A Rotten Deal

Much of the torrent of criticism of the health-care package just rushed into law by Gov. Pataki and Albany leaders has been procedural, focused on how the governor and Albany leaders rushed the legislation through. Critics see it as a payoff by the governor to keep union leader Dennis Rivera from wielding the power of his union in this fall's elections.

But this legislation is bad not only because of how it was negotiated, or because New York can't afford it right now. As health-care policy, the deal is all wrong for New York.

Rather than restrain New York's spiraling health-care costs, the $2.7 billion spending package will raise them further. And that will make it even more difficult for individuals and businesses in the state to afford private insurance, while simultaneously producing an ever-greater burden on the state's budget.

The deal uses public money to pay raises to private-sector health-care workers. It takes what is already the most heavily subsidized and inefficient health-care system in the country and pumps even more money into it—without demanding anything in return from health-care workers and institutions.

Little of this is understood because health-care policy can be so complex. That's why it's possible for Rivera to defend his deal with Gov. Pataki by claiming that in doing well for his workers he's also doing good for the state. But nothing could further from the truth.

Here's what's wrong with health care in the state, and why this deal makes it worse:

When Gov. Pataki took office in 1994, the state's health-care system was already in deep trouble: An early-'80s Albany effort to control health-care costs by setting hospital prices had backfired.

The price-control system couldn't account for hospitals that performed inefficiently and were unable to get by on the same rates that other hospitals charged. To keep those lagging hospitals alive, the state let them charge more; gradually, many hospitals in the state grew inefficient because there was no incentive to act otherwise.

Prices increased, doctors kept patients hospitalized far longer in the state than elsewhere and the size of the industry grew even as it was shrinking around most of the country.

Even worse, politicians soon began fiddling with prices. Politically connected hospital executives persuaded the state to tack surcharges onto hospital and insurance bills to pay for the education of medical residents, and to help doctors and hospitals pay for medical malpractice insurance.

The result? By 1995, the bill from a hospital had so many surcharges added onto it that the total cost sometimes amounted to twice the actual charges for a procedure.

Pataki set out to reform this system by proposing to end the state price controls. He also wanted to end or reduce many of the surcharges by cutting back on subsidies to hospitals.

But the governor came under intense political pressure from Rivera and hospital executives, and so he abandoned some of his reform proposals, and kept many of the levies intact—explaining that hospitals needed subsidies for several more years to allow them to make the transition into the era of private competition.

As a result, Pataki's first reform package, which went into effect in 1996, didn't achieve much, and the state's health-care system was ill-prepared for what happened next across the rest of the country.

After a period of low inflation, U.S. health-care prices began rising rapidly in the mid- '90s, driven by the soaring cost of prescription medicine and the failure of HMOs to deliver on their promise to restrain costs. Not surprisingly, the price hikes had a deeper impact on New York's fragile health-care system.

Small businesses increasingly couldn't afford to offer insurance to their workers, and big businesses that asked workers to pay a portion of their soaring health premiums found some workers simply decided not to opt for coverage.

By the close of 1999, New York had more working people without health insurance than any other state.

At that point, Pataki had another chance at real reform, because the 1996 law was expiring. But he succumbed to another intense lobbying effort by Rivera and the hospitals, who spent $13 million—the most ever on lobbying for a single issue in Albany.

Instead of change, Pataki simply took $9 billion in money from the federal tobacco settlement, including money that many hoped would go to help offset the state's already high health-care costs, and used it instead to further expand the state's health-care spending and to bail out inefficient hospitals that should have been cutting costs.

Meanwhile, individuals and businesses who bought their own insurance got no relief. For instance, the state continued to force anyone who buys private health-care insurance in New York City to pay $350 a year over the cost of the policy to fund medical education and retraining programs for hospital workers.

Continuing this and other surcharges virtually assured that even more working New Yorkers would wind up without health insurance in coming years.

Feeding the hospitals and Rivera's union with big subsidies didn't solve much, because the money gives the industry no incentive to act more efficiently. Soon, the hospitals and Rivera started complaining that the bailout it wasn't enough. By early 2001, Rivera was already asking for another $150 million for workers salaries. Then, after the post-Sept. 11 economic slowdown, the industry's demands escalated.

The result is the current package, in which the governor is taking money from the conversion of Empire Blue Cross and Blue Shield to a public company—money that was supposed to go to help solve the state's health-care problems—and shoveling it to Rivera.

The deal also adds new costs onto private insurance, this time in the form of a tax on long-term care—but offers no relief to those who are already paying steep surcharges on their insurance premiums.

The ranks of the uninsured are almost certain to continue increasing as a result of the deal. As more people go without insurance, Rivera will demand more money from the state to cover them, portraying himself as their champion and thereby placing ever greater numbers of New Yorkers in ineffective and costly publicly funded health programs.

Meanwhile, the state's hospitals are increasingly becoming wards of the government. In New York City, for instance, more than half of all revenues at private hospitals come from public dollars. Small wonder that the quality of New York's once great health-care system is in decline.

Together, Rivera and Pataki are essentially socializing medicine in New York. As their deals progress, health care is becoming an ever bigger part of the state's budget, crowding out spending on education and other important issues while doing little to solve the true problems of the New York's system.

In short, there is no light at the end of the tunnel that Pataki and Rivera are digging for the Empire State.