Have New York legislators figured out a way to get free money from the federal government? With a budget proposal to win $4 billion in federal dollars to fund Medicaid, the state’s health insurance program for low-income residents, that’s their hope.

Medicaid funding has emerged as one of the most divisive issues in the fight over this year’s budget, due April 1. Seeking to rein in the program’s $30 billion cost to New York, Governor Kathy Hochul proposed over $1 billion in cuts, which would include reducing wages for health aides and payments to nursing homes.

The legislature wants to go in the opposite direction, proposing billions of dollars in additional spending on hospitals, nursing homes, and other investments. The measures come on the heels of an aggressive campaign from the state’s main hospital lobby and largest healthcare workers’ union calling for a multi-billion-dollar boost in Medicaid funding.

But the legislature didn’t simply adopt the hospital lobby’s plan, which called for the state to tap its reserves to pay for Medicaid. Instead, the Senate and Assembly proposed an accounting trick that would allow them to raise $4 billion at no cost to New York.

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Simple strategy

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The details are fiendishly complicated, but the overall strategy is simple: The state would tax health insurers billions of dollars more each year, then turn around and put that money back into the insurance industry. Theoretically, insurers would be made whole, and the state’s Medicaid spending would appear $4 billion higher. Then, New York would cash in.

Under a longstanding policy, the federal government provides matching funds for states’ Medicaid programs. For every dollar New York spends on Medicaid, the federal government sends another dollar — so Washington would send $4 billion.

“This really is a way to print $4 billion out of the sky, as far as we can tell,” said Michael Kinnucan, health policy advisor at the Fiscal Policy Institute, a liberal think tank. “It allows the legislature to make every Medicaid constituency happy.”

It has not, however, made every industry stakeholder happy. The proposal is now driving a clash between major players in New York’s health care industry, as some private health insurers argue that if the federal government doesn’t approve the scheme — or only does so temporarily — it could ultimately hit their bottom lines.

1199SEIU, the union allied with the hospital lobby, supports the plan, calling it a needed investment in the state’s Medicaid program. “We’re absolutely appreciative that they included that tax in the budget,” Tori Newman Campbell, the union’s legislative coordinator, told New York Focus.

Lev Ginsburg, executive director of the New York State Conference of Blue Cross Plans, which lobbies on behalf of the insurance industry, suggested that if the tax eats into their profits, they may pass costs off to New Yorkers.

“We find it pretty troubling and we are very much opposed to it,” Ginsburg said. Representatives of the National Federation of Independent Businesses and New York Business Council, also said that their organizations oppose the tax over concerns that it could raise health care costs for their members.

Both factions are now competing for the governor’s ear. Hochul’s office did not respond to questions about her position by time of publication.

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California

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Albany didn’t invent this playbook. Last year, California passed a similarly structured tax that is slated to win the state nearly $5 billion a year in federal cash.

Assemblymember Amy Paulin, who chairs the health committee, said that California’s example inspired Assembly staff members to propose the tax for New York. “It came from Assembly staff, and the Senate decided to agree,” she said. (She denied that the hospital lobby first floated the idea.)

Before the tax was unveiled, 1199SEIU and the Greater New York Hospital Association, the state’s main hospital lobby, called on Hochul to tap the more than $20 billion the state has in reserve funds to pay for their proposed Medicaid boost.

Even with the proposed $4 billion tax, that’s still something the union wants.

“Good substitute?” Newman Campbell said. “No, would be useful in addition to.”

One risk of the proposal is that the federal government could soon block this type of tax. Although federal regulators approved California’s similar tax last year, they noted that it “does not appear consistent” with Medicaid’s purpose and that they plan to develop “new regulatory requirements” that could bar similar efforts in other states.

The hostility toward New York’s strategy would likely be even stronger if Donald Trump returns to the presidency next year. In 2019, the Trump administration proposed regulations that would have significantly curtailed states’ abilities to use tax gimmicks to get federal funds without spending their own money. The regulations weren’t adopted, but a second Trump term could feature a repeat effort.

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Rule change worries

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If New York implements the tax, comes to depend on it, and then is blocked from renewing it, lawmakers would need to drastically cut Medicaid or quickly find billions of dollars to cover the gap, noted Bill Hammond, senior health policy analyst at the Empire Center, a fiscally conservative think tank.

Paulin, the health committee chair, said that the possibility of future rule changes is no reason not to implement the tax now.

“In the meantime, we would have generated $20 billion to New York that we wouldn’t have had otherwise,” she said. “California is enjoying this money and so should New York.”

The legislature’s proposed boost of Medicaid payments to hospitals, summing to hundreds of millions of dollars a year, could provide significant relief for the 79 hospitals statewide that are financially struggling. But both Kinnucan and Hammond pointed out that the funds would also flow to already well funded private hospitals that serve a relatively small percentage of low-income patients.

“It’s not like it’s all going to distressed hospitals. It’s going to New York Presbyterian and NYU Langone,” Hammond said. NYU Langone, the hospital system of New York University, reported profits of over $600 million in each of its two most recent fiscal years.

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Hospital association

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For the Greater New York Hospital Association and 1199SEIU, this across-the-board boost has been key. Their campaign pushes higher Medicaid funding for rich hospitals and poor hospitals alike.

“I definitely would say because Greater [New York] does have such a range, we wanted to include all facilities,” Newman Campbell said. “So it’s kind of just been like all or nothing.”

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This story originally appeared in New York Focus, a non-profit news publication investigating how power works in New York state. Sign up for their newsletter.