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State’s Highest Court Hears Oral Argument in LeadingAge NY Challenge to Executive Order #38 Regulations

On Sept. 5th in Albany, the New York State Court of Appeals heard oral argument in LeadingAge New York et al v. Shah, a challenge we brought along with other groups to Executive Order #38 (EO #38) and the resulting regulations which cap executive compensation and administrative costs. A companion case, Coalition of New York State Public Health Plans et al v. New York State Department of Health et al, was also heard that day. The actual oral argument may be viewed on the Court of Appeals website. The Court of Appeals will likely issue a written decision on the appeals in the next 30 to 60 days.

The EO #38 regulations limit executive compensation for covered providers in two basic ways. The “Hard Cap” prohibits the use of State funds or State-authorized payments (including Medicaid funds) in excess of $199,000 to provide “executive compensation.” The “Soft Cap” prohibits executive compensation exceeding $199,000 from all sources of revenue unless the compensation in question is within the 75th percentile of comparable providers and has been approved by the provider’s governing board, including at least two independent directors or voting members.

Two lower courts which reviewed the LeadingAge New York et al v. Shah and Coalition cases had upheld the Hard Cap but agreed with the Petitioners that the Soft Cap exceeded the Department of Health’s (DOH) authority and, therefore, violated the separation of powers doctrine.

During oral argument at the Court of Appeals, Petitioners argued that DOH exceeded its authority by setting a cap on executive salaries and defining the criteria and decision-making processes that must be applied before corporate entities can exceed the cap. In this regard, Petitioners argued that DOH was improperly acting on its own ideas of good public policy. Petitioners also emphasized that allowing the Soft Cap limit on executive compensation would allow DOH to reach unduly into corporations’ prerogative to allocate assets and income from both governmental and non-governmental sources.

The State Respondents argued that DOH did not usurp the Legislature’s prerogative by establishing caps on administrative costs and executive compensation that will be reimbursed by State funds or State-authorized payments. Respondents contended that DOH has the authority to regulate the use of public health funds under the Public Health Law. Some members of the court inquired whether DOH’s authority to enter into contracts and to regulate the financial assistance granted by the State in connection with all public health activities includes the authority to limit executive compensation and administrative expenses which derive from State funds.

Petitioners replied that DOH’s authority to control its own expenditures cannot be reasonably interpreted as authority to control how providers spend earned revenues for past services, since title to those funds has effectively transferred to the providers. Finally, Petitioners noted that the initial effort to include executive compensation limits as part of the budget bill supported Petitioners’ claim that there was no prior legislative authority for the EO #38 compensation limits.

Contact: Dan Heim, dheim@leadingageny.org, 518-867-8866