ALBANY – The state law that provides billions of dollars in subsidies for hospitals and health coverage for the uninsured is handing out money faster than it comes in, and could open a hole in next year’s budget, Comptroller Alan Hevesi warned yesterday.

The biggest threat is litigation that is jeopardizing about $1.2 billion in state revenue tied to the 2002 conversion of New York’s largest health insurer, Empire Blue Cross & Blue Shield, into the for-profit company known as WellChoice.

This litigation, if left unaddressed, could leave programs financed through the Health Care Reform Act $400 million in the red before it expires June 30, he said.

Meanwhile, the costs of health plans for the working poor – Child Health Plus, Elderly Pharmaceutical Insurance Coverage, Family Health Plus, and Healthy New York – are growing faster than the revenues earmarked to pay for them, he said.

The report foreshadows what is likely to be a major headache of the legislative session next year, as lawmakers consider how to preserve costly health programs they created over the past seven years, mostly during flush times, in light of today’s chronic budget shortfalls.

First enacted in 1997, the Health Care Reform Act ended a decades-old system of state regulation of hospital fees.

In place of that system, the act, known as HCRA, levied taxes on health-care services, largely paid by insurers, to generate billions of dollars. The state used that money to compensate hospitals for providing charity care to the indigent and training young physicians.

Later amendments used HCRA as a vehicle to expand health coverage for the poor, using new taxes on cigarettes and the proceeds of a lawsuit settlement against tobacco companies. In January 2002, in a deal with labor leader Dennis Rivera, Mr. Pataki agreed to subsidize the pay and benefits of health-care workers using the proceeds of the Empire conversion and a further cigarette tax hike.

Consumer groups sued over that law, arguing that proceeds from the sale of stock in a nonprofit company should go into a trust fund rather than the state treasury.

Mr. Pataki proposed legislation last year designed to moot that lawsuit, but the Assembly and Senate never approved it.

Yesterday, the comptroller, a Democrat elected in 2002, called for lawmakers to stop depending on one-time sources of cash, such as the Empire conversion, to pay for ongoing programs, and to stop sequestering about $1 billion in annual payments to hospitals in “off-budget” accounts.

Mr. Hevesi called for the contract to manage those accounts, currently held by an upstate insurance company, to be awarded by competitive bidding.

“Questionable financing arrangements, such as our reliance on Empire proceeds, could lead to unfunded or under funded programs,” Mr. Hevesi said in releasing the report. “The state should not be using nonrecurring revenues for ongoing expenses, but instead should be using these resources for one-time health costs, such as capital projects.”

Hospital officials disputed the comptroller’s analysis, saying the state was unlikely to forfeit the $1.2 billion and might actually collect more than that if lawmakers authorize the conversion of additional health plans to for-profit status.

“Frankly we’re not really worried about the Empire money,” said the senior vice president for finance at the Greater New York Hospital Association, Patricia Wang.

“The state could win in court. The Legislature and the executive have it within their ability to amend the legislation. We think it’s more a matter of timing,” she said.

The association’s senior vice president for government affairs, David Rich, also argued that moving the hospital subsidies into the budget, where they would be subject to approval by the Legislature and the comptroller’s office, would lead to unnecessary delays.

“The last thing we want to see is another layer of bureaucracy put between these financially struggling institutions and the funds they need to survive,” Mr. Rich said.