UPDATE 1-US states can divert stimulus aid for Medicaid--NY

(Updates with city testimony, association's response, new paragraphs: 5-7, 11-12.)

By Joan Gralla

NEW YORK, March 5 (Reuters) - U.S. states, including New York, can use some of the Medicaid aid in the U.S. economic stimulus plan for other programs, Governor David Paterson said on Thursday, a day after New York City charged that the state was withholding as much as $900 million of its Medicaid funds.

The Democratic governor said in a statement that Congress only barred states from putting the Medicaid dollars in rainy day funds or lowering the number who can get Medicaid, the federal-state health plan for the poor, disabled and elderly.

In contrast, the $787 billion plan to revive the nation's economy set specific limits on education and transportation spending. The education aid must make up for planned cuts, while the transportation projects must get under way quickly.

New York is one of only a few states that require cities and towns to share Medicaid's cost, and often a thorny issue because the state spends twice the national average, $2,283 versus $1,026, on a per capita basis.

New York City worked with Congress to require the state to base Medicaid dollars for cities, towns and counties on how much they actually spend, Jeff Kay, who runs the city's Office of Operations, told the Democratic-led City Council.

But instead, the state is interpreting the stimulus law "in a way that allows them to disregard actual Medicaid expenditures and take more money for the state directly from the city's share," Kay said in his written testimony.

In 2005, the state curbed how much Medicaid costs can rise when they are paid by localities -- but that safeguard is now in peril, Kay said. The city, which has most of the state's Medicaid patients, will get an extra $1.9 billion from the stimulus plan, but it says it should get up to $2.8 billion.

Jeffrey Gordon, a spokesman for the state budget division, said New York City was getting "a fair and equitable" amount. The state will spend $1.2 billion limiting Medicaid costs for cities, towns and counties, which means the state will "ultimately" take on a bigger burden, he added.

Both the state and city have budget holes, and Paterson plans to slash spending on healthcare and education.

The state ranks 30th in the quality of its healthcare, and "Statistics show patients still aren't getting the care they deserve," said Paterson.

The Greater New York Hospital Association, among others, has run ads bashing Paterson's health cuts and he urged it to instead "engage in a public debate."

An Association spokesman said Paterson's news conferences, YouTube videos, etc., and its "ongoing public education all prove the merits of Governor Paterson's health care proposals are in fact being publically debated each and every day."