Paterson Sets a Showdown on Hospitals

After infuriating teachers unions with a plan to cap property taxes, Governor Paterson has opened a second front in a brewing budget battle by proposing a round of spending cuts that is aimed squarely at the state's health care industry.

After telling New Yorkers to prepare for "painful" cutbacks necessary to close a budget gap that has soared past $6 billion, Mr. Paterson stung hospitals, nursing homes, and insurance companies with an emergency budget plan that slashes Medicaid reimbursement rates and imposes more than $100 million in additional fees.

The governor recommended a total of $1 billion in cuts for the current fiscal year and $1.6 billion for the next year in a proposal to lawmakers that would also reduce funding to the City University of New York, shrink aid to local governments, including New York City, and scale back pork-barrel spending.

"I want to change the culture of how New York State views deficits," Mr. Paterson told reporters in a conference call announcing the cuts, saying he wanted New York to serve as a model for other states grappling with their own budget woes. With "just a little bit of sacrifice, we can get out of this situation," he said.

More than half of the cost-saving measures entailed cuts or fees imposed on health care institutions, a proportion that drew an outcry from officials in the industry who vowed to fight back with an aggressive lobbying and grassroots campaign similar to the one Governor Spitzer faced in 2007 when he attempted and failed to impose similar cuts.

"This is beyond anything we've seen before in our collective memory," a spokesman for the Healthcare Association of New York State, which represents hundreds of hospitals and nursing homes around the state, William Van Slyke, said.

"I know the fiscal condition of our hospitals intimately. There is no way that all of this money can be pulled out of them without pushing hospitals into bankruptcy," the president of the Greater New York Hospital Association, Kenneth Raske, said.

He said hospitals would be forced to lay off employees and scale back services, and that it was "highly discriminatory" for Mr. Paterson to recommend that the health care industry bear the brunt of the budget axe while leaving public education funding unscathed.

Mr. Paterson proposed reducing Medicaid spending by $500 million this fiscal year and $1 billion next year, although he stopped short of calling for any restructuring of the entitlement program. The state-financed portion of Medicaid, which consumes a larger piece of the budget than any other area aside from education, is expected to grow to $11 billion next year from $9.2 billion.

Mr. Paterson recommended no cuts to state education aid, which is estimated to grow by nearly $2 billion to $23 billion next year.

His plan would slash rates that hospitals and nursing homes are reimbursed for treating Medicaid patients as much as 7% over the next two years, would eliminate cost-of-living adjustments, and would force hospitals to pay a higher assessment on their revenues.

The annual "covered-lives assessment" paid by insurance companies would also increase by $120 million to $1.04 billion.

A spokeswoman for the New York Health Plan Association, Leslie Moran, said the higher assessment would be passed to consumers in the form of a flat fee added to the cost of individual insurance policies. In New York City, families buying health insurance would pay about $600 a year more and individuals would owe nearly $200, she said.

Mr. Paterson introduced his plan in the middle of campaign season and eight days before lawmakers are set to return to Albany for a special session at which they will consider a separate bill that would impose a 4% on property tax increases levied by suburban and upstate school districts. A tax cap is fiercely opposed by the teachers unions because it would put pressure on school districts to shrink their budgets.

In its emphasis on squeezing state aid out of Medicaid rather than public education or public employee costs, the proposal was seen as a preview of the executive budget that Mr. Paterson will deliver to lawmakers in January.

It also provided a flavor of Mr. Paterson's flexible negotiating tactics. As tough as his tightening measures were, Mr. Paterson said he does not expect lawmakers to rubber-stamp his proposal but said he would accept a smaller and alternative deficit-reduction package totaling 60% — or $600 million for the current year.

The relaxed approach took heat off the legislative leaders, who barely acknowledged the governor's cutbacks in their responses yesterday.

The Democratic speaker of the Assembly, Sheldon Silver, whose conference supports raising taxes on millionaire residents, said the Assembly would "review" Mr. Paterson's proposals but refrained from commenting on them.

A Democratic assemblyman, Richard Brodsky, of Westchester, said the Assembly isn't opposed to lowering spending but said wealthier New Yorkers should pay a higher price.

"It makes no sense to ask the families who send kids to CUNY and SUNY to sacrifice, while the families who send kids to Dalton or Harvard make no sacrifice," Mr. Brodsky said.

The Republican majority leader of the Senate, Dean Skelos, said Albany should first "root out fraud, waste, and abuse" from Medicaid before resorting to hospital and nursing home cutbacks.

"We're not going to do anything that puts us in a difficult position that raises property taxes or that gores the health care providers, and we're not going to do tax increases," a spokesman for Mr. Skelos, John McArdle, said.