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In re Leadingage New York, Inc.

Supreme Court of New York, Third Department

June 22, 2017

In the Matter of LEADINGAGE NEW YORK, INC., et al., Appellants- Respondents,
v.
NIRAV SHAH, as Commissioner of Health, et al., Respondents- Appellants. (Proceeding No. 1.) In the Matter of COALITION OF NEW YORK STATE PUBLIC HEALTH PLANS et al., Appellants- Respondents,
v.
NEW YORK STATE DEPARTMENT OF HEALTH et al., Respondents- Appellants. (Proceeding No. 2.)

          Calendar Date: March 29, 2017

          O'Connell & Aronowitz, Albany (Cornelius D. Murray of counsel) and Hinman & Straub, PC, Albany (David T. Luntz of counsel), for Leadingage New York, Inc. and others, appellants-respondents.

          O'Melveny & Meyers, LLP, New York City (Henry M. Greenberg of Greenberg Traurig, LLP, Albany, and James W. Lytle of Manatt, Phelps & Phillips, LLP, Albany, of counsel), for Coalition of New York State Public Health Plans and others, appellants-respondents.

          Eric T. Schneiderman, Attorney General, New York City (Matthew W. Grieco of counsel), for respondents-appellants.

          Before: Peters, P.J., McCarthy, Egan Jr., Mulvey and Aarons, JJ.

          Peters, P.J.

         Cross appeal from a judgment of the Supreme Court (Hartman, J.), entered November 17, 2015 in Albany County, which partially dismissed petitioners' applications, in two combined proceedings pursuant to CPLR article 78 and actions for declaratory judgment, to declare invalid certain regulations promulgated by respondent Department of Health.

         Respondent Department of Health (hereinafter DOH) is responsible for overseeing a number of state programs to provide medical services to needy New Yorkers, the most prominent of which is Medicaid. Including federal Medicaid funds, the money entrusted to DOH for public health programs for the 2016-2017 fiscal year surpasses $137 billion, which includes $63 billion in state Medicaid funds (see NY State Div of the Budget, 2016-2017 Executive Budget Briefing Book at 83 [2016-2017]). DOH directs a significant portion of these funds to private entities that provide health care services to New Yorkers under agreements with DOH and local governments that act on DOH's behalf.

         In January 2012, Governor Andrew Cuomo issued Executive Order No. 38 (hereinafter EO38) (see Executive Order [Cuomo] No. 38 [9 NYCRR 8.38]) to a number of his appointees, including respondent Commissioner of Health, instructing them to ensure that taxpayer funds allocated for services to needy New Yorkers are primarily spent on providing services to such persons, rather than on overhead expenses. EO38 was triggered by a task force investigation, which had revealed that some "providers of services that receive[d s]tate funds or [s]tate-authorized payments... used such funds to pay for excessive administrative costs and outsized compensation for their senior executives" (9 NYCRR 8.38). "[S]uch abuses, " EO38 stressed, "harm both the people of New York who are paying for such services, and those persons who must depend upon such services to be available and well-funded" (9 NYCRR 8.38). EO38 accordingly directed DOH, among other covered state agencies, to promulgate regulations aimed at curbing "abuses in executive compensation and administrative costs and ensur[ing] that taxpayer dollars are used first and foremost to help New Yorkers in need" (9 NYCRR 8.38). To accomplish this goal, EO38 elaborated, the regulations must direct that "[n]o less than [75%] of the [s]tate financial assistance or [s]tate-authorized payments to a provider for operating expenses shall be directed to provide direct care or services rather than to support administrative costs" (9 NYCRR 8.38 [2] [a]). This percentage was to "increase by [5%] each year" so that, as of April 2015, 85% of state-authorized payments to providers would be directed "to provide direct care or services rather than to support administrative costs" (9 NYCRR 8.38 [2] [a]). EO38 further instructed the agencies, "[t]o the extent practicable, " not to provide funding for executive compensation above $199, 000 per year (9 NYCRR 8.38 [2] [b]). The $199, 000 figure was intended to reflect the highest salary paid to executives in the federal government, which could be adjusted annually for the cost of living and other factors (see 9 NYCRR 8.38 [2] [b]). Finally, EO38 directed that the regulations could allow, "under appropriate circumstances and upon a showing of good cause, " a waiver from compliance for certain providers (9 NYCRR 8.38 [3]).

         In May 2013, DOH promulgated regulations, codified in 10 NYCRR part 1002, which imposed limits on administrative expenses [1] and executive compensation of certain health care providers that receive state financial assistance or state-authorized funds (hereinafter the hard cap) (see 10 NYCRR 1002.2 [a]; 1002.3 [a]). The regulations also placed the same restrictions upon certain providers that receive funding from all sources, including nontaxpayer funds, except under certain conditions (hereinafter the soft cap) (see 10 NYCRR 1002.3 [b]). Before adopting the regulations, DOH published a proposed rule and accepted public comments for a full year, and thereafter made multiple rounds of revisions in response to those comments (see 34 NY Reg, Oct. 31, 2012 at 42; 35 NY Reg, Mar. 13, 2013 at 36; 35 NY Reg, Apr. 10, 2013 at 16; 35 NY Reg, May 29, 2013 at 12).

         Consistent with EO38, 10 NYCRR part 1002 requires the "covered providers" to file an annual disclosure form with DOH regarding their allocation of state funds (10 NYCRR 1002.5) and generally prohibits such providers from using 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 (10 NYCRR 1002.3 [a]). The regulations further provide that, where the covered providers' executive compensation exceeds $199, 000 per year from any source of funding (i.e., state or non-state), the covered provider will be subject to penalties if such compensation either (1) is "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 as established by a compensation survey identified, provided, or recognized by [DOH] and the Director of the Division of the Budget"; or (2) was not reviewed and approved by the board of directors or equivalent governing body of the covered provider after taking into consideration "appropriate comparability data" (10 NYCRR 1002.3 [b]). However, the restriction on executive compensation would not apply to limit reimbursement with state funds or state-authorized payments for "reasonable compensation paid to a covered executive for program services, including but not limited to supervisory services performed to facilitate the covered provider's program services, rendered by the executive outside of his or her managerial or policy-making duties" (10 NYCRR 1002.3 [c]).

         The regulations also provide that any covered provider may apply for a waiver of the executive compensation and/or administrative costs limits upon a showing of "good cause, " which consideration takes into account various factors such as the extent to which the availability and quality of the program services that the subject provider provides would be negatively affected without a waiver, as well as the nature, size and complexity of the provider's operations (10 NYCRR 1002.4 [a], [b]) [2]. If a covered provider fails to comply with the limitations on executive compensation or administrative expenses and has not obtained a waiver, it is subject to suspension, modification or termination of its service contract or its license to deliver DOH program services or, where possible and consistent with federal and state laws, the redirection of state funds or state-authorized payments (see 10 NYCRR 1002.6 [a], [d]).

         Shortly after their promulgation, petitioners separately commenced these hybrid proceedings seeking to invalidate the subject regulations on the grounds that they violate the separation of powers doctrine and are arbitrary and capricious. The proceedings were consolidated and, after joinder of issue, Supreme Court issued a detailed and comprehensive decision finding that, with the exception of the soft cap provision, the regulations at issue were a constitutional exercise of authority by DOH and are neither arbitrary nor capricious. Accordingly, the court partially granted the petitions and declared the soft cap provision invalid as violative of separation of powers principles. This cross appeal ensued.

         Petitioners contend, and the dissent agrees, that both the hard cap and the soft cap components of the subject regulations violate the constitutional separation of powers doctrine. "The concept of the separation of powers is the bedrock of the system of government adopted by this [s]tate in establishing three coordinate and coequal branches of government, each charged with performing particular functions" (Matter of NYC C.L.A.S.H., Inc. v New York State Off. of Parks, Recreation & Historic Preserv., 27 N.Y.3d 174, 178 [2016] [internal quotation marks and citations omitted]; see NY Const, art III, § 1; art IV, § 1). The separation of powers doctrine "'requires that the [L]egislature make the critical policy decisions, while the executive branch's responsibility is to implement those policies'" (Greater N.Y. Taxi Assn. v New York City Taxi & Limousine Commn., 25 N.Y.3d 600, 609 [2015], quoting Bourquin v Cuomo, 85 N.Y.2d 781, 784 [1995]).

         "The cornerstone of administrative law is derived from the principle that the Legislature may declare its will, and after fixing a primary standard, endow administrative agencies with the power to fill in the interstices in the legislative product by prescribing rules and regulations consistent with the enabling legislation" (Matter of Nicholas v Kahn, 47 N.Y.2d 24, 31 [1979] [citations omitted]; see Greater N.Y. Taxi Assn. v New York City Taxi & Limousine Commn., 25 N.Y.3d at 608). "In so doing, an agency can adopt regulations that go beyond the text of that legislation, provided they are not inconsistent with the statutory language or its underlying purposes" (Matter of General Elec. Capital Corp. v New York State Div. of Tax Appeals, Tax Appeals Trib., 2 N.Y.3d 249, 254 [2004] [citation omitted]; accord Matter of Allstate Ins. Co. v Rivera, 12 N.Y.3d 602, 608 [2009]; Matter of WL, LLC v Department of Economic Dev., 97 A.D.3d 24, 29 [2012], affd sub nom. James Sq. Assoc. LP v Mullen, 21 N.Y.3d 233');">21 N.Y.3d 233 [2013]). We are mindful that "[t]he branches of government cannot always be neatly divided"; thus, "common sense must be applied when reviewing a separation of powers challenge" (Greater N.Y. Taxi Assn. v New York City Taxi & Limousine Commn., 25 N.Y.3d at 609; see Bourquin v Cuomo, 85 N.Y.2d at 784-785).

         As recently reaffirmed by the Court of Appeals, Boreali v Axelrod (71 N.Y.2d 1');">71 N.Y.2d 1');">71 N.Y.2d 1');">71 N.Y.2d 1 [1987]) continues to be "the touchstone for determining whether agency rulemaking has exceeded legislative fiat" (Matter of NYC C.L.A.S.H., Inc. v New York State Off. of Parks, Recreation & Historic Preserv., 27 N.Y.3d at 178; see Matter of Acevedo v New York State Dept. of Motor Vehs., ___ N.Y.3d ___, ___, 2017 NY Slip Op 03690, *8 [2017]; Matter of New York Statewide Coalition of Hispanic Chambers of Commerce v New York City Dept. of Health & Mental Hygiene, 23 N.Y.3d 681, 692-693 [2014]). Boreali "set out four 'coalescing circumstances'... for courts to consider when determining whether an agency has crossed the hazy 'line between administrative rule-making and legislative policy-making'" (Greater N.Y. Taxi Assn. v New York City Taxi & Limousine Commn., 25 N.Y.3d at 610, quoting Boreali v Axelrod, 71 N.Y.2d at 11; see Matter of Acevedo v New York State Dept. of Motor Vehs., 2017 NY Slip Op 03690 at *8). These circumstances are

         "whether (1) the agency did more than balance costs and benefits according to preexisting guidelines, but instead made value judgments entailing difficult and complex choices between broad policy goals to resolve social problems; (2) the agency merely filled in details of a broad policy or if it wrote on a clean slate, creating its own comprehensive set of rules without benefit of legislative guidance; (3) the [L]egislature has unsuccessfully tried to reach agreement on the issue, which would indicate that the matter is a policy consideration for the elected body to resolve; and (4) the agency used special expertise or competence in the field to develop the challenged regulation" (Matter of NYC C.L.A.S.H., Inc. v New York State Off. of Parks, Recreation & Historic Preserv., 27 N.Y.3d at 179-180 [internal quotation marks, brackets and citations omitted]; see Matter of Spence v Shah, 136 A.D.3d 1242');">136 A.D.3d 1242, 1245 [2016], lv denied 27 N.Y.3d 908');">27 N.Y.3d 908');">27 N.Y.3d 908');">27 N.Y.3d 908 [2016]).

         The Boreali factors "are not mandatory, need not be weighed evenly, and are essentially guidelines for conducting an analysis of an agency's exercise of power" (Greater N.Y. Taxi Assn. v New York City Taxi & Limousine Commn., 25 N.Y.3d at 612; accord Matter of NYC C.L.A.S.H., Inc. v New York State Off. of Parks, Recreation & Historic Preserv., 27 N.Y.3d at 180; see Matter of Acevedo v New York State Dept. of Motor Vehs., 2017 NY Slip Op 03690 at *8). The "central theme" of the Boreali analysis is that "an administrative agency exceeds its authority when it makes difficult choices between public policy ends, rather than finds means to an end chosen by the [L]egislature" (Matter of New York Statewide Coalition of Hispanic Chambers of Commerce v New York City Dept. of Health & Mental Hygiene, ...


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