Eligible Charges

by Tom Yamachika, President, Tax Foundation Hawaii

Our issue of the week has been brought to us by an alert reader.

He noted that some health insurance programs don’t cover general excise tax that we in Hawaii impose on health care charges.  So, sometimes a patient gets a bill for the GET on a medical charge.  As one health insurer’s website states:  “According to Hawaii State Law, general excise tax is an expense of doing business and is generally passed on to patients, which means that you are responsible for paying any applicable tax in addition to your co-insurance and co-payment.  Please note that your provider should charge you tax based on the eligible charge for the service, and not based on the billed charge.”

But what does that last sentence mean?  Insurance is not paying the full medical charge.  It’s paying a “negotiated” reduced rate called an “eligible charge.”  The medical provider typically signs an agreement with the insurer saying that it will accept the eligible charge as payment for its services.

Suppose, for example, that you get a bill from a medical provider for $100 plus 4.712% tax, and it says you are supposed to come up with the $4.71 tax out of your own pocket because insurance won’t cover the tax.  But, in reality, your insurance company pays the “eligible charge” of, let’s say, $75 for the services.  The medical provider’s gross income is the $75 from the insurance company plus the $4.71 from you.  The GET it actually pays is $79.71 x 4.5% = $3.59, a difference of $1.12 just for that visit.  The medical provider, knowingly or not, is keeping that $1.12 difference.

The Tax Department has already weighed in on this situation.  Here is what they said, in Tax Facts No. 98-1:  “If a medical participating provider computes the GET on an amount greater than their gross income (for example, greater than your plan’s eligible charge), the GET calculated will be more than the actual GET due on the transaction.  Under consumer protection laws, GET that is visibly passed on cannot exceed the actual tax due on the transaction.”

Here, the Tax Department is saying, first, that the tax due to it is based on the eligible charge, which is typically a smaller amount than the billed charge; second, that a difference between what the medical provider told you and what it actually paid is probably illegal; and third, that enforcing those laws is not what it does (assuming that it receives all of the tax that is legally due).

So, who is supposed to enforce those laws if the Tax Department doesn't?  The Department answers this question in Tax Facts 37-1:  “The Office of Consumer Protection will take immediate action against businesses that charge more tax than what is actually due.  For more information, call the Office of Consumer Protection at (808) 586-2630.”

Medical providers, please take note!  If your billing system is overcharging patients, please fix the problem now…before it’s too late.