Health Services Medical Corp. of Cent. New York, Inc. v. Chassin

• Citation: 668 N.Y.S.2d 1006,175 Misc.2d 621
• Parties: , 1998 N.Y. Slip Op. 98,085 HEALTH SERVICES MEDICAL CORPORATION OF CENTRAL NEW YORK, INC., Plaintiff, v. Mark CHASSIN, as Commissioner of the Department of Health of the State of New York, et al., Defendants.
• Decision Date: 27 January 1998
• Court: New York Supreme Court

Page 1006

668 N.Y.S.2d 1006

175 Misc.2d 621, 1998 N.Y. Slip Op. 98,085

HEALTH SERVICES MEDICAL CORPORATION OF CENTRAL NEW YORK INC., Plaintiff, v. Mark CHASSIN, as Commissioner of the Department of Health of the State of New York, et al., Defendants.

Supreme Court, Onondaga County.

Jan. 27, 1998.

Costello, Cooney & Fearon, L.L.P., Syracuse (Frances A. Ciardullo, of counsel), for plaintiff.

Dennis C. Vacco, Attorney General (Michael L. Hanuszczak, Syracuse, of counsel), for defendants.

ROBERT G. HURLBUTT, Justice.

In this declaratory judgment action, plaintiff seeks summary judgment declaring that an increase in the mandated rate of payment to hospitals for inpatient services provided to subscribers of health maintenance organizations (hereinafter HMOs), pursuant to Public Health Law (PHL) § 2807-c(2-a), represents a tax, and that such tax, as applied to plaintiff, is unconstitutional. Plaintiff, incorporated as a not-for-profit corporation pursuant to the Not-for-Profit Corporation Law in 1975, is a health maintenance organization under Article 44 of the Public Health Law and a health service corporation under Article 43 of the Insurance Law. As a health maintenance organization, plaintiff arranges for the provision of health services to its enrolled subscribers for a set, pre-paid fee.

In April 1992, the State Legislature amended the Public Health Law as part of the Omnibus Revenue Act of 1992 (L.1992, ch. 55). PHL § 2807-c, subdivision 2-a ¹ increased the amounts HMOs paid to hospitals for inpatient hospital services furnished to their non-Medicaid subscribers. Previously, the rate of payment to a hospital was based upon Diagnosis Related Groups (DRGs) which dictated the amount paid for a patient's care based upon the diagnosis category rather than the actual cost of the care. Public Health Law § 2807-c(2-a) imposed an assessment upon the amounts paid by HMOs for inpatient hospital care, effective with patient discharges occurring on or after July 1, 1992, adding a factor of 9% over and above the DRG rate. The monies generated by the 9% assessment were not to be paid to the hospital, but were paid to an HMO pool and then were deposited to the State's general fund. ² (PHL § 2807-c[2-a][c][i].)

Pursuant to the legislation, the 9% increase was subject to reduction if the HMO met targeted enrollment goals for Medicaid recipients in each social services district in which it operated. Plaintiff sought and was granted reductions in assessment, ³ but made payments to the HMO pool under PHL § 2807-c(2-a) in the sum of $122,850 on August 14, 1992, $119,972 on September 10, 1992, and $241,884 on September 12, 1995. Plaintiff contends that these payments represent tax payments and that the HMO tax is improperly imposed upon it because it is exempt from taxation as a charitable institution pursuant to NYS Constitution Article 16 and Insurance Law Article 43. Plaintiff seeks a declaration that the statute imposing this tax is unconstitutional as applied to it, and further seeks the return of all monies paid under the statute.

Defendants cross-move for summary judgment declaring that the assessment imposed by PHL § 2807-c(2-a) is not a tax, and that even in the event that the court finds that it is a tax, plaintiff is not entitled to exemption. Defendants argue that the 9% assessment is a regulatory mechanism. They contend that payment differentials among hospital payers are rate-setting tools used historically to promote social goals relating to health care. ⁴ Public Health Law § 2807-c(2-a) was enacted to give incentive to HMOs to enroll Medicaid recipients under the belief that the health care needs of Medicaid patients would be more effectively and efficiently addressed in a "managed care" setting, and additionally, to generate revenue for the State. (Affidavit of Steven C. Anderman, New York State Dept. of Health, sworn to on October 1, 1992 and attached as Exhibit D to defendant's answering papers; Affidavit of Richard Pellegrini, New York State Dept. of Health, sworn to on June 24, 1997.)

Whether the PHL § 2807-c(2-a) "differential" on rates paid to hospitals for in-patient care imposes a tax upon HMOs and, if so, whether plaintiff is exempt from payment of the tax, are questions of law which are appropriately determined on summary judgment. The question whether a provision imposes a tax or a regulatory fee turns on legislative intent. (Am. Sugar Refining Co. of New York v. Waterfront Comm. of New York Harbor, 55 N.Y.2d 11, 447 N.Y.S.2d 685, 432 N.E.2d 578, appeal dismissed New York Shipping Assn. Inc. v. Waterfront Com'n of New York Harbor, 458 U.S. 1101, 102 S.Ct. 3474, 73 L.Ed.2d 1362.) Plaintiff provides some legislative materials with the moving papers, including a summary distributed to the Senate session describing the legislation and reporting that the HMO differential will raise $31 million for the state general fund. The expenses to administer the funds were not to exceed $200,000. The sum of $1 million was earmarked to aid managed care development, leaving revenue for the general fund far exceeding the associated expenses and the expenditure earmarked for the social goal. In August 1992, revisions to the legislation were proposed to insure that the assessment would generate sufficient revenue. (Tallon Bill Memorandum.) It cannot be overlooked that the legislation imposing the assessment upon HMOs was a revenue act. The legislative materials thus emphasize the revenue raising role of PHL § 2807-c(2-a).

It is significant that the amount generated by the differential was not to be paid to the hospital to cover its expenses, but instead was to end up in the general fund of the State. Charges exacted for revenue purposes or to offset the cost of general governmental functions are generally held to be taxes (New York Tel. Co. v. City of Amsterdam, 200 A.D.2d 315, 317, 613 N.Y.S.2d 993; Matter of Joslin v. Regan, 63 A.D.2d 466, 470, 406 N.Y.S.2d 938, affd. 48 N.Y.2d 746, 422 N.Y.S.2d 662, 397 N.E.2d 1329; Radio Common Carriers of New York, Inc. v. State of New York, 158 Misc.2d 695, 601 N.Y.S.2d 513), while fees are "enacted principally as an integral part of the regulation of an activity and to cover the cost of regulation." (Radio Common Carriers of New York, Inc., supra, at 698, 601 N.Y.S.2d 513, citing Am. Trucking Assns. v. O'Neill, 522 F.Supp. 49.) "Taxes are imposed for the purpose of defraying the costs of government services generally ... [while] [f]ees ... have been characterized as the 'visitation of the costs of special services upon the one who derives a benefit from them'." (Albany Area Bldrs. Assn. v. Town of Guilderland, 141 A.D.2d 293, 298, 534 N.Y.S.2d 791, affd. 74 N.Y.2d 372, 547 N.Y.S.2d 627, 546 N.E.2d 920.) The amount of a regulatory fee "cannot be greater than a sum reasonably necessary to cover the costs of issuance, inspection and enforcement." (Matter of Torsoe Bros. Constr. Corp. v. Board of Trustees of Village of Monroe, 49 A.D.2d 461, 465, 375 N.Y.S.2d 612.)

In holding that an exaction from employers was in the nature of a license fee rather than a tax, the Court in Am. Sugar Refining Co. of New York (supra), said "[a] license fee has for its primary purpose the regulation or restriction of a business deemed in need of public control, the cost of such regulation being imposed upon the business benefited or controlled, whereas the primary purpose of a tax is to raise money for support of the government generally." (Id., at 26-27, 447 N.Y.S.2d 685, 432 N.E.2d 578.) In that case, the court found that the fee was imposed for a purpose which brought benefits to the industry which would "in major part redound to the benefit of employers." (Id., at 27, 447 N.Y.S.2d 685, 432 N.E.2d 578.)

Although the exaction from HMOs in the instant case is undoubtedly for the purpose of regulating the health care industry, it differs from that found to be a license fee in Am. Sugar Refining Co. of New York, supra, in that here, the funds are directed to the general coffers to meet the cost of general governmental functions and are not utilized in a way that "redounds to the benefit of" the payer. The revenue raised bears no relationship to the cost of regulation. The policy behind the legislation, which seeks to lower the cost of the Medicaid program by forcing enrollment in managed care, is one benefiting the wider community of state taxpayers, and there is no special benefit to HMOs. Where the legislation has both regulatory and revenue raising aspects, emphasis is placed on "the revenue's ultimate use" (San Juan Cellular Tel. v. Public Service Commn. of Puerto Rico, 967 F.2d 683, 685), which, in the instant case, is for the common welfare (County of Westchester v. Town of Harrison, 201 Misc. 211, 215, 114 N.Y.S.2d 492), and not more narrowly for the benefit of HMOs, nor the specific regulation of the health care industry.

Plaintiff was an intervenor in a federal court action in which plaintiffs claimed that the statutory assessments enacted as part of the Omnibus Revenue Act of 1992 were preempted under the Employee Retirement Income Security Act (29 U.S.C. § 1001 et seq. [ERISA] ) and the Federal Employees Health Benefits Act (5 U.S.C. § 8901 et seq. [FEHBA] ). In Travelers Ins. Co. v. Cuomo, 813 F.Supp. 996, the United States District Court for the Southern District of New York assumed that the statutory assessments, including the 9% assessment at issue in the instant case, were taxes within the meaning of the Tax Injunction Act (28 U.S.C. § 1341). The court relied, in particular, upon the fact that the assessments were paid into the State's general fund, and further observed that a major purpose of the legislation appeared to be to balance the State's budget. (Travelers Ins. Co. v. Cuomo, supra, at 1000, 1004.) The Court of Appeals modified the court's decision on other grounds, but expressly upheld the conclusion that the 9% and 11% surcharges in the 1992 legislation were...