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—but the best? 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.
As a result, nationwide pressures—from cutbacks in federal spending to the introduction of managed care—have sparked a succession of crises 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.
Rocky's Mistake
It all began with Gov. Rockefeller's overenthusiastic embrace of Medicaid, the new federal program providing health coverage for the poor, in 1965. Each state could custom-tailor its own Medicaid program; Rockefeller designed the country's most liberal and inclusive—and asked the state's cities and counties to foot half the bill.
The result: Optional procedures became common, hospital stays lengthened and fraud proliferated. Rockefeller had estimated the state's Medicaid bill at $80 million in 1966, but it rose to $762 million by 1976. Add in the federal and local shares, and Medicaid's full cost in New York that year was a staggering $3 billion.
Meanwhile, new technologies and increasing specialization began driving up health costs nationwide. New York, with its large number of academic medical centers, was ground zero. From 1960 through 1970, the number of doctors in the state swelled by 40 percent to 23,493, led by a tripling of hospital-based specialists practicing the most expensive kind of medicine.
Hospitalizations and costs shot up. Blue Cross premiums rose by nearly 140 percent from 1960 to 1969, and then soared 43 percent in 1970 alone.
Rockefeller's successor, Hugh Carey, tried hard to contain these runaway costs. He set out to monitor the treatments that doctors ordered 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.
But when hospitals actually began to close, Carey blinked, and agreed to a series of bailouts. Hospital managements increasingly became immune from responsibility for their problems. 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.
To fix the crisis, the state designed a system, signed into law by 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. Ultimately, the state laid down more than 100,000 different rates, allowing inefficient or financially ailing hospitals to charge more for procedures. Surcharges added onto bills further increased hospital subsidies.
Costs went through the roof. A hospital bill for an appendectomy at a city academic medical center in this era gives a perfect illustration. The procedure cost $2,880, but surcharges for medical education, care for the uninsured, a malpractice-insurance fund and so on brought the total to $4,940.
Failed Reforms
Finally, in 1995, the new Pataki administration set out to overhaul health care radically: end state price-fixing; let insurers and hospitals negotiate rates; cut hospital subsidies; make hospital pricing data available to consumers—and cut $1 billion from the state's $26 billion Medicaid bill, almost as big as the combined cost of the next two biggest state Medicaid programs.
Hospitals and their unions went ballistic. Local 1199 chief Dennis Rivera, whose union represents mostly unskilled workers, predicted that the state would lose 150,000 of its 740,000 health-care jobs.
With a credulous press printing daily scare stories of impending health-care chaos, the administration backed off its bold plan. It agreed to continue 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.
But despite dire warnings, the state's health-care system never shrank dramatically. Hospital employment statewide fell just 2.8 percent to 322,000 positions from 1995 to 2000. Even with the drop, the state's hospitals employed more people at the end of the '90s than at the start. In New York City, supposed to bear the brunt of Medicaid cuts, private-hospital jobs dropped just 2.2 percent, or 3,500, from '95 through 2000, after growing by 30,100 in the previous 13 years.
Pataki's Surrender
But another threat emerged for New York hospitals: the 1997 Balanced Budget Act cut $119 billion over five years out of federal health-care programs. Worried about the impact, 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, with scare-mongering TV ads warning of a crisis that could close hospitals and prompt huge layoffs.
Reluctant to challenge the powerful Rivera, Pataki's staff invited the union leader directly into negotiations on a new bill, which not only maintained the existing subsidies but added $1.3 billion in state tobacco-settlement money and threw in another $1.4 billion from a new cigarette tax. Most of the added money would go to expand the richest Medicaid system in the country.
Perversely, a tiny piece of the new law—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," says Roger Hannay, owner of Hannay Reels, a small manufacturer in Westerlo.
But Rivera (who refused requests for an interview) made out like a bandit. Of $150 million in grants to job-retraining programs that the legislation included (even though the hospitals and unions had never needed most of the previous money allocated for retraining, because so few workers actually lost their jobs), more than half of all the funds disbursed earlier this year went to local 1199's training programs—just in case.
And the new law ended 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.
Unaffordable Insurance
Exactly how much damage have Pataki's deals with Rivera done to the state's health-care system? 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.
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 No. 1 impediment to economic growth in a poll by Rochester's Center for Governmental Research.
Adapted from the Summer issue of the Manhattan Institute's City Journal, where Steven Malanga is a senior editor.