Thoughts on the FY 27 Executive Budget – Part I

Commentary #25 by Paul Francis

Introduction

Last week, I published an op-ed in the New York Daily News about Gov. Kathy Hochul’s FY 27 Executive Budget titled, The Days of Wine and Roses Are Back. That short op-ed sought to capture what I think is the essential story of the FY 27 Executive Budget – i.e., a bounty of tax revenue and a suspension (for this year at least) of upcoming federal cuts that combine to result in an Executive Budget that requires few if any difficult decisions this year, while making substantial new investments in popular programs. In other words, a politician’s dream of an election-year budget.

As I alluded to in my op-ed, the most interesting subplot of the FY 27 Executive Budget is the reversal of financial fortune between New York City and the State. Back in the mid-1970s (when Gov. Hugh Carey famously declared that “the days of wine and roses are over”), New York City’s financial problems were much deeper than those of the State. Beginning with the Bloomberg administration and continuing until the Covid pandemic in 2020, those fortunes shifted – New York City was in a stronger financial position and able to increase spending at a greater rate than the State – even though it took a long time for the narrative to change (if it ever really did) that New York City was the poor relation that needed to be propped up by the State.

Beginning in the years following the Covid pandemic, the financial fortunes of New York City and the State reversed once again. According to the newly-elected New York City Comptroller, Mark Levine, New York City may be facing a $2.2 billion deficit in its current fiscal year and a $10.4 billion deficit in its upcoming budget year, while the State is generating surpluses. The Mayor’s Preliminary Budget, to be released in February 2026, will clarify the depths of the City’s fiscal problems, but unless Comptroller Levine’s forecast is wildly off target, the major budget issues in the State budget may well involve the extent to which the State will raise taxes or otherwise change policies to bail out the City from its fiscal problems.

At a high level, there are two primary reasons why the financial fortunes of New York City and New York State have reversed in the last five years. First, in 2021, New York State increased its personal income tax on high earners (who account for roughly 40% of total income tax revenue in both the City and the State), while New York City did not increase rates. Second, personal income taxes (including the Pass-Through Entity Tax (PTET)) account for nearly 80% of State tax receipts,[1] but only about 23% of City tax receipts.[2] Although other revenue categories, such as property tax and sales tax, have also been increasing over the last five years, the rate of growth in personal income and PTET tax revenue has been even higher.

Even a relatively noncontroversial State Executive Budget, which the FY 27 Executive Budget surely is, includes a wealth of important issues to be addressed in the areas of focus of the Step Two Policy Project. Rather than trying to comprehensively review all of these issues, I want to comment today on three such issues in the FY 27 Executive Budget, all of which we have written about in the past. Part II of our Budget Commentary will discuss several additional issues affected by the FY 27 Executive Budget.

The Essential Plan and the State’s Section 1332 Waiver Request

The fate of the Essential Plan and its nearly 1.8 million current enrollees is one of the most significant issues facing the State in the year ahead. The Executive Budget managed to create a good deal of confusion about what comes next.

As we discussed in our paper How Many New Yorkers Will Become Uninsured Due to the One Big Beautiful Bill Act? the passage of the One Big Beautiful Bill Act (“HR 1”) forced the State to make significant changes in the Essential Plan. First, HR 1 ended federal funding for lawfully present non-citizens who do not meet the law’s new definition of an “eligible alien,” which affects roughly 730,000 Essential Plan enrollees. Second, the termination of federal payments for the legally present non-citizen population changed the economics of the Essential Plan to such an extent that the State concluded that it would no longer be financially viable for the State to cover the roughly 462,000 enrollees (nearly all of whom are citizens) with household incomes in the range of 200%-250% of the federal poverty level (FPL).

At the time HR 1 was passed, the State Budget Director said that the State would need to spend roughly $3 billion annually to provide State-only Medicaid coverage to the roughly 506,000 non-citizens with incomes up to 138% of FPL, who are income-eligible for Medicaid but ineligible for federal Medicaid funding due to their immigration status. This group is known as the “Aliessa” population because of a Court of Appeals decision by that name, which ruled that the State had an obligation under the New York State Constitution to provide Medicaid-equivalent coverage to this population.

At some point, the administration realized that the State could perhaps postpone the day of reckoning with respect to the cost of paying for State-only Medicaid coverage for the Aliessa population by terminating the Section 1332 Waiver authority it received from the federal government in 2024 (in order to expand Essential Plan eligibility to individuals with household incomes of 200%-250% of FPL) and revert to the previous statutory authority for a Basic Health Program (the technical name of the Essential Plan) under Section 1331 of the ACA.

Because Congress (by accident or design) did not extend the HR 1 prohibition on using federal resources to support benefits for non-citizens to Section 1331 of the ACA, the State believes it has the statutory authority to use the $9.6 billion in reserves in the Basic Health Program Trust Fund to continue to pay these costs for all 730,000 legally present non-citizens made ineligible for the Essential Plan by HR 1 – until those Trust Fund reserves are exhausted in two or three years.

However, since eligibility for federal subsidies under Section 1331 is explicitly limited to individuals with household incomes at or below 200% of FPL, federal approval of this request would force the State to drop Essential Plan coverage for enrollees with incomes between 200%-250% of FPL. The State continues to enroll individuals in the 200%-250% of FPL cohort, but they will lose their Essential Plan coverage if the State’s waiver request is approved by the federal government and a transition plan is implemented. Even if the request is denied, the State seems to be saying that it will need to amend the 1332 waiver to exclude coverage for individuals in this cohort because it is no longer financially viable for the Essential Plan to cover them.

For legal and political reasons, I think it is more likely than not that the federal government will approve the State’s waiver request. Admittedly, a statement from a CMS spokesperson to the effect that the agency would “ensure federal taxpayer dollars are only used for individuals who are lawfully eligible for coverage under the ACA,”[3] suggests otherwise. However, I think at the end of the day the federal government will interpret that to mean that no new federal funding is spent on ineligible non-citizens, while allowing the State to utilize funds from the Trust Fund for that purpose.

It is understandable that the Executive Budget presentation would reflect the more conservative position of assuming that the waiver request will be denied, including the assumption that the State would provide State-only Medicaid coverage to the more than 506,000 individuals in the Aliessa population. The Executive Budget also reflects that Essential Plan coverage would end mid-year for the roughly 462,000 individuals in the 200%-250% of FPL cohort. In addition, because the State has never stated or implied that it would provide State-only Medicaid coverage to the roughly 200,000 lawfully present non-citizens with incomes between 138%-200% of FPL, it seems almost certain that that group would also become uninsured if the State waiver request is denied by the federal government.

The Executive Budget, however, has created a fair amount of confusion about what would happen to the remaining approximately 400,000 citizens with incomes between 138%-200% of FPL. I have always assumed that that group would remain covered by the Essential Plan. Although the Hochul administration has never expressly stated that it would end Essential Plan coverage for this group, Bill Hammond of the Empire Center reasonably interpreted the presentation tables in the Executive Budget – which show no federal revenue for the Essential Plan after June 30, 2026 – to mean that the Hochul administration would eliminate the Essential Plan entirely if its Section 1331 waiver request is denied.

In response to questions about this, the New York Post reported that “Hochul’s office and the Department of Health refused to answer questions from The Post about how it intended to proceed with the essential plan.” The administration has tried to say as little as possible on the entire issue of its waiver request and the Essential Plan in order to avoid drawing attention to its proposed use of what were initially federal funds that now reside in the Basic Health Program Trust Fund. But it will have to make clear in Budget negotiations its true intentions for the future of the Essential Plan in the event its request is denied.

I doubt those plans would include terminating the Essential Plan for the roughly 400,000 citizens and the small number of non-citizens who continue to meet federal eligibility rules who are in the 138%-200% of FPL range, which would force those individuals to pay on average close to $3,000 annually to obtain coverage through the New York State of Health marketplace (NYSoH) using ACA premium tax credit subsidies.

Under both the Section 1331 and Section 1332 authorities, the federal government pays to the Essential Plan an amount equal to 95% of the ACA premium tax credit enrollees would receive if they purchased individual insurance. On average, the amount of that federal subsidy for individual coverage for a two-person household in New York in the 138%-200% of FPL range (i.e., 169% of FPL at the median) is approximately $8,400 annually,[4] which is well above the expenses of that group. By way of comparison, the average per capita cost of enrollees in mainstream managed care is approximately $4,500 annually.[5] Even with reimbursement rates above Medicaid, continuing the Essential Plan for citizens in the 138%-200% of FPL range is clearly financially viable and far preferable to forcing these individuals to acquire insurance on the NYSoH marketplace.

By contrast, it’s not surprising that continuing Essential Plan eligibility for those in the 200%-250% of FPL range may not be financially sustainable without the cross-subsidy from enrollees in lower income cohorts in which the federal subsidy is greater. We don’t know the mix of incomes within the 200%-250% income cohort or their average annual healthcare expenses. However, if the average income in this cohort were 225% of FPL, the average member contribution to purchase the benchmark Silver plan would be $3,600 annually, and the federal subsidy would be approximately $6,500 annually, at current premium tax credit levels. Depending on reimbursement rates, the $6,500 federal subsidy might be sufficient to develop a separate section 1332 waiver program just for this income cohort if additional State funding is available.

In the State of the State, Gov. Hochul said she would “direct DOH to negotiate with the federal government to develop affordable coverage options to ensure continued access to affordable healthcare for those impacted by federal cuts.” My understanding is that states with a Basic Health Program may also be permitted to have a separate 1332 waiver program for those not covered by the Basic Health Program (assuming they otherwise qualify for federal subsidies). Given how few individuals in the 200%-250% of FPL income cohort chose to purchase insurance using federal premium tax credits (i.e., 78,000), it might yet be possible to construct an Essential Plan-like program for this group with additional State support, rather than seeking to provide State supplements to federal premium tax credits to encourage purchases of Qualified Health Plans on the NYSoH marketplace.

I suspect one of the significant issues that will emerge in the FY 27 Budget negotiation will involve whether the State will provide State subsidies to whichever groups are negatively affected by the outcome of the State’s waiver request. In an Executive Budget with affordability as its central theme, it would be a dissonant note if healthcare becomes essentially unaffordable for as many as 462,000 New Yorkers (if the federal government approves the State’s waiver request), another 200,000 non-citizens who will be ineligible for State-only Medicaid, and another roughly 400,000 New Yorkers who are citizens if the federal government declines the State’s waiver request and the State completely eliminates the Essential Plan.

Personal Care and the CDPAP Transition

The growth in personal care spending, which accounts for approximately 36% of DOH Medicaid spending,[6] continues to be the greatest single challenge in the Medicaid budget. We have written in the past about the unsustainable growth in personal care spending in general and the evolution of the Consumer Directed Personal Assistance Program (CDPAP) in particular. Reforms implemented in FY 26 appear likely to at least slow the rate of growth in personal care spending, although it is too soon to project a new long-term baseline for this program, which is swimming against the demographic tide of an aging population paired with declining informal supports.

It has long been clear that one of the drivers of personal care spending growth was the role of more than 600 Fiscal Intermediaries (FIs), entities that had a strong incentive to expand the number of recipients of personal care by aggressively marketing the CDPAP program. The role of FIs is to serve as the payment intermediary between LTC plans and personal care aides (for simplicity, we will refer to them as “home care workers”) hired by the CDPAP recipients themselves.

The Cuomo administration in the FY 20 Budget sought to reduce the number of FIs from more than 600 to about 60 entities. These entities would have been required to enter into agreements with the State designed to control their marketing activities and strengthen oversight of the program. However, that effort was thwarted by insurmountable litigation obstacles as well as intense stakeholder opposition. Other personal care reforms that emerged in the FY 22 Budget as a result of recommendations of the Medicaid Redesign Team II were put on hold because of Maintenance of Effort provisions included in federal pandemic relief assistance.

In 2025, late in the negotiations of the FY 26 Budget, an alliance emerged with 1199SEIU to replace the existing FI structure with a single FI accompanied by a few dozen subcontractors who would play a supporting but minimal role. 1199SEIU favored having a single FI because it would make it much easier to organize home care workers, since the FI technically is the “co-employer” of the home care workers. The support of 1199SEIU brought along the legislature to support an initiative to replace the more than 600 FIs with a single FI. That contract was subsequently awarded to the national firm called Public Partnership LLC, or “PPL” for short.

I wrote at the time that the administration was to be commended for taking on this controversial but necessary reform. The elimination of more than 600 independent FI entities was one of the most controversial actions Gov. Hochul has taken since assuming office. She has had to absorb sharp personal criticism and spend real political capital defending the policy. Questions about the procurement that resulted in the award of the single State FI contract to PPL, as well as complaints about the implementation of the transition, continue to plague the governor and DOH.

Although I have supported the policy of FI consolidation going back to efforts in the Cuomo administration, it’s clear from press coverage, legislative hearings, reviews by policy analysts, and conversations with participants that operationalizing this new policy has been rocky. Unfortunately, there are many times when the “right” policy doesn’t correspond with the operational reality on the ground. My hope is that the administration will work intensively with PPL to address the problems on the ground to reduce the increased friction of getting workers hired and paid under the CDPAP program, so the operational reality matches the policy vision.

Despite all the political capital that needed to be spent to achieve the CDPAP consolidation, in the long run this will be an important but small step in the need to redesign the delivery of personal care and home care in New York. The challenge of how to deliver and pay for the long-term care of an aging population is a global issue in most advanced economies. Labor productivity gains – whether from technology or more efficient social or congregate settings (especially for those with less acute needs) that are more acceptable to the population in need of long-term services and supports than traditional nursing homes – almost certainly will be required. Near-term organizational changes, such as the wisdom of paying for care through partial capitation managed long-term care plans, may also be required to buy time for more structural solutions.

These indispensable questions, however, are not something I want to try to address today. Rather, I will concentrate my observations in this area on two aspects that relate specifically to the FY 27 Executive Budget: first, understanding the sources and extent of savings from the FI consolidation; and, second and more subjectively, how the narrative of this reform, which has been centered around “waste, fraud and abuse” as opposed to a more transparent discussion about the trade-offs involved in the personal care program generally, fits into the larger national debate about “waste, fraud and abuse” in Medicaid and other social service programs.

The Budget and other public information from the State provide limited transparency about the economics of personal care spending within its three main delivery systems – CDPAP, Licensed Home Care Service Agencies (LHCSAs), and fee-for-service (FFS), as well as the Nursing Home Transition and Diversion (NHTD) waiver program, which is another vehicle for delivering these services. After School Aid, personal care spending is the single largest category of spending on a particular service in the entire Budget, so it’s unfortunate that more information is not publicly available. The Executive Budget does not even include the more detailed breakdown of personal care spending through MLTC plans and FFS that is made available in the quarterly Medicaid Global Cap reports. In addition, although enrollment in various types of MLTC plans is reported monthly by DOH, the number of enrollments in CDPAP, LHCSAs, and NHTD programs is not regularly disclosed anywhere and can only be gleaned from roll-ups of year-end cost reports.

This lack of transparency may be one reason that lawmakers and other critics of PPL and the FI consolidation are skeptical that the FI consolidation will generate $1.2 billion of State share savings, as claimed by the Division of the Budget. Sen. James Skoufis, one of the leading critics of the FI consolidation, said, “I look forward to actually seeing the justification that demonstrates that that number is real and the savings are even higher than expected.”[7]

What is clear through the monthly MLTC enrollment data published by DOH is that there has been a significant slowing in the growth of MLTC enrollment throughout FY 2026. There may be other factors at play in reducing the rate of growth, including the imposition of a tighter eligibility standard (requiring need for assistance with a “minimum of three Activities of Daily Living” to be eligible for personal care), but the most logical explanation is the impact of the FI consolidation in reducing aggressive marketing by entrepreneurial, for-profit FIs – which, more than reduced administrative costs, was always expected to be the main source of savings from the FI consolidation.

FY 26 marks the first time in several years that the rate of enrollment growth in MLTC has started to decline. The annualized rate of growth in enrollee months in FY 26 (with actual results through December) is virtually flat compared to enrollee month growth of 11.9% in FY 25 and 10.4% in FY 24. In an effort to improve transparency and enable the public to estimate MLTC spending growth on an ongoing basis, the Step Two Policy Project website includes a webpage with a downloadable Excel spreadsheet that shows the most relevant metrics, which are updated dynamically on a monthly basis. Users can project future growth in spending by inputting assumptions about the average per capita cost of care (gleaned from the quarterly Medicaid Global Cap reports) and assumed rates of future enrollment growth.

Faced with intense stakeholder opposition to the FI consolidation, the Hochul administration’s central defense of the initiative has always been that the change would not affect benefits or eligibility for personal care services or reduced compensation for workers. Rather, savings would be achieved simply through administrative efficiencies involving “middlemen – i.e., the FIs – and the elimination of fraud and abuse. Indeed, in many instances, such as the story in the New York Post (described on the next page and referenced in endnote 8), administration representatives have emphasized the “fraud and abuse” narrative.[8]

The truth is more complicated and requires an unpacking of the long-term issues alluded to above – an exercise that is beyond the scope of this Commentary.

Michael Kinnucan of the Fiscal Policy Institute (FPI), in particular, and Sam Mellins of the independent newsroom NY Focus have done a good job in analyzing the PPL transition and reported savings. During the FPI Budget briefing, Michael Kinnucan said he would be publishing a further analysis in the future. Michael Kinnucan is one of the most insightful thinkers I’ve encountered on these issues, and we look forward to his further analysis.

One important aspect of the PPL transition that Kinnucan has already explained is why most CDPAP workers will experience a wage reduction of approximately one dollar per hour as a result of the PPL contract with home care workers. In an FPI post in August, Kinnucan noted that PPL is requiring workers subject to the wage parity obligation (i.e., all workers in the downstate region, about 85% of the total) to enroll in a health insurance plan that satisfies the Minimum Essential Coverage (MEC) requirement of the ACA, but which is of very limited value to the worker.

As Kinnucan notes:

“PPL is funding this contribution using the wage parity supplement to workers’ wages – a state-mandated addition to wages which the state requires FIs to spend on wages or benefits, and which many FIs currently spend on wages. So, after the transition, many workers will see a wage cut of nearly a dollar in order to pay for health insurance coverage that does not cover hospitalization.”

In addition to this charge for an MEC health plan, PPL is also funding a portion of Paid Time Off (PTO) – worth $0.67 per hour according to PPL – through its wage parity obligation.

The PPL transition has also had a significant unintended consequence for many CDPAP workers. Because FIs under New York’s CDPAP program are treated by statute as the “joint employer” of the home care worker, PPL would face a tax penalty of approximately $2,900 per full-time worker if it did not at least offer an MEC plan to home care workers. The mere offer of an MEC plan makes workers who otherwise would be eligible for Medicaid and the Essential Plan ineligible for those public programs. PPL did not need to require all workers to participate in the MEC plan to avoid the ACA penalty, but chose to make participation mandatory as a way of reducing the cost of its wage parity obligations.

It is not known how many CDPAP workers would otherwise have been eligible for Medicaid or the Essential Plan (and that number will be smaller once Essential Plan eligibility will be limited to those with household incomes of 200% of FPL and below, for those home care workers the loss of eligibility for Medicaid, the Essential Plan, and (in some cases) eligibility for spousal coverage in private healthcare plans, is likely even more significant than the effective reduction in cash wages.

One of the main drivers of the growth in CDPAP was that those workers generally received their wage parity amount in cash, in contrast to Licensed Home Care Service Agencies (LHCSAs) workers, who generally saw their wage parity amounts dedicated to real healthcare insurance. Without the cash wage advantage of CDPAP (and perhaps the increased friction of working with PPL), there appears to have been a dramatic shift in new MLTC enrollments from CDPAP to Licensed Home Care Service Agencies (LHCSAs). Prior to the transition, roughly 80% of new enrollments involved CDPAP. Anecdotally, the most recent trends are that new enrollments are running two-thirds to LHCSAs and one-third to CDPAP.

With respect to fraud and abuse, It is certainly the case that a program like CDPAP with distributed administration is more susceptible to fraud (e.g., no bona fide recipient of services, as in the recent story about a CDPAP enrollee being impersonated by her brother while she resided in Bangladesh) and abuse (e.g., aggressive business practices from FIs such as recruitment of new clients and forum shopping among managed long-term care plans for the most generous plan of care) than a program more tightly managed by a single FI or a LHCSA.

But the main reason for the extraordinary growth in the cost of CDPAP was simply the generous design of the program – a noble goal but one that proved financially unsustainable. A single FI such as PPL may offer some operating efficiencies due to economies of scale and perhaps be more efficient in recognizing fraud, but the principal benefit of a single FI is likely to come from a reduction in aggressive marketing and recruitment of clients. From the standpoint of patient advocates (as well as self-interested stakeholders), this is a barrier to entry that discourages those who need help from receiving it. From the State’s standpoint, it’s an essential element (albeit less targeted than eligibility changes) in sustaining the cost of the personal care program.

I have often made the point that government overengineers against risk – for good reasons and bad. Two of the good reasons are, first, the disproportionate political cost of fraud and abuse; and, second, the extraordinary difficulty of reversing bad policy decisions once made, because it is so hard politically to take away benefits or hurt providers. Both of these reasons are clearly seen in the long and often unhappy saga of the State’s personal care and CDPAP programs.

Ultimately, in the absence of a breakthrough in labor productivity in delivering personal care services, reining in the cost of this program will require incremental changes to benefits, eligibility, or home care worker compensation. Although it is politically appealing to suggest the savings come primarily from reductions in fraud and abuse and “administrative efficiencies” that only affect “middlemen,” the truth is a more difficult set of trade-offs between compassion for the elderly and disabled and the financial ability of the State to sustain the program.

Democrats, who are the strongest supporters of these social entitlement programs, should level with people that sometimes government makes commitments in good faith that it just can’t keep indefinitely. In the long run, confronting the limits of these entitlement policies is the only way to balance the competing priorities of government and to re-establish faith among voters about the integrity of their leaders.

Funding for Financially Distressed Hospitals

After the growth in spending on personal care, the largest source of increased spending in the Medicaid budget over the last decade has been operating subsidies (technically, “supplemental payments”) to support financially distressed hospitals. In addition to the significant financial commitment, the outsized importance of hospitals to key stakeholders and local communities requires a disproportionate amount of attention from State officials.

Despite the powerful resistance to change when it comes to hospitals, the State has made progress over the last five years in implementing its strategy to stabilize financially distressed hospitals. Much of the credit for this progress goes to the Deputy Secretary for Health, Angela Profeta, who has made financially distressed hospitals one of her priorities. The cliché about the time it takes to turn an aircraft carrier aptly applies to the State’s efforts in this area, but the aircraft carrier is slowly turning.

One of the keys to this progress was a simple bureaucratic change: the creation of the Health Care Safety Net Hospital Transformation (SNHT) Program in the FY 25 Budget. This program changed the paradigm of providing State assistance from an approach based on arms-length Requests for Proposal programs and uniform funding formulas to one of authorizing the State to work strategically with health systems. This involved a joint effort to develop financial and operational strategies while providing regulatory flexibility in the same way that the State has always worked strategically with corporations on major economic development projects.

A milestone was reached in October 2025 when Gov. Hochul announced $2.6 billion in capital and operating awards for six projects under the SNHT program. Four of these projects involved hospitals in upstate New York, with one full merger and three other initiatives involving various types of strategic alliances and infrastructure enhancements. The two initiatives involving downstate health systems both involve “full mergers”: the acquisition of St. John’s Riverside in Yonkers by Montefiore Health Systems; and the acquisition by New York City’s Health and Hospitals (H + H) system of Maimonides Medical Center in Brooklyn.

At least since 2014, the State’s overarching strategy for dealing with financially distressed hospitals was to have them acquired by stronger academic health systems. For reasons we have discussed in the past, the top private (“voluntary”) health systems wouldn’t touch these transactions with a 20-foot pole. What changed in FY 26 was that the significant financial resources made available by the SNHT program and the compelling synergies between Montefiore and St. John’s Riverside finally brought to fruition a combination that had been discussed but not realized for many years.

The other big change in FY 26, and one with wider implications, is that, in addition to Montefiore, the State found another health system that was more willing to accept long-term financial risk and was not afraid of the management distraction, reputational risk, and political complexity of making changes involving safety net hospitals, namely, NYC H + H. Involving H + H was not considered until about three years ago. The Hochul administration and the leadership at H + H both thought outside the box to solve the growing challenges of Maimonides Medical Center.

H + H brings the economies of scale, integrated IT systems, and sophisticated management team that the State sought in vain to gain from the major voluntary health systems. In addition, H + H brought a measure of financial vigorish to the acquisition in the form of higher Medicaid reimbursement rates that were not available to the major voluntary health systems. An arcane maneuver by the Trump administration in 2025, in connection with negotiations of HR1, authorizes H + H to receive significantly higher Medicaid reimbursement rates than other hospitals through a directed payment template (DPT) program. Specifically, H + H is able to receive the “average commercial rates” in the downstate region. Although this right may phase out over the course of the next 10 years, for the time being, H + H’s Medicaid reimbursement rates are well above the DPT rates the State pays on average to voluntary hospitals.

Time will tell whether the H + H-Maimonides combination model can apply to other financially distressed hospitals downstate, which at present are only able to remain open with ever-growing State operating subsidies. The devil is in the details in any complex acquisition, and it will take a while to figure out the operating and financial challenges and benefits of the Maimonides acquisition. But there is not a long-term future for standalone safety net hospitals – and H + H may be part of the solution.

As with other areas of the Budget, there is less transparency than policy analysts would like when it comes to the State’s financially distressed hospital program. The total amount of operating subsidies the State pays to individual financially distressed hospitals is not made public, so it is difficult to track progress (or regression) from year to year. Although the October 2025 announcement of the six SNHT program transactions stated that $2.6 billion was involved, there was no identification of individual awards or even the breakdown between operating subsidies and capital allocations. Indeed, at the time of the announcement, not even all of the affected hospitals were told the amount they would receive. This absence of transparency makes it more difficult for outsiders to understand the State’s policies and reinforces the Albany inside game in which trade associations and lobbyists know much more than the public.

Executive Budgets do, of course, provide some aggregate information about the amount of State operating subsidies paid to financially distressed hospitals. The last several Executive Budgets have presented this information in a loosely drawn chart in the Budget Briefing Book (p. 70), rather than a table that would clearly show the specific amounts of funding in each of the multiple categories of funding sources for operating subsidies:

Moreover, this picture in the Budget Briefing Book is distorted by the fact that the Executive Budgets of the last several years present a funding scenario that includes State-only VAPAP operating support (the most flexible source of funding) at a level that is $500 million less than the prior fiscal year’s level, only to have this added back by the legislature. While this may (or may not) give the Executive leverage in negotiations with the legislature, it’s not particularly plausible that the State could abruptly reduce operating subsidies by that amount, and it routinely understates the true level of expected spending for this purpose.

If you assume that this $500 million will be added to the Budget in negotiations, the Budget Briefing chart indicates that gross operating subsidies in FY 27 will be slightly more than $3.5 billion, which is roughly the amount of gross operating subsidies the State has spent since FY 24. Given that operating deficits at many (though not all) financially distressed hospitals have continued to grow, just holding operating subsidy spending constant, while making incremental progress on dealing with the underlying operating and financial problems of financially distressed hospitals, is something of a fiscal achievement.

At the same time, nearly all hospitals face growing financial pressure as a result of both long-standing trends we have discussed in the past (reduced patient volume combined with the compounding growth in expenses), as well as more recent significant challenges.

Among these new challenges are four in particular. First, HR 1 and Trump administration policies may result in a significant increase in uncompensated care due to both the insurance program changes discussed above and work requirements that will increase the number of uninsured. Second, there is growing pressure locally and nationally to impose “site-neutral” regulations that enable insurance plans to avoid paying hospitals more for performing procedures than the procedure would cost in outpatient settings.

Third, reform ideas now being discussed in Congress, by regulators, and in policy circles would reduce hospitals’ ability to use their 340B pharmaceutical discount programs to generate additional revenue – building on the significant change implemented by the State through its FY 24 carveout of pharmacy payments for managed care. Fourth, and most immediately, hospitals in New York are in the midst of quadrennial labor contract negotiations. The wage and other demands of the largest nurses’ union are sufficiently extreme that the major New York City health systems are willing to endure a long strike rather than capitulate. There is new leadership at 1199SEIU, which will be under strong pressure to keep up with wage increases granted to nurses when the 1199 contracts come up for negotiation later this year.

There are few sectors of the economy more susceptible to economic and technological disruption than hospitals. The day of reckoning will not occur in FY 27, so the major problems will continue to be kicked down the road, in part because the path forward is not only politically daunting but not yet clear. But the day of reckoning is coming within the next 5-10 years. Policymakers rarely have the luxury of pondering this future, so much of the intellectual spade work will have to be done by think tanks, visionary health systems, and private sector innovators, such as the venture firm General Catalyst, which acquired a hospital system in Ohio to better understand the impact of health technology point solutions when applied in a comprehensive hospital setting. It would be hubris to say that the Step Two Policy Project will be able to develop profound insights on this issue in the years ahead – but we are committed to trying to better understand the diagnosis and prescription for this coming transition.

Conclusion

When HR 1 was signed into law on July 4, 2026, a strong sense of gloom settled over the healthcare community in New York. I said at the time that I was in the camp of those who argued that most of the Medicaid cuts were more performative than real, but still thought that the combination of the loss of MCO tax revenue and the cost of shifting the Aliessa population to State-only Medicaid would require $4.3 billion of additional State-share Medicaid in FY 27.

Particularly in light of the pessimism of that time, the FY 27 Executive Budget in Health seems to offer almost an embarrassment of riches. On top of the better-than-expected financial picture, the FY 27 Executive Budget reflects incremental but important progress in addressing some of the biggest challenges in Health in recent years – the growth in personal care costs and MLTC plan enrollment, and the growing need for operating subsidies for financially distressed hospitals.

In addition, if our belief that the federal government will approve the State’s request to use the Basic Health Program Trust Fund reserves to fund Essential Plan benefits for the close to 750,000 lawfully present non-citizens rendered ineligible for federal benefits by HR 1, then the State will have an additional $2 billion to direct to other programs within the financial envelope identified in the Executive Budget.

That said, the Health budget faces looming threats just over the horizon. At best, the Trust Fund reserves last only for two or three years, after which the State will need to absorb close to $3 billion in additional State share expense related to the Aliessa population.

Implementation of other Medicaid cuts will begin after the 2026 midterm elections, leading to a rise in the number of the uninsured, an increase in uncompensated care, and other provider cuts. Moreover, the underlying trends of increased costs of long-term care, rising labor costs, and growth in operating deficits are unlikely to reverse.

Nevertheless, the relative lack of controversial issues and urgent needs in the FY27 budget gives the state the opportunity to seek tactical improvement in a number of smaller areas in the Health budget, including long-thwarted efforts to achieve efficiencies through expanded scope of practice provisions. We will address some of these other issues in the coming weeks.

It is often said that a crisis is a terrible thing to waste. But it is also true that it would be a waste if the State is unable to take advantage of its relative largess this year to address issues like scope of practice and investments in areas of need in the Healthcare budget that often get shunted aside because of the need to address the sector’s largest and most urgent problems.

We look forward to the evolution of the FY 27 Budget as it moves through the negotiation process.

Errata:

We try hard to get everything right in our Step Two Policy Project papers. When we make a material mistake, we will let you know about it. In Thoughts on the FY 27 Executive Budget – Part I, I wrote that the amount of federal payments to New York for the Essential Plan under both Section 1331 and Section 1332 waivers under the ACA generally represent 95% of the amount of the federal premium tax credit enrollees would have received had they purchased a Qualified Health Plan (QHP) on the NYSoH marketplace. On this logic, we estimated that the federal subsidy related to individuals enrolled in the Essential Plan who were in the income cohort of 200%-250% of the federal poverty level was approximately $6,500 per year.

However, the federal approval of the Section 1332 waiver limited the aggregate amount the federal government would pay in connection with the 200%-250% of FPL cohort to the amount that would be paid based on the expected enrollment in the Essential Plan by individuals in this cohort in order to maintain “budget neutrality.” Because QHP enrollment among this income cohort was only about 78,000, application of that principle limited the federal payment for this cohort to $570 million annually. My observations in the Commentary about transparency aside, this statistic is available publicly from CMS, so we could have caught it.

Because actual enrollment in the Essential Plan reached approximately 460,000 people, the actual federal subsidy on a per capita basis is only about $1,200 – a far cry from our estimate. That amount will be even lower now that the enhanced Premium Tax Credits have expired. This suggests that our potential remedy – to get federal approval for a parallel 1332 waiver just for the 200%-250% cohort – is, as the expression goes, “a dog that won’t hunt.” This also means that addressing the loss of affordable coverage for this large cohort of New Yorkers will be more difficult and more expensive than I had hoped.

Although we got that particular detail wrong, another development this week suggests we have been more on track in arguing that the Trump administration really does not want to significantly reduce Medicaid funding for New York before the 2026 midterms. As we had predicted might happen, CMS last Thursday finalized a rule that will delay the phaseout of the MCO tax until December 31, 2026, enabling the State to collect approximately $1 billion in additional federal funds that currently are not reflected in the Executive Budget. (Crain’s)

This below-the-radar-screen action by CMS reinforces our belief that, in addition to the legal reasons, political considerations weigh in favor of the federal government granting the State’s request to revert to the Section 1331 Essential Plan and utilize resources in the Basic Health Program Trust Fund to pay for the costs of covering otherwise ineligible non-citizens in the Essential Plan. This would eliminate the need for the State to spend more than $2 billion that is currently reflected in the FY 27 Executive Budget as being spent to provide State-only Medicaid to the Aliessa population.

In Budget terminology, the $1 billion in additional MCO tax revenue and the $2 billion now reserved for covering the Aliessa population have become a Budget “avail” for which many stakeholders will have ideas about how to use it.

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Endnotes

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[1] 2025 Financial Condition Report of New York State. Office of the New York State Comptroller Thomas DiNapoli. P. 24.

[2] The NYC Personal Income Tax Before and After the Pandemic. Office of the New York City Comptroller Brad Lander. November 2025. P. 2.

[3] Hochul’s proposed budget includes massive Medicaid spending, but Dr. Oz could sink NYS’ funding options. Vaughn Golden and Carl Campanile. New York Post. January 21, 2026.

[4] This is assuming that the enhanced Premium Tax Credits are not restored.

[5] Medicaid Managed Care Enrollment and Spending, by Fiscal Year. Step Two Policy Project.

[6] Medicaid Global Cap Spending Report April 2025 through September 2025. New York State Department of Health.

[7] Lawmakers skeptical of Hochul’s claimed $1.2B in home care savings. Kate Lisa. State of Politics/Spectrum News. January 21, 2026.

[8] Notoriously fraudulent NY health program lost $1.2 billion to scammers and middlemen: ‘Minnesota multiplied by 10.’ Isabel Vincent. New York Post. January 8, 2026.

This article offers a microcosm of the phenomenon of conflating fraud, waste and abuse. I will quote the story here at some length to help illustrate the point.

The article begins with a description of an example of fraud so egregious that it seems almost comical:

“Taking advantage of a generous New York state program to aid his ailing mother, Ballal Hossain signed up a dozen family members to work as her caregivers. Over six years, they were paid $348,000 to look after the elderly woman at a Manhattan apartment. Except the mom was in Bangladesh the entire time. Incredibly, Hossain got away with the fraud by having his brother pose as their sick mother for whenever inspectors showed up, before finally being caught. He was later sentenced for grand larceny, according to prosecutors. It’s just one egregious example of a welfare program — called the Consumer Directed Personal Assistance Program, or CDPAP — that has cost New York taxpayers hundreds of millions of dollars to waste and fraud.”

The New York Post article concluded with a statement from a DOH spokesperson:

“New York State took significant steps to reverse the CDPAP fiscal crisis by reining in administrative costs and establishing systems to eliminate opportunities for waste, fraud and abuse,” a spokesperson told The Post. “Fraudsters fought tooth and nail for over a decade to keep [the old] broken system in place – but those days are over because we shut them down. “The State Department of Health … [cut] out hundreds of middlemen – saving $1 billion for taxpayers over the past year and protecting home care for people who actually need it.”