ALBANY — Governor Spitzer is moving closer to brokering an agreement on a Medicaid budget framework with the state’s largest hospital association, a development that would further isolate the health employees union at a critical stage of negotiations.

A deal that is emerging between the Healthcare Association of New York State and Mr. Spitzer is likely to restore a sizable portion of the $1 billion cost-saving measures that the governor put into his executive budget. It’s also likely to fall significantly short of the demands made by the 1199 SEIU United Healthcare Workers East, which has been leading the charge against Mr. Spitzer’s Medicaid agenda.

Chances are Mr. Spitzer will lift his proposed freeze on inflation adjustments to Medicaid reimbursement rates, a cut that has encountered stiff opposition from both houses of the Legislature. At the urging of the hospital lobby, he also appears to be inclined to allow a two-year-old hospital gross receipts tax to lapse instead of making it permanent.

The governor is least likely to restore his $82 million cut to a graduate medical education program that covers hospital costs of teaching medical students. Mr. Spitzer has argued that New York is spending too much on this program compared with other states such as California. The hospital employees union has made restoring the money one of its top priorities, as hospitals that stand to lose the most from the cut are located in New York City and have employees who are members of 1199 SEIU.

A deal with the hospital association would help Mr. Spitzer by further splintering opposition to his Medicaid plan, weakening 1199 SEIU’s position at the bargaining table. With the state’s largest hospital trade group on his side, the governor would be in a stronger position to broker a budget deal with lawmakers that preserves some of his proposed cuts and changes to Medicaid funding formulas that have come under attack by the union.

A deal would also represent a culmination of the governor’s “divide and conquer” strategy of splitting apart the hospital lobby and the employees union, two powerful interest groups that have for years waged a common war to keep Medicaid money flowing.

Last week, a New York City-area hospital trade group, the Greater New York Hospital Association, which had teamed up with 1199 SEIU to pay for an expensive television advertising campaign, decided to pull the plug on its involvement in the effort at the urging of some of the city’s top hospital executives.

For weeks, Mr. Spitzer had been highlighting the multimillion-dollar salaries of hospital executives to question claims made by the hospital lobby that the institutions could not afford any cuts. Union officials said the hospital association withdrew its funding for the ads to keep attention focused on the governor’s budget instead of on executive compensation.

Spitzer officials say Greater New York Hospital Association pulled out after Mr. Spitzer met with a select group of executives at top New York City hospitals earlier this month and made a persuasive case for the need to put the brakes on Medicaid spending.

Hospital executives interviewed said they were uncomfortable with waging such an aggressive campaign against a governor who has the power to punish hospitals that don’t cooperate. Mr. Spitzer’s administration has the final say on approving certificate of need projects such as renovations, handing out government grants outside the budget process, expediting reimbursement money, and deciding the merits of Medicaid rate appeals.

“It is not in the hospital executives’ interest to get into a fight with the governor,” a New York hospital executive told The New York Sun.
The battle between the governor and the hospital lobby has become a defining challenge of Mr. Spitzer’s first year, a test of his ability to successfully take on powerful special interest group accustomed to getting its way in the Legislature.

Mr. Spitzer began plotting his strategy against 1199 SEIU before taking office. During the gubernatorial transition period, he rounded up a team of well-known health care experts, such as United Hospital Fund president James Tallon, to advise him on health care policy, adding credibility to his policies and giving him powerful allies in the industry.

By shifting more money to public health areas, Mr. Spitzer was able to secure the support of a variety of health groups, including community health centers, advocacy and consumer health groups, helping the governor fight off the claim made by the 1199 SEIU that Mr. Spitzer’s policies would have a devastating effect on health care.

Mr. Spitzer also didn’t cut funding to New York City’s Health and Hospitals Corporation, the public hospital system that is strongly backed by Mayor Bloomberg.

The governor also spent hundreds of thousands of dollars of his own political money on a television campaign to counter the attacks, striking back with a force not attempted by his predecessor, Governor Pataki.