ALBANY, N.Y.-New York employers are resisting efforts to prolong a hospital surcharge that has been used for more than 10 years to fund excess medical malpractice coverage for doctors affiliated with hospitals.

The surcharge is an outdated and unfair "hidden tax" on businesses in the state, and the legislation that supports it should be allowed to expire at the end of June, as it currently is slated to do, employers say.

But the Medical Society for the State of New York says the program provides necessary coverage for doctors who already face exorbitant primary medical malpractice premiums and is lobbying for it to be renewed.

The argument is complicated by the New York Legislature, which has dipped into the funds several times and taken out more than $700 million to help balance the state's budget.

Doctors and employers agree that the money held by the four insurers of the program would likely have generated sufficient investment income to pay claims for many years to come, possibly in perpetuity, if the state had not dipped in.

The New York Excess Medical Malpractice program was established in 1985 in the middle of the last hard liability insurance market. At the time, some doctors, in particular obstetricians and gynecologists, argued that the absence of reasonably priced medical malpractice coverage would force them to leave the state.

To allay the doctors fears, the state instituted the medical malpractice program, which provided $1 million excess of $1 million per incident and $3 million excess of $3 million in aggregate coverage for about 20,000 doctors.

The program was funded through a surcharge on hospital discharge fees, which the hospitals then used to pay premiums to the insurers that covered the risks. The two main insurers established for the program have been the Medical Malpractice Insurance Assn. in New York and HANYS Insurance Co. Inc. in Albany, N.Y.

Legislation supporting the program was renewed several times until last year, when health care reforms instituted by Gov. George E. Pataki's administration allowed the program to expire at the end of June 1997.

Insurers and employers estimate premiums and investment income earned by the excess medical malpractice insurers during the life of the program exceeds $2 billion. The premiums were calculated as a percentage of the primary medical malpractice premiums doctors paid. Early in the program, the premium for the excess coverage was 40% of the primary premium, but it has since fallen to 21%. The state approves the rates.

Over the course of the program, the state has borrowed more than $700 million from the fund to help balance its budget. In 1992, MMIA had to give $60 million to the state; in 1993, it gave $150 million; in 1996, it gave $350 million; and in 1997, it gave $131 million. No one from HANYS was available to list how much the state borrowed from that insurer.

Claims payments and reserves for future losses also have been a drain on the fund. For example, MMIA, the largest insurer in the program, has paid $100 million in losses; it has case reserves of $280 million; and it has incurred-but-not-reported reserves of $350 million, said Joseph Alvear, chief financial officer of MMIA.

"So we have paid back most of any excess in premiums that we may have collected," he said.

With the expiration date for the program drawing near, doctors and employers are lobbying legislators.

The program is a necessary protection for doctors who are already paying huge premiums for primary medical malpractice coverage, said Gerard Conway, director of governmental affairs at the Medical Society for the State of New York.

In the absence of tort reforms that have been instituted in other states, doctors in New York still face potentially huge liabilities, he said.

"Physicians risk everything they ever worked for every time they deliver health care," he said.

And with the emergence of managed care in recent years, many doctors are being pressed to reduce their fees, Mr. Conway said. As a result, they are unable to pay for the costly liability protection they need, he said.

The Medical Society is holding meetings with legislators and the New York Insurance Department to try to persuade them to continue the coverage, Mr. Conway said. Possible solutions run from renewing the program in its entirety to assessing whether there is enough money to run the plan without additional premiums, he said.

If the state had not dipped into the funds, there would be enough money to pay claims indefinitely, he said.

Still, even with the depleted funds, there is likely no need for any further surcharges, said Elliott Shaw, director of governmental affairs at the Business Council for the State of New York in Albany.

"Even with the large chunk of money taken out of it, I think the program could be self-funding," he said.

And even if more premiums are needed, they should be paid by the doctors, not raised through what amounts to "a hidden tax" on businesses in New York, Mr. Shaw said.

"The doctors should be able to afford it just as well as a small business that pays its own liability insurance," he said.

The history of the program and the ability of the state to take huge amounts out of the funds shows that it was waste of money, said Geoffrey Taylor, director of public policy and communications for the New York State Conference of Blue Cross & Blue Shield Plans in Albany.

"And it's hard to have a program that provides free insurance to doctors when, according to the last census, there were 2 million uninsured New Yorkers," he said