The growing cost of New York’s Medicaid program is once again looming as a key issue in a potential budget veto showdown between Governor Pataki and the Legislature. To no one’s surprise, the budget adopted by the Senate and Assembly last week rejected many of Pataki’s Medicaid cost-containment reforms–particularly those that would restrain the growth in program costs in future years. (For details on how the legislative plan differed from the governor’s, see this Budget Division report.)

The Legislature’s failure to enact long-term Medicaid reform will make a big fiscal headache even worse in the near future. Pataki had projected that approval of all his proposals would still lead to a Medicaid spending increase of $5.7 billion, or 47 percent, by fiscal 2009-10. Under the Legislature’s budget, the growth during that period will be closer to $8 billion, or 70 percent. (For more on the trend, see this Empire Center Health Points research paper.)

A new study from the Dallas-based National Center for Policy Analysis (NCPA) provides a timely and fresh look at the reasons for New York’s sky-high Medicaid spending. The study’s lead authors are John C. Goodman, NCPA’s president, and Michael Bond, director of the Center for Health Care Policy at The Buckeye Institute and a professor at Cleveland State University. Dr. Goodman, who’s been called “the father of Medical Savings Account,” is a leading national expert on market-driven approaches to health care policy. Dr. Bond was involved in designing South Carolina’s innovative Medicaid reform program.

NCPA’s summary of the reasons why New York spends so much on health care for the poor will be familiar in many respects to veterans of New York’s Medicaid wars, but bears repeating and close consideration.

Higher living costs do not account for the high Medicaid spending in New York. The state spends more because of policies that encourage higher spending and discourage cost control. Other states share some of these same problems, but none have such a wide array of perverse incentives. Specifically:* Unlike most other states, New York offers coverage to virtually all optional populations, and covers almost all optional services.

* New York pays physicians less than almost any other state, even though physician therapies are often more cost effective than hospital therapies.

* In contrast to its treatment of physicians, New York pays hospitals generously; whereas in most states Medicaid pays the lowest hospital fees of any payer, in New York Medicaid pays the highest fees of any payer–including private insurers.

* New York does not use smart buying techniques, such as selective contracting with providers, to reduce costs.

* New York spends more than any other state on drugs and pays some of the highest drug prices of any state; the state imposes few restrictions on doctors who prescribe the most expensive drugs, when lower-cost alternatives are often just as effective.

* The political incentives to spend are greater since the New York legislature bears only a fraction of the cost (less than almost any other state); for every dollar the state spends, it can confer $4 of benefits.

* New York does not aggressively pursue fraud–even failing to spend a substantial portion of the federal funding available for antifraud efforts; in 2004, only 37 cases of suspected fraud were uncovered.

* New York’s insurance regulations raise the cost of private insurance, and make (free) Medicaid coverage more attractive.

* While personal and home care substitute for institutional care in other states, New York spends more than most states for all three, and a fourth of all Medicaid dollars spent nationwide for personal care are spent in New York!

So what can be done about it? The NCPA study has some answers for that question, too.

New York can control costs and improve services, by adopting common-sense reforms; by contracting with private sector providers for services; by fundamentally restructuring its program; and by moving patients out of Medicaid and into private sector plans. As part of this reform effort, the state also needs to completely overhaul long-term care and home health services. The common-sense reforms include:* Negotiating discounts for most medical services through selective contracting.

* Treating patients in outpatient settings, such as doctors’ offices, where medically appropriate.

* Paying higher fees to physicians to increase patients’ access to health care and reduce expensive emergency room visits.

* Controlling drug costs using private-sector techniques, including pharmacy benefit managers (PBMs).

* Setting up cash accounts that disabled Medicaid recipients can use to manage their own health care dollars and take direct control over the purchase of needed services.

* Adjusting payments to hospitals to reward facilities that achieve low infection rates and reduce errors.

* Coordinating care to improve its quality and reduce medical errors, such as drug interactions, and instituting disease management, which involves developing treatment plans based on current protocols and training patients how to the follow them.

* Pursuing fraud aggressively by giving local governments the authority to prosecute fraud and financial incentives to recover payments.

While the Legislature seems determined to close down the Pataki era with minimal further change in Medicaid policy, the NCPA study can serve as a vital briefing paper for the candidates who are jostling to succeed him.