Public Policy Institute of New York State, Inc.

Medicaid: wreaking havoc in health care

How New York State's runaway Medicaid spending is strangling the taxpayers and undercutting the quality of medical care

The reality of New York's Medicaid program:

  • Supporting Medicaid costs the average family of four in this state over $5,000 a year.

  • Our costs for Medicaid are well over twice the national average.

  • The two larger states, California and Texas, have almost three times our population—but combined, they spend only a bit more than New York on Medicaid.

  • Our costs are particularly out of line with the norm in spending on nursing homes and home health care.

  • What drives our costs? A program that is more generous to health-care providers than other states'.

  • New York's costs are so far out of line that the state sticks local governments with a substantial share—and that, in turn, is a major reason our property taxes are so high.

  • But plenty of ideas for cutting costs are on the table.

New York State's Medicaid program was launched more than 30 years ago as a way of financing health care for the neediest of our citizens. But today our Medicaid program has emerged as a monstrous, $24.5 billion budget-buster at both the state and local levels. And it ties up so much of its money supporting a bloated health-care industry that it cannot even offer coverage to more than 3 million uninsured New Yorkers.

The health of our state's economy and of its tax base—and the health of New Yorkers—now depend upon reining this monster in.

How big a monster is it? New York's Medicaid program is saddling the taxpayers with a cost that's well over twice the national We'd save an incredible $2.7 billion if we could cut the cost of Medicaid to 'only twice' the national average. average, and at least 50 percent more costly than in the next worst state, Connecticut.

Every year it's the 800-pound gorilla of the state budget, soaking up money that could be used for tax cuts to make our economy competitive, or for expanding health-care coverage, or for improving education—or for all that, and more. Medicaid is also the major component in county property taxes—and New York's excess property tax burden, now about 62 percent above the national average per capita, is this state's largest remaining competitive disadvantage.

Our spending on Medicaid is far out of line with every other state's; it's about 2.25 times the national average. Here's one implication of this fact that seems almost incredible—yet it's true: If New York were able to find a way to reduce its Medicaid spending per capita to merely twice the national average, that would save taxpayers about $2.7 billion a year.

Medicaid Spending per Capita: New York vs. Competitors
But every effort to rein in Medicaid spending in New York is met with titanic resistance. The flood of taxpayers' money that Medicaid has poured into the hands of providers has spawned a militant, aggressive health-care lobby that threatens and targets individual legislators, and that spends millions on advertising apparently designed to convince the public that any Medicaid cuts would result in patients dying in the hallways of hospitals.

In effect this lobby is using our own money to try to scare us into thinking that New York cannot spend less on Medicaid. But the fact is that our competitor states spend far less, without jeopardizing the quality of care—and New York can, too.

In the face of a major state budget gap in 1995, Governor Pataki won legislative approval of some initial Medicaid reforms.

But comforted by a budget surplus during the 1999 session, the Legislature turned aside the Governor's proposals for more cost containment—and, in fact, it toyed with the idea of undoing some of the 1995 reforms. The issue is certain to be fought out again in the 2000 session, and the stakes for the taxpayers are high.

The full impact

One way of understanding those stakes is simply to look at the cost of the Medicaid program in New York as a whole.

In 1997, the last year for which complete statistics are available, Medicaid in New York cost $24.525 billion. About half the cost is paid for through Federal taxes, about 35 percent through state taxes, and about 15 percent through local taxes. With only about 9 percent of the nation's Medicaid recipients, New York is paying out over 15 percent of all the spending on Medicaid in the entire United States. The program pays out health benefits for some 3.1 million New Yorkers annually, or about one-tenth the state's population, at an average cost per individual recipient of nearly $7,900. (The program covers about 17.4 percent of the state's population.)

Often described as the health-care system for the poor, Medicaid is really two systems.

About two-thirds of the money goes to provide taxpayer-financed health insurance coverage for welfare recipients, disabled, low-income and other needy residents of the state. The rest of the money pays for nursing-home care and home health care for the elderly and others who need long-term care—most of whom were not classified as "needy" until they began to require such intensive and expensive health-care services.

This nearly $25 billion program costs the taxpayers over $1,300 a year for every man, woman and child in the state. Directly (through their own taxes) and indirectly (through taxes paid by businesses from which they buy goods and services), the average family of four in New York is paying over $5,000 a year to support the Medicaid program.

That $5,000, as it happens, is close to the cost of basic health insurance coverage for a family of four. In other words, on average each family of four in the state is paying in Medicaid taxes about what it would cost to insure that whole family. Yet with all that money, Medicaid covers less than one-fifth of tour population.

Some key comparisons

Not only does New York spend considerably more than twice the national average per capita on Medicaid; among competing states only two, Connecticut and New Jersey, manage to spend more than half what New York does—$897 per capita for Connecticut and $680 for New Jersey, compared to $1,352 in New York.

Pennsylvania is also slightly above the national average, at $672 per capita. Other key competitor states, including California, Texas, Florida, Illinois and Ohio, spend less than the national average per capita. (1997 figures from the U.S.Health Care Financing Administration; see graph, back page.)

As state Budget Director Robert L. King has pointed out, some particularly interesting comparisons can be made between New York and the two states with larger populations than ours, California and Texas.

Between them these two states have 52 million people—or almost three times New York's population. And they have more Medicaid recipients, too—a combined total of 7.4 million, compared to 3.1 million for New York.

California and Texas combined spend about $1.3 billion a year more on Medicaid than New York. But even so, these two states between them are spending only about 5 percent more than New York, on 138 percent more recipients.

These two states also spend more Medicaid dollars than New York on hospital care—about $9.2 billion between them, compared to $7.4 billion for New York. But again, that's with more than twice as many Medicaid recipients. Per patient, New York's hospital costs under Medicaid are $4,200 a year, compared to $2,391 for Texas and California.

And New York leaves California and Texas utterly in the dust when it comes to spending on long-term care. We spend 50 percent more than those two states on nursing-home care, even though they have 60 percent more nursing-home patients funded by Medicaid. Home-care services (which, believe it or not, were originally touted as a way of reducing New York's nursing-home costs) cost New York taxpayers 3.3 times the total spent in Texas and California.

Table 1
New York vs. California and Texas:
Some Key Comparisons
New York State
California & Texas, combined
arrow Difference

arrow Their total is almost 3 times NYS
Total Medicaid Spending:
New York State
California & Texas, combined
arrow Difference

$24.5 billion
$25.8 billion
arrow Spending is only 1.05 times NYS
Nursing Home Spending under Medicaid:
Nursing-home patients, New York
Nursing-home patients, California + Texas
arrow Difference
New York spending, total
California + Texas spending, total
arrow Difference
New York spending per patient
California & Texas spending, per patient
arrow Difference

arrow They have 1.6 times the patients
$5.3 billion
$3.4 billion
arrow We spend 1.6 times as much
arrow NY's costs are 2.5 times higher
Home-Care Spending under Medicaid:
Home-care patients, New York
Home-care patients, California + Texas
arrow Difference
New York spending, total
California + Texas spending, total
arrow Difference
New York spending per patient
California & Texas spending, per patient
arrow Difference

arrow We have 1.2 times the patients
$2.3 billion
$700 million
arrow We spend 3.3 times as much
arrow NY's costs are 2.7 times higher
Hospital Spending under Medicaid:
Total hospital patients, New York
Total hospital patients, California + Texas
arrow Difference
New York hospital spending, total
California + Texas hospital spending
arrow Difference
New York spending per patient
California & Texas spending, per patient
arrow Difference

1.77 million
3.87 million
arrow They have 2.2 times the recipients
$7.4 billion
$9.2 billion
arrow They spend 1.2 times as much
arrow NY's costs are 1.7 times as high

 New York vs. California and Texas

The impact on property taxes

New York's Medicaid costs are so far out of line that this state has taken the unusual step of sticking local governments—counties, and New York City—with nearly a third of the non-federal share of the cost.

This is "the mother of all mandates," in which Albany unilaterally decides on the parameters of a Medicaid program that costs well more than twice the national average, and then by fiat orders local governments to pay almost $3.7 billion a year of the cost.

This mandate hits taxpayers directly in their property taxes (except in New York City, which collects much of the cost through its own personal income tax). Property taxes are New York's largest remaining cost disadvantage; on a per capita basis they are about $9.5 billion higher than they would be if New York matched the national average. County governments collect some $3.4 billion in property taxes every year, and a large chunk of that goes for Medicaid.

In rural counties, Medicaid and other social-services costs soak up almost all of the county property-tax revenues; Livingston County, for example, puts the figure at 80 percent.

The burden is high even in urbanized counties with other expensive services. Erie County's Division of Budget, Management & Finance recently calculated that the county's property tax could be reduced by 45 to 55 percent if Medicaid costs were equivalent to those in similar counties in other states.

Moreover, the cost that Medicaid imposes on counties is continuing to rise, even as welfare reform has reduced the relief rolls and thus cut the cost of other social services. Albany County, for example, forecasts a 6 percent increase in its Medicaid costs for the year 2000—to a level more than twice what the program was costing the county 10 years ago.

County-level elected officials routinely call for a state assumption of the full non-federal cost of Medicaid. Absent cost-cutting reforms, of course, this would save the taxpayers nothing; it would merely shift the burden from one form of taxation (local) to another (state). But if New York managed to get its Medicaid costs down to the national average, it could instantly eliminate the entire local-government share of the cost—and hence the burden on local property and income taxes—without adding one cent to the state budget.

The drive for solutions

So why does Medicaid cost so much in New York? And what can we do about it?

A small part of the answer is that New York provides Medicaid coverage to a larger portion of its population than do most other states (about 17.4 percent of the state's population, compared to 15 percent in California, and 13.1 percent in Texas). If it were done cost-effectively, that would be a good thing; the more citizens who have health-care coverage, the healthier our population will be. But the differences in the number of people covered by Medicaid do not come anywhere near explaining the yawning gap in costs between New York and its competitors.

Nor do other frequently offered explanations hold much water. New York does not have a notably older or sicker population than other states, for example.

What New York does have is a health-care provider lobby that uses its political clout to focus Medicaid dollars on big health-care institutions with well-financed unions, such as hospitals and the home health-care industry. New York's hospital system is only about 65 percent utilized on average. Much of the politics around Medicaid is focused on preserving that system intact—not on the needs of recipients and patients. (And despite constant claims of crisis, the hospital sector in New York has been growing, both in terms of employment and of profits; see Table 2, below.)

Table 2
Medicaid "Cuts" Are Not Bankrupting New York's Hospitals
Reported hospital profits* Hospital employment**
Sources: * State Health Department news release, Jan. 25, 1999.
** NYSDOL establishment data; annual average for 1991-98; average through August for 1999.

Through Medicaid, for example, the taxpayers are forced to pick up about $950 million a year to support graduate medical education at the state's teaching hospitals—even though more than half of the interns and residents trained in New York leave the state to practice. (Non-Medicaid insurers and patients are taxed another $544 million a year for this program.)

This political log-rolling tilts the whole structure of New York's health-care system towards large institutions, as opposed to preventive care and neighborhood access; that, in turn, undermines the quality of care for all New Yorkers, whether they are Medicaid patients or not.

Cost efficiencies can improve care—rather than undermine it. A major step forward in Medicaid was achieved in 1996, for example, when Governor Pataki won legislative approval to switch most beneficiaries to managed care. Not only did that save money; it also gave many poor families their first access ever to regular, preventive health care.

Cost-cutting ideas are plentiful

There is no lack of good ideas about other ways to trim back New York's runaway Medicaid costs. Given how far out of line New York is in the cost of hospital, nursing-home and home health care, a reasonable goal would be to cut $2 billion a year from those items alone. Eliminating Medicaid subsidies for graduate medical education, for example, would save $950 million a year. Nearly $300 million could be saved by freezing the so-called "trend factors" that ratchet up hospital and nursing-home rates every year. Some $325 million could be saved by eliminating various special subsidies that have been worked into the rates over the years, for purposes that no longer apply—extra subsidies for nursing homes with over 300 beds, for example, or for handling alleged staff shortages at hospitals that now are actually saying they are overstaffed and may resort to layoffs. Restructuring hospital and out-patient clinic rates to encourage the use of such facilities as detoxification clinics instead of emergency rooms could save up to $200 million. Rolling back home health care rates by 10 percent could save $250 million.

The Citizens Budget Commission, a respected think-tank in New York City, has called for a major attack on the cost of long-term care—where, as noted above, New York's costs are most out of line with competing states. CBC has recommended extending managed-care concepts to nursing homes and home care, and requiring well-off families and individuals to bear more of the cost of long-term care before asking taxpayers to take over the burden.

A 1995 study done for the New York State Association of Counties by the Center for Governmental Research in Rochester called for eliminating first-dollar coverage for long-term care under Medicaid (that is, imposing a substantial deductible), and tightening controls over the estate-planning gimmicks that are aimed at helping middle- and upper-income families pass the cost of long-term care over to the taxpayers.

Significant savings might be achievable without impacting benefits or health-care payments at all. Former state Comptroller Edward V. Regan estimated in 1992, for example, that New York could save anywhere from $400 million to $1.9 billion a year by eliminating the duplication of Medicaid administrative bureaucracies at the state and local levels.

It is clear that we can spend much less on Medicaid, and preserve (and even improve) the quality of health care. Other states do it; New York can, too. The question is whether we have the political will to do so.