ALBANY – In unusual move, state lawmakers are suspending the competitive-bidding rules for an obscure pilot project at the Health Department, allowing officials there to hand-pick the two institutions that will benefit.

Officials said the intended recipients are Village Care of New York, which runs nursing homes and provides other services for the elderly and AIDS patients in downtown Manhattan, and Loretto, a long-term care organization in the Syracuse area.

Both organizations are headed by former state officials and have the support of the major union for health-care workers, SEIU/1199, in applying for the pilot project.

Under the program, the two organizations would be eligible for small startup grants totaling $750,000 over three years and would also receive adjustments in their Medicaid rates worth potentially much more.

The Legislature created the project as part of the state budget in August. On Tuesday, in small package of budget amendments, lawmakers added a clause declaring that the Health Department could select participants for the program without soliciting competing bids.

They made a similar change in a $28 million “health care stabilization program,” which makes grants available to hospitals in fiscal distress. Under the amendment, officials at the Health Department have discretion, within certain guidelines, to decide which institutions should receive help.

These maneuvers raised eyebrows at the state Capitol, where government officials have come under fire for favoritism in the awarding of contracts.

The chief executive of Village Care, Arthur Webb, said the pilot program would ultimately save the state money by making long-term care more efficient. He said his organization deserved to be selected because it had worked with the Health Department to design the project over the past two years.

“We feel we have demonstrated the capacity and the capability to launch this,” said Mr. Webb, who was commissioner of the Office of Mental Retardation and Developmental Disabilities under Governor Cuomo.

The legislative director of the Business Council, Elliott Shaw, criticized what the Legislature had done.

“It’s outrageous,” Mr. Shaw said. “I’m of the belief that the taxpayer gets the best value when things are open in competitive bidding.”

“My suspicion antenna is keenly sensitive when, at the last night of session, bills pop up with odd language in them,” the legislative director of the New York Public Interest Research Group, Blair Horner, said. “It may be completely innocent. But anytime you eliminate things from the competitive bidding process, you are locking money in to go to certain facilities and not others.”

Legislative officials familiar with the issue could not be reached for comment yesterday. A spokesman for Governor Pataki’s budget office, Kenneth Brown, said the administration had not objected to the Legislature’s decision.

“We didn’t oppose the change because it clarifies what the original intent of the programs were,” Mr. Brown said.

Mr. Webb said the project is aimed at reducing the fragmentation of the long-term care delivery system so that a single “care advocate” would help elderly and chronically ill patients manage the transitions from home to hospital to nursing home and back to the community.

The Health Department would adjust the Medicaid fees it pays to Village Care to create financial incentives for treating patients in the community, which can be less expensive, rather than moving them into a nursing home, Mr. Webb said. Village Care would also be reimbursed when it provides intensive services to certain patients, such as those with Alzheimer’s, he said.

The director of the Home Care Association of New York State, Carol Rodat, noted that Mr. Pataki recently vetoed a bill that would have made similar rate adjustments for a broad category of providers.

“A lot of us were supportive of creating a disability-adjusted rate of payment for managed long-term care programs,” Ms. Rodat said. “That needs to move ahead rapidly, and soon.”