September 20,20 I 0




HOD. David A. Paterson Governor

State of New York

633 3rd Avenue 39th Floor New York, NY 10017

Dear Governor Paterson,

At your request, I have spent the past year as Lieutenant Governor studying New York's fiscal condition and budget crisis. I have shared my recommendations with you. As part of that effort, I am enclosing the attached report on Medicaid in New York, the largest single driver of the State s growing expenditures.



Richard Ravitch Lieutenant Governor



The State of New York faces growing budget gaps in the next several years, and a chief source of pressure on the State budget is the growth in Medicaid costs.

Medicaid is a joint federal-state program that pays the health care costs of lowerincome individuals. The federal government reimburses the stales for a certain percentage of their Medicaid expenditures and imposes its own rules on those expenditures, Medicaid is not Medicare, though the two programs overlap. Medicare is wholly federal; it is primarily a health insurance program for the elderly, though it also covers people with certain disabilities. Medicare pays mainly for "acute care" services such as hospitals and doctors' visits. In contrast. Medicaid will pay not just for acute care but for long term care such as nursing homes and home health care, including certain services for the mentally disabled.

Once a program only for welfare recipients, Medicaid now pays the health care costs of lower-income working families with no other coverage, provides long term care services, and di.rectly subsidizes safety-net hospitals for the otherwise uncompensated care of the uninsured. lt has become a massive program. It is the largest purchaser of health care in the State, serving more tha n fa ur and a hal f m i lli on New Y orkers=-al most one in four state residents.

In State "fiscal year 2009-10, Medicaid spending-State, federal, and localtotaJed over $50 billion, the equivalent of more than one-third of the State's All Funds budget. Between 2009~ 1 0 and 20 13~ 14, this total is expected to grow by 27 percent lo $63.5 billion, an average annual increase of nearly seven percent During the same

period, the State s share of Medicaid costs will increase much faster-by 71 percent an average annual increase of nearly 18 percent-because of the expiration of federal stimulus aid.' In 2014, because of the recently enacted federal health care reform law. increased numbers of New Yorkers are projected to enroll in Medicaid, further increasing State costs.

New York s present budget crisis and the anticipated consequences of federal health care reform make it especially important to control Medicaid spending and improve management But for reasons of history, bureaucratic inertia, and politics. Nev York's Medicaid program is not admini tered in the most rational or cost-effective manner. It has an un ieldy and overly decentralized structure that serves contradictory goals and provides perverse incentives. As a result, it is ill-equipped to control costs or to benefi t from federal heal th care reform.

The late cannot do an adequate job of managing the increased numbers of enrollees and their associated costs let alone adjusting to the changes contemplated by federal health care reform, unless it changes the way in which Medicaid manages.' delivers, and pays for health care.


r. The State should change the process by which Medicaid sets rates of reimbrnsement to health care providers in order to increase the program's capacity 10 control costs and improve outcomes.


A. Instead of prescribing rate-setting methods by statute, the State should

allow specific methods to be established by experts under tbe State Medicaid Director within the Department of Health.

B. Following the federal model. the State should establish an independent

commission to advise the Executive and Legislative brancbes on rate-setting issues ..

C. A new Center on Medicaid Innovation should be established within the

Department of Health to play the lead role in developing new models of payment and service delivery and maximizing New York's benefits [Tom federal health care reform.

II. The State sbouId consolidate administrative authority over Medicaid in the State instead of the counties and, within the Slate, under the State Medicaid Director within the Department of lIealth.

A. The Medicaid Director, as the Department. of Health administrator of a

third of the State's budget, should be appointed by and report directly to the Governor.

B. Administrative authority over rate-setting and other purchasing decisions

for both acute and long term care, and for services regulated by the State's behavioral health agencies, should be consolidated within the Office of Health Insurance Programs under the Medicaid Director.

C. Among the chief responsibilities of the Medicaid Director should be [he

development of a comprehensive strategy for the financing of a more efficient and effective delivery of long term care and services to chronically ill and "dual eligible" beneficiaries.


D. The State should assume the Medicaid functions now performed by the

counties, as required by State legislation, and should plan for a full fiscal takeover of Medicaid by the tate within State budget constraints.

Ill. The tate must address cost pressures arising outside Medicaid.

A. The State must reform its medical malpractice system.

B. The State should increase its prevention efforts in underlying public health areas such as substance abuse, cardiovascular diseases, and childhood obesity.

C. The State should address the tate Medicaid rules that are most vulnerable

to abuse.

IV. The State must pursue federal action on Issues where New York is

disproportionately burdened or constrained in its efforts to control costs.

A Tbere should be no higher priority for New York political and civic

leaders than to continue to seek a share of the federal contribution to Medicaid that bears a rational relationship to the tate's poverty levels and its high cost of health care.

B. The tale should pursue changes in federal statutes and rules that would

allow for more coordinated and cost-effect! ve care of "dual eligible" beneficiaries.


Beyond meeting basic federal requirements slates historically have been able to shape their Medicaid programs by defining the categories of people who are eligible for Medicaid, limiting the extent to which beneficiaries may utilize different Medicaid services, and setting rates-both the underlying ormulas and the I vels of payment.


But the states' ability to control Medicaid costs is limited by the general increase in health care costs-currently rising at more than six per cent annually." Additional limits on New York's ability to control costs stem from the State's historical relationship to the Medicaid program the recent economic downturn, and the enactment of fed ra! health care reform.

History: In evaluating the State s high Medicaid costs, it IS important to recognize that we did not get here overnight.

When Medicaid was enacted at the federal level in 1965, almost all people eligible for Medicaid were individual receiving cash assistance or welfare. Thus. when New York enacted its Medicaid program in 1966. the new State Medicaid program was administered by the same agency that administered the State's welfare program.

But two major developments after 1966 re-shaped New York Medicaid. First, in 1996 the federal government abolished the old welfare system-but retained Medicaid eligibility for many peopl who were no longer eligible for welfare. This change meant that Medicaid wouJd increasingly serve not welfare recipients but the working poor. Accordingly, most of the responsibility for administering Medicaid was moved into the State Department of HeaJth. Today, only one out of six New York children and adults receiving Medicaid ervices also receives cash assistance.

Second, since the inception of Medicaid. ew York has made purposeful and largely successful efforts to attract federal matching dollars for expanded Medicaid programs. The State has used these federaJ funds 10 extend services to more beneficiaries and increase payments to health care providers. For example, New York Medicaid 110 covers low-income childless adults, one of only five states to do SO."i


But the federal funds that have facilitated the growth of New York Medicaid are not free to the State: They are provided only to the extent that New York spends its own funds on the program. Thus, policy decisions to "Medicaid" State health care spending and maximize federal funds also require largeexpenditures of State funds. Moreover. the resulting services become part of a State-wide entitlement program, making them far more difficult to constrain or reform. This is among the many reasons why New York's Medicaid spending per enrollee is among the highest in the country.

The FMAP Formula: Maximizing federal f-unding has been especially costly 10 New York because the rate of reimbursement it receives from the federal governrnentits Federal Medical Assistance Percentage. or FMAP-is relatively low. State FrvtAPs range from a low of 50 percent to a high of 74 percent, with an individual state's FMAP based on the state's average per capita income relative to the average per capita income of the country as a whole. Because New York has a high average income, it gets the minimum FMAP of 50 percent.

But two states with the same average per capita income can have very different Medicaid needs. The first state may not have many high-income people-but may not have many poor people, either. The second state, with the same average income, may have some people with very high incomes but many more people in poverty, who place large burdens on the state's Medicaid program .. New York is the second type of stale, one with great Medicaid needs-vas well as high health care costs. New York's share of the federal contribution to Medicaid does not properly reflect those needs and costs.

Downturn and Reform: Recent events have intensified tile pressure of Medicaid on the State budget. In 2008 and 2009 .. because of the economic downturn and policy


choices favoring expanded coverage, the State's Medicaid rolls grew by more than 600000. This budgetary strain was temporarily eased by federal stimulus legislation that increased the federal reimbursement rate (0 approximately 62 percent, thus bringing billions in additional dollars to the State." But the increased rate will expire in June, 2011.

Among the many changes that the federal health care reform law will effect as of 2014 in order to expand coverage of the uninsured is the permanent expansion of Medicaid eligibility to childless adults with incomes of up to 133 percent of the federal poverty level. New York will have a certain number of new enrollees. and the law provides for eventual federal reimbursement of almost all of the State's costs for these new beneficiaries, But childless adults will continue to account for only a small percentage of Medicaid spending." For the great majority of State Medicaid spending. the State will continue to get only its normal FMAP of 50 percent.


II is foolish to claim that it would be easy for the State to make huge cuts in its Medicaid program; if it were easy. it would already have been done. But opportunities for significant cost control exist As New York's largest single health care payor. Medicaid can drive reforms in the overall health delivery and financing system, thus moderating the rise in general health care costs. Historically, New York has lagged in this regard.

Long term care is one area of opportunity. Long term care includes nursing horne care. It also includes home health care, such as visiting nurses and nurses' aides. And it



includes personal care, which encompasses the day-to-day services for incapacitated or disabled individuals-sucb as bathing, dressing, housecleaning, and cooking. New York Medicaid has relatively generous long term care policies. For example, the State has one of the most liberal policies in the country in pro iding personal care services to Medicaid beneficiaries. Long term care accounts for almost half of the State s Medicaid spending and includes those services in which costs are growing fastest: home health care personal care, and other community-based services. But for long term care that is purchased on a fee-for-service basis, rather than through managed care organizations, Medicaid simply has no coordinated cost management strategy. including a strategy for coordinating the programs that presently offer combined long term care services.

There is another significant opportunity for cost control, as well as an opportunity to provide better care, with some of Medicaid's most medically complicated and costly beneficiaries-the seriously and persistently mentally ill and people with co-morbidities, who often require long term care. The large majority of New York's Medicaid beneficiaries receives its care through managed care organizations and accounts for only 17 percent of total Medicaid spending, In contrast, only 25 percent of beneficiaries receive care on a fee-for-service basis-but they account for by far the biggest share of Medicaid dollars.

The largest "fee for service" group is made up of "dual eligibles ·-people who are eligible both for Medicare, because they are elderly or physically or menially disabled, and for Medicaid, because they are poor. They make lip just 15 percent of Medicaid enrollees but account for 40 percent of Medicaid spending,


It is increasingly clear that fee-far-service payment is not cost-effective for either Medicaid or these beneficiaries, because fee-for-service payment provides incentives for more care but not coordinated or better care. No single plan or set or providers is responsible for these people s health outcomes. This must change: There must be more and better-coordinated managed care for these beneficiaries.

Progress in these and other areas will require administratively ambitious actions by the State. But New York Medicaid, because of its fragmented decision-making authority, does not yet have the capacity to make the required interventions.

Rale- elling by Slalute: New York is unusual among major states in the degree to which its Medicaid rate-setting methods are specifically spelled out in statutes. Maryland's all-payer system-covering private insurance. Medicare, and Medicaidleaves rate-setting methods to administrative authorities. Neither Massachusetts, New Jersey nor Pennsylvania sets hospital or nursing home rates by statute. California Medicaid C Medi-Cal") gives an independent commission rate-setting authority 1'01' most acute care hospitals.

In contrast, for most areas of Medicaid payment in New York-in-patient hospital care, freestanding ambulatory care centers home health agencies, nursing homes-the basic formulas for reimbursing Medicaid providers are set directly by the State Legislature as part of the annual negotiations over the budget. even minor adjustments require legislative action. As a result, the State has found it exceedingly difficult to control Medicaid costs by improving and updating payment methods.

For example, until recently the State was r quired by la to reirnburs hospitals for most in-patient care under a complex inflation-adjusted formula devi ed in 1981,


Since that time, there have been revolutions in hospital operations, staffing, and technology-changes for which the inflation rate is a grossly inadequate proxy. But because the formula was embedded in statute, it took almost 20 years, until 2009, lor the methods to be updated. For the same reason, needed change remains stalled in the reimbursement of fee-for-service home health agencies and nursing homes.

New York already has an example of what a less convoluted, more rational ratesetting process would look like. The State Medicaid Director, as head of the Office of Health Insurance Programs. has broad discretion, free of specific statutory formulas, in setting rates of reimbursement for both acute and long term· care provided by Medicaid managed care plans. Recently the State inaugurated new rate-setting methods in this area. Despite the complexity of the change, it was phased in quickly and efficiently. The same efficiency is possible in other Medicaid areas but it will not come about unless experts are allowed to determine Medicaid payment formulas.

At the federal level, Medicare rate-setting by Congress is aided by additional expert advice from the Medicare Payment Advisory Commission, or MedPAC, which has considerable autonomy and a highly skilled professional staff. The success of MedPAC has led Congress to establish an even .strcnger body as part of federal health care reform-the Independent Payment Advisory Board, whose recommendations will be binding unless specifically overridden by statute. The State needs an independent body to play this advisory role in rate-setting. The body should. have seven to ten membersexperts in health care finance, quality. management, and related fields-who are appointed by the Governor and the Legislature for staggered five-year terms and have a qualified full-time staff with the resources to conduct its own research and analysis.


They should be required to report annually to the Governor and the Legislature with concrete recommendations for rate-setting changes, and the commission's enabling statute should further require that the Department of Health provide written responses to the commission's recommendations-at a minimum. indicating whether such recommendations are being adopted and, if not, reasons why.

Finally, a new Center on Medicaid Innovation should be established within the Department. of Health to lead the development of new health care delivery models and to facilitate partnerships with the federal government that can improve the Medicaid program and reduce its cost to New York.

Adminislrative Fragmentation: Rate-setting by statute is not the only obstacle to the State's developing coordinated Medicaid cost control strategies. Another obstacle is the fragmentation of Medicaid's administrative authority ..

It is true that since 2007. when much of the State s administrative rate-setting authority was consolidated in the Office of Health Insurance programs under the newly created post of the State Medicaid Director." the State has instituted a more cost-effective payment system for acute services; expanded managed care for both acute and long term care; developed a more efficient enrollment process, which will be able to co-ordinate more effectively with the State-wide insurance exchange contemplated by federal health care reform; and generally increased Medicaid's capacity io monitor and measure the effects of its purchasing decisions.

in short, in these areas, the State has been able to develop a coordinated strategy. But not all administrative authority over rate-setting and other purchasing decisions was given to the Medicaid Director in the 2007 overhaul. Offices within the


Department of Mental Hygiene-which have licensing, surveillance, and program authority over people with mental, developmental, and drug-and-alcohol-related disabilities-also set rates for Medicaid programs focused 011 beneficiaries with these specia 1 needs. vii Such pro grams accoun t for $10 billion in Medicaid spending, 20 percent of the State total. The specialized agencies provide valuable expertise to their target populations, but their separate rate-setting authority has hindered Medicaid's efforts to bring a unified funding stream and coordinated management to the same populations, As it stands, no single provider entity or health plan paid by Medicaid is responsible for the full range of services delivered to these beneficiaries by New York's health care system. Thus, no single entity can be held accountable for the costs of those services or the beneficiaries' health outcomes. Rate-setting and other purchasing authority over services for special-needs beneficiaries should lie with the State Medicaid Director.

Similarly, within the Department of Health, the Office of Long Term Care remains separate from the Office of Health Insurance Programs. Many of the beneficiaries of long term care services, primarily the frail elderly and the physically disabled. account for substantial acute care costs as well. These beneficiaries require a coordinated strategy for their acute and long term care. Thus, there is a strong argument for folding most responsibilities of the Office of Long Term Care into the Office of Health insurance Programs, under the State Medicaid Director.":

Because of the absolute cost of long term care and its rate of growth, controlling costs in this area is critical to the job of controlling Medicaid costs. The State Medicaid Director should be given specific responsibility for developing a comprehensive strategy for the financing of more efficient and effective delivery of long term care.


The Stare and the Counties .. · While the State has pnmary administrative

responsibility for Medicaid, the State's 57 counties-along with New York City, whose

five counties make up a single administrative unit-e-determine Medicaid eligibility,

authorize and contract with the providers of personal care services, and hire and set rates

for companies thai provide non-emergency transportation to Medicaid beneficiaries.

New York stands virtually alone among the states in its State-county division of financial

and administrative Medicaid responsibilities.

This decentralization reflects the fact that the counties once shared Medicaid costs

equally with the State. Over time, the State has paid an increasing share of Medicaid

costs;" yet core Medicaid administrative functions remain under the control of 58

separate governments whose officials report nut to the State but to local authorities.

Not surprisingly, there IS great State-wide variation in these functional areas.

producing inefficiencies and potential inequities for beneficiaries. This structure is

virtually guaranteed tu be incapable of developing or implementing coordinated cost

control initiatives or coordinating effectively with the State-wide insurance exchange

contemplated by the federal health care reform law.

Under recently enacted legislation, the Department of Health is required to

develop a plan for the State's administrative takeover of Medicaid. The plan should

provide for the State's assumption, as quickly as possible, of Medicaid eligibility

~. .

determinations and the management of personal care services and nun-emergency

transportation for Medicaid beneficiaries. This plan should also include provisions for an

investment in new data systems that are capable of meeting the simplification

requirements embodied in federal health care reform.



Because administrative costs make up only a small part of Medicaid costs. the savings from this change may be limited." However, the savings could usefully be directed to increasing the organizational resources available to the State Medicaid Director.

A State takeover of the administrative functions of Medicaid should pave the way for a future State fiscal takeover of the program. Thus, the Division of Budget. in consultation with the Department of Health, should be asked to address the issue of how, consistent with budget constraints, the State can best effect a full fiscal takeover.

Many of the conditions that drive Medicaid costs lie outside the Medicaid program itself While this paper cannot discuss them in detail, they urgently need to be addressed.

Within the Stale

Medical Malpractice: Any serious Medicaid cost control effort requires reform of the State's expensive and inequitable medical malpractice system, which exerts significant cost pressure on the program. Reform should aim at significant premium relief for physicians, reduced coverage costs for hospitals, and promotion or patient safety.

The legislative components of a reform package should include tort reform measures such as a cap on non-economic damages, a neurologically impaired infant fund, and specialized courts. 11 should reduce the primary medical malpractice insurance coverage required to make physicians eligible for the "free layer" of excess coverage.


The administrative components of the package should establish programs to increase obstetrical patient safety and provide physicians with greater premium discounts and credits for participating in such programs.

According to some estimates, a package such as this one could save hospitals and physicians over $500 million a year.

Public Health: Behavioral issues and underlying health conditions, including smoking, substance abuse, childhood obesity, and high blood pressure, are major drivers of health care costs. Any effective expansion of State preventive efforts in these areasincluding a tax on the consumption of sugared beverages-s-will contribute significantly to Medicaid cost control.

Medicaid Rules." It is widely known that some of New York's Medicaid rules. including its "spend-down" rules and its doctrine of "spousal refusal," are vulnerable to abuses that divert resources from Medicaid's legitimate purpose=serving as a safety net for the needy-and tum the program into an entitlement for the less needy. The State should re-examine these rules to re-balance the competing equities.

Ai the Federal Level

The FMAP Formula: While any proposal to alter the calculation of the FMAP will be controversial, there is a broad consensus that the present formula is seriously flawed as a measure of Medicaid needs. Various options have been proposed for adjusting the formula to take more accurate account of these needs. One option would make some part of the FMAP dependent on the percentage of a state's population with income below the federal poverty level. Another option would weight the poverty figure by age, to lake account of the increased costs of serving the elderly poor. Still other



proposals would weigh state health care costs." But there should be no higher priority

for New York's political and civic leaders than (0 continue seeking a share of the federal

contribution to Medicaid that bears a rational relationship to the State's Medicaid needs.

"Dual Eligibles:" Mandatory delivery of care to New York's "dual eligible"

beneficiaries through managed care organizations would bring significant cost savings [0

the State'" and more coordinated care to these beneficiaries. Such delivery would require

a change in statutory Medicare "freedom of choice" provisions and certain federal

waivers of Medicaid "freedom of choice" provisions.i'" Such changes arecontroversial.

But. New York has a proven track record and Infrastructure for administering Medicaid

managed care. 11 should seek federal changes because it can no longer afford Medicaid

without them.

The subject of Medicaid is extremely complex, and it is not [he intention of these

recommendations to deal with all of its complexities. Instead, the aim here is to enable

people who are not experts to understand what needs to be changed in order to address

what is an unsustainable inflation in Medicaid costs. Essential among those changes are

strengthening and aligning Medicaid's core management functions, as outlined here, to

eliminate the current fragmentation of administrative authority.

i These figures do not reflect the recent extension of the temporary FMA P increase through June, 201 I.

ii Kaiser Commission on Medicaid and the Uninsured ("Kaiser Commission"), Few Options for Stares ((\pril 2008), p. 2.

"' Kaiser Commission, Where Are the States Today? (Dec. 2009),

iv Kaiser Commission, State Fiscal Conditions and Medicaid (Feb. 20 I 0). Table I.

v In State fiscal year 2008·09, Medicaid spending on childless adults totaled $5.2 bill ion. For 2014-15, the total is projected at $8 billion out of a projected $63.5 billion. New York State Division of the Budget,

vi The Office of Health Insurance Programs assumed rate-setting authority previously held by the Office of Health Systems Management and the Office of Managed Care. The Office of Health Systems Management retains licensing and surveillance authority in these areas.



vii These agencies are the Office for People with Developmental Disabilities, the Office of Menta! Health, and the Office of Alcoholismand Substance Abuse.

viii The licensing and surveillance authority now held by the Office of Long Term Care should be shifted 10 the Office of Health Management Systems, which holds such authority in the acute care area.

lx The legislation generally "capped" county contributions at three percent per year over 2005 levels. In the past five years, this "cap" has reduced the localities' costs-and increased the State's costs-by $3.9 billion. When Ihe stimulus legislation temporarily increased the rate of federal reimbursement, the counties' required contributions dropped below the level permitted by the cap. But when the increased federal rate expires, the counties' contribuuons will grow by more than three per cent a year, until they once again reach the level permitted by the cap. From 2009-10 to 2013-14 the county share will increase by eight percent a year.

x The Division of the Budget projects 2010-11 administrative costs for Medicaid at $J.J billion.

xi See, e.g., Vic Miller and Andy Schneider, 771e Medicaid MOfching Formula: Policy Considerations and Options for Modification, Research Report 2004-09 (Public Policy Institute, AARP, 2004-09), available al 09 formula.pdf (accessed Sept 8, 20(0); Government Accountability Office, Medicaid Formula: Differences in Funding Ability Among Slates Are Widened, GAO·03·620 (2003), pp, 32·38 .

. xii One estimate projects $ 10.8 billion in savings over ten years. New York State Health Foundetion, Bending the Health Care Cost Curve in Nell' York State (July, 2010), p. 4.

xiii /d .• pp. 33-38.