N.J. imposes taxes on cosmetic procedures, ASCs

Physicians are confused about which procedures will be affected and how to comply with the new taxes.

New Jersey physicians were taken by surprise recently by the introduction of two new medically related taxes. The taxes, both of which will potentially affect ophthalmologists, were introduced in bills passed in late June and are expected to become effective in the fall.

The legislation imposes taxes on cosmetic procedures and on the gross receipts of ambulatory surgery centers (ASCs). The new taxes have created confusion among New Jersey physicians, who say they had no warning that the taxes were under consideration.

Some speculate that the language of the bill could be read to include LASIK and other refractive surgery procedures, although the bill’s own sponsor said he did not consider refractive surgery taxable under the bill.

“My understanding of this whole issue is that it came out of nowhere,” said Janet Neigel, MD, an oculoplastic and facial plastic surgeon in West Orange, N.J. “There are all sorts of gray areas that haven’t been addressed.”

New Jersey is the first state in the nation to explicitly tax surgical procedures, according to a press release from the American Society of Plastic Surgeons.

Joseph Cryan, the Democratic assemblyman who sponsored the bill imposing the cosmetic procedure tax, said the bill was introduced and passed quickly because it was part of a budget process that was behind schedule. The two bills were introduced and passed within a week, he said.

Mr. Cryan said the impetus for the bills came in part from the New Jersey Hospital Association. Revenues generated by the ASC tax will go to fund charity care in hospitals, he said.

“We had a shortfall for charity care, and the funds from the bill are intended to go to proceeds to fund it. It happened so fast because we recognized that we had a shortfall. This was one of the ideas that had been recently discussed, and we decided to go with it,” Mr. Cryan told Ocular Surgery News.

“Charity care is used in all hospitals that have to pay for the uninsured. The state pays back a certain figure of that, and the intention here is to fully fund charity care so the hospitals receive those reimbursements,” he continued.

Funding charity care is a top priority of the administration of New Jersey Gov. James E. McGreevey for fiscal year 2005, according to the New Jersey Academy of Ophthalmology.

Mr. Cryan sponsored the bill imposing a 6% tax to be paid by patients on cosmetic surgery proceeds. The other bill, which imposes a 3.5% tax on the gross receipts of ASCs, was sponsored by Patrick Diegnan Jr, a Democratic assemblyman. That tax affects ASCs that grossed $300,000 or more in fiscal year 2003, and the maximum assessment is $200,000, according to the legislation.

A statement on the New Jersey Academy of Ophthalmology’s Web site regarding the proposed taxes notes that the ASC tax “can not be passed onto the payer and represents in effect a third tax (coupled with corporate business and income taxes) on income earned by physicians owning these facilities.”

Questions, questions

New Jersey physicians were taken by surprise by the rapid introduction and passage of the bills, Dr. Neigel said. They had no time to react and lobby against the bills.

“They came up with this scheme that basically went through committee, was passed overnight and was signed by the governor without anybody being given any warning over it,” she said.

Dr. Neigel said she fears that the ASC tax may impede patient care. “This is just going to drive up the cost of health care. People will stop having licensed one-room [surgical] facilities because you can’t afford them with this tax,” she said.

There is also confusion as to when and how the cosmetic tax will be collected. In cosmetic procedures, Dr. Neigel said, “Patients are paying a doctor, a hospital and an anesthesiologist. So all three are going to have to collect this tax. It’s going to be a very onerous task for people to try to collect it and then follow up.”

Referring to the Health Insurance Portability and Accountability Act, she said, “With all the new privacy rules, there’s a question as to how you’re even going to audit this and see that it’s being carried out.”

There are questions regarding who is ultimately responsible for paying the cosmetic surgery tax because in some cases there is one collector who must pay out to other providers, said Alan E. Reider, JD, Ocular Surgery News Regulatory/Legislative Affairs Section Editor. He said billing will be different from the Medicare system, under which each provider bills for his or her own services.

“Under Medicare, the ophthalmologist bills for ophthalmic services and the optometrist bills for optometric services. For LASIK, often the ophthalmologist will bill globally and collect the entire fee and then pay the optometrist. In my view, in that case the ophthalmologist is really only a collection agent for the optometrist because otherwise it’s a fee split,” Mr. Reider said. “But even if you’re the collection agent, it’s still the optometrist’s responsibility to collect the tax through the collection agent, and then the optometrist will be responsible for paying that tax to the state.”

Confusion over cosmetics

There is confusion over what procedures will be considered medically unnecessary and what will be considered specifically “cosmetic” — and therefore taxable under the bill.

The legislation defines cosmetic surgery, but the definition leaves some ambiguities. Mr. Cryan said a more definitive answer to which procedures are covered by the legislation will be available when the New Jersey Taxation Guide for 2004 is completed.

One procedures to be taxed that most obviously affects ophthalmology is the use of Botox, Dr. Neigel said. But Botox can be used off-label for medical indications as well as cosmetic ones. Dr. Neigel said she is unsure whether the tax will apply to procedures considered medically unnecessary by insurance companies but deemed medically necessary in individual cases by the physician.

“I use Botox (botulinum toxin type A, Allergan) for cosmetic reasons, but also for migraine headaches, muscle spasms and things like that. Some of these are not covered by insurance because they are considered an off-label use of Botox. If [the patient is] paying out-of-pocket for something like a migraine headache, is that now considered a cosmetic procedure even though it’s a medical problem?” she asked.

The same question might apply to certain reconstructive procedures, Dr. Neigel said. If a patient needs reconstructive surgery due to a complication from a cosmetic procedure, it is unclear whether the reconstructive surgery will also be considered cosmetic, she said.

Additionally, a procedure such as blepharoplasty can be done for functional or cosmetic reasons. How will the line be drawn between the two, Dr. Neigel asked.

“There are some people who have droopy eyelids, the lid is drooping, and it bothers them. But the insurance company looks at their picture or their visual field and say they don’t see it. The patient ends up paying out-of-pocket. Again, is that considered cosmetic or functional?” she asked.

Tax on LASIK?

Under the legislation’s definition, it is unclear whether LASIK fits the criteria for cosmetic surgery. The definition reads, in part, “‘Cosmetic procedure’ means any medical procedure performed on an individual which is directed at improving the procedure subject’s appearance and which does not meaningfully promote the proper function of the body or prevent or treat illness or disease. … ‘Cosmetic surgery’ means the surgical reshaping of normal structures on the body to improve the body image, self-esteem or appearance of an individual.”

People interviewed for this article disagreed over whether LASIK would fall under this description.

Mr. Cryan said he did not think LASIK would fit under the definition because the procedure promotes the proper function of the body.

Mr. Reider, on the other hand, thought the language might be applicable to LASIK because the procedure enhances the patient’s appearance.

“The definition says it involves reshaping of a normal structure of the body, and LASIK is the reshaping of a structure for appearance,” he said in reaction to the definition. “LASIK generally is considered to be cosmetic, and it appears that this is the type of procedure designed to be covered by the statute.”

ASC tax

The new laws will mean double taxation for some procedures done in ASCs, Mr. Reider said.

“This means you are going to be subject to both taxes if a cosmetic procedure is done in [an ASC] facility. You’ll have the 6% tax and then the ASC tax, and the ASC is going to increase its prices,” he said.

Like the cosmetic procedure tax, Dr. Neigel said the ASC tax will be unfair to physicians. The revenue from the tax is to go to charity care, but physicians already contribute their time and effort to charity care, she noted.

“Who owns [the ASCs] but the doctors, the ones who do the charity care? They’ll have to pay based on their gross revenue. A small one-room center that only brings in $100,000 a year may suddenly be in the red due to this tax because it’s based on gross revenue, not on profit. A lot of people don’t make money off their surgery centers. They just like to have them for the convenience,” Dr. Neigel said.

According to the legislation, the ASC tax will be due in fiscal year 2005, based on 2003 gross receipts. The ASCs required to pay the tax will be notified, the bill says.

Dr. Neigel said the taxes were one more issue obstructing the practice of medicine in New Jersey. “It’s very frustrating. We’re in the middle of this malpractice crisis. … Then you throw in overnight all these things, and you get tired of trying to fight. I just want to practice medicine, do a good job, take care of my three kids and not worry about all this trivia,” she said.

For Your Information:

• Janet Neigel, MD, can be reached at the Neigel Center for Cosmetic and Laser Surgery 101 Old Short Hills Road, Suite 204, West Orange, NJ 07052; 973-325-7779; fax: 973-556-1213; e-mail: jmneigel@eyelid.com.
• Joseph Cryan can be reached at 985 Stuyvesant Ave., Union, NJ 07083; 908-624-0880; fax: 908-624-0587.
• Alan E. Reider, JD, can be reached at Arent Fox PLLC, 1050 Connecticut Ave NW, Washington, DC 20036; 202-857-6462; fax: 202-857-6395; e-mail: reider.alan@arentfox.com.