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F I S C A L I M P A C T R E P O R T

SPONSOR Sandoval

ORIGINAL DATE

LAST UPDATED

2/19/07

2/20/07 HB 987

SHORT TITLE Health Care Clinical Lab Gross Receipts

SB

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

(20,537.6)

Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates SB 893

Conflicts with HB 684, HB 797, HB 683, HB 23, SB 161, S 326

SOURCES OF INFORMATION

LFC Files

Responses Received From

Department of Health (DOH)

Health Policy Commission (HPC)

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

House Bill 987 makes several changes to Section 7-9-93 NMSA 1978, the medical services gross

receipts tax deduction enacted in 2004. The bill expands the list of health practitioners who

receive the gross receipts tax deduction for receipts from managed care providers, commercial

health insurers and Medicare part C to include accredited clinical laboratories that are not located

in a physician’s office or hospital. Clinical laboratories were not included in 2004 legislation that

made many other health provider receipts deductible from gross receipts tax.

The bill also expands the deduction so that it will apply to receipts from co-payments or

deductibles paid by an insured person to a health practitioner.

The effective date of the provisions in this bill is July 1, 2007.

House Bill 987 – Page

2

FISCAL IMPLICATIONS

Based on the Report 80, TRD believes taxable gross receipts for clinical labs not located in a

physician’s office or a hospital will be $54 million in FY08. Based on information from the

federal Centers for Medicaid and Medicare Services (CMS) and from industry representatives,

about 75 percent of that total comes from facilities not associated with physicians’ offices or

hospitals, and about 35 percent of these receipts come from managed care insurers. Therefore,

the fiscal impact to the general fund from the amendments to Section 7-9-93 NMSA 1978 is

estimated to be $935.6 thousand in FY08 ($54 million X 75 percent X 35 percent eligible

receipts X 6.6 percent statewide tax rate). This $935.6 thousand estimate includes the direct

impact of making these clinical laboratory receipts deductible, as well as the impact of holding

local governments harmless from the new deductions.

TRD estimates total taxable gross receipts for all physicians eligible for the proposed co-

payment and deductible deduction will be about $825 million in FY08. Based on information

from CMS, TRD believes that 40 percent of that total is reimbursed by the state and federal

governments. That leaves 60 percent, or $495 million, to be reimbursed by private payers. TRD

estimates that about 60 percent of that $495 million, or $297 million, is attributable to co-

payments or deductibles. Taxed at a statewide average rate of 6.6 percent, the co-payment and

deductible deduction will reduce revenue by about $19,602 thousand. The entire revenue

decrease will be to the general fund.

SIGNIFICANT ISSUES

Proponents of this legislation note that recruitment and retention of health providers has been

difficult in New Mexico because of the gross receipts tax. Economic theory suggests that a

shortage of healthcare labor will push healthcare wages, and therefore healthcare costs higher.

Although much of this problem was addressed in 2004 when Section 7-9-93 NMSA 1978 was

enacted, some healthcare practitioners in New Mexico still pay gross receipts tax, while their

counterparts in most other states do not. Unlike many businesses that are subject to gross receipts

tax but pass the tax on to consumers, many health providers cannot pass the tax on because

managed care organizations and Medicare refuse to pay the tax.

LFC notes that while individual deductions from the gross receipts tax may have small fiscal

impacts, their cumulative effect significantly narrows the gross receipts tax base. Narrowing the

gross receipts tax base increases revenue volatility and requires a higher tax rate to generate the

same amount of revenue.

LFC notes that receipts of health practitioners have historically grown faster than receipts of

other industries. Removing receipts from high-growth sectors from the gross receipts tax base

makes it more difficult for tax revenue to keep pace with inflation.

ADMINISTRATIVE IMPLICATIONS

The bill will have a moderate administrative impact on TRD. The department will recode

systems, revise instructions and forms, prepare taxpayer education materials, and train personnel.

These changes can be accomplished with existing resources.

House Bill 987 – Page

3

DUPLICATION, CONFLICT

House Bill 987 duplicates Senate Bill 893.

House Bill 987 conflicts with Senate Bill 684 and House Bill 797. These bills contain identical

provisions pertaining to clinical labs but do not expand Section 7-9-93 NMSA 1978 to include

receipts from deductibles and co-payments.

House Bill 987 conflicts with House Bill 638, which contains the same provisions regarding

clinical labs but also makes amendments to Section 7-9-77.1 to expand a gross receipts tax

deduction for the receipts of certain health care practitioners from third-party administrators of

Medicare and the federal TRICARE program to include several additional practitioner classes.

HPC believes that page 5, line 13 of House Bill 987 conflicts with Senate Bill 161, House Bill

23, and Senate Bill 326. These bills provide a phased-in gross receipts tax deduction for receipts

of for-profit hospitals. House Bill 987 would provide an additional deduction for receipts of

clinical laboratories located in hospitals.

TECHNICAL ISSUES

TRD notes that Section 7-9-93 might not be the right location for the clinical laboratory

deduction proposed in this bill because it adds clinical laboratories to the list of health

practitioners. However, clinical laboratories are defined as health facilities under 42 U.S.C.

Section 263a.

HPC notes that receipts of a clinical laboratory in a free-standing clinic or anatomical laboratory

owned by a pathologist will not receive the clinical laboratories gross receipts tax deduction

created in the bill. If this is not the intent of the bill, HPC recommends deleting the words, “in a

physician’s office or" on page 9, line 22.

TRD notes that the proposal splits present law Section 7-9-93(A) NMSA 1978 into two

subsections. The first new subsection retains the gross receipts tax deduction for payments by a

managed care provider or health care insurer, and retains the exclusion for fee-for-service

payments. The second subsection provides the proposed co-payment and deductible language.

Unlike present law, the new language is not limited to managed care plans, but extends to co-

payments and deductibles under any type of health plan. Since the section does not define a

“health plan," the bill may create confusion for taxpayers and TRD about what is covered by the

new co-payment and deductible deduction. This confusion could increase the bill’s fiscal impact.

SS/csd