On Jan. 22, New York Governor Eliot Spitzer released his budget proposal for State fiscal year (SFY) 2008-09, which begins on Apr. 1, 2008. Due to a projected $4.4 billion budget shortfall for the coming fiscal year, the budget contains a number of proposals to decrease State spending, including an estimated $1 billion reduction for health care programs like Medicaid. Unlike last year, this year's budget looks to all sectors of the health care community—hospitals, nursing homes, home health care providers, payers, and pharmaceutical companies—to share the burden of budget reductions, rather than relying disproportionately on hospitals and nursing homes to shoulder the brunt of the cuts.      

Nevertheless, several of the savings proposals present great cause for concern. In a statement released the day the budget was announced, the Healthcare Education Project (HEP)—a joint project of GNYHA and 1199 SEIU United Healthcare Workers East—expressed support for some aspects of the budget, including a critical expansion of health insurance for uninsured children, but also expressed concern about cuts to hospitals, nursing homes, home health care providers, and the New Yorkers they serve. HEP also urged the Governor to finalize a medical malpractice relief proposal to help reduce costs for hospitals and physicians.

Hospitals—Medicaid: The Governor's hospital proposals are extremely complex, mixing major reimbursement reforms with straight Medicaid reimbursement rate cuts, including a 25% cut in the Medicaid inflation, or "trend factor," update; a major cut in funding for Medicaid inpatient detox services, which will cost hospitals providing such services $70 million in the next State fiscal year; the phased elimination of workforce recruitment and retention funding for public hospitals, costing such hospitals $12 million in the next year; and a cut in outpatient specialty mental health rates for nine hospitals across the State, which will cost those institutions $4.2 million annually. 
     
The most complicated reform in the budget is an update of the year that NYS uses to determine the costs on which Medicaid inpatient rates of payment are based. Specifically, the Governor proposes updating the "base year" costs used to determine Medicaid inpatient rates from 1981 to 2005. The new rates, based on 2005 costs, would be phased in over four years, starting with 25% of the rate on July 1, 2008. The remaining 75% would be based on the current methodology, using 1981 costs and current law adjustments. The updating of the base year—which the hospital community supports in concept—raises many issues, including the impact of phasing out funding for workforce recruitment and retention, changing the way teaching hospitals are reimbursed for graduate medical education (GME) costs, and eliminating special adjustments that hospitals have been granted over time. In addition, the State would move away from paying hospitals a rate based upon a combination of their own costs and the average costs of their "peer group" (for example, academic medical centers, major public hospitals, downstate non-teaching hospitals, and so forth) to a methodology that would recognize the average costs of the peer group only. The State estimates that updating the base year would reduce Medicaid inpatient payments for hospitals by $104 million in the coming fiscal year, and some $600 million annually when fully phased in. 
     
The Governor proposes re-investing some savings back into the health care community by fundamentally restructuring payments for outpatient services. This would be achieved by changing outpatient payments—which for most hospitals are capped at $67.50 per visit—to a new methodology known as "ambulatory payment groupings" (APGs), which place different weights on different outpatient procedures based on diagnosis and relative resource consumption. When fully phased in, the State projects spending on hospital outpatient services will increase by $420 million annually, with $120 million in increased spending in the coming fiscal year. (Under the Governor's proposal, the APG methodology would be phased in over four years for general clinic services, and fully implemented on July 1, 2008, for ambulatory surgery services and on Jan. 1, 2009, for emergency services.) Given the complexities of the inpatient rebasing proposal, and the new, as yet unfinalized APG methodology, it is impossible to determine the impact of the Governor's budget proposal on individual hospitals at this time.

GME, Bad Debt: The Governor also proposes shifting funding away from the main, formula-driven GME pool for teaching hospitals, and using the "shifted" funds—$15.6 million in 2008, with much larger shifts in 2009 and 2010—to fund other workforce initiatives, including loan forgiveness for physicians, practice support for physicians in underserved areas, a diversity program sponsored by the Associated Medical Schools of New York, and other initiatives. In addition, the budget would require teaching hospitals, in 2009, to submit detailed GME budgets to the State and would implement new standards for outpatient clinics in teaching hospitals to encourage continuity of care. 
     
The Governor's budget also calls for a major change in the methodology used to distribute bad debt and charity care funding, or Indigent Care Pool funding, to hospitals, with a phase-in beginning on Jan. 1, 2009. The new methodology would, in general, collapse several of the current voluntary hospital pools into one pool (a separate pool would remain for public hospitals) and then divide funding between costs of care for fully uninsured individuals (85%) and bad debt costs (15%). Funding would be further restricted over time to costs incurred caring for individuals eligible for each hospital's financial assistance policy, and the new methodology would be based on units of service provided, using Medicaid rates as a proxy for costs. Significant data constraints preclude a determination of the impact on hospitals at this time, which, when combined with other major changes in the budget, creates considerable financial uncertainty for hospitals trying to understand the impact of the Governor's proposed changes.