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Zack Hutchins
Director of Communications

February 16, 2006

Report warns state must reform Medicaid to avoid budget headache

While capping the growth in county Medicaid costs eased local taxpayer burdens, more needs to be done at the state level to rein in Medicaid spending and prevent a fiscal crisis, according to a new study by the Manhattan Institute’s Empire Center.

“From Headache to Migraine” was written by Tarren Bragdon, a health policy analyst for the Empire Center. The report details why easing the local Medicaid burden strengthens the need for comprehensive Medicaid reform at the state level.

“[S]tate-funded Medicaid costs are projected to increase by $5.6 billion, or 47 percent over the next four years,” the report said. “Of this amount, $2.2 billion—about 40 percent of the total increase—will consist of Medicaid and Family Health Plus expenses formerly borne by the county and New York City taxpayers.”

The report also argues that this shift will increase pressure on Albany to enact real Medicaid reform.

"Shifting more local costs to the state level also increases pressure on state officials to enact the kind of fundamental Medicaid reform they have long resisted," the report said. "Albany's chronic Medicaid headache could soon turn into a raging fiscal migraine—unless state lawmakers do much more to rein in the program's costs."

If nothing is done to reform the Medicaid program, state-funded Medicaid spending will increase annually by 10.2 percent through 2010, the report said. "State funds will be the fastest growing component of Medicaid in New York—a dynamic unmatched elsewhere in the country."

"Incremental cost-containment won't be enough to ensure an affordable future for New York's Medicaid program," the report said. "States such as Florida and South Carolina have adopted more sweeping reforms that encourage Medicaid recipients to take more responsibility for their own coverage in partnership with private insurers. Recent federal changes encourage such approaches."

“Counties and the city can limit their Medicaid payments to Albany to an annual inflation factor of 3.5 percent in 2006, 3.25 percent in 2007 and 3 percent in 2008 and thereafter,” the report said. “The state must assume any growth above those amounts.”

In addition to increased state costs because of the cap, the state is also facing increased enrollment in Medicaid and Family Health Plus programs, the report said.

The state can also expect higher bills because counties and New York City have the one-time option of switching Medicaid payments for a sales tax intercept, the report said.

“The state now collects and processes all sales tax receipts and then remits the applicable county and local portion,” the report explained. “The state sales tax rate is 4 percent with counties and New York City imposing additional sales taxes of 3 to 4.25 percent.”

If counties elect to swap Medicaid payments for a sales tax intercept, the state will keep a fixed portion of all the county sales tax receipts and give the rest back to the county, the report said. “The county, in turn, will no longer make any Medicaid payments to the state.”

The report suggested that counties in which tax revenue is estimated to grow rate equal to or less than the growth of the capped Medicaid payments should consider the sales tax intercept.

"In low sales tax growth counties, the future 'cost' to the county of the sales tax intercept is less than the future increase of capped Medicaid payments."

Twenty-five New York counties should consider the option based on their historic sales tax growth, the report said.

"Counties and New York City will have from April 13, 2007 to September 30, 2007 to decide whether to pursue this option," the report said. "But if 'reverse revenue-sharing' becomes popular, the state-level Medicaid migraine—and the pressure to reduce costs—could grow even stronger."

The report suggested several reforms which would make private insurance more accessible to the working poor, including: