NY Appellate Division, Third Dept., Rules EO-38 Soft Cap Unconstitutional

On June 22, 2017, a New York appeals court took aim at Gov. Andrew Cuomo’s Executive Order No. 38. The executive order and the accompanying Department of Health (“DOH”) regulations have been the subject of controversy and appeal since their 2012 debut.

The New York State Appellate Division, Third Department, in Leadingage N.Y., Inc. v. Shah invalidated the Executive Compensation Soft Cap provision, which caps executive compensation paid through all sources of revenue, but upheld the Executive Compensation Hard Cap and Administrative Expense Cap provisions.

Background

The Executive Compensation Soft Cap prohibits the payment of state funds to a covered provider when the provider’s executive compensation derived from all sources, including private insurance, exceeds $199,000.

The Executive Compensation Hard Cap prohibits the payment of state funds to a covered provider when the provider’s executive compensation derived from state funds exceeds $199,000 per year.

The Administrative Expense Cap provision directs that at least 75% (with an increase of 5% each year to a maximum of 85%) of state funds granted to a healthcare provider be used for direct care and services rather than for administrative expenses.

Penalties for violating these three provisions include, but are not limited to, redirection of state funds, suspension, modification, limitation or revocation of the provider’s license to operate programs that deliver Medicaid services and/or termination of contracts or other agreements with Medicaid.

The Decision

The Third Department diverged from the 2015 Second Department decision with respect to its Boreali analysis of the Executive Compensation Soft Cap provision. The Third Department held that the DOH exceeded its authority and improperly acted on its own accord in promulgating the soft cap provision, as it interrupts the decision-making process of corporate governing bodies and violates the separation of powers doctrine.

Specifically, the court found it concerning that the soft cap provision limits the use of non-state funds for executive compensation, as it is falls outside the scope of the DOH’s authority to focus taxpayer funds on direct patient care and services. However, the court upheld the Executive Compensation Hard Cap and Administrative Expenses Cap, finding that the DOH has a rational basis to regulate health care costs and regulate the use of state funds to limit excessive compensation and promote public health programs.

Future Impact

Both the Second Department and the Third Department have upheld the Administrative Expenses Cap and the Executive Compensation Hard Cap. Health service providers including, but not limited to, covered Article 28 facilities, Article 36 facilities and Article 30 ambulance and first response services that receive sufficient state funds or state authorized payments, including Medicaid, must ensure compliance with the Administrative Expenses Cap and Executive Compensation Hard Cap provisions of Executive Order No. 38 and its implementing regulations. The Executive Compensation Soft Cap was held unconstitutional with respect to the parties in this most recent case.

To date, the DOH has not updated its website to account for the Second and Third Department decisions and has not yet issued a response to this most recent ruling. It is unclear how the DOH will react with respect to other covered providers in New York State.