ALBANY, N.Y. — Faced with increased Medicaid enrollment and a cash crunch in New York’s health care system, Democrats in Albany are hoping to use a maneuver they say will allow the state to generate billions of dollars a year, effectively out of nowhere.
The proposal exploits a loophole in the Medicaid reimbursement process that allows states to bill the federal government for billions of dollars.
Here’s how it could work: New York could pass a tax targeting managed care organizations like Aetna and UnitedHealthcare that would force them to pay a hypothetical $1 billion into state coffers. The state would then reimburse the insurers through Medicaid, using $500 million in state funds and an additional $500 million in federal funds, leaving the state with an additional $500 million for its budget.
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Because everything the state spends on Medicaid is reimbursed by the federal government, the loophole creates the opportunity for a legal game in which Medicaid insurers stand out, the state makes money and the federal government loses.
Variations on this trick have been around for years, with 18 states using some type of tax on managed care organizations to increase their share of federal reimbursements. But last year, as California faced major budget shortfalls, state leaders introduced an aggressive version of the plan that narrowly missed and benefited Medicaid insurers, resulting in a staggering circular transaction worth billions of dollars.
Now Democrats in New York are eyeing California’s maneuver and see the move as an easy way to inject billions of dollars into the state’s health care spending as it negotiates the state’s overall budget.
According to the Centers for Medicare & Medicaid Services, New York spends more per capita on health care than any other state in the country, an amount that is only expected to grow due to rising enrollment and demographic shifts.
Government Kathy Hochul has proposed cutting $1.2 billion from the state’s health care budget in its executive budget, much of it from long-term care and related programs, a plan that would nonetheless increase health care spending by about $3 billion.
Democrats in the Legislature have spoken out against these cuts, which are also fiercely opposed by the powerful Greater New York Hospital Association and its allies in the labor market, which have collectively spent hundreds of thousands of dollars on recent lobbying and awareness campaigns.
Hospitals are asking for an increase in Medicaid reimbursements, which they say will help support a crisis in safety net hospitals and ensure Medicaid patients receive better care.
It is not clear exactly how New York plans to use the funds from the Medicaid plan. House Speaker Carl Heastie, a Democrat, said the money would be used for “medical purposes” and suggested some of the money could be withheld to offset future financial risks.
Amy Paulin, chair of the Assembly Health Committee, said she supported the plan because it had the potential to address systemic disinvestment that has left many safety net facilities on the brink of collapse. “We’re in a terrible situation right now, and a lot of that is due to Medicaid underfunding every procedure,” she said.
She added: “The question for me is why would we leave federal dollars on the table?”
There is no guarantee that the federal government will approve New York’s scheme, and some skeptics warn that balancing the budget based on that assumption could worsen financial problems.
Although the Centers for Medicare & Medicaid Services approved California’s tax through 2026, it warned that it viewed the maneuver as a violation of the spirit of the program, saying in a letter accompanying the approval that the agency planned to issue a regulation to propose ‘to tackle the problems’. this issue.”
The Centers for Medicaid & Medicare Services declined a request for comment on New York’s proposal.
But Hochul said Thursday that she believed the federal government was genuinely interested in closing the loophole that California had found, and that she hoped she could convince federal officials to wait until New York could also benefit from it.
“We have been very persistent in asking them to give us the same accommodations before anything is closed,” Hochul said, adding that the effort included communication with the “highest levels of the White House.”
It wasn’t a yes yet, the governor said, “but they heard us.”
Still, the specter of the loophole’s soon closing has only heightened the concerns of some budget watchdogs.
“The best they can hope for is a short-term windfall,” said Bill Hammond, a researcher at the Empire Center who has done in-depth research on the state’s health care spending. “But they’re talking about using it to make changes to the Medicaid rate structure. That would be permanent.”
Andrew Rein of the nonpartisan Citizens Budget Commission agreed, saying, “You shouldn’t use short-term money for long-term needs. That is a recipe for fiscal instability or worse.”
But California lawmakers shared Hochul’s optimism, saying they are not at all confident the money will run out anytime soon.
“That rumor has been around for a while, and CMS has never backed down,” said Sen. Caroline Menjivar, a Democrat who heads California’s health and human services budget subcommittee. She added that California expects to receive $1.5 billion more than the state requested last year.
“That doesn’t mean CMS is going to pull the rug out from under us,” she said.
The biggest concern, Menjivar said, was how the political climate in Washington would change under a possible second Trump presidency.
“Whatever happens in November could change a lot,” she said. “If the federal government changes, it will not consider California a friend.”
The same can certainly be said for New York.
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