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In re Application of Leadingage New York, Inc.

Supreme Court, Albany County

November 13, 2015

In the Matter of the Application of Leadingage New York, Inc. and NEW YORK STATE HEALTH FACILITIES ASSOCIATION, INC., et al., Plaintiffs-, Petitioners,
v.
Nirav R. Shah, M.D., M.P.H., as Commissioner of The New York State Department of Health, and ANDREW CUOMO, as Governor of the State of New York, Defendants-, Respondents. In the Matter of the Application of COALITION OF NEW YORK STATE PUBLIC HEALTH PLANS, NEW YORK STATE COALITION OF MANAGED LONG TERM CARE/PACE PLANS, and NEW YORK HEALTH PLAN ASSOCIATION, INC., Plaintiffs-Petitioners,
v.
NEW YORK STATE DEPARTMENT OF HEALTH And NIRAV R. SHAH, M.D., M.P.H., as Commissioner Of The New York State Department of Health, Defendants-Respondents.

          Hinman Straub, P.C. Attorney for Plaintiffs-Petitioners (LeadingAge New York, Inc. and New York State Health Facilities Association, Inc.) (David T. Luntz, Esq., of counsel)

          O'Connell & Aronowitz Attorneys for Plaintiffs-Petitioners (LeadingAge New York, Inc. and New York State Health Facilities Association, Inc., et al.) (Cornelius D. Murray, Esq., of counsel)

          O'Melveny & Myers LLP Attorneys for Plaintiffs-Petitioners (Coalition of New York State Public Health Plans, New York State Coalition of Managed Long Term Care/ Pace Plans, and New York Health Plan Association, Inc.) (Andrew J. Frackman and Abby F. Rudzin, Esqs., of counsel)

          Eric T. Schneiderman Attorney General of the State of New York Attorney for Defendants-Respondents (Stephen M. Kerwin, of counsel)

          Denise A. Hartman, Acting Supreme Court Justice

         In January 2012, Governor Andrew Cuomo issued Executive Order No. 38 directing the Department of Health, among other agencies, to promulgate regulations (a) requiring that at least 75 percent of State financial assistance or State-authorized funds be used for direct care or services; and (b) prohibiting the use of such funds for executive compensation in excess of $199, 000 per year. In May 2013, the Department of Health adopted final regulations imposing these limits on administrative costs and executive compensation of care providers that receive State financial assistance or State-authorized funds (see 10 NYCRR part 1002). Going beyond the terms of the executive order, the regulations also impose a "soft cap" on executive compensation from all sources-including non-taxpayer funds-except under certain conditions (see 10 NYCRR § 1002.3).

         Plaintiffs-petitioners (collectively, petitioners) are multiple not-for-profit and for-profit health care providers, managed care plans, and trade associations. They commenced these two hybrid declaratory judgment actions-article 78 proceedings to challenge the executive order and the Department of Health's regulations. By order dated August 13, 2014, Supreme Court (Ceresia, J.) consolidated the cases and dismissed pursuant to CPLR 3211 (a) (7) all causes of action but those alleging a violation of the separation of powers doctrine and that the regulations are arbitrary and capricious. Defendants-respondents, the Department of Health and its Commissioner and the Governor (collectively, respondents), then answered. The Court heard oral argument on September 2, 2015.

         The Court concludes that, with the exception of the "soft cap" provision imposing limits on executive compensation regardless of the source of funds, the Department of Health regulations implementing the executive order do not violate the separation of powers doctrine, nor are they arbitrary and capricious.

         Background

         In January 2012, Governor Cuomo issued Executive Order No. 38 declaring that the State has "an ongoing obligation to ensure that taxpayers' dollars are used properly, efficiently, and effectively, " and that "in certain instances providers of services that receive State funds or State-authorized payments have used such funds to pay for excessive administrative costs and outsized compensation for their senior executives rather than devoting a greater proportion of such funds to providing direct care or services to their clients." In an effort to focus taxpayers' dollars on paying for direct care and services to those in need, the executive order directed agencies that give State financial assistance or State-authorized payments to providers of care or services to promulgate regulations requiring that no less than 75 percent of State financial assistance or State-authorized payments to a provider for operating expenses shall be for direct care or services rather than administrative costs. It directed agencies to ratchet up the minimum direct care percentage to 85 percent by April 1, 2015.

         The executive order also directed "to the extent practicable" that reimbursement with State financial assistance or State-authorized funds shall not be provided for compensation paid to any executive in an amount greater than $199, 000 per year. It permitted the agencies to adjust that figure annually, subject to the approval of the director of the budget, but not to exceed the federal rate of basic pay set forth in the executive schedule promulgated by the U.S. Office of Personnel Management.

         In May 2013, after notice and public comment, the Department of Health promulgated regulations to implement Executive Order No. 38 (see 10 NYCRR part 1002). The regulations set limits on "administrative expenses" and "executive compensation" for "covered providers, " and address waivers, reporting, and penalties for non-compliance. "Covered providers" include, among others, hospitals and nursing homes, home care services agencies, residential health care facilities, long term health care programs, AIDS care programs, hospices, assisted living residences, and emergency service entities that receive State funds or State-authorized payments above certain thresholds (id. at § 1002.1[d] [3]). An entity is "covered" if, pursuant to an agreement with a State, county or local government to render program services, it receives State funds or State-authorized payments averaging in a two-year period more than $500, 000 annually, and receives more than 30 percent of its total in-state revenues from State funds or State-authorized payments (id. at § 1002.1[d] [1], [2]).

         Administrative Expenses Regulation

         The regulation sets limits on the amount of administrative expenses that may be paid using State funds or State-authorized payments. The regulation defines "administrative expenses" as those expenses "incurred in connection with the covered provider's overall management and necessary overhead that cannot be attributed directly to the provision of program services" (10 NYCRR § 1002.1 [a]). They include the "portion of the salaries and benefits of staff performing administrative and coordination functions that cannot be attributed to particular program services, " such as the executive director or chief executive officer, financial officers, and accounting, public relations, information technology, and human resources personnel (id. at § 1002.1 [a] [1] [i]). They also include legal expenses and office expenses that cannot be attributed directly to the provision of program services, such as the costs of telephone and computer systems, licenses and permits, office supplies, subscriptions and conferences, and insurance (id. at §§ 1002.1 [a] [1] [ii], [iii]).

         The regulation mandates that "[n]o less than seventy-five percent of the covered operating expenses of a covered provider paid for with State funds or State-authorized payments shall be program services expenses rather than administrative expenses" (id. at § 1002.2 [a]). The percentage, which became effective for all covered providers on July 1, 2013, was required to be increased by five percent each year until it reached 85 percent in 2015 (id.).

         Executive Compensation Regulations

         The regulations impose two different limits on compensation for "covered executives." The term "covered executive" includes "a compensated director, trustee, managing partner, or officer, " and "key employees" whose salary and/or benefits, in whole or in part are administrative expenses (id. at § 1002.1 [b]). The definition confines "key employees" to the top-ten highest paid individuals, and excludes chairs, directors, and other clinical and program personnel in hospitals or other facilities that provide program services (id.).

         The first limit on executive compensation is what petitioners term a "hard cap." Absent a waiver, a covered provider "shall not use State funds or State-authorized payments for executive compensation given directly or indirectly to a covered executive in an amount greater than $199, 000 per annum" (id. at § 1002.3 [a]). The Department of Health must review that hard cap amount annually and adjust it as necessary, subject to the approval of the Division of the Budget (id.). The "hard cap" applies only to the use of State funds or State-authorized payments for executive compensation.

         The second limit on executive compensation, which goes further than the limit directed by the executive order, is what petitioners term a "soft cap." The "soft cap" provision allows covered providers to pay covered executives more than $199, 000 per annum from "not only State funds and State authorized payments but also any other sources of funding, " but, absent a waiver, they may do so only under one of two circumstances (id. at § 1002.3 [b]). First, the covered executive may be paid more than $199, 000 from all sources if the amount is not "greater than the 75th percentile of that compensation provided to comparable executives in other providers of the same size and within the same program service sector and the same or comparable geographic area" based on a compensation survey recognized by the Division of the Budget (id. at § 1000.3 [b] [1]). Second, the covered executive may be paid more than $199, 000 from all sources if the amount has been reviewed and approved by the covered provider's board of directors or equivalent governing body, "including at least two independent directors or voting members, " and such review includes an assessment of appropriate comparability data (id. at § 1000.3 [b] [2]).

         The effective date of the executive compensation limits was July 1, 2013, but contracts with covered providers that predated July 1, 2012 were grandfathered (id. at § 1002.3 [h]). The limits are applicable to renewals of such contracts, as well as to pre-existing contracts extending beyond April 1, 2015, unless the covered providers obtain a waiver (id.).

         Waivers, Reporting, and Penalties

         The regulations provide for waivers of the limits on executive compensation and administrative expenses upon a "showing of good cause, " and establish procedures for obtaining such waivers (id. at § 1002.4). They also set forth the factors to be considered before granting or denying such waivers and provide that any waiver must be approved by both the Department of Health and the Division of the Budget (id.). The regulations establish reporting requirements to facilitate enforcement (id. at § 1002.5). And they establish procedures for determining non-compliance, an opportunity for corrective action, and penalties ranging from the redirection of funds to the suspension, modification, or termination of licenses or contracts to provide services (id. at § 1002.6).

         Petitioners' Contentions

         Petitioners in LeadingAge New York, Inc., et al. v Shah (the LeadingAge Petitioners) consist of "covered providers" and trade associations that collectively represent the interests of more than 1, 000 not-for-profit and for-profit entities that provide care in long-term and skilled nursing facilities, senior housing facilities, and adult care and assisted living communities in this State. Petitioners in Coalition of New York State Public Health Plans, et al. v New York State Department of Health (Coalition Petitioners) consist ...


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