Fraud and Waste Infect New York Medicaid

Published September 1, 2005

New York State’s Medicaid problems are the worst in the nation, but they exemplify troubles that plague the entire system: lack of control over costs and fraud.

The extent of Medicaid fraud in New York State was highlighted in July by extensive news coverage in The New York Times and other publications. A dentist operating out of a small Brooklyn storefront billed Medicaid for 991 procedures in one day in 2003. Similarly, in a single day a school in Buffalo received funds for referring 4,434 students to speech therapy–without actually talking to them or reviewing their records. Over a period of about three years, a physician prescribed $11.5 million worth of a synthetic hormone popular with bodybuilders.

Countless Questionable Claims

James Mehmet, former chief state investigator of Medicaid fraud and abuse in New York City, told The New York Times on July 18 that fraud equals about 10 percent of total Medicaid dollars spent each year. In addition, the use of medically unnecessary services and procedures that probably doesn’t rise to the level of criminality siphons off an additional 20 to 30 percent, he said.

“So we’re talking about 40 percent of all claims [that] are questionable,” according to Mehmet. All told, nearly $18 billion of the New York Medicaid budget is spent on fraudulent or medically unnecessary services and procedures, Mehmet said.

Doctors, drug makers, hospitals, and their unions have all fought attempts to provide tighter oversight of Medicaid spending. “All of the emphasis of the coalition in New York has been on expanding the size of the program, and that’s where the payoff is for politicians,” said Stephen Malanga, a senior fellow at the Manhattan Institute.

Any attempts to rein in spending on unnecessary, wasteful medical services are fought bitterly by those profiting from such waste. As a result, the state has failed to experiment with reforms that other states have used successfully. “There’s been little emphasis on reform or eliminating waste, so that even as the program has grown to become the largest in the nation, the state office that investigates fraud and waste in Medicaid has been shrinking,” Malanga said.

Runaway Costs

New York’s Medicaid program is the largest and most costly in the nation. Although the state accounts for less than 7 percent of the U.S. population, nearly 14 percent ($45 billion) of Medicaid funds nationwide will be spent there in 2005 on more than 4 million enrollees, according to the National Governors Association.

Per capita, New York Medicaid spending is 130 percent more than the national average, according to the Public Policy Institute of New York State. The state spends $10,788 per Medicaid enrollee–more than $43,000 to insure a family of four. New York spends more on almost every service category than comparable states: hospitalization, long-term care, and in-home and personal care.

New York spends about as much on Medicaid as do California and Florida combined, despite having only about a third of their combined population. The federal government pays 50 percent of New York’s Medicaid costs, and the state shifts nearly one-third of its remaining costs to the counties.

“New York spends far too much on Medicaid. We can cut costs sharply and still improve quality dramatically,” said Robert Ward, director of research for the Public Policy Institute of New York State. According to The New York Times, Medicaid has become “an economic engine that fuels one of the state’s biggest industries.”

High Use of Services

New York Medicaid spent about $10 billion on inpatient care in 2003. That was nearly three times the national average on a per-capita basis. Experts suggest one reason New York City relies heavily on hospitals is due to the large number of medical schools, teaching hospitals, and research centers located within the state. In addition, labor unions representing hospital workers influence the political process to keep funds rolling in.

Nationally, Medicaid pays for two-thirds of all nursing home patients. In New York, the figure is nearly eight in 10 (78 percent). More than 17 percent of the Medicaid money spent on long-term care in the United States is spent in New York.

New York also spends more than other states on programs whose purpose is to allow people to avoid nursing homes: 13 percent of New York Medicaid enrollees utilize personal care, and 8 percent use home care, compared to an average of 11 percent and 2 percent, respectively, nationwide.

High-Cost Enrollees

Medicaid spending on elderly and disabled enrollees is 10 times higher than spending on children. But New York Medicaid excludes the elderly and disabled– representing about 72 percent of Medicaid spending–from its managed care program. At an annual cost of more than $20,000 per enrollee, these are precisely the patients whose costs might be lower under managed care.

About 30 states have a formulary of preferred drugs, but New York does not. New York only recently began encouraging the use of generic drugs, but doctors can still easily substitute higher-priced brand drugs. The New York state program provides few incentives for enrollees to reduce spending. States that have adopted drug formularies have substantially lower costs.

National Problem

The cost of Medicaid rose rapidly nationwide during the past decade. Generous federal matching funds enticed many states to expand enrollment. The number of enrollees increased by more than one-third between 2000 and 2005 to just over 50 million people.

As a result, according to recent press accounts, many new enrollees are dropping private coverage to sign up for free care. Michael Cannon, the Cato Institute’s director of health care studies, said, “Medicaid encourages recipients to become dependent on government; encourages people to behave in ways that increase the cost of government and of health care, which makes self-reliance more difficult for their neighbors; and encourages state policymakers to get more people to behave that way.”

Worried State Governments

Escalating Medicaid costs, which account for about 22 percent of state spending, are high on state budget directors’ minds. If it remains unreformed, Medicaid threatens to take every state tax dollar and will bankrupt every state in as little as 20 years.

The National Governors Association met in Iowa in July to discuss reform measures. Among its list of proposals was one that called for increased flexibility for state Medicaid programs.

One problem with most reform proposals is that each state runs its own program, and no proposal will work for all 50 states. Although states share many of the same problems, a one-size-fits-all solution does not exist. Currently, the federal government sets the rules and provides matching funds, which range from 50 to 77 percent.

A solution many experts favor is a no-strings-attached federal block grant. States would have the flexibility to tailor their programs as they see fit and experiment until they discover what works best. President George H.W. Bush proposed this in 1993, and Congress introduced it again in 1995. To control federal Medicaid costs, states should be required to live within their means. Doing away with the convoluted system of matching funds would provide states with the ability–and, ideally, the incentive–to fix the problems in their Medicaid programs.

Devon M. Herrick, Ph.D. ([email protected]) is a health economist and senior fellow at the National Center for Policy Analysis.

For more information …

An article by Jeanne M. Lambrew of George Washington University, “Making Medicaid a Block Grant Program: An Analysis of the Implications of Past Proposals,” published in January 2005 in the Milbank Quarterly, is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to, click on the PolicyBot™ button, and search for document #17624.

The New York Times coverage of Medicaid fraud is available on its Web site, for a per-article fee, at Enter “Medicaid fraud” in the home page search box.