Everybody believes that New York State’s health-care system, led by Gotham’s famous teaching hospitals, is the best in the nation—and therefore the most expensive. Expensive, yes: and all the more so after Governor Pataki, under pressure from powerful hospital union chief Dennis Rivera, last year turned over all of New York’s share of the federal tobacco settlement to the health-care system, already the most subsidized in the country. "To think that $9 billion in government spending over three years was decided by a union leader and the governor!" marvels Gary Fitzgerald, head of the Iroquois Healthcare Alliance, an association of hospitals in upstate New York. "It was unprecedented."

But the nation’s best health-care system? Oh, no—not anymore. For 35 years, political rather than practical considerations have ruled the state’s health-care decisions, with disastrous results. The state’s leaders piled on mountains of regulations, starved successful hospitals for capital, kept inefficient but politically connected institutions alive through big subsidies, and levied special assessments and surcharges on businesses and citizens already burdened by high costs. In the process of driving up the price of health care in New York—and incidentally sending the rolls of the uninsured soaring far beyond national levels—Albany reduced to mediocrity what was once the most prestigious health-care system in the land.

After decades of meddling by politicians, union leaders and advocates—who together have shaped New York’s health-care system far more than doctors have—the Empire State is ill-prepared to deal with the forces that have been transforming medicine nationwide since the mid-sixties. These pressures, from cutbacks in federal spending to the introduction of managed care, have sparked a succession of crises in New York, a permanent emergency that can only be solved if the state’s political leaders stop treating health care like a patronage fiefdom to be financed and protected for their own political gain. Albany needs to cut billions in subsidies to dubious programs, to close poorly performing hospitals, especially those in areas that have too many hospital beds, and to end mandates designed to micro-manage the system. The stakes are high: if the state doesn’t act—soon—its bloated health-care system threatens to overwhelm state and local budgets and sap New York’s private-sector economy, as well.

The trouble started with Governor Rockefeller’s overenthusiastic response to President Johnson’s 1965 legislation creating Medicare (designed to pay for health care for the elderly) and Medicaid, (providing coverage for the poor). Since each state could custom-tailor its own Medicaid program, Rockefeller designed the most liberal and inclusive Medicaid legislation in the country and asked the state’s cities and counties to foot half the bill. The new program debuted just as New York mayor John Lindsay, with equal enthusiasm, was leading an aggressive effort to expand the city’s welfare rolls, which formed the basis of Medicaid enrollment. Lindsay more than doubled public assistance rolls, ballooning the state’s Medicaid program far beyond projections.

Doctors and hospitals had their own cause for enthusiasm: they billed aggressively for these patients. With government footing the cost, optional procedures became common, hospital stays lengthened, and fraud proliferated. Rockefeller had estimated New York State’s Medicaid bill at $80 million in 1966, but it rose to $330 million in 1969, then $474 million by 1972, and $762 million by 1976. Adding contributions from the federal government and municipalities, the full cost of Medicaid in New York was a staggering $3 billion by 1976.

A state commission described New York City’s early efforts to cope with the fire-hose torrent of Medicaid bills as "unaccountable, uncontrollable and unmanageable." Albany didn’t do much better. Overwhelmed administrators couldn’t keep up, and New York’s over-ambitious system ended up the last state Medicaid program in America to be computerized.

Just when Medicaid exploded onto the scene, changes began roiling the nation’s private health-care system, too, as the introduction of expensive new technologies and a sharp turn from family medicine to increasing specialization began driving up costs. And New York State, with its large number of academic medical centers, was ground zero for many of the changes.

From 1960 through 1970, the number of doctors in New York State swelled by 40 percent to 23,493, a surge led by a tripling of hospital-based specialists practicing the most expensive kind of medicine in the most expensive settings. At the same time, the ranks of family practitioners decreased by half, so that by 1970 family doctors made up just 10 percent of all physicians in New York, while hospital specialists accounted for 39 percent. As a result, hospitalizations and costs shot up, especially in the New York City area, whose medical inflation rate, less than the national average in the 1950s, surged past the U.S. average in the 1960s. Premiums for Blue Cross—the nonprofit, public trust corporation that provided most of the state’s private health insurance—rose by nearly 140 percent from 1960 to 1969, and then soared 43 percent in 1970 alone, thanks to rising hospital prices. Governor Rockefeller angrily denounced hospitals; the New York Times grumbled that doctors, unions, and hospital administrators needed to recognize that "excellence of service is not dependent on utter incontinence in the spending of health dollars."

Bedeviled by the mess he had precipitated, Rockefeller pushed through a law limiting hospital price hikes for Blue Cross and Medicaid patients. But the price controls did nothing to restrain a surging usage of hospital beds by so many specialists and by a Medicaid system so profligate and so ill-administered.

Rockefeller’s successor, Hugh Carey, tried hard to contain these runaway costs, and the campaign that sank his efforts set the pattern for how politics would govern health care in New York for the next quarter-century. Carey set out to monitor the treatments that doctors were ordering for Medicaid patients, and to eliminate the surplus hospital beds—5,000 in New York City alone—that experts said were contributing to excessive hospitalizations. The cost-containment efforts worked so well that they prompted an immediate crisis in those hospitals in poorer neighborhoods that were dependent on Medicaid, like Jewish Hospital and Medical Center of Brooklyn. When Brooklyn Jewish announced in 1977 that it would have to close because of Medicaid cutbacks, hospital advocates held the state responsible. In a refrain that would soon become drearily familiar, they also argued that the hospital’s Bedford-Stuyvesant neighborhood couldn’t do without the institution’s 2,000 jobs—as if the health-care system were an employment program, too. The arguments ignored the region’s surplus of hospital beds and the claims of well-informed critics that problems at Brooklyn Jewish stemmed more from mismanagement than Medicaid cutbacks. Still, Governor Carey gave way and approved a bailout. Other bailouts followed, and the managements of hospitals, especially in poor neighborhoods, increasingly became immune from responsibility for their problems.

As the health-care system rapidly became politicized and lost its focus on providing care at a reasonable cost, conflicting agendas emerged. Upstate Republicans and inner-city Democrats argued that hospitals must be saved; Democrats statewide complained that the system had to finance health care for the new class of permanent poor. How to achieve these goals? "Everyone was just saying, ’Let’s regulate more,’" says John Rodat, a health-care policy expert with the state legislature at the time.

What resulted was something closer to socialized medicine than anything ever tried in the United States: a sweeping law, signed by Governor Carey in 1982, that set the price of every procedure done in every hospital, not just for Medicaid but for Blue Cross and all private insurers too. The system, dubbed New York’s Prospective Hospital Reimbursement Methodology (NYPHRM), perversely allowed institutions in financial difficulty or with higher operating costs to charge more than their better-run counterparts. Ultimately, the state laid down more than 100,000 different rates.

With the state in complete control, allowing poorly run or unneeded hospitals to close became virtually impossible. In 1986, a decade after the state had vowed to cut 5,000 beds in New York City, Gotham boasted more hospital beds than ever. NYPHRM eliminated any incentives hospitals might have to operate efficiently, since the state sharply curbed the rates of well-managed institutions and continually bailed out ill-run ones.

The NYPHRM legislation also created pools of money to subsidize medical education at big academic centers, something no other state did so extensively, and the government money ultimately produced both an excess of doctors in the state and the most expensive doctor-training system in the country. To fund those pools, Albany tacked surcharges on private insurance, thereby raising the cost of one part of the system even as it was trying to restrain costs elsewhere. "There was no firewall between the politicians and the regulators, so the health-care system became like school aid in New York," says Elliott Shaw, vice president of the Business Council of New York State. "The hospitals and doctors had to be taken care of, just like the school districts."

For the next 13 years, those inside the system got taken care of at the expense of New Yorkers who paid the health-care bills. For instance, when the state faced a medical malpractice crisis in 1985, as rising jury awards led some doctors and hospitals to stop performing the riskiest procedures, Albany didn’t put caps on malpractice awards but instead levied a surcharge on health-insurance policies to help doctors and hospitals pay for additional insurance.

Gradually, hospital administrators and doctors became better at manipulating this highly politicized system than at dealing with the rapidly changing health-care world. They maneuvered around the controls the system placed on them, often with disastrous results. For instance, at first only the state’s health commissioner could approve purchases of expensive equipment and hospital construction, whose cost was built in to state-regulated hospital prices. His authority quickly eroded, however, as the boards of New York hospitals—ornamented by some of Gotham’s biggest movers and shakers—lobbied for pet projects.

As hospitals learned to game the system, crisis after crisis ensued. In the mid-eighties, the hospitals used an obscure federal financing program that helped institutions build new facilities—the Hospital Mortgage Insurance Program—to bankroll an unprecedented construction spree. In a state with a surplus of hospital beds, 64 New York hospitals took on more than $4 billion in debt for new construction—90 percent of all the money lent by the federal program. In Manhattan, St. Luke’s-Roosevelt, Columbia-Presbyterian, and Mount Sinai borrowed around $400 million each for new buildings that together contained 2,475 unneeded beds. The first of these gleaming, expensive facilities opened just when HMOs were storming into New York in the late 1980s, driving down hospital usage. The result was a fiasco: hospital beds went unfilled; institutions struggled to meet their debt payments. Eventually, the federal government listed $1.2 billion of the loans as troubled, and the state had to let hospitals boost their rates to pay off their debt.

Little wonder that in the end NYPHRM, instead of restraining hospital costs, drove them through the roof. A hospital bill for an appendectomy at a New York City academic medical center during this era provides a perfect illustration. The actual procedure cost $2,880, but state surcharges for medical education, care for the uninsured, the malpractice insurance fund, and so on brought the total amount to $4,940.

Late in 1995, business leaders, complaining that the system drove up their costs and helped push firms out of New York, joined forces with union chiefs, who grumbled that surcharges on insurance forced working-class New Yorkers to pay for elite programs like graduate medical education. Together they urged the new Pataki administration to overhaul health care radically. Health commissioner Barbara DeBuono responded with a proposal to end state price-fixing and to let insurers and hospitals negotiate rates with each other. She called for a substantial reduction of hospital subsidies. To encourage competition, she advocated rating hospitals and making pricing data available to consumers. Pataki himself called for a $1 billion cut in the state’s $26 billion Medicaid bill, almost as big as the combined cost of the next two biggest state Medicaid programs, those of California and Texas. Advocates of reform applauded.

Hospitals and their unions went ballistic. Local 1199 chief Rivera, whose union represents mostly unskilled workers, predicted that the state would lose 150,000 of its 740,000 health-care jobs. More apocalyptic, the Greater New York Hospital Association warned that nearly half of the 330,000 health-care jobs in the city—constituting Gotham’s biggest industry—could evaporate. An ex-head of Bellevue Hospital predicted that one-third of the city’s hospitals might close.

With a credulous press printing daily scare stories of impending health-care chaos, the Pataki administration scaled back its bold plan. It junked a proposal to allow for-profit hospitals. It sweetened rate deregulation by continuing for at least three years many of its biggest subsidies, and even kicked in new money from surcharges for retraining hospital workers who might be laid off by consolidation. The Clinton administration piled on a further $1.6 billion in transition funds. Everyone agreed that after years of regulation the state’s hospitals were ill-prepared for competition. "Hospitals in New York went into this new environment in much worse shape than hospitals around the country," says Dan Sisto, head of the Health Care Alliance of New York State, a hospital association.

Even so, deregulation at first seemed to spark an enormous change in hospitals as they scrambled to get ready for a competitive marketplace. A wave of local mergers took place, as institutions sought to cut costs, eliminate redundancies, and beef up their negotiating power with insurers. In New York City, New York and Columbia-Presbyterian Hospitals merged, as did Mount Sinai with New York University Medical Center, and Beth Israel with St. Luke’s-Roosevelt.

But if hospital board members were eager for the benefits of consolidation, many doctors who ruled over fiefdoms in big medical centers were not, and they quickly subverted the efficiency of most deals. The Mount Sinai-New York University merger is a case in point. Resistance from doctors aborted the hospitals’ first merger attempt, and, when the deal finally went through, the institutions didn’t act like one organization. They first united and then re-split their boards; the combined system has made little headway on eliminating redundant departments and virtually none on combining clinical practices. It continues, for instance, to operate two separate liver-transplant units—when most institutions don’t even have one—because neither hospital wants to give way.

Virtually every major merger has followed this pattern. At New York-Presbyterian, for instance, the heads of both neurology departments retired soon after the merger, but rather than name one chief, the system appointed two and passed up a chance to consolidate the practices. "In mergers, New York hospitals have taken the Noah’s Ark approach," says health-care consultant Rodat: "Two of everything."

New York’s doctors have argued that too much consolidation just doesn’t make sense competitively or for patient care. The former head of NYU-Mount Sinai, Dr. John F. Rowe, refused to consolidate transplant departments for fear doctors would leave the institution. And Dr. Herbert Pardes, chief executive of New York-Presbyterian, says that with employment cut by 1,100 jobs, or 8 percent, since the merger, his staff is overworked. "Today, only the sickest patients are being hospitalized," he says. "With staff cuts, we have fewer people to deal with more acute cases, and everyone is stretched thin."

The results have been only nominal cost savings. Mount Sinai-NYU saved a mere $8 million from consolidations the first year after its merger, and experts estimate that New York’s biggest hospital mergers may be yielding, at best, combined savings of $30 million to $50 million a year—a far cry from the $250 million annual savings won from the well-chronicled, highly successful Boston merger of Massachusetts General Hospital with Brigham and Women’s Hospital.

If doctors have found deregulation distasteful, so have many New York legislators, accustomed to having a big role in shaping health care. Unable to control prices, and disliking the new power that insurance companies now wielded, legislators began asserting their power through mandates that dictated what kinds of care private health policies had to cover. Mandates had for years been controversial: they heap costs onto the private health-insurance system. In the 1980s, for instance, a national study found that mandates that require second opinions for surgery raised premiums by 7 percent—because doctors rarely contradicted the recommendations of their colleagues.

Although Albany had passed just two mandates all through the 1980s, in 1997 alone it enacted five, including one requiring that all policies cover chiropractic care. A 1999 state health-department study found that the chiropractic mandate alone added 1.5 percent to insurance premiums—a significant boost, when family coverage already averages $6,000 a year. Legislators have piled on four more mandates in the last three years, despite pleas for a moratorium from a coalition of businesses, labor unions, and associations representing cities and counties. The legislators’ rationale? Explains Queens City Councilwoman Julia Harrison, when asked why she supported the chiropractors’ mandate: "They go to the little leagues. They are active. They want a bill, I’m happy to help them."

With hospitals resisting cost cutting, and mandates piling up, the state’s health-care system never shrank, and the anticipated savings never materialized, despite the mergers. Hospital employment statewide declined by just 2.8 percent to 322,000 positions between 1995 and 2000. Even with the decline, the state’s hospitals employed more people at the end of the 1990s than at the beginning of the decade. In Gotham, supposed to bear the brunt of Medicaid cuts, jobs at private hospitals declined by just 2.2 percent, or 3,500 jobs, from 1995 through 2000, after growing by 30,100 jobs during the NYPHRM era. With hospitals so closely allied with union leader Rivera that they found it hard to shrink their workforces, so few workers lost their jobs that the money the state collected from private health-insurance premiums in 1996 to retrain fired health-care workers sat largely unused, and in 1998, Albany simply gave $148 million of it to hospitals.

Nevertheless, the state’s health-care industry didn’t like what little reform it had gotten, and by the late 1990s industry leaders began making plans to thwart any further reforms. Their efforts intensified when the federal government’s 1997 Balanced Budget Act cut $119 billion over five years out of federal health-care programs. Soon after the federal bill, Rivera and his hospital allies began lobbying Albany to ensure that Pataki not only renewed the transitional subsidies he’d set in place in 1996 but also added money to offset federal losses.

Rivera built up a $13 million political action fund from contributions from his members and others, including the Greater New York Hospital Association. In 1999, his coalition launched the most expensive lobbying campaign in state history, featuring scare-mongering television ads that warned of an impending crisis that could close hospitals and prompt huge layoffs. Rivera hugely outspent the opponents of subsidies. "The governor never put out a counterproposal for us to defend, so it was difficult to raise money for a campaign," explains one business lobbyist.

The campaign cemented Rivera’s reputation as one of Albany’s most influential players and derailed any hope of reform. Pataki’s staff invited Rivera directly into negotiations on a new bill, which not only maintained the subsidies previously set in place but also added $1.3 billion in state tobacco-settlement money and threw in another $1.4 billion from a new tax on cigarettes. Most of the additional money would go to expand the richest Medicaid system in the country, an allocation that Rivera and the city’s hospitals pushed at the expense of institutions where Medicaid matters less. The deal starkly underscored how much the city’s private hospitals had come to depend on Medicaid, which today accounts for a third of their total billing, turning what was once the country’s most revered hospital system increasingly into a ward of the state’s social services apparatus.

Perversely, the tiny piece of the new legislation designed to help small businesses provide health-care coverage only affected firms that had not previously offered health insurance. "Some of my employees actually asked me to drop our company coverage for a year so that they could join the state program, because it’s so much more generous than the coverage I can afford to offer," says Roger Hannay, owner of Hannay Reels, a small manufacturer in Westerlo, New York.

But Rivera, who refused requests to speak with City Journal, made out like a bandit. Of the $150 million in grants to retraining programs that the legislation included (even though the hospitals and unions had never needed most of the previous money allocated for retraining), more than half of all the funds disbursed earlier this year went to local 1199’s training programs—just in case. And the new legislation eliminated programs to rate hospitals on the quality of their care, an accountability initiative Rivera and the hospitals hotly opposed. "You have to wonder if we can ever discuss quality health care in a highly political environment like this," says Al Charbonneau, the former head of Genesee Hospital in Rochester, who chaired a committee that created a model hospital report card for the state health department, only to see the idea die in 1999.

In return for this bounty, the normally Democratic Rivera stayed neutral in the 2000 elections, when an embattled Pataki feared that his Republicans could lose their hold on the State Senate. Doubtless Pataki will also seek support from Rivera—or at least neutrality—in the 2002 gubernatorial race. But Rivera is sure to extract more for that—and indeed, in March he asked the state for $100 million in new money for nursing homes, whose workers 1199 also represents.

Exactly how much damage have Pataki’s deals with Rivera done to the state’s health-care system? Although some rates declined after the state stopped setting prices, a recent study by the Data Advantage consulting group found that New York’s hospitals collectively ring up the second-highest average bills of any state in the nation—$6,204 per hospitalization, or 30 percent above the national mean, even after adjusting for the severity of cases New York hospitals treat. Meanwhile, the state spent $7.4 billion in 1999 on hospitalized Medicaid patients, or $4,180 per patient, compared with $9.2 billion, or just $2,377 per patient, in Texas and California combined.

As costs have soared, the ranks of the uninsured have swelled from 13.5 percent of the state’s population in 1990 to 18.5 percent by decade’s end. By 2000, more than 3 million residents were without coverage—nearly 40 percent of them employed. New York State’s health-care-cost explosion has left many individuals unable to afford insurance, and it has made businesses, especially small ones, unable to offer it. The typical family policy offered by small businesses in New York these days costs between $5,000 and $6,000 per year, depending on deductibles. No wonder that the state’s small businesses listed health-care costs as the Number One impediment to economic growth in a poll by Rochester’s Center for Governmental Research.

Saddest of all, this costly system can no longer claim to offer premier health care. True, the city’s big academic medical centers still boast a galaxy of star doctors and can deliver world-class care to those rich enough to pay for it, but the big subsidies haven’t stopped a broader decline. Today Gotham’s big institutions are under challenge not just from centers in other cities, like the Mayo Clinic or Johns Hopkins, but from aggressive institutions in the local suburbs, too, like St. Francis Hospital in Roslyn, now the second-largest cardiac surgery center in the country, or New Jersey’s Hackensack University Medical Center, which has swiped pediatric specialists away from city hospitals and won national acclaim for its nursing programs. Meanwhile, states like California and Massachusetts have won hundreds of millions of dollars in federally funded medical research away from New York institutions, which are no longer tops at hauling in federal research money.

How HHC Healed Itself

When Rudy Giuliani took office in 1994, one of his first priorities was to staunch the budget-busting $365 million loss at the city’s dysfunctional Health and Hospitals Corporation by cutting costs and selling off its money-losing hospitals.

The mayor’s efforts hit heavy political opposition, and a judge blocked any privatizations. But no matter: Giuliani appointed Dr. Luis Marcos as head of HHC in mid-1995, and since then the public hospital network has largely achieved what the mayor envisioned for it anyway. Engineering changes that his colleagues in the private sector have been unable—or unwilling—to make, Marcos has eliminated deficits since 1996 and last year ran a surplus of $75 million, while 40 percent of the city’s voluntary hospitals lost money.

When Marcos took over, HHC facilities, suffering from a lack of investment, were unattractive and uninviting. Private hospitals—facing reduced reimbursements from HMOs—were starting to poach HHC’s Medicaid patients. Union rules left the system bloated and inefficient.

A determined Marcos renegotiated existing relationships with the city’s private hospitals, saving HHC $100 million a year. He drove down the length of patient stays at HHC hospitals and eliminated 4,000 empty hospital beds. Unlike the city’s private hospitals, whose sweetheart relations with union leader Dennis Rivera have made it difficult for them to shrink their workforce, Marcos’s HHC cut 12,000 jobs.

Marcos invested the savings in the system, even unveiling HHC’s first advertising campaign. “I told people that from now on, their jobs depended not on subsidies from the city but on attracting patients,” he says.

The successes have kept HHC off life support. Still, the system faces numerous challenges because of its historical role serving the city’s poorest—and often sickest—patients. HHC now must deal with the rising number of uninsured in the state, especially illegal immigrants who are likely to find their way into a public hospital, not a private institution. About 10 percent of HHC’s hospital patients, and 30 percent of those who use its clinics, lack insurance, and the losses this growing group imposes upon HHC threaten to wipe away Marcos’s surplus.

Marcos is trying to bolster his balance sheet by closing 27 clinics that are big money losers, but he faces stiff opposition from health-care advocates. The city has agreed to kick in $20 million to help offset some losses from care for the uninsured, and the state recently won federal approval for a new program that will provide the uninsured working poor with coverage—if the Pataki administration can successfully sign up hundreds of thousands of poor, uninsured patients and persuade them to receive their health care through HMOs.

Marcos doesn’t rule out closing a major hospital to keep HHC viable, although he concedes that the political obstacles are great. “We’ve raised the bar very high in the last few years,” he says. “Now we have to live up to those standards.”

Most pointedly, although New York’s institutions long argued that the rich subsidies were necessary to maintain their national preeminence, today these institutions rarely rate well in studies comparing quality of care around the U.S. No New York State institution is on the current list of the Top 100 Hospitals in America compiled by the well-respected health-care consulting company Solucient. New York’s hospitals, with their long patient stays, high bills, and only average mortality rates, simply don’t measure up to today’s profile of a top hospital. True, many New York institutions care for a troubled population, in which drug use, poverty, and unhealthy behavior make treatment difficult, but most studies of hospital performance adjust for such demographic factors. Solucient’s Top 100 Hospitals, for instance, treat more Medicaid patients on average than the typical hospital but turn in superior performance despite this generally sicker population.

Other studies have reached similar conclusions. A 1999 ranking of academic medical centers by the Center for Healthcare Industry Performance Studies in Columbus, Ohio, placed no New York institution in the top 50, and most of the state’s and city’s academic centers received C and D grades. "Faced with a long history of regulation, New York’s hospitals have been forced to focus on financial issues more than on quality of care," explains Jean Chenoweth, director of the Solucient study.

Although such results might shock most New Yorkers, they are no longer so surprising to health-care experts, who view the state’s hospital industry as out of step with the most progressive trends in health care. For years, for instance, the state’s hospitals, and especially the city’s, have kept patients hospitalized much longer on average than other institutions and have justified this practice by claiming that longer stays are needed to heal patients properly—an appealing argument in an age when some HMOs release patients too soon from hospitals. But increasingly, experts view long patient stays as a warning sign, possibly signaling hospitals where complications are common or the most current therapies are not administered promptly and effectively. That is the message underlying a recent federal study that ranked New York State’s hospitals fourth-worst in the nation in the treatment of pneumonia in Medicare patients. New York institutions, the study found, were slow to administer drug therapies that effectively fight the illness. Perhaps not surprisingly, the state has a higher age-adjusted mortality rate for pneumonia and influenza than the nation as a whole.

"I lecture around the country on the relationship of quality of care to parameters like patient stays," one top health-care consultant says. "But when I came to New York to talk about this, they looked at me like I had two heads. They are dinosaurs there."

There’s no mystery what the state’s health-care system needs to heal itself. But it can’t happen unless courageous leadership in Albany forces the necessary moves.

Albany’s first goal should be to eliminate the costly subsidies that serve no useful purpose, especially the $544 million paid yearly for graduate medical education and retraining of hospital workers. This steep tax on insurance premiums—which adds some $375 to the cost of a family health policy in New York City—is a classic case of how government money can drive up costs and produce imbalances. After years of training subsidies, New York has more doctors per capita than any other state, and more than half of all doctors trained in the state leave to practice elsewhere. The average cost of training a resident in New York State is now about four times as high as at major medical centers in California or Massachusetts. The current graduate-training tax does little for New York and needs to be scrapped.

The state also needs to shrink the charity/bad-debt fund, a $738 million-a-year pot of money paid for by an 8.18 percent surcharge on health-care services and intended to pay for care for poor people who don’t qualify for Medicaid. The state has increased the pot without auditing hospitals’ billing practices. An audit would show, the Business Council of New York estimates, that two-thirds of hospitals’ uncompensated care doesn’t represent charity cases, but uncollected bills due to inefficient administrative or collection procedures. Albany could easily cut this subsidy at least in half and still pay for real charity care.

State legislators need to cool down their mandate fever, too. In addition to the 30 or so existing health-care mandates, over 100 mandate bills are floating around Albany, requiring insurers to cover (among other things) acupuncture, infertility treatments, and hairpieces. To stop this lunacy, the governor needs to use his veto.

Finally, given New York State’s surplus of hospital beds, Albany needs to let hospitals fail and close. A movement to shut hospitals is already gaining currency around the state. The Buffalo News recently editorialized in favor of eliminating about 25 percent of the beds in that marketplace, and Erie County executive Joel Giambra called for a health-care summit to discuss closing at least one local hospital. When a small hospital in Rochester recently announced it was closing, the city’s mayor refused to join an effort by local doctors to keep the institution alive. Mayor William A. Johnson Jr. instead acknowledged that the city had a surplus of hospital beds and that the institution should be allowed to close. The heads of two upstate hospital associations, Gary Fitzgerald at the Iroquois Healthcare Alliance and Dan Sisto of the Health Care Alliance of New York State, also advocate allowing the state’s hospital network to shrink. Sisto points approvingly to New Jersey Hospital Association advertisements urging that hospitals there be shut as a way of right-sizing the market in the Garden State.

In Albany, though, it’s hard to discern the courage needed to make such moves. The Assembly is the creature of 1199’s Rivera; the Senate belongs to the hospitals; and the governor is consumed with worry about his tenuous hold on his job. So the problems of the state’s system are only likely to get more acute, especially since the federal government has significantly cut its health-care programs, and the Bush administration is unlikely to contribute to new spending.

The state’s ever growing bills will fall more and more on average New Yorkers. For years they have ignored the state’s health-care mess, because someone else—their employers, their insurers—paid the freight. But now they are footing a growing portion of their own insurance, and an explosion of self-employment has left many people completely responsible for their own coverage. When the current system of subsidies expires in mid-2003, the complaints of these average citizens may be loud enough to allow a strong-willed, reform-minded governor—should one emerge—to push through a health-care reform agenda that truly makes a difference in New York.


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