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Winter 1996
   
Medicaid’s Fatal Attraction
Ned Regan
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Shortly after I became Erie County executive in 1972, 1 placed a phone call to John Lindsay, then mayor of New York City. The state Medicaid program was killing my budget—and his as well, I presumed. I thought we ought to do something about it.

Deputy Budget Director Jim Cavanagh returned my call. I reminded him that while states create local governments and have the power to determine their functions, New York State historically abuses this power. Medicaid was Exhibit A: though normally federal and state governments split the vast cost 50-50, New York, alone of all states except Arizona, requires localities to pay almost half the state’s share.

I pointed out that Medicaid costs were growing and that New York City and Erie County—which contains Buffalo, the state’s second-largest city—bore the largest burdens in the state. I suggested that we join forces with upstate and Long Island county officials to pressure state officials to do as other states do and gradually take up the full cost of Medicaid-at 5 percent a year, say, over a 20-year period.

Cavanagh, in response, was polite, friendly—and noncommittal; clearly, he was only going to amble around the subject. I learned two things, though: he had little interest in seeking relief from Medicaid costs, and his lack of interest apparently was connected to the value of the city’s public hospitals to the city administration. In the course of other inquiries, I pieced together what seemed to be at stake. The city hospitals provided much more than operating rooms and inpatient beds. They employed tens of thousands of people and had extensive emergency room facilities that provided basic health services to dozens of large neighborhoods. The city, I remember Cavanagh suggesting, actually “recruited” Medicaid-eligible individuals to keep the hospitals filled. In the hands of public officials or well-organized political or community groups, the hospitals were enormous favor-dispensing and patronage centers. Local political paladins reportedly have weighed in on everything from who gets to be the head nurse to which departments will get closed down and which will remain in business.

If city taxes paid part of Medicaid, city officials could have their say in how the program was to be run. They could garner immense community and political gratitude with the expenditure of what was for them—given the federal and state money involved—just 25 cents for every dollar spent.

Later mayors would come to rue what seemed like a sweet deal back in the seventies. The cost of Medicaid inexorably—and predictably—grew year after year. When I talked to Cavanagh, Medicaid absorbed approximately 5 percent of the city's locally raised revenues. In fiscal 1995, New York City spent $2.7 billion, 13 percent of local revenues. This expense, which approximates the city’s structural deficit, hobbles the local economy even when it is otherwise strong. And during weak economic periods, the enormity of this deficit forces curtailment of sanitation, libraries, and other city services.

The desire to maintain the hospital system as a thriving source of political support leads to other distortions of the health care system. While New York State has, by any measure, the most expensive Medicaid program in the nation, one vital portion of the program, the amount paid to physicians for a visit by a Medicaid patient, is just about the lowest in the nation. New York doctors receive a paltry $11 per visit, compared with a national average of $22. Only West Virginia pays doctors less. The comparable numbers for Massachusetts and Minnesota are $41 and $30, respectively.

Why? At least one answer seems obvious. With such low rates, family doctors are reluctant to locate in areas where many potential patients are on Medicaid, so sick people have no choice but to crowd into the emergency rooms or ambulatory care clinics of city hospitals. A 1990 Community Service Society study uncovered some shocking facts. For 1.7 million residents of the city's poorest neighborhoods, from Bushwick to the South Bronx, there are only 28 qualified primary-care physicians who accept Medicaid patients. In other words, there is one doctor for every 60,700 residents in these areas. The emergency room or clinic care that is about the only option for residents of these neighborhoods is wildly expensive-an emergency room visit cost $92.50 in 1994.

However important the health care mission of at least some of the city hospitals might be, the desire to subsidize and protect them adds up to a huge deficit for the city, a dearth of family doctors in poor neighborhoods, and an exponentially increasing cost to the taxpayers for providing primary care to those populations.

As Medicaid costs increased, New York City mayors couldn’t help but grow concerned. Mayor Beame met, at my urging, with a group of now genuinely alarmed county executives, and we held the first City Hall press conference on this issue. After I became state comptroller, I discussed the issue with Mayors Koch and Dinkins. As a member of the Financial Control Board, I raised it again when it became evident that soaring Medicaid costs and the attendant structural deficit could push the city back into the fiscal crisis from which it had just emerged. While mayors, notably Ed Koch, would join in calls for Albany to pick up Medicaid expenses, there did not seem to be a real sense of urgency. I do not remember other city officials speaking out. Nor did mayors seem eager to urge what was surely a necessary precondition for such a pickup-a reduction in the costs of the state Medicaid program.

The total cost of Medicaid in New York defies explanation. According to reports now filtering out of Albany, the cost of Medicaid in fiscal 1996, counting the federal, state, and local contributions, will easily top $23 billion. By any measure—per capita, per client, as a percentage of total state economic activity—New York State’s costs vastly exceed, usually by two to three times, the costs of any other state in the country. The charts that accompany this story, which understate New York’s costs for the strictest accuracy of comparison, are shocking in their implications for taxpayers. New York’s total Medicaid expenditure for 1993, the last year for which comparable data are available, is nearly twice that of California, a state with 70 percent more population. Per capita Medicaid costs are two and a half times those of the average of the next three states-Minnesota, Ohio, and Illinois-urban and industrialized states with comparable demographics and costs of living.

As state comptroller, I conducted studies to try to determine the causes of this disparity. We found vast fiscal differences on a program-by-program basis. For instance, New York State spends seven times more on home health care than California does, nearly equaling the combined spending of 11 similar states, from Michigan to New Jersey. Florida, with its huge elderly population, spends only a quarter as much as New York on nursing homes. And so it went. What accounts for such irrational differences? We noted generous eligibility standards that include many who aren't poor enough to qualify for welfare. We remarked on the availability of nearly all the optional benefits, from artificial insemination to transportation to false teeth, that the federal government permits—and that raised the total that New York State and its localities spent in fiscal year 1993 on Medicaid by an extra $3.5 billion, to over $10 billion. In fact, the enter for Governmental Research estimates that only 32 percent of the total cost of Medicaid in New York State is federally required. We were aware of the byzantine web of laws, rules, regulations, and customs that control New York’s health care system. Yet we could never satisfactorily determine a rationale for it all.

At one point, I sent two of my staff to Baltimore to get the answers from officials at the Health Care Financing Administration (HCFA), the division of the United States Department of Health and Human Services that oversees the Medicaid system. They were well aware that New York State then spent 17 percent of the nation’s Medicaid funds, with only 7 percent of the population. My staff were back home the same day. HCFA had no real answer, either; New York was “just different.”

We know today that about 38 percent of New York’s total Medicaid expenditure goes to nursing homes (now mainly a state expense), home health care, and personal care, according to a study by two state civic organizations. At an unknown cost, middle- and even upper-income families often take advantage of these Medicaid services to avoid the major costs of caring for their elders. To qualify for Medicaid, middle-income people often feign poverty by placing money in a trust, by transferring assets to children or a spouse, and by preserving in their own name only assets not counted in eligibility tests-houses and cars. These middle-class Medicaid recipients are yet another addition to Medicaid’s powerful political base.

You’d expect that a state that devotes such extraordinary resources to the Medicaid program could make it of exceptionally high quality. But no: New York State's program is not much better—according to the latest survey on the subject conducted by the Health Research Group of Public Citizen—than that of most other states. In fact, the Minnesota and Wisconsin quality ratings are slightly better than New York’s, even though those states are only number 4 and number 11, respectively, in costs per recipient. In fact, the vast amount of money coursing through the Medicaid system surely is a key reason why New York is a decade behind other urban states in restructuring health care. Surely, too, it helps explain why the average hospital stay is 50 percent longer in New York than in California.

While county executives were complaining about the devastation to their tax bases and New York City mayors were at least calling attention to the problem, what were the state officials doing? Nothing. There are identifiable culprits here, and they are called governors, senators, and assemblymen. Unlike their counterparts in virtually all the other states, they have purposely forced almost half the state obligation for Medicaid onto the tax base of local governments. Now and then, a governor or the Legislature has made a gesture in the direction of local relief, only to be swamped by out-of-control cost increases.

As Erie County executive, I was among the first elected officials to feel the full destructive capacity of Medicaid spending. Because county governments, from urban Nassau to rural Essex, rely primarily on the property tax as their source of revenue, property taxes necessarily rise when Medicaid costs increase. There is no place for county officials to hide.

Ed Crawford, at one time county executive of Broome County, which includes Binghamton, used to tell a story reminiscent of my own painful experiences. During the seventies, as a direct result of the quite standard 10 to 20 percent increase every few years in Medicaid expenses mandated by the state, he would be forced to raise property taxes. On one such occasion, a few days after he announced his tax hike, he attended a local chamber of commerce dinner. As he walked into the reception, the crowd frostily avoided him. A few minutes later Warren Anderson, then State Senate majority leader, walked in. Crawford stood by and watched the crowd move toward Warren with the usual hand pumping and back slapping. Of course, it was Anderson and his colleagues who had just imposed the Medicaid increase on the county, forcing the tax increase. But it was the county executive who was blamed.

To spotlight the state responsibility for these higher taxes, I and other county executives would print our annual budgets in two documents-the normal one and one we labeled “New York State.” The goal was to demonstrate, in detail, that the tax increase was a direct result of state mandates and requirements. As Medicaid costs continued to soar, desperate county officials used a variety of similar tactics, but voters understandably were not quick to credit the argument that another government was to blame for taxes we had raised.

With Medicaid costs climbing, state officials should have felt urgent pressure to impose efficiencies and limits. But we’re dealing with a group in Albany whose mantra for over 30 years has been high spending and high taxes. And for many years, until very recently, the local portion of Medicaid spending was roughly equal to the amount by which total spending exceeded that of other states. It appears that in 49 states, officials controlled costs to some degree; in New York State they pushed the excess off to local governments.

Even so, the state share of the cost rose at an 11.6 percent annual rate between 1984 and 1994. But when the state had to raise taxes to cover these increases, legislators could do so under a cloak of invisibility. Instead of raising the major taxes, they raised dozens of relatively obscure or trivial fees and license charges, such as hunting and driver’s license fees. But mainly they passed the increased costs along to future generations. In the late 1980s the state engaged in a number of highly dubious transactions, like raising cash by “selling” Attica prison and Interstate 287 to state authorities, with the state reimbursing them for every penny of debt service with “rent” payments. While I was able to block a similar transaction by suing the governor and the Legislature, others, which had a slightly more persuasive patina of legality, were consummated. I once reported that as of January 1, 1990, state taxpayers would have to pay $2.9 billion in principal and interest payments over the next 20 years for money borrowed in deals like this-deals that raised funds only to balance a past operating budget. Naturally, the requisite voter approval was sidestepped.

As more money flooded into the Medicaid program, political life got quite easy for state officials. They got the gratitude and campaign contributions from health care providers and union organizations, and the support and votes from Medicaid clients and those who work in the health care system. While others raised the taxes, state officials became virtually invincible at the polls.

Even so, New York City mayors, until the present one, did not mount a forceful attack on this incursion upon their tax base. Perhaps they did not want to seem lacking in compassion by attacking a health care program or to incur the wrath of Medicaid’s powerful constituencies: the health and hospital workers, the thousands of middle-class voters whose families were now collecting Medicaid nursing home benefits, and the health care providers. And while gradually diminishing, the patronage-like aspects of the city hospitals still provided political gain, despite the budget-busting costs of the whole system. On the debit side, the political cost of letting the problem slide was not as great as in a county, where increased Medicaid costs immediately show up as property tax hikes. The city, after all, has a smorgasbord of taxes, among which costs of Medicaid increases are not so starkly visible.

So it was left to county officials to make the case, and most of the time they felt as if they were shouting into an empty room. Getting the press to focus on this phenomenon is tough: bureaucratic and intergovernmental procedure is not a sexy topic, nor is one politician's bill of complaints about other politicians. What's more, the major news outlets that serve the city, Long Island, and the surrounding upstate counties are all located in Manhattan, and they cover the world-from foreign and domestic policy to financial and cultural news. From their perspective, what goes on in a small town 140 miles up the Hudson River isn’t at the top of the agenda. Certainly these newspapers and broadcasters don’t do much to hold the State Legislature accountable: it is perhaps impossible for them even occasionally to mention each of the 85 state legislators’ names, much less deal with the substance of legislators' activities. So voters learn little about the institution of state government, its vast reach, and its impact on the lives of New York City residents.

As a result, governors and legislators can impose heavy burdens on New York City with impunity. They drive up city spending and taxing, as with Medicaid, in half-billion-dollar lumps, with no political cost. In addition to Medicaid, they force the city taxpayers to pay for half the state's welfare program, for an estimated fiscal 1996 cost of $673 million-again, a burden borne by no other city in the United States. Abusing a power that all states have in their constitutions, New York State regulates thousands of other aspects of the city’s financial health and quality of life, from the caliber of the guns of New York's Finest to the Wicks Law governing the number of contractors the city has to hire to build anything.

For this reason, local taxes in New York State are the highest in the nation: there is no close second. In 1992 the per capita tax burden was $1,870 in New York; the next three highest states average only $1,288-one-third less. The U.S. average is a mere $883. State taxes, on the other hand, are in fourth place within a cluster of other industrial states. It is the excessiveness of the local taxes—driven up by state mandates—that pulls up the average to give New York State citizens their status as the highest-taxed in the nation. Putting aside the well-known anomaly of Alaska, the state combined tax burden exceeds that of the second-ranking state by $500 per capita.

This shifting of costs to localities plays havoc not just with the tax base but with the democratic process as well. When Albany officials can spend but do not have to tax for that spending, they short-circuit accountability to the voters. Little wonder that state legislators routinely win reelection. Their turnover rate is among the lowest in the nation: at the end of the four-year period between 1986 and 1990, 98 percent of incumbent state legislators remained in office-compared with 38 percent of the state's county executives.

The most important economic fact in New York State government is that state officials can and do drive up taxes through their excessive spending and get away with it because the voters, especially in New York City, are unaware of what is going on. If state officials were forced to take responsibility for taxing for everything they spent, they would spend far less.

Last February the question I asked in my 1972 phone call finally received a response—from newly elected Governor Pataki and then from Mayor Giuliani. Finally, New York City would get major relief from its crushing Medicaid burden. True, the Medicaid program is now vastly too expensive for the state just to take it over, even on the gradual 5-percent-a-year basis I suggested almost a quarter-century ago. Total Medicaid spending would have to be cut first, to start bringing it back nearer to the next-highest-spending states. And that is what the governor’s first budget, released on February 1, 1995, proposed. It cut over $1 billion from projected state Medicaid spending.

For the first time, the heretofore insidious bond between the state budget and the city budget was to have a beneficial effect. Formerly, when Albany raised Medicaid spending, it forced the city to do likewise. Now the process was to be reversed. The proposed state cuts would automatically mean about $600 million less in city spending from the year before. Pleased, the mayor called for even more cuts in the state Medicaid program, to generate an additional $200 million in savings, for a total of $800 million a year.

With these projected changes looming, the city’s health care industry and its lobbying arms, recognized as among the most powerful in any state capital in the country, went into action. The Healthcare Association of New York State and the Medical Society of New York spent a total of $3 million in campaign contributions and lobbying between 1993 and 1994. Many of the 847,000 employees of the health care industry in New York State sprang to arms, led by their unions. Exhortations to legislators, press conferences, marches on Albany, and a barrage of newspaper and radio ads unfolded throughout the spring.

The press reports on the proposed Medicaid cuts focused mainly on the complaints and complainants. I saw no story on why the health care industry and Medicaid recipients absorb twice the dollars in New York State and City that they do in very similar states and cities. Nor was there a story on how the governor's and mayor's proposed Medicaid cuts would allow city officials to cut taxes, keep libraries open longer, and provide more cops on the streets. The mayor's calls for less state spending utterly puzzled the press. Implicit in their reports was this unspoken question: “Wait: city mayors always call for more state spending so as to get more state aid. What’s going on?” Of course, the mayor was accurately saying that if Albany spends less on Medicaid, the city receives, virtually dollar for dollar, fiscal relief because of the bond between the two budgets.

With few commentators paying attention to these facts—and fewer understanding them—the city’s legislative delegation could choose to listen only to the well-orchestrated and highly selective campaign against the governor’s budget and ignore what continued high Medicaid spending will do to the budget, tax base, and services of the city they are elected to represent. In any event, in June they joined the rest of the Legislature and voted to restore much of the governor’s Medicaid reduction. The city’s budgeted Medicaid expenditures for fiscal 1996 are now only $200 million less than they were the previous year. A July report by the Financial Control Board, though, points out that numerous and complex assumptions about Medicaid “savings” built into this figure mean that city Medicaid spending could be “susceptible to upward pressure.”

As the new chairman of the Municipal Assistance Corporation, I pointed out at our annual meeting that the Legislature had thwarted a well-conceived effort to cure the city's structural deficit, something that deeply concerns MAC. This was one of the few times that the Legislature had actually reduced aid that was proposed for New York City by the governor and enthusiastically supported by the mayor.

Now change approaches. Congress is proposing a block grant to states for the federal share of Medicaid. While there are several plans to do that, one thing is certain: New York will no longer be able to count on automatically increasing dollar-for-dollar federal support for its lavish Medicaid spending. The governor's fiscal 1997 budget proposes fully $1.1 billion in Medicaid cuts. Mayor Giuliani has already allocated $675 million in “entitlement savings” in his next budget, most of which will come from Medicaid.

This time, with these budget changes impending, New Yorkers ought to learn what the intergovernmental Albany and New York City budget process is all about, and how Albany officials take credit for the programs they authorize while routinely sending the bill for them to the city taxpayer. Voters and journalists need to question why Medicaid providers and clients cannot trim back-not to some national average but just to the level of their peers in the very next tier of high-spending, high-service states. Finally, citizens and commentators must smoke out their state legislators and challenge them to support the governor’s and mayor’s aim of providing fiscal relief for New York City. Perhaps this will lay the groundwork for an eventual state assumption of the city’s (and the counties’) Medicaid expenses.

That could mean, in time, that the city’s structural deficit could be eliminated, which in turn would permanently improve the city's economy and the quality of life for city residents. All that's required is for the New York City establishment, and city voters, to demand the same treatment they would get if they were located in any normal state.

 

 

 
New York’s legislators love Medicaid for the goodies it lets them dispense. Now it could destroy the city’s and state’s budgetary health.
City Journal Winter 1996.
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