Cuomo’s Medicaid Changes Are at Washington’s Mercy

Now billions of dollars in state revenue may ride on which image prevails, as presidential politics puts a new spotlight on the joint federal and state spending program for care of the disabled, the elderly and the poor.

No state spends more Medicaid money than New York — $54 billion a year. But Gov. Andrew M. Cuomo, a Democrat, persuaded health care providers and major health worker unions to live within a strict Medicaid spending limit last year, and to accept an ambitious Medicaid redesign that promises better health outcomes at a lower cost.

The governor takes credit for $2 billion in federal savings already, and projects that $15.1 billion more will be saved over five years. He is asking federal authorities for a waiver that would give $10 billion of the federal savings back to New York to help pay for the overhaul, to “permanently restructure our health system and continue to make New York a national model.”

But on Capitol Hill, another side of New York’s Medicaid image is on display. In a scathing report and in a hearing this fall, the House Committee on Oversight and Government Reform showcased $15 billion in federal Medicaid overpayments to the state’s centers for developmentally disabled people over the past two decades, at reimbursement rates 5 to 10 times higher than cost.

Those rates have now ballooned to $2.5 billion a year for just 1,300 residents, or more than $5,100 a day per person, growing through a complex formula approved by previous administrations for 20 years.

Representative Paul A. Gosar, who presided over the recent hearing as vice chairman of the oversight panel’s health subcommittee, called the payments “another brazen example of government failure.”

“Medicaid spending on New York’s developmental centers alone exceeded the entire Medicaid budgets of 14 states,” Mr. Gosar, a Republican of Arizona, said. “New York’s spending for a little more than a thousand patients in these institutions equals Kansas’ entire Medicaid budget, which serves nearly 400,000 people.”

The Cuomo administration says that the overpayments should not derail its separate application for the $10 billion, but the issue is clearly becoming a headache for the state. Federal officials are insisting that correcting the overpayments takes priority, raising the possibility that Mr. Cuomo’s plans for Medicaid will be at the mercy of the party that controls the White House and Congress next year.

Federal and state officials had been negotiating over the excessive rates since 2010, when an investigation by The Poughkeepsie Journal alerted the Obama administration to the overpayments.

“The payments for New York’s developmental centers are excessive and unacceptable,” Penny Thompson, a deputy director at the federal Center for Medicaid and CHIP Services, told the House committee. “We’re really taking New York as a case study in determining what additional steps we might need to take to improve our management controls over all.”

The Cuomo administration, which plans to close the 11 state centers in 2014, does not defend the reimbursement system it inherited, though it disputes the committee’s figures.

But veteran state officials say the extra money helped develop a peerless array of home and community programs for people with developmental disabilities, many from middle-class families. The money has also paid for a widening swath of indirectly related state expenses. The Cuomo administration is asking federal authorities for alternative Medicaid payment methods to make up the shortfall.

“This is a tremendous challenge both politically and financially for New York State,” said Gary Lind, formerly a senior state official and now deputy executive director of Nysarc Inc., one of the nation’s largest nonprofit organizations for people with developmental disabilities. “We’re concerned about how this plays out with families.”

The Cuomo administration has tried to play down the issue. “This is a problem that has existed for the last decade, and there are no new facts in this issue, only new political theater,” a spokesman for the governor, Matthew L. Wing, said in an e-mail last week.

Mr. Gosar countered that American taxpayers can no longer afford for New York State “to continue plugging large budget holes with creative financing schemes.”

But New York is hardly the only state to maximize the flow of federal Medicaid dollars. Indeed, as Massachusetts’s governor, Mitt Romney hired private consultants and on contingency fees to find new ways to capture Medicaid money, and proposed an amendment to state law to shift Medicaid revenue from a health care trust fund for the needy into the state’s general fund, said Daniel L. Hatcher, an associate professor at the University of Baltimore School of Law who has written on the issue.

“In such strategies, health care facilities serving the poor are used to claim federal funds,” Professor Hatcher said. “But the health care facilities and the poor may get nothing, as the state diverts the federal aid to general coffers, and revenue maximization contractors reap millions in contingency fees.”

Mr. Romney, the Republican nominee for president, now says the best way to rein in Medicaid is to turn it into a limited block grant to the states, shrinking it and ending federal oversight because, he said in the debate on Monday, “states run these programs more efficiently.” While that would give New York much more freedom to spend the money as it wished, it would also cut financing.

Like President Obama, Professor Hatcher disagrees with that approach. “That would allow states to have free rein to funnel the money into state revenue, and the poor wouldn’t stand a chance,” he said. “In hard budget times, when the poor need more help, they’ll be the first to be cut.”

In a sense, the payments to New York’s developmental centers turned that pattern on its head. A plan to close the state centers by 2000 was scrapped during the administration of Gov. George E. Pataki, a Republican, in part because the centers generated so much income, said Paul J. Castellani, who formerly directed upstate operations for the state, and now teaches at the Rockefeller College of Public Affairs and Policy, at the State University at Albany.

“I would never use the term overpayment,” cautioned Professor Castellani, the author of “From Snake Pits to Cash Cows,” a history of the centers published in 2005. He said that the rates were always federally approved, and helped create a network of public and private services for the disabled while replacing jobs in upstate New York communities crippled by the loss of smokestack industries.

Still, he said, from the inception of Medicaid in 1966, New York has taken an exceptionally aggressive approach, typified by the budget division’s mantra: “If it moves, Medicaid it; if it doesn’t, depreciate it.”

“Once New York really grasped the rules of the game, it set the agenda,” Professor Castellani added. “The feds never caught up.”