BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  3

DATE:  February 26, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: HB - 893

SPONSOR: Representative Lujan

BILL SHORT TITLE: Gross Receipts Tax Credit for Charity Care Provided by For-Profit Hospitals

DESCRIPTION: This bill provides that the state’s for-profit hospitals – both general and specialty – may claim a credit against gross receipts tax liability for the amount of charity care delivered by the hospital. The credit must be applied for and approved by the Department prior to crediting the approved amounts against gross receipts tax liability. Charity care is carefully defined in conformance to the definitions proposed by the HJM-18 task force. A charity patient is determined at intake as one whose family income is less than 200% of poverty and is without any reasonably identifiable alternative third party or government payment source (including Medicaid, County medically indigent funds or Medicare). The amount of care that can be credited is the unpaid amount of hospital charges for charity patients, multiplied by the “cost-to-charge” ratio as determined by HCFA.

EFFECTIVE DATE: July 1, 2001; only charity care expenditures after July 1, 2001 are eligible for credit. For Administrative reasons, the Department requests a January 1, 2002 effective date, and corresponding change in expenditures incurred date.

FISCAL IMPACT (Thousands of dollars):  		Note: Parenthesis ( ) indicate a revenue loss:
		Recurring or		
Estimated Impact on Revenues	Nonrecurring	Funds 	
 FY 2002 	FY 2003	FY 2004   	     Impact     t     	             Affected          .             	
(2,700)*	(4,900)**	(5,100)**	Recurring	General Fund	
(2,200)*	(3,900)**	(4,100)**	Recurring	Local Governments	

*	Assuming a one quarter plus one month lag between expenditure and first use of credit, the first year maximum would be $5.6 million split between local governments with for-profit hospitals and the state general fund. The number here assumes that current levels of charity care are 2% of total revenues for the specialty hospitals and 5% for general hospitals, which equals $10 million in credit, which exceeds the amount of GRT. However, with this assumption, the specialty hospitals do not cover the entire amount of their GRT. On average, 87% of current GRT would be covered.

*	Specialty hospitals that do not cover their entire amount of GRT would soon adjust their policies to accept medically indigent patients, since their care would be paid 100% by the tax credit. For FY 2003 et. seq., this change in policy is assumed to be complete.

ADMINISTRATIVE IMPACT: significant. The CRS system does not have provision for considering credits as payments. In other contexts this session, such administrative impacts have been considered conceptually simple but complex and costly in terms of programming. The TRIMS/CRS system is scheduled for production about June, 2001. The initial six months will be spent completing the programming, fixing bugs, and building data extracts. There will not be sufficient spare resources to implement a change of this complexity prior to January 1, 2002. Auditing this complex definition will be difficult. However, hospitals might be a suitable “test case” for managed audits pursuant to HB-154 of this session.

TECHNICAL ISSUES: none. See, however, “OTHER ISSUES AND IMPACTS” #3 below for a proposal to repeal the current 50% deduction for-profit hospitals enjoy. 

OTHER IMPACTS AND ISSUES:
1.	Five-year impact – maximum impact.
	FY 2002	FY 2003	FY 2004	FY 2005	FY 2006	
    General Fund	(3,100)	(4,900)	(5,100)	(5,700)	(6,400)	
    Local Governments	(2,500)	(3,900)	(4,100)	(4,600)	(5,100)	
        Total	(5,600)	(8,800)	(9,200)	(10,300)	(11,500)	

2.	Background: in 1991, the interim Revenue Stabilization and Tax Policy studied extensively the issue of taxing health care services in the state. This was at a time of consistent cost overruns in the Medicaid program, and the threat of closure of some of the smaller local hospitals in the state. Clearly something needed to be done. However, the only provision that was passed was the 50% deduction for for-profit hospitals. However, in the discussions leading up to this enactment, it was clear that the not-for-profit hospital community also had a problem that needed work – that of the amount of unreimbursed care that the hospital community was providing. In subsequent years, several proposals have surfaced. These proposals led to a determination that all the hospitals were suffering, but the magnitude of the problem could not truly be determined because each hospital had differing policies and definitions for the three components of unreimbursed care. In 1997, Representative Coll sponsored HJM-18. The description of HJM-18 from the FIR follows:

This memorial directs the Health Policy Commission, the Department of Health and the Taxation and Revenue Department to establish uniform and clear definitions of uncompensated health care services, bad debts, charity care, discounts and allowances, etc. These agencies are required to reporting to the state of uncompensated care provided by hospitals and health care facilities. From the information obtained the legislature is directed to propose and adopt minimum levels of charity care for hospitals to limit or authorize an entity’s right to gross receipts and corporate income tax deductions and exemptions.

The three agencies, plus the New Mexico Hospital Association and a number of concerned individuals, expended hundreds of hours studying this issue. The working group proposed, and eventually adopted, common definitions for the important classes of uncompensated care: “community education”, “charity care”, “bad debt”, “managed care allowance”, and  “cost-to-charge ratio”. Unfortunately, it took quite a while for these definitions to be written into rule by the Health Policy Commission. The rule was drafted and redrafted, so that the data format for the state report would conform to that of the Medicare Cost Report. The Health Policy commission is currently collecting data for the year ending 6/30/00. The Commission reports it should have the first full year of data from all hospitals by the end of this calendar year.

In the meantime, the HJM-18 Phase I report did provide a rough estimate of the total amount of uncompensated health care services. Page 207 reports: 

Since by definition, these individuals [the uninsured] do not pay premiums for health insurance, the relevant expenditure class is the amount spent on unreimbursed care, charity care and other out-of-pocket care by the individual.  Per capita costs are estimated by dividing the total amount spent by the number of individuals identified.  Total expenditures are estimated to be $226.3 million for the uninsured in New Mexico in 1999.

In the face of this substantial number, an estimate of $10.2 million for charity care (only) delivered by the state’s for-profit general and specialty hospitals is not out of line.

3.	At least part of the tax policy rationale for the 50% deduction at 7-9-73.1 NMSA 1978 is that both for-profit hospitals and not-for-profit hospitals deliver charity care. (Another reason is the general tendency to remove tax from the health industry.) If this is a fair characterization, then this bill should repeal the 50% deduction, since the provisions of this bill allow the for-profit hospital community to explicitly calculate the amount of care delivered as a responsibility of government. As best as can be determined with the data available, with this arrangement all the for-profit general hospitals would cover their gross receipts tax liability (even in the face of losing the 50% deduction) and the specialty hospitals would experience a slight increase in tax (maybe as much as 10%) in face of the net effect of losing the 50% deduction and being allowed the explicit credit of this bill.

4.	Profile
	All Health Services	Exempt, Gov’t	Exempt, Non-Profit	Exempt, Facility HMO	Total Sales for GRT Purposes	Approx. Reported Total	Deductible Medicaid Tangibles	Deductible, 50% General Hospital (after Medicaid)	FY 2002 Medicare Deduction	
	($1,000)	($1,000)	($1,000)	($1,000)	($1,000)	($1,000)	($1,000)	($1,000)	($1,000)	
    Hospitals incl. HMOs	2,918.4	693.4	1,789.0	193.5	242.5	242.5	15.6	113.5	7.7	
        General medical & surgical hospitals	2,547.6	693.4	1,676.9		177.2	177.2	11.4	82.9	7.7	
        HMO medical centers (facility)	194.2		0.8	193.5						
        Psychiatric & substance abuse hospitals	97.0		64.4		32.6	32.6	2.1	15.3	0.0	
        Specialty (except psychiatric & substance abuse) hospitals	79.6		46.9		32.6	32.6	2.1	15.3	0.0	

	Approx. 1997 RP-80 Taxable	Approx.
FY 2001	Approx. FY 2002	Approx. FY 2003	Approx. FY 2004	Approx. FY 2005	Approx. FY 2006	
	($1,000)	($1,000)	($1,000)	($1,000)	($1,000)	($1,000)	($1,000)	
    Hospitals incl. HMOs	113.5	131.4	139.2	147.4	156.1	165.3	175.1	
        General medical & surgical hospitals	82.9	94.1	99.6	105.5	111.7	118.3	125.3	
        HMO medical centers (facility)								
        Psychiatric & substance abuse hospitals	15.3	18.7	19.8	20.9	22.2	23.5	24.9	
        Specialty (except psychiatric & substance abuse) hospitals	15.3	18.7	19.8	20.9	22.2	23.5	24.9