NY's Hospital Bloat

A special commission charged with shrinking New York state's gold-plated health-care system took the political middle road yesterday, recommending closing only nine hospitals and consolidating several others to cut costs.

The commission should have called for tougher medicine—more closures, more mergers, more service-sharing, etc. New York's struggling hospital system has massive problems—starting with thousands of unneeded, costly hospital beds. But vested interests have long prepared to fight off any reform, as they've successfully done in the past, so the commission apparently opted for the toughest recommendations it thought politically possible.

If the governor and the Legislature fail to adopt even these modest proposals, New York taxpayers will be stuck paying vast subsidies to those various interests—money that in many cases actually makes for worse health care.

In advance of this report, advocates for the most troubled hospitals were already jockeying to save themselves. Several have considered filing for bankruptcy, in hopes of convincing a friendly federal judge to order that they remain open.

New York's City Council—aware that several city hospitals should top any list of sensible closures—also set out to undercut the commission. Speaker Christine Quinn called the panel too "homogenous" and not representative of the city—yet commission chief Stephen Berger is a New York City Democrat.

And the council issued its own prescriptions for the state's health-care system: even more government subsidies and somehow forcing health insurers to "give back" part of their profits to local communities. Yet it's 40 years of just such ideas that created New York's hospital crisis in the first place.

The mess began in the late 1960s, when Gov. Nelson Rockefeller and the Legislature shaped America's biggest, most expensive Medicaid program, offering higher reimbursements and covering more services and more people than any other state.

State and county administrators were unprepared to cope with the massive workload of overseeing all this. Fraud, over-billing and overuse of hospital services soon became common. Health-care costs in the state budget exploded from an estimated $80 million in 1966 to $767 million in just a decade.

Many hospitals began living off government-subsidized patients—and even used the windfall to expand aggressively. By the mid '70s, experts were estimating that New York City alone had about 5,000 excess hospital beds.

But when state officials tried to reform the system, they found they'd created a political football. Some hospitals warned that they might go under if the state cut off the cash gusher.

So New York's leaders opted to make the problem worse—protecting the hospitals by in essence creating America's first version of socialized medicine. The state took over responsibility for setting all hospital rates in New York (not just for Medicaid). If a hospital couldn't stay afloat, the state even let it charge more than a hospitals that operated more efficiently.

New York, in essence, rewarded ineptitude and waste. Naturally, hospitals started delivering more of both.

Most shockingly, the average length that a patient stayed in the hospital soared in New York relative to the national average. This is extremely telling—because longer hospital stays tend to be not just more costly, but unhealthy: Risks of infection, among much else, are lower for patients who recover at home.

But New York hospitals were in a "medical arms race," chasing every new health-care fad—aware that if they invested in the wrong services or technology, the state would bail them out. Even when the state ended the rate-setting regime in the mid '90s, Albany bowed to political pressure and kept on heavily subsidizing troubled and underused hospitals.

The costs have left state and local budgets groaning. New York's Medicaid program is nearly twice as expensive as any other state's—without making us any more healthy.

And the state has taken to plundering the private-insurance system to help cover its costs. To subsidize hospitals, it piles taxes on private health premiums and on hospital bills—further driving up health-care costs at a time when more and more employers and workers are struggling to afford insurance.

In effect, New York is caught in a vicious cycle: The more it spends to subsidize hospitals that can't make it on their own, the more it raises health-care costs with taxes and surcharges—driving people off private insurance and into state-subsidized plans, thereby boosting the state's own health-care outlays. Only by letting the system shrink to the right size can the state begin to break this cycle.

Legislators have until the end of the year to accept the Berger commission's recommendations. If they do, the state gets some $1.5 billion from the federal government to help with closings and consolidations and to aid in financing a shift toward greater use of outpatient facilities.

Even if the state does the right thing there, new Gov. Eliot Spitzer will still have plenty to do on this front, especially in grabbing control of Medicaid costs and making private insurance more affordable. In particular, he'll need to reverse a growing trend: Because Medicaid is the better deal for them, more and more workers are enrolling in Medicaid even though their companies offer private coverage.

State officials have spent 40 years making a mess out of New York health care—producing a system that neither the state and local governments nor private citizens can afford anymore. Something's got to give.

Steven Malanga is a contributing editor of the Manhattan Institute's City Journal.