Paying for Medicaid: A Good Idea Whose Time Has Not Yet Come
Gerald Benjamin, SUNY New Paltz, and Thomas Gais, Rockefeller Institute of Government
Republican Congressmen John Faso wants the federal government to require that New York State assume all of the nonfederal share of Medicaid costs incurred outside of New York City. He conditioned his support for the previous, failed efforts to repeal and replace Obamacare on inclusion of this requirement in the federal law; the Graham-Cassidy bill is said to include the requirement. New York City and the counties now pick up 13 percent of the total state tab ($58.8 billion in Fiscal Year (FY) 2015). The cost for New York City is $5.2 billion. The total at stake for counties outside the city is $2.3 billion. Not chump change.
The proposal outraged Governor Andrew Cuomo. He called it a “political Ponzi scheme,” evidence that the congressman violated “his oath of office to represent the interest of the people of the state of New York.…”
Neither Cuomo’s rage nor the failed GOP takedown of Obamacare has deterred Faso. He has vowed to find another path to force full state assumption of the nonfederal share of Medicaid costs in upstate New York. Indeed, the Sturm und Drang of zero-sum national partisan politics aside, the congressman’s idea may be good public policy, or at least a start towards good policy. But there remain a number of big, unanswered questions. If full state assumption is good for counties outside New York City, why not also for the city itself? Should the national government be dictating the financial relationships a state has with its local governments? And if so, why just for New York?
A Ponzi Scheme? If So, Others Have Tried It
Over the last half century, reducing or removing the Medicaid burden from local government has been a goal of one Democratic constitutional convention and two Democratic governors:
- In 1967, constitutional convention delegates — a majority of whom were Democrats — adopted a provision requiring a state takeover of all nonfederal Medicaid costs, phased-in over five years.
- In 1981, Governor Hugh Carey, a Democrat, proposed a state takeover with a slightly longer (seven year) phase-in.
- Two years later, in 1983, Governor Mario Coumo proposed a partial takeover, designed to ultimately leave counties with 10 percent of the total cost.
And, in fact, the state has assumed a greater burden for certain expenses and populations.
- Later in 1983, the state under Mario Cuomo’s administration did assume a greater share of long-term care costs (then the fastest growing program element, accounting for 46 percent of total Medicaid costs). Full state assumption of the local matching requirement for a number of specific populations followed.
- In 2004, the state took full responsibility for the nonfederal share of the Family Health Plus Program.
- In 2005, Republican Governor George Pataki advocated for, and achieved, a capping of annual growth in the county share of Medcaid costs at 3 percent.
- Governor Andew Cuomo’s 2012 -13 state budget took over the growth in the local share of Medicaid costs and began a phased takeover of local government Medicaid administration expenses. The result was that in 2015-16 and after, all counties and New York City would no longer have to contribute toward the growth of Medicaid expenses.
Each of these changes brought a measure of fiscal relief to counties for a time. But the fiscal pressures returned as the Medicaid program grew in its scope and reach. Upstate voters were aroused as county Medicaid bills drove up local property taxes. Pressed for revenue to pay their bills as Medicaid shares approached their total property tax receipts, county governments sought and gained additional sales tax authority. Most recently, counties have argued that, notwithstanding state actions to provide fiscal relief and, paying for growth in Medicaid costs is unsustainable, especially when state law caps increases in their property tax revenues at 2 percent.
But full state assumption is not a good idea just because it relieves fiscal pressure on counties. It’s widely regarded as sound public policy, more equitable, and more likely to lead to better program administration.
A Historical Legacy
Significantly, the idea of a county share for meeting the federal matching fund requirement in the Medicaid program is not a result of thoughtful program design. Rather, it is an historical legacy. The current practice for administering and paying for Medicaid in New York is rooted in centuries of reliance on localities for addressing poverty. When it was first implemented in New York in 1966, Medicaid was assigned for administration to the Department of Social Services, the agency responsible for public assistance; the program was not transfered to the state Health Department until 1996. Medicaid’s pattern of shared state/local financing of the nonfederal program costs was modeled on how New York financed national social welfare programs that required a state match. Upstate counties embraced this arrangement because the preponderance of Medicaid expenditures (70 percent) was expected to be in New York City. Full state funding, they thought, would therefore be far more redistributive of upstate resources to meet downstate needs than the familiar state-local sharing arrangement in place for other assistance programs.
Time for Reconsideration?
But Medicaid expanded greatly in eligibility, service coverage, and expenditures since that arrangement was first established. And a growing share of expenditures occurred outside of New York City — up to 39.3 percent in 2014, partly due to the aging upstate population. There were also broader, statewide reasons for reconsidering the county share. The 2011 study by the the Citizens Budget Commission (CBC), previously cited, entitled A Poor Way to Pay for Medicaid: Why New York Should Eliminate Local Funding For Medicaid, noted that the state’s method for sharing program costs had two major deficiencies: it was regressive, and it offered little incentive for efficient administration. The Commission found that, “Since areas with higher poverty rates and lower median household incomes generally experience higher Medicaid costs, there is a direct positive relationship between the poverty rate and local Medicaid costs, and an inverse relationship between average household income and local Medicaid costs.” Regarding administration of the program, the CBC said: “The local Medicaid payment policy misaligns incentives to control costs. Under the current structure, counties do not set eligibility standards or control other significant Medicaid cost drivers, yet they perform key administrative functions.… The cap on local Medicaid payment growth, instituted in 2005, means that counties realize little or no benefit from any savings they implement.”
With regard to administration, scholars have commented with regularity on New York’s “fragmented, decentralized Medicaid bureuacracy.…” One 2006 study prepared for the Medicaid Institute of the United Hospital Fund counted “[m]ore than a dozen State entities, 57 counties and the City of New York, and private contractors … sharing responsibility for Medicaid administration.” The aforementioned cap on county costs adopted in 2005 left unchanged the considerable local administrative responsibility for the Medicaid program.
Passage in Washington of the Patient Protection and Affordable Care Act (ACA, or “Obamacare”) in 2010 significantly increased state administrative responsibility for health policy in general, and Medicaid in particular. Almost simultaneously, the legislature in Albany mandated a five-year plan to implement state assumption of Medicaid administration, and the newly elected Governor Andrew Cuomo created the Medicare Redesign Team initiative to “fundamentally transform … [New York’s] … Medicaid program into a national model for cost effective health care delivery.” A larger state role in program management was an important element of this effort. Yet despite these moves to centralize administration at the state level, a big part of financing the program remains with the counties. The logical next step is full state funding. Colocation of administrative and financial responsibility for Medicaid in the state would complete the reform process.
Wrong Assumptions Behind a Federal Mandate
Despite the reasonableness of the basic principle of a state takeover, however, Congressman Faso was almost certainly wrong that a full state takeover of Medicaid costs would produce the property tax relief he said was his prime motivation in proposing it. And Governor Cuomo was also almost certainly wrong in suggesting that such a takeover would result in a massive state tax increase.
Instead, the state assumption would likely be financed by a take back of sales tax revenues, authorized for the counties in part in the first place to help cover Medicaid costs. The sales tax is, in effect, a shared broad-based revenue source to fund state and local costs for social programs. New York State first enacted a 2 percent state sales tax in 1965; it was accompanied by authorization of upstate cities and counties to levy up to another 2 percent at their discretion. (Eight counties and five cities already had a sales tax; New York City’s had to be cut back from 4.5 to 3.0 percent, with alternative revenue sources provided, to facilitate passage of the 1965 law.) The explicit justification was to provide a new state-local shared resource to pay for rising social program costs without increasing demands on local property taxpayers. (In fact, all or most of the fourth local sales tax penny on a dollar—a tax reauthorized in 2017 special legislative session for three years in some counties—is dedicated to covering Medicaid expenses.)
The average sales tax rate levied by counties in New York outside New York City in 2016 was 4.48 percent. By one calculation, it would require a take back of 1.2 percentage points, on average, to make the state whole. But the ratio of sales tax revenues to Medicaid costs varies from county to county, as do the proportions in which county sales tax revenues are shared with the other local governments within them. So the state, which already collects the sales tax for all recipients, would have to develop a methodology for retaining an additional portion of these revenues for itself to cover its added Medicaid costs on a county-by-county basis. Difficult, but not impossible.
There would be many major administrative challenges to a full state takeover of the Medicaid program. A few examples: county employees might have to become state employees, with all the compensation, accrued benefits, and human resource management complexities this would entail; methods for compensating counties for the direct and indirect cost of using county facilities, if this continued, would have to be determined; effects on assessments of county finances — for bond ratings for example — would have to be anticipated and, if negative, avoided.
The Medicaid Takeover/Sales Tax Giveback Tradeoff
Counties won’t give up sales tax revenue easily. An option to do so was offered in 2005 as an alternative to capping local Medicaid share increases. It was considered seriously in Monroe County, but not taken up there or anywhere else in the state. A significant portion of the sales tax is paid by visitors; it grows with the economy; and, most of all, it is not the hated property tax.
There is always the experience-driven fear that, even with Medicaid out of county budgets, other big ticket county costs will rise — e.g., for pension contributions and health insurance premiums for public employees. With a lower sales tax base these might have to be met from the property tax — with the added political risk of needing to override the property tax cap to do so.
Nonetheless, giving some sales tax money to get out of the Medicaid payment business, especially the annual Medicaid cost increases, would likely still leave counties with what is, on balance, a positive outcome. What it won’t do is produce significant property tax cuts.
Why Leave Out New York City?
If a state takeover is a good idea for the 57 counties outside New York City, why not for the city too? That’s a $5.4 billion question. If funded from general state resources, without a sales tax giveback, the effect would be to shift city program costs to the rest of the state. The city collected $8.23 billion in sale taxes in 2016. However, if enough is retained by the state to cover the Medicaid costs it assumes in the the same manner as for other counties, then that seems okay too. Full state assumption of Medicaid costs makes sense for all of New York, not just counties outside New York City. The Faso-Collins amendment does not do the full job.
A National Issue
These deficiencies in the amendment also lead to a broader, national question: To what extent should the federal government legislate the details of how states and their local governments raise funds for their Medicaid programs, and for what purposes?
Medicaid gives states much flexibility in determining which sources of funds to use in financing their nonfederal share, though it does impose limits. For the most part, the federal interest has been to restrict states’ use of local government and healthcare provider pass-throughs to maximize federal financial support for states’ Medicaid programs. A state, for example, may obtain funds from a local government, such as a county or city, including its public hospitals, through “intergovernmental transfers” (IGTs). In some cases, the state would receive the IGTs, apply those funds to pay its nonfederal share, draw down federal Medicaid money, and employ various means to reimburse the local governments for their initial contributions — using, to some extent, the federal money obtained in the process.
These and other arrangements have generated a complicated financing system for Medicaid. In 2012, for example, the U.S. Government Accountability Office found that only 69.5 percent of the nonfederal share of Medicaid expenditures came from state revenues, while 15.5 percent came from local governments, 10.5 percent came from taxes on healthcare providers, and 4.6 percent from other sources — and that these latter, nonstate sources were growing as a share of nonfederal revenues. Many of these sources and financial pathways are viewed as legitimate and reasonable by most policymakers. But some practices involving reimbursements by states to local governments (and healthcare providers) are controversial. Over the years, Congress has tried to stem the more egregious practices involving reimbursements, yet it has refused to ban them altogether.
Congress has, in brief, been reluctant to strictly regulate how states secure their nonfederal share of Medicaid funding, even when the practices appear to be aimed at maximizing federal funding. This makes singling out New York State particularly problematic. Medicaid mandates that states cover certain mandatory populations and services, and it requires that states pay a specific share of the costs. But Medicaid also gives states many options regarding additional populations and services and it has generally allowed states a great deal of flexibility in deciding how to finance this huge and growing program. Such flexiblity can and has been abused, but Congress has treaded carefully in addressing the problems — perhaps in part because of the complexities and pressures states face in financing their shares.
The Faso-Collins amendment, though applicable to only one state, struck at this longstanding feature of Medicaid — as a shared federal-state program that provides a core set of health services to poor people, one that gives states the responsibility to pay a substantial share of the costs yet offers states significant discretion in deciding how to pay their shares. Such arrangements are often called “cooperative federalism,” and Medicaid is one of its most successful and enduring examples.
As members of Congress continue to work on new healthcare legislation, they need to keep in mind how hard it is for the federal government to get things right when it involves regulating the great diversity of state and local government finances. Even a smart, conscientious federal legislator like Representative John Faso — one who immerses himself in policy and is deeply experienced in New York State government — may find himself acting for laudible ends while at the same time undermining valued core intergovernmental principles.
Full state assumption of Medicare is a good policy for New York. But it needs to be full state assumption for all of the state, by the state. It’s been a goal of several administrations, and progress has been made. But it’s a large and complicated task. Achieving this end via federal coercion is likely to be based on false premises; it takes a big bite out of states’ authority over their own basic operations, including their revenue systems and relations with local governments; it could inhibit states’ abilities to make revenue adjustments in the future in response to changes in health, the economy, and state and local fiscal problems.
The frustrations of decades of failure notwithstanding, it remains wise to leave with the states, and their local governments, much of the responsibility to improve their own internal financial arrangements. They know the facts, they will have to live with the consequences, and they may well need to make adjustments in response to the many other factors affecting state and local finances.
 A description of the text of Graham-Cassidy includes a reference to the Faso provision. See “Graham-Cassidy Section by Section”, at https://www.lgraham.senate.gov/public/_cache/files/7836a765-a813-4e74-b5f4-fc23d3a1c787/section-by-section-final.pdf. However, the provision is not found in the actual text of the amendment (substitute for H.R. 1628) on Senator Lindsey Graham’s webpage. See https://www.lgraham.senate.gov/public/_cache/files/06822f49-b801-4d9f-95f5-d7b5406e9aa9/lyn17709.pdf. Messages to the Senator’s office to explain the discrepancy have not yet been answered.
 We thank Melinda Elias at the Independent Budget Office and Tracey Hitchens Boyd of the New York State Comptroller’s Office for obtaining NYC’s FY 2015 contributions to the state toward the city’s local share of Medicaid spending.
 Information on counties’ FY 2015 contributions to Medicaid are available at the Office of the New York State Comptroller, “Financial Data for Local Governments” (Level 2 data for counties), at http://www.osc.state.ny.us/localgov/datanstat/findata/index_choice.htm.
 1967 Draft Constitution Article X §16.
 A Poor Way to Pay for Medicaid: Why New York Should Eliminate Local Funding for Medicaid (New York: Citizens Budget Commission, December 2011): 7, https://cbcny.org/sites/default/files/media/files/A%20Poor%20Way%20to%20Pay%20for%20Medicaid.pdf. See also Deborah Bachrach and Mira S. Burghardt, Understanding the New State/County Paradigm: The 2005 New York State Medicaid Cap Legislation (New York: United Hospital Fund, November 2006): 3, https://www.uhfnyc.org/publications/434594.
 Derived from data from the New York State Department of Health, “Medicaid Quarterly Reports of Beneficiaries and Expenditures by Category of Eligibility and Social Service District: 2014, Calendar Year,” https://www.health.ny.gov/statistics/health_care/medicaid/quarterly/ssd/.
 A Poor Way to Pay for Medicaid, 12.
 Ibid, 17.
 Michael K. Gusmano, Courtney Burke, and Frank J. Thompson, “Health Care Politics and Policy in New York State,” in The Oxford Handbook of New York State Government and Politics, ed. Gerald Benjamin (New York: Oxford University Press, 2012): 599-634, see614.
 Deborah Bachrach, Karen Lipson, and Kalpana Bhandarkar, Administration of Medicaid in New York State: Key Players and Their Roles (New York: United Hospital Fund, November 2006), https://www.manatt.com/getattachment/b2926449-cc2d-4bb7-8463-e81d8531b71b/attachment.aspx
 A Plan to Transform the Empire State’s Medicaid Program: Better Care, Better Health, Lower Costs — Multi-Year Action Plan (Albany: New York State Department of Health, 2011): 5, https://www.health.ny.gov/health_care/medicaid/redesign/docs/mrtfinalreport.pdf.
 See, for example, Making New York the Healthiest State: Annual Report 2015 (Albany: New York State Department of Health, 2015): 17, https://www.health.ny.gov/press/reports/docs/2015_annual_report.pdf for a discussion of the state assumption of administration of Medicaid transportation costs.
 See A4001 (2017) Section 1. Subparts F, X, CC, for Chatauqua, Livingston, and Niagara Counties.
 Bill Hammond, “Parsing a NY Medicaid takeover,” NY Torch: A Public Policy Blog, Empire Center, March 27, 2017, https://www.empirecenter.org/publications/impact-of-medicaid-takeover-would-vary/.
 State reimbursements to local governments occur in several ways, the most common being through “disproportionate share hospital” (DSH) and “upper payment limit” (UPL) payments to government-owned or operated healthcare providers. These are legal payments. DSH payments go to hospitals serving large shares of low-income people; UPL payments give healthcare providers that serve Medicaid recipients larger reimbursements for those services, up to Medicare’s higher payment rates. Both types of payments have legitimate purposes. Even after the ACA expanded Medicaid and increased health insurance coverage, many low-income individuals are still not fully covered — and Medicaid’s payment rates to healthcare providers are low, often much lower than Medicare’s. See James Cosgrove, Medicaid Financing: Long-Standing Concerns about Inappropriate State Arrangements Support Need for Improved Federal Oversight, Testimony Before the Subcommittee on Health, Committee on Energy and Commerce, House of Representatives, GAO-08-650T (Washington, DC: U.S. Government Accountability Office, April 3, 2008), http://www.gao.gov/assets/120/119542.pdf; Medicaid Financing: States’ Increased Reliance on Funds from Health Care Providers and Local Governments Warrants Improved CMS Data Collection, report to Congressional Requesters, GAO-14-627 (Washington, DC: U.S. Government Accountability Office, July 2014), http://www.gao.gov/assets/670/665077.pdf.
 Medicaid Financing: States’ Increased Reliance.
 For a recent discussion of Medicaid’s strengths, see Michael Sparer, “The Best Replacement for Obamacare Is Medicaid,” New York Times, May 18, 2017, https://www.nytimes.com/2017/05/18/opinion/obamacare-repeal-medicaid.html?_r=0.