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Steven Malanga
More Money to Shrink Health Care?
This plan already failed once before in New York State.
Autumn 2006

When it comes to reforming New York State’s bloated health-care system, it often seems like “d´jà vu all over again,” as Yogi Berra would say. Earlier this month, the Pataki administration announced that the federal government will spend some $1.5 billion to help shrink New York’s health-care colossus, in part by cutting costs in its Medicaid program, by far the nation’s most expensive. The deal recalls agreements that New York negotiated with the Clinton administration, which pumped billions into state health care to streamline it but did little except expand the system further and drive up costs.

The nineties plan grew out of a New York State–commissioned study that called for slashing the number of beds in New York hospitals, reducing subsidies to those hospitals, and other reforms. When hospitals grumbled that they needed federal aid to cope with such strong medicine, the Clinton administration ponied up around $1 billion, earmarking some of it to help hospitals open neighborhood outpatient facilities, believing that they could provide less expensive care than emergency rooms and hospital wards. The Clinton plan also set aside money to retrain workers who’d lose jobs when hospitals began shutting unused wards and eliminating beds. Hoping to control Medicaid costs, the administration encouraged the state to shift recipients into managed-care programs, which limit what doctors can charge.

Virtually none of this worked out as planned, with expensive consequences. As part of its managed-care drive, the state unwisely gave HMOs the right to enroll applicants into Medicaid, something that only the state—which, in theory, has an incentive to ensure that applicants qualify before signing them up—could do before. The companies responded with (astonishingly unanticipated) gusto, reeling in new revenue-producing members and swelling the state’s Medicaid rolls. Meanwhile, hospitals happily took the federal money allocated to build the new neighborhood-care facilities, but balked at reducing beds or eliminating unneeded wards. The result: the industry, already oversize, grew bigger still. Needless to say, the money that the feds had set aside to retrain unemployed health-care workers proved unneeded. Eventually, the politically powerful hospitals got the funds sent to them.

In the new agreement, Washington is again letting the state depute HMOs to enroll applicants into Medicaid while simultaneously signing them up as their own clients. And the Bush plan includes funds that again allow hospitals to convert unneeded wards to outpatient facilities, hoping that these will be cheaper than hospital care. To offset spending on these facilities, the Bush plan is providing funds that will help pay off the debts of hospitals that the state wants to close. But the money will only be useful if state pols can muster the courage to shutter underused hospitals—something they have flinched from doing for 30 years.

The Bush plan does offer a few other new wrinkles. It is mandating, for instance, that New York State triple the amount of money it recovers from Medicaid fraud to $645 million by 2011. While that’s a worthy goal in a state that for years has lagged in fighting fraud, the fiscal impact will be small on a program that will soon likely cost upward of $50 billion yearly.

The Bush-Pataki deal is thus the latest version of a reform that the state’s health-care industry has advocated for more than a decade, proposing to save money by first spending lots of it. Until now, it hasn’t worked. Maybe, then, the real key to shrinking the industry is just to shrink it. That sounds like something Yogi might have said.

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