The Public Policy Institute

Misguided Money

Section 4

Billions more in unanticipated hospital subsidies

When HCRA was enacted, it had the support of the business community because of the prospect that the marketplace would force greater efficiencies in the system. During the HCRA debate fears were raised of multiple hospital closings and mass layoffs, but that result did not come to pass. “No worst-case scenarios have developed,” a hospital industry spokesperson told The Sunday Gazette. “The not-for-profits look pretty darn good right now, thank you very much.”(25)

Deregulation of rates was clearly a positive step, according to policy makers, business leaders and even hospital officials. However, the wisdom of continuing large subsidies for hospitals is far less clear. Besides reporting good results from negotiated rates and being the beneficiaries of the bulk of HCRA taxes, hospitals are reaping unexpected windfalls, as a result of unanticipated actions by both federal and state governments since HCRA's enactment.

A $400 million federal 'farm' subsidy to train fewer doctors

“The federal government has long paid farmers to grow fewer crops. Now it is paying $400 million to 41 New York hospitals to train fewer doctors.” That's how The Associated Press opened its report that the Health Care Financing Administration (HCFA) had agreed to pay New York hospitals $400 million over the next six years in exchange for the hospitals' agreement to reduce the number of doctors they train. Hospitals receiving the money will train 2,000 fewer medical residents than they train now.(26)

New York currently trains 15.1 percent of the nation's doctors, which makes it the country's leading producer of new physicians. The federal subsidy for teaching hospitals was a proposal made by the Greater New York Hospital Association (GNYHA) in the summer of 1996, and it received approval from the HCFA in February 1997. Announcement of the program was made in Manhattan with champagne toasts” between hospital executives and federal officials, according to The New York Times' coverage of the event. Since then, Congress has extended a similar subsidy program to other states.

“The hospitals' executives said the program would allow them to wean themselves from their dependence on the cheap labor of residents rather than having to go cold turkey,” The New York Times reported. “Hospitals currently receive up to $100,000 a year from Medicare for each resident and pay these doctors-in-training $40,000 for a 90-hour work-week. So residents often do tasks that could be performed by less highly trained personnel or sometimes even machines.”(27) The additional federal support for the teaching hospitals is on top of the $1.4 billion in annual GME assistance financed through HCRA.

A $1.25 billion subsidy to adapt to managed care

New York State hospitals also are getting $1.25 billion in unusual federal assistance over five years to help them adapt to the state's plan to place 2.4 million Medicaid recipients into managed-care programs.(28) Major beneficiaries of the $1.25 billion subsidy are teaching hospitals that are also receiving $400 million from the special federal Medicare subsidy program to train fewer doctors, in addition to the $4.155 billion, three-year HCRA subsidy for graduate medical education.

The federal government is expecting to save money as a result of allowing New York to implement the mandatory shift of the Medicaid population away from fee-for-service medicine to managed care. Part of the deal reached with the Clinton Administration was for the federal government to share a portion of the projected savings--$250 million annually for five years--with the hospitals, a package that amounts to an unanticipated source of added revenues for about 80 eligible hospitals across the state.

Called the Community Health Care Conversion Demonstration Project, the federal aid package will be used by hospitals to set up and operate primary care facilities such as community health clinics for Medicaid patients and to retrain workers. To be eligible for the special federal aid, hospitals must have a total of 5,000 patient discharges per year and 20 percent of the patients they admit must be either Medicaid or self-pay individuals.(29)

Critics of the deal told The New York Times that the federal hospital aid package represented “a wasteful taxpayer bailout of an inefficient system that has stubbornly refused to adapt to changes in the marketplace. They say that the money, like subsidies to other struggling industries, from tobacco farming to military contracting, could help keep health-care costs artificially high. And they questioned why it was given exclusively to hospitals and not the scores of nonprofit community clinics that have become the main providers of primary medical care in many of the state's poorest communities.”

“The Government is helping these hospitals adapt, which is really not the responsibility of the Government,” said Kenneth S. Abramowitz, a health-care analyst at the Sanford C. Bernstein & Company securities firm. “These organizations should have adapted on their own. This just prolongs the agony.” Critics of the Medicaid package “maintain that allowing a few hospitals to close would yield much-needed savings in the industry by eliminating fixed costs like the maintenance of aging buildings, among other things.” The New York Times reported.

“Jeff Goldsmith, a health-care analyst with Health Futures Inc. in Charlotte, Va., contends that hospital closings will free money that can be invested in building primary care networks. That is why he questions the decision to pump yet more public money into hospitals that are already too dependent on such financing. 'I think this is a questionable investment of public money,' he said. 'This is like crops support.'”(30)

A gross receipts tax cut; a children's health program

A state gross receipts tax on hospitals and other health-care facilities was repealed as a result of actions taken by Governor Pataki and the New York State Legislature, and supported by The Business Council. While repeal of a state tax is not a government subsidy, it does represent significant savings not contemplated when the HCRA taxes were created in 1996. “For hospitals, this will double their bottom line, and since they are nonprofits, that money will go back into the community,” a hospital executive told Newsday when the agreement was reached.(31)

Hospital executives had nicknamed it the “sick tax,” a 0.7 percent tax on gross receipts collected by health-care providers and paid by patients and their health plans. Citing Pataki Administration estimates, Crain's Health Pulse said the savings to hospitals amount to $154 million annually.(32)

New York State hospitals may see about $335 million in additional revenues within five years for their services as a result of the federal subsidy program for children's health insurance programs.(33)

Most of the $1.29 billion earmarked as the state's share of the five-year, $24 billion federal program expands New York State's Child Health Plus program that provides children of needy families with free or low-cost health-care coverage. Starting in the fall of 1997, the Child Health Plus program benefit package was enhanced to include inpatient hospital services for the first time. An estimated 26 percent of the premiums of participating health-care plans pay for hospital services, including inpatient care, emergency room visits and outpatient treatments for such services as radiology, chemotherapy and surgery. The GME tax is also built into the premiums. Hospitals primarily benefit from the federal subsidy because the children who are served by it would likely be bad debt or charity cases without the coverage.

Other new sources of revenue are likely to benefit some of New York's teaching hospitals. A $2 billion boost approved by Congress in next year's funding of the National Institutes of Health budget could increase New York's share by about $200 million to about $1.2 billion, according to the Greater New York Hospital Association as reported in Crain's Health Pulse. GNYHA, with about two dozen hospitals and universities, formed the Academic Medicine Development Corp. to jointly apply for a greater share of federal research funding.(34)

25. Hammond, William F., Jr. “New York Hospitals Surviving Deregulation,” The Sunday Gazette [Schenectady] June 21, 1998.

26. Associated Press and Staff Reports. “Hospitals Paid to Train Fewer Doctors.” Daily Gazette [Schenectady, NY] February 19, 1997.

27. Rosenthal, Elizabeth. “U.S. to Pay New York Hospitals Not to Train Doctors, Easing Glut.” The New York Times. February 18, 1997.

28. “Terms and Conditions Associated With The Community Health Care Conversion Demonstration Project.” Attachment J of the Approved NY Partnership Plan Terms and Conditions, July 15, 1997.

29. Hernandez, Raymond. “New York Accord on Hospitals Aid Sets Off Debate,” New York Times July 28, 1997.

30. Ibid.

31. Gordon, Craig and Slackman, Michael. “Health Providers Close to a Victory: Albany Budget Likely to Aid Hospitals." Newsday [Huntington Station] July 29, 1997.

32. “Gross Receipts Tax Removal a Trade-Off,” Crain's Health Pulse [New York] Aug.. 7, 1997.

33. United States. Congressional Budget Office. Annual State Allocations for Children's Health Insurance. Chart. Washington: GPO, 1997. U.S. House Commerce Committee Chairman Tom Bliley released the allocations for the children's health initiative enacted as part of the Balanced Budget Act of 1997. About 26 percent of the state's Child Health Plus Program premiums are spent on hospital services. Child Health Plus is an approved program to receive $1.29 billion over the next five years and is expected to also benefit hospitals.

34. “More Research Dollars,” Crain's Health Pulse [New York] Oct. 20, 1998.

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