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Steven Malanga
Deadly Medicine
A new health-insurance plan threatens New York’s small business.
14 January 2004

There is a rich irony to the new proposal by New York’s health-care workers’ union and the state’s hospitals that Albany impose a steep new tax on businesses to finance its bloated Medicaid program. Together with politicians in Albany, the union and the hospitals have promoted policies and legislation that have driven up the cost of health-care insurance in New York to the point where millions of residents can no longer afford it, and many small firms can’t pay for it for their employees. Now these forces are scheming to “cure” this problem by forcing business to pay even more for the dysfunctional system they have created with a steep, job-killing tax that will fall most heavily on the state’s most vulnerable companies—its small businesses. The new proposal is exactly the wrong solution, but a predictable one for New York.

The proposal, by health-care workers’ union chief, Dennis Rivera, and the head of the Greater New York Hospital Association, Kenneth Raske, seeks to stem rising criticism of the state’s Medicaid system, whose costs have exploded as increasing numbers of uninsured workers have entered the system and which therefore has become an enormous burden not only on the state but on the budgets of county governments and New York City. In recent months, that crushing burden has prompted county executives to mobilize for Medicaid cost containment and even, in some cases, to threaten political action against Albany legislators who refuse to act. Sensing a threat to their cherished Medicaid program, which compensates hospitals at far higher rates than in other states and provides employment for many health-care union members, Rivera and Raske have cleverly proposed instead a $3,000 a year tax on employees at businesses that don’t offer health insurance, as a way to fatten the pot of state money for Medicaid and reduce the burden on counties. Their proposals contrast with calls by many fiscal monitors and others to reduce the outsized spending of the state’s Medicaid program, which is nearly as large as the combined programs of the states of Texas and California.

Although no other state has such an outlandish tax, New York already levies many taxes and surcharges on health care that don’t exist elsewhere, because of the power of health-care interests to get both Republicans and Democrats in Albany to do their bidding. Consider, for instance, that New York State contributes hundreds of millions of dollars to the hospitals to subsidize their training of medical students—far more than any other state. To finance this program, New York imposes a tax on every private-sector health-insurance policy. The tax, which varies by region, amounts in New York City to about $350 a year—a steep premium that residents of no other state must pay, and one that significantly swells the cost of insurance in the state.

The state also routinely takes money that could be used to offset the high cost of health insurance and funnels it into pet ideas promoted by the union and hospitals. In 2002, the state, having extracted a pledge for nearly $2 billion from Empire Blue Cross to permit its conversion into a for-profit company, passed legislation to use that money to help hospitals pay for raises for health workers, an unprecedented subsidy by government of private-sector employers, with money that could have been used to lower state taxes on health-care premiums.

Instead of trying to offset the rising costs of health insurance, state lawmakers, from the governor right down to ordinary legislators, use the system for their own political gain and hence keep driving up its costs. One clear example of this tendency is the way legislators continue to pile health-care mandates on the system—forcing insurers to cover everything from fertility treatments to chiropractic care in recent years. Studies have shown that each new mandate adds several percentage points to the cost of health insurance for everyone—the chiropractor mandate, for instance, costs policyholders about 1.5 percent more—and the cumulative effect can add more than $1,000 to the cost of policies in New York. But legislators keep adding these mandates because they face heavy lobbying from special interests and would rather satisfy these groups than address the fundamental problems of health insurance.

Even more significantly, such mandates make it impossible for insurers in New York State to offer no-frills policies that cover people against catastrophic illness but require policyholders to pay for regular doctor visits and other ordinary costs. Such policies are popular elsewhere but unknown here, where insurers must offer only “Cadillac” or “Mercedes” policies—that is, ones filled with all the options. Imagine, by contrast, if New York State required every driver to buy only a Cadillac or a Mercedes. Hundreds of thousands of drivers couldn’t afford them and wouldn’t own a car. The idea sounds ludicrous, but it is exactly what the state has accomplished through its health-care mandates, forcing everyone to buy a high-end policy or nothing at all and hence pushing more and more people off the insurance rolls.

But what’s most outlandish about the latest proposal is that it will fall most heavily on small businesses that can hardly afford such a levy. The proposal is not surprising, considering its source. To nonprofit, government-subsidized interests like those represented by Rivera and Raske, businesses that are not offering health insurance must be greedy, or their owners must be hoarding the profits themselves. But in reality many firms don’t provide insurance because they can’t afford to, and trying to require them to do so is only likely to drive many out of business, or force them to eliminate jobs.

The state’s burgeoning minority business community will be the hardest hit. The last economic census of New York State showed that the fastest growing small business community in the state, and especially in Gotham, is composed of minority businesses, who after years of struggle are finally starting to grab a piece of the entrepreneurial pie. Many of these business are extremely fragile, and they have succeeded only by a Herculean effort in a state that has one of the worst business tax and regulatory environments in the country. Now Rivera and Raske and those in Albany would snuff out that entrepreneurial spark with this steep tax.

There is another way to solve the state’s health-insurance problem, and that is for Albany to start employing policies that contain health-care costs. It could start by bringing Medicaid reimbursement rates more in line with other states and by ending programs that other states don’t provide. It could also roll back expensive mandates and leave businesses and individual health-care buyers with the options in purchasing insurance, including a no-frills policy. And state leaders could start using windfalls, like the revenues from the Blue Cross offering, to help reduce the burden on taxpayers or buyers of private health insurance.

The route to reform is unmistakable. But it is filled with artificial roadblocks constructed by Albany itself.

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More by Steven Malanga:
Welcome to the Jungle
Trolling for Dollars
March Labor Madness
More . . .
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