On November 13, 2015, the New York State Supreme Court, Albany County issued a decision in LeadingAge et al. v. Shah,1 upholding in part and invalidating in part regulations issued by the Department of Health to implement Executive Order 38, limiting executive compensation and administrative expenses for certain State-funded providers.2  The petitioners in the consolidated case comprise over 200 not-for-profit and for-profit nursing homes, assisted living programs, home care agencies, trade associations, and managed care plans.  Previously issued Clients & Friends Memoranda discuss the challenged regulations in greater detail.3

Specifically, the decision upholds the Department’s authority to cap the use of State funds by a “covered provider"4 (absent a waiver) to pay for (a) executive compensation, at $199,000 a year and (b) administrative expenses, initially at 25% of total operating costs and lowering the cap by 5% per year to 15% by 2015.  The Court, however, invalidated the regulation’s “soft cap” on executive compensation, limiting the amount paid by allsources – including non-State sources – and specifically requiring providers to satisfy the regulatory “safe harbor” in order to justify compensating covered executives from all sources in excess of $199,000.  The safe harbor permits total compensation above $199,000 (absent a waiver), provided the compensation falls below the 75th percentile for executives of comparable providers and is approved by the provider’s board of directors, including at least two independent directors using comparability data; and such approval is substantiated with sufficiently detailed contemporaneous data. 

In the Court’s view, by limiting State dollars spent on executive compensation and administrative expenses, the Department of Health was acting within its “statutory authority to ‘regulate the financial assistance granted by the state in connection with all public health activities’ (Public Health Law § 201[o]), and to ‘expand funds made available for public health pursuant to law’ (id. at § 201[p])”; and to generally “regulate funding for health care providers and to enter into contracts for the provision of services and care.”  However, the Court reasoned, “the Department of Health overstepped its statutory authority by setting a ‘soft cap’ on executive salaries paid from all sources and defining the criteria and decision-making processes that must be applied before corporate entities may exceed the ‘soft cap.’”

The ultimate fate of Executive Order 38, together with the promulgated regulations, still remains uncertain.  The New York State Appellate Division, Second Department heard argument on April 27, 2015 in the appeals of the April 8, 2014 decision of the Supreme Court, Nassau County, holding that Executive Order 38 and the Department of Health regulations exceeded the agency’s authority (Agencies for Children’s Therapy Services Inc. v. New York State Dep’t of Health); and the July 29, 2014 decision by Supreme Court, Suffolk County, upholding the Department of Health’s authority (Concerned Home Care Providers, Inc. v. New York State Dep’t of Health).  Guidance posted on the State’sExecutive Order 38 Website indicates that covered providers conducting business in Nassau County are not required to file Executive Order 38 disclosures pending the determination of the Agencies for Children’s Therapy Services appeal.  The Second Department’s decision resolving the split in lower court decisions may be further appealed to the State’s highest court -- the Court of Appeals -- for final determination.