The newly revealed federal probe of Crystal Run Healthcare, a large doctors group in the Hudson Valley, fits a common pattern with Albany scandals: It’s not just about bad behavior but also bad policy.

As reported by the Times Union’s Chris Bragg, Crystal Run won $25 million in state grants — money it seemingly did not need — after the firm and its partners donated $400,000 to Gov. Andrew Cuomo’s campaign account.

The whiff of pay-to-play is unmistakable and should be investigated thoroughly. But people who care about good government should also question why the state was handing out money like that in the first place.

The funding for Crystal Run grew out of a significant but little-discussed change in how the state finances health care capital projects, such as renovating maternity wards, expanding surgery suites or building clinics.

Formerly, the state’s role was mostly limited to offering low-interest loans, which were financed through tax-free bonds floated by the Dormitory Authority. In recent years, however, governors and legislators have increasingly made direct capital grants to hospitals and other providers. The money in question is still borrowed, but it’s taxpayers, not providers, who are on the hook for paying bondholders back.

The dollar amounts are significant even by Albany standards. As documented in an Empire Center report this month, Gov. Andrew Cuomo and the Legislature have approved $3.8 billion in health care capital programs since 2014. On top of that, the HEAL-NY program established under Gov. George Pataki distributed $2.5 billion over the past 12 years.

To justify these enormous outlays, lawmakers and industry groups point to the neediest providers, including 27 hospitals on a Health Department “watch list” with no more than 15 days’ worth of cash on hand.

Yet as they hammer out details of these programs, legislators typically weaken the emphasis on financial need — so that it becomes one of many factors to be considered in awarding grants not a baseline requirement.

Of $1.6 billion doled out in March 2016, for example, the Empire Center found that only about one-quarter went to hospitals on the watch list.

The eligibility rules are written so loosely that even the wealthiest providers can qualify — Crystal Run being a case in point. Founded in 1995, the multi-specialty practice has grown to be one of the largest employers in the Hudson Valley, with 400 physicians and more than 2,000 other employees in 25 locations.

The two grants it received in 2016, totaling $25 million, were officially to pay for construction of a pair of medical office buildings in Orange and Rockland counties. Yet the firm had successfully completed several similar projects with private financing. And indeed, Crystal Run had already broken ground on the new buildings before the grants were announced — creating an appearance that Crystal Run never really needed the taxpayers’ cash at all.

The fact that the firm and its partners had previously contributed $400,000 to Cuomo’s campaign — including 10 donations of $25,000 each over a two-day period in 2013 — certainly raises flags. Yet even without those donations, grants of any amount to any prosperous for-profit firm would have been scandalously unwarranted.

Questions could also be raised about the necessity of other payouts in the same grant cycle, including $7.9 million that went to New York-Presbyterian Hospital, the state’s largest, which reported a $270 million operating surplus the year before receiving it.

Indeed, the practice of distributing capital grants to the health care industry smacks of pork barrel politics — elected officials using tax dollars to curry favor with an influential constituency.

The providers in question are private businesses. Except in unusual circumstances, they should be financing their own capital projects. Having to borrow money — even in the form of state-brokered low-interest loans — imposes a modicum of discipline, in that it discourages providers from pursuing imprudent or wasteful projects.

Grant programs, especially when loosely designed and badly managed, risk having the opposite effect — of incentivizing providers to take risks they wouldn’t otherwise consider as they scramble for a share of the bounty.

The Crystal Run scandal was an all-too-predictable result.

About the Author

Bill Hammond

As the Empire Center’s senior fellow for health policy, Bill Hammond tracks fast-moving developments in New York’s massive health care industry, with a focus on how decisions made in Albany and Washington affect the well-being of patients, providers, taxpayers and the state’s economy.

Read more by Bill Hammond

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