NY Legislature Cuts Gov’s Medicaid Cost Reductions

Published June 1, 2006

In his 2006/2007 Executive Budget, Gov. George Pataki (R) proposed to cut the cost of the state’s Medicaid program by about $1.3 billion. However, in its Legislative Budget Agreement of March 31, 2006, the legislature agreed to only about $700 million in savings.

The legislature refused to accept Pataki’s cost-containment initiatives to stop automatic increases in hospital and nursing home rates. Lawmakers also rejected proposals to control the rising costs of prescription drugs. There is widespread agreement among policy analysts, however, that both elements of the Medicaid program are costly and fraught with waste.

The New York Medicaid program is the costliest in the nation, currently covering one in every five residents of the state–an estimated 4 million people.

At a cost of more than $45 billion per year, New York State spends about 43 percent more on Medicaid than Texas and Florida combined, despite having a total population only about half the size of the two states’ together.

Fraud Rampant

The problem that recently has received the most attention is fraud. The extent of Medicaid fraud in New York State was highlighted over the past year by extensive news coverage in The New York Times.

Some of the more egregious cases cited by the newspaper include:

  • a dentist working out of a small Brooklyn storefront who billed Medicaid for 991 procedures in one day;
  • a school in Buffalo that received funds for referring 4,434 students to Medicaid-covered speech therapy without talking to the students or reviewing their records; and
  • a physician who prescribed, over a three-year period, $11.5 million worth of a synthetic hormone popular with bodybuilders.

Officials disagree on the size of the problem. James Mehmet, a former chief state investigator of Medicaid fraud and abuse in New York City, told The New York Times last summer he estimated fraud consumed 10 percent of the state Medicaid budget. That is consistent with national estimates by the Government Accounting Office reported in 1997.

New York Attorney General Eliot Spitzer, by contrast, recently stated he believes fraud represents only about 2 percent of the state’s Medicaid budget.

Leaders Calling for Action

State leaders have been sounding the alarm about Medicaid fraud for some time. New York State Senate Deputy Majority Leader Dean G. Skelos (R-Rockville Centre) said, “14 months ago, I began raising the issue of Medicaid fraud and its importance to New York’s taxpayers.”

In 2005 Pataki signed an executive order creating a state Medicaid Inspector General (IG) to combat fraud. The New York Assembly and Senate are currently working on a compromise bill to create an Office of Medicaid IG by statute. The state Senate wants a much stronger Medicaid IG than the state Assembly wants.

According to Skelos, the Senate bill “is comprehensive reform that fights fraud at every stage of the billing process. The time for debate and delay is over. The Assembly needs to act.”

Others note waste and abuse of the system are an even larger problem than fraud. Mehmet says the use of medically unnecessary services and procedures that probably doesn’t rise to the criminal level siphons off an additional 20 to 30 percent of the Medicaid budget. An office of Medicaid IG would pursue fraud but not waste.

Problems Are Systemic

Fraud, waste, and abuse appear to be a byproduct of the way Medicaid providers are paid.

“The way Medicaid is designed, we were inviting fraud,” said Chemung County Executive Thomas Santulli. He said when health care is free at the point of service, enrollees have little incentive to scrutinize the services they receive (or are billed for on their behalf). Unscrupulous providers find unconcerned patients to be an easy mark for services they may not need.

Though the office of the attorney general is charged with fighting fraud in New York State, the office may not systematically analyze utilization trends that could indicate patterns of fraud until a case is referred by the Department of Health. And until recently, New York counties were not allowed to police the Medicaid providers within their borders, even though counties pay a significant portion of the costs.

In fall 2005, the New York State Department of Health allowed 12 counties to look for unusual patterns in Medicaid billings. After examining just a small portion of the bills, investigators in Rockland County discovered what appeared to be $13 million in questionable charges over less than two years.

Fraud Is Distraction

Experts point out fraud is but one of many problems in New York’s Medicaid system.

“Legislators in both parties have latched on to the fraud issue chiefly as a means of freeing up money to spend on an already bloated program,” said Edmund J. McMahon, director of the Empire Center, a public policy institute that studies New York State finances. “Gov. Pataki’s proposed budget cuts have only scratched the surface of New York’s enormous Medicaid budget problem.”

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