Any discussion of the budget crises in New York State and City must necessarily turn to the elephant in the room: Medicaid. Responsibility for feeding the elephant — to the point where it is set to crush the Empire State’s local governments and taxpayers — must be laid at the feet of the lawmakers at Albany. While Medicaid is a federal program, New York does everything it can to stuff cash into its slack maw, sustaining and fattening the state’s powerful, unionized health-care workers.

The New York Sun recently spoke with the New York State health commissioner under Governor Carey and former member of the Financial Control Board, Stephen Berger. Mr. Berger recalls a time when Medicaid spending by the state came in at under $3 billion — as opposed to north of $25 billion today. The growth in spending has far outpaced inflation, averaging around 9% a year. It’s a rate of growth that can’t be sustained, since the state’s revenues can’t be expected to grow at that rate. Mr. Berger’s suggestion: a blue-ribbon commission to restructure health care delivery in the state. There are too many hospitals, he said, and too many middle class families are hiding assets to get on the Medicaid rolls.

The fundamental problem with Medicaid, as far as its political structure, is that the state’s cities and counties are on the hook for half of the state’s spending on the program. This means that out of every $4 Albany spends on the program — whether on payoffs to Dennis Rivera’s health-care union during the 2000 election, on expanded coverage, or on expanded enrollment — it only has to come up with $1. Two dollars come from Washington, and $1 from the local governments.

No other state has such a system, and it shows in the way New York outspends them all. A 1999 report from the Public Policy Institute of New York State lays out some stunning numbers. New York spends more than $1,200 for every person in the state on Medicaid — double the national average, and more than 50% above the next most spendthrift state, Connecticut. New York spends about as much on Medicaid as California and Texas combined, even though their combined population is almost three times that of New York.

In 2002, the city spent $3.62 billion on the program. In the mayor’s January financial plan, spending on the program was projected to jump almost 5% to $3.79 in 2003, and then to grow to more than $4 billion a year. This represents roughly 1/11 th of a $44 billion budget. To keep up, Mayor Bloomberg has boosted the property tax by 18.5%. The rest of the state has followed suit, according to the New York State Association of Counties, boosting property tax es 12% on average.

Simply making the state pay all Medicaid costs would do nothing to reduce the overall tax burden — taxes would just have to go up at the state level to compensate — but it would go a long way toward restoring accountability. No longer would the state be able to mandate extras and pad the rolls without having to worry about where the money would come from.

Since it doesn’t have to worry about supplying $3 out of every $4 in spending it mandates, New York State mandates prac tically every optional Medicaid benefit under the sun. These include podiatry, dentistry, eye care, and prescription drugs — including Viagra. The solution here is to unleash market forces. It’s not that Medicaid recipients should not have access to the services listed above; it’s that the costs of these services will remain exorbitant so long as those receiving them have no incentive to keep their usage to a minimum and to shop around for the best cost.

One of the primary concepts any blue-ribbon commission would do well to look at would be a defined-contribution program. The National Center for Policy Analysis makes the case for such a plan in a February 2003 report, “Reforming Medicaid.” Currently, New York State law sets out who is eligible and for what benefits. This leaves only one variable, cost, which will run as high as needs be to keep up with the other two variables — thus skyrocketing Medicaid spending. Under a defined-contribution program, the state would determine who is eligible and how much they would be given to spend, and they could purchase health insurance on the private market, choosing the benefits they anticipate needing. As the NCPA report puts it, “nursing home residents don’t usually need maternity benefits and infants rarely need bypass surgery.”

Some might worry that it would be difficult find private insurers willing to cover Medicaid recipients. One example of the defined-contribution approach cited by the NCPA, however, is the Federal Employee Health Benefits Program, which is almost 50 years old; the federal workforce is generally older and has more health problems than the general population — which is true of Medicaid recipients — but, the NCPA found, “premiums have been comparable to other, private sector insurance and federal employees have an annual choice of a dozen or so health plans.”

One problem with the current arrangement is that any cost-cutting measure meets with the wrath of the state’s healthcare unions, who are concerned with pre serving hospitals. This, despite the fact that, according to the NYPPI, New York’s hospital system is only about 65% utilized on average. Further, taxpayers pick up about $1 billion in spending on teaching hospitals each year, even though about half of the interns and residents trained leave the state to practice elsewhere. This tilts the system even more toward the big institutions as opposed to more decentralized alternatives, such as community clinics.

Closing hospitals and reducing the amount of money flowing to the remaining ones is tough politically, but any healthcare reform commission would be negligent to take such options off the table.

There would no paucity of ideas for a commission to consider. There needs to be reform of New York’s estate planning laws to prevent middle-class families from hiding their assets and foisting the care of their elderly relatives on taxpayers. And there are a bevy of market-based devices for containing health-care costs being devised at think tanks around the nation. The normal political process will never squeeze the Medicaid elephant out the door by traditional means. As costs soar, it’s time to consider a crane.