State Health Commissioner Submits Report to Governor Paterson Detailing Findings, Recommendations for Reforming Medicaid Payments for Hospital Inpatient Care

Findings Validate Berger Commission Conclusions, Reconfirm Need to Change How New York Medicaid Pays for Inpatient Care

ALBANY, N.Y. (Feb. 26, 2009) State Health Commissioner Richard F. Daines, M.D., today issued a report detailing his findings and recommendations for reforming New York's Medicaid reimbursement system for inpatient care. The report was submitted to Governor David A. Paterson, as required by Chapter 58 of 2008, and reflects the work of the Technical Advisory Committee (TAC), which was established in last year's State Budget to examine hospital data and evaluate rate-setting methodologies.

"New York State has many of the best hospitals, doctors, nurses and health care facilities in the country, yet our current health care system is failing the people of this state. We are spending far too much and getting too little in return," said Governor Paterson. "Reform of our State's health care system is needed now, and the recommendations in this report serve as a guide to enhance the quality of treatment, increase access to primary care, improve public health, and make our health system more affordable for every New Yorker."

The Commissioner's report, Reform of Medicaid's Inpatient Rate Setting Methodology and Payment Levels, concurs with observations made in the final Berger Commission report that states New York's current reimbursement methodology "…distort(s) patterns of service delivery and induce(s) facilities to pursue high margin services, sometimes at the expense of more essential community needs" and is "discouraging the provision of preventive, primary and other baseline services."

"My report suggests a number of critical changes to our Medicaid inpatient payment methodology which will not only ensure that Medicaid patients receive optimal care, but will help New York become a more prudent purchaser – paying the right price for the right care in the right setting," said Commissioner Daines. "We must rationalize our reimbursement system if we want to move New York's health care system into the 21st Century."

With extensive input from TAC – whose membership included representatives from hospitals, primary care providers and consumers – the Commissioner's report concludes that the Medicaid inpatient reimbursement system is broken and in desperate need of repair.

"Essentially what we found is that our current reimbursement system does not effectively serve the interests of patients, providers or taxpayers," said Commissioner Daines. "It does not reflect the state's desire to purchase quality, cost-effective care in the appropriate setting, nor does it allow providers a transparent and straightforward revenue stream."

"Right now, Medicaid uses an outdated inpatient reimbursement method that pays too much for inpatient care and distributes those dollars to hospitals in an irrational way – delinked from quality or efficiency," said Deborah Bachrach, Deputy Commissioner and New York State Medicaid Director. "We cannot improve the care Medicaid patients receive or contain costs if Medicaid's payment allocation does not appropriately reflect the acuity of the patient, the quality of the service, or the efficiency of the hospital."

To reform New York's Medicaid reimbursement system for inpatient care – ensuring the right care, in the right setting, at the right price – the Commissioner's report recommends that:

  • New York should continue to reduce hospital inpatient payment levels to bring them closer to the reported costs of care for Medicaid patients.
  • The State replace various adjustments, add-ons and peer grouping with a All-Patient-Refined Diagnostic Related Group (APR-DRG) methodology for reimbursing inpatient Medicaid services.
  • The reimbursement methodology eliminate coarse proxies for patient severity, such as those based on peer groupings, hospital specific volume and avoidable differences in hospital-specific cost, and eliminate add-ons to the base rate that are not directly linked to the delivery of cost-effective care to Medicaid beneficiaries.
  • The State update its methodology for reimbursing Graduate Medical Education from hospital-specific 2001 costs to 2005 costs.
  • The State re-evaluate the relevance of the $282 million Professional Education Pool established in 1996 and consider using these critical health care dollars to support teaching hospitals serving uninsured patients.
  • The State reinvest inpatient savings into primary and preventive care and other traditionally under-paid ambulatory care services in order to improve the quality of patient care, ensure access to these services and avoid more costly inpatient admissions.

Dr. Daines noted that Governor Paterson's proposed 2009-2010 budget includes measures that reflect many of these recommendations and builds on the health care reforms adopted in the 2008-09 State Budget. In that budget, the State began a multi-year process of reducing inpatient rates while increasing outpatient rates for hospital clinics, community health centers, and physicians. Additionally, last year's Budget significantly reformed the way Medicaid pays for outpatient care.

Dr. Daines recently joined Governor Paterson at a meeting at the New York Academy of Medicine to discuss the need for immediate reforms to New York's health care system to improve health outcomes for New Yorkers while making health care more affordable and sustainable for the long term.

At the meeting Governor Paterson emphasized that reforms to the way New York's Medicaid program pays for health care is an essential piece of the state's broader health care agenda and must be done despite objections from hospital associations and health care unions so that New York has a more affordable and effective health care system.

The Commissioner's report can be viewed in its entirety at

For additional information about ongoing health care reform initiatives in New York State, please visit