On October 18, 2018, the New York Court of Appeals refused to enforce New York Department of Health regulations which precluded healthcare providers from paying executive salaries over $199,000 regardless of the funding source. In Leading Age New York Inc. v. Shah, the court ruled that regulations which set caps on the use of state funds for administrative costs and executive compensation were permissible but ruled that a similar regulation, which penalized excessive compensation regardless of the source of the funds, was impermissible.
In January 2012, New York Governor Andrew Cuomo issued Executive Order 38 directing agencies providing state funding to regulate the recipients’ use of such funding by limiting amounts spent towards executive compensation and administrative costs. The Executive Order was designed to ensure that New Yorkers’ tax dollars were being used in the most effective way. The New York Department of Health (NY DOH) later promulgated regulations in line with the Executive Order.
The NY DOH regulations applied to “covered providers,” which were defined as those entities (1) receiving state funds or state-authorized payments in an average annual amount in excess of $500,000; and (2) at least 30% of whose total annual in-state revenues were from state funds or state-authorized payments. The regulations placed, what the court referred to as, a hard cap and soft cap. The hard cap had two components – one relating to administrative costs and one relating to executive compensation. For administrative costs, the regulations prohibited covered providers from spending more than 15% of state funds on administrative costs. For the executive compensation hard cap, the regulations prohibited covered providers from using state funds to pay executive salaries in excess of $199,000 per year per executive.
The soft cap also capped executive compensation at $199,000 but included state funds, state-authorized payments, and, importantly, any other sources of funding. If the executive compensation exceeded $199,000 and either (1) was greater than the 75th percentile of that compensation provided to comparable executives; or (2) was not reviewed and approved by the covered provider’s governing body, then such covered provider would be subject to penalties. If a covered provider failed to cure such violation, the penalties included a (1) redirection of state funds; (2) suspension, modification or termination of the covered provider’s license to operate its programs; and (3) suspension, modification, or termination of state contracts with the covered provider.
This action commenced soon after the NY DOH promulgated the regulations. One action was brought by a collection of nursing homes, assisted-living programs, home-care agencies, and trade associations representing those providers (Matter of Leading Age New York, Inc., et al. v. Shah, et al). Another action was brought by the Coalition of New York State Public Health Plans, New York State Coalition of Managed Long Term Care/PACE Plans, and the New York Health Plan Association, Inc. (Matter of Coalition of New York State Public Health Plans, et al. v. New York State Department of Health, et al.). Both groups argued that the NY DOH exceeded its regulatory authority and sought to have the regulations invalidated. The two cases were consolidated to create this action.
The New York Court of Appeals agreed with the lower courts that the NY DOH did not exceed its regulatory authority in adopting the hard cap regulations. The court determined that passing the hard cap regulations was in line with the NY DOH’s authority to “regulate the financial assistance granted by the state in connection with all public health activities,” as granted by the New York Public Health Law. The court refused to uphold the regulation which penalized covered providers from paying executive salaries over $199,000 regardless of the source of the funding. The court reasoned that the soft cap regulations differed from the hard cap regulations as it was not focused on the direct regulation of state health care funding.
The NY DOH regulations can be found here. The opinion can be found here.
