is theoretically supposed to help eliminate some of the problems the tax was created to solve. Bad debt? Charity care?
And Obamacare is theoretically supposed to help eliminate some of the problems the tax was created to solve. Bad debt? Charity care?
In a world where almost everyone has insurance, these issues are supposed to disappear, or at least lessen.
Even under the Affordable Care Act, as the state touts more than 2 million new enrollees in both Medicaid and commercial insurance plans, the state is not planning to spend any less on charity care—the state's budget commits nearly $800 million each year for the next five years to help hospitals defray the costs of providing care to the uninsured.
This puzzles not only insurance companies but also patient advocates who have long said the indigent care money doesn't go to the hospitals that need it most.
A 2011 report by the Commission on the Public's Health System found "little or no relationship between the actual dollars received by the hospitals from the hospital Charity Care Pool and the amount of health care services they provided to the uninsured."
Former CPHS director Judy Wessler said the state has continued to systematically underfund hospitals with the highest share of Medicaid patients, while giving millions of dollars to hospitals with higher concentrations of commercially-insured patients.
"There’s no hiding how political this is," Wessler said of the state's funding formula. State law does not require hospitals to show how the hospitals spend the indigent care funds they receive.
"It is very, very difficult to ever really understand what all that money is being spent on," said Lev Ginsburg, director of Government Affairs for the Business Council of New York state. "It’s that lack of transparency which sort of was being alluded to in the Sheldon Silver case, that we can just spend $50,000 here, $50,000 there and there’s no problem."
But health industry officials say now the state is in too deep to roll back or even cut the tax.
“[HCRA] became a vehicle for directing revenues that got created with some health care attachment, and using it to fund purposes with some healthcare attachment,” said Dennis Whalen, president of the Healthcare Association of New York State, and former executive deputy commissioner at the state health department. “Now it is so intertwined with the budget and as a revenue mechanism that it would be difficult to unwind this.
A version of this article appeared in the March edition of Capital magazine.