New York providers and health plans that contract with the state have fewer restrictions on how much they pay their executives, thanks to a recent ruling from New York state's highest court.
They may pay executives more than $199,000 a year as long as they are not using state funds, the New York State Court of Appeals ruled last week.
Chief Judge Janet DiFiore called the "soft cap" unconstitutional. The soft cap penalized providers or plans that contract with the state and pay their executives more than $199,000 annually from any source of funding—state or private. The Department of Health exceeded its authority with soft caps by "attempting to regulate compensation from all sources," according to the appellate court, which agreed with the a lower court ruling.
But the "hard cap" is still intact, absent any waivers. Under that provision, contracted providers and insurers can't use state funds for executive compensation that exceeds $199,000. It also caps administrative spending to 15% of their total operating expenses.
"This has widespread impact because it doesn't subject these entities to limitations on their use of private funds," said Eileen Considine, a partner at Drinker Biddle. This is an important case because it involves the separation of powers, she added.
Governor Andrew Cuomo signed Executive Order 38 in 2012, seeking to curb abuses in executive compensation and administrative costs. It applies to providers or insurers that receive more than an average of $500,000 from the state, namely from Medicaid, during a two-year period. Also, 30% of the organization's total annual revenue has to come from the state.
While eliminating the soft cap would have a minimal impact on healthcare spending, it could bolster competition, said Hermes Fernandez, a senior partner at Bond, Schoeneck & King.
"It gives agencies that have other funding sources greater flexibility and will help them retain and recruit executive talent," he said.
A healthcare organization may receive a waiver for the caps if they can demonstrate that they would be unable to provide the program at the same level of quality and availability without state funds, among other exceptions.
The plaintiffs, LeadingAge New York and the Coalition of New York State Public Health Plans that represent and cover nursing homes, assisted-living programs and home care agencies, argued that both the soft and hard caps are arbitrary. Medicaid reimbursement rates do not go up when executives are paid more, they contend. Setting those caps falls outside of the Department of Health's purview, plaintiffs also claimed.
Only one judge dissented from the appellate court on the hard cap issue, where the original ruling said they did not fall outside of the Department of Health's jurisdiction because the department has a duty to use tax dollars efficiently. Hard caps did not usurp the legislature's role, the Supreme Court found.
