New Jersey's freestanding ASCs are about to start paying taxes just for being, well, surgery centers. In the latest round of the battle between hospitals and physician-owned ASCs, the New Jersey Hospital Association backed a bill that will impose a 3.5 percent tax on ASCs' gross revenues. In addition, cosmetic surgery centers will be taxed 6 percent of gross revenues; it will be passed on to patients.

The legislation was rushed through with the state budget, speeding from committee to approval in two weeks. The money derived from the tax will help fund $31 million in charity care performed by the state's hospitals. Hospitals are just short of ecstatic. Physician-owners are stomping mad. Could such legislation be headed to your state? Here's what you need to know.

Handling the green in the Garden State
The so-called ASC tax is capped at $200,000 and also applies to facilities licensed to provide MRI, CT, lithotripsy, radiation oncology, orthotripsy and PET. It won't apply to facilities licensed to a general hospital as an off-site ambulatory center. Here are the basics of the ASC tax:

• Facilities subject to the tax must submit an annual report to the state by Sept. 15 that includes case volumes, charges and gross revenues by payer type beginning with calendar year 2003 data.
• Failing to provide the required data means fines of up to $500 per day of non-compliance.
• The state can levy retroactive assessments if it finds the data inaccurate.
• Any facility performing a service it's not licensed for after July 1 will be liable for double the tax owed, plus fines. (Note: The tax does not apply to physician-owned, single-OR facilities, because they are not licensed.)
• Payments, in four installments, begin Oct. 1.

Taxes on gross revenues aren't new to New Jersey. Until now, however, such taxes were levied only on the utility industry, which can pass the tax on to the public. ASCs don't have this ability because Medicare and managed care contracts wouldn't permit it. ASCs and their physician-owners, therefore, will absorb 100 percent of the tax burden. Because of various costs associated with providing services, it's possible that a 3.5 percent tax could, in some situations, eat up 30 percent to 50 percent of a surgery center's profits.

The immediate aftermath
These taxes will pump millions of dollars into hospitals, so it's safe to say they're happy.

Physicians are expressing their dismay by threatening to amend medical staff bylaws to eliminate non-paid-coverage duties at the hospitals they also admit to. At least three radiology and two physician groups have told me they've advised hospital administration that they won't participate in capital fundraising campaigns.

The hospitals are responding. Some say they didn't realize the tax would be such a blow to physicians, who actually provide the patient care, and would support a repeal. Some hospitals say they would support a repeal, but not before alternate sources of funding are secured. Others say that physicians who do charity care at hospitals should receive money from the charity fund.

Not the first time
Physicians have two options: litigation and legislation.

In Florida in 2002, the Circuit Court in Leon County, Fla., invalidated a 1 percent tax imposed on the operating revenue of certain provider groups (including ASCs, clinical laboratories and imaging centers) on the grounds such a tax violated the Florida Constitution, which prohibits "any tax on gross income derived by individuals."

The New Jersey Constitution doesn't contain a comparable section that circumscribes the power of the legislature to tax the gross income of individuals, so a constitutional challenge is little hope. However, it may be possible to challenge the statute on due process grounds.

That is, if the tax can be deemed confiscatory - in essence putting an industry out of business - a court might require the law be repealed. To do that, you'd have to show that a 3.5 percent gross revenue tax wipes out profits or puts many of these practices in the red.

Providers are being surveyed to gauge the financial impact, so we'll soon have a better idea of whether a suit exists. Many ASCs are very profitable and might be able to reap sizable profits. But imaging centers, for instance, could be hit hard. Because the law ties imaging centers, ASCs and others together, it might be repealed entirely. On the other hand, if it's shown that only imaging centers are unduly suffering, the language of the law might be reworked to exclude them.

If a case isn't worth filing, corrective legislation will be the route; preliminary moves in that regard are in the works.

Far-reaching effects?
The New Jersey Legislature is not exactly physician-friendly, and Gov. Jim McGreevy's (D) resignation doesn't clear the picture; acting governor and state Sen. Richard Codey (D), sponsored the legislation. With certificates of need under fire from the Federal Trade Comm-ission and Justice Department, taxes could be a new method to control ASC development.

Providers and hospital associations nationwide are now looking to New Jersey to determine whether the physician outcry or the hospital lobby wins out. If it turns out ASCs can bear the burden of funding charity care, ASC taxes could become the model for other state legislatures. This might not be a situation you can afford to ignore.