The Public Policy Institute

Misguided Money

Section 1

A health-care system in transition

On January 1, 1997, New York joined 48 other states in deregulating its hospital rate-setting system with the objective of permitting the marketplace to help contain the escalating costs of health care. At that time:

Under New York's former rate-setting system, called the New York Prospective Hospital Reimbursement Methodology (NYPHRM), inpatient hospital rates were set by the state Health Department. The agency provided financial trend factors and other adjustments, dictated by the Legislature, that nearly always guaranteed each year that hospitals would receive higher reimbursement rates than they received the previous year. And periodically the Legislature would enhance hospitals' revenues even beyond the trend factors, by raising rates across-the-board.

Hospital revenues under the last year of NYPHRM in 1996 were generally healthy. Data from the Health Department showed that the overall surplus for New York's hospitals rose 81.5 percent from 1995, going from nearly $380 million to about $690 million. Net patient revenue rose by $1.38 billion from the previous year.(2)

The inefficiencies and waste in New York's hospital system were noted by Governor George Pataki's Ad Hoc Task Force on NYPHRM, which was comprised of representatives from the hospital and medical industry, employers, state and local government officials and insurers. In December 1995, the task force, chaired by Health Commissioner Dr. Barbara Ann DeBuono, recommended that the state deregulate hospital rates.

Part of the task force's rationale for deregulation was that the marketplace would help achieve what government lacked the political will and ability to do by itself--force greater efficiencies and reduce hospital excess capacity. “NYPHRM maintains excess hospital capacity,” the task force wrote. “The absence of economic discipline coupled with pass-throughs and state guarantees for capital financing have provided disincentives to eliminate excess capacity in the hospital industry by subsidizing hospitals that might otherwise scale back or close. It has also held back private-sector capitalization of the hospital system.”(3)

New York's Health Care Reform Act of 1996 (HCRA) deregulated hospital rates. It also reduced (by about $300 million) and restructured some surcharges used to finance various programs for graduate medical education, bad debt and charity care at hospitals, and other health-care initiatives. The surcharges paid under NYPHRM were substantial, and those mandated under HCRA remain high for employers and employees who purchase health-care coverage and who pay for the state's Medicaid program. Through add-ons to hospital bills and insurance premiums, about $2.6 billion in annual subsidies are provided for various health-care initiatives --financed by private insurance taxes, and by the general taxes used to support Medicaid.

1. Health Care Financing Administration and the U.S. Bureau of the Census. Healthcare Association of New York State (HANYS), Vital Signs October 1994: p.44. Hammond, William F., “Hospital Deregulation Gets High Marks in Other States.” Sunday Gazette [Schenectady] December 10, 1995. Governor George E. Pataki's Ad Hoc Task Force on New York's Prospective Hospital Reimbursement Methodology. New Directions for a Healthier New York: Reform of the Health Care Financing System, December 1995.

2. Department of Health comparison of 1995 and 1996 adjusted revenue and expenses: Summary computer printout, Jan. 7, 1998.

3. Governor's Ad Hoc Task Force on New York's Prospective Hospital Reimbursement Methodology.

contents Intro Section2 Section 3 Section 4 Sectin 5

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