No. APL-2017-00150 To be argued by:
MATTHEW W. GRIECO
20 minutes requested
State of New York
Court of Appeals
Proceeding No. 1
In the Matter of the Application of
LEADINGAGE NEW YORK, INC., et al.,
Appellants–Cross-Respondents,
For a Judgment Pursuant to Article 78 of
the Civil Practice Law & Rules
-against-
NIRAV SHAH, as Commissioner of Health, et al.,
Respondents–Cross-Appellants.
. Supreme Court, Albany County, Index No. 5333/13 .
Proceeding No. 2
In the Matter of the Application of
COALITION OF NEW YORK STATE PUBLIC HEALTH PLANS, et al.,
Appellants–Cross-Respondents,
For a Judgment Pursuant to Article 78 of
the Civil Practice Law & Rules
-against-
NEW YORK STATE DEPARTMENT OF HEALTH, et al.,
Respondents–Cross-Appellants.
. Supreme Court, Albany County, Index No. 5352/13 .
REPLY BRIEF FOR STATE RESPONDENTS–CROSS-APPELLANTS
STEVEN C. WU
Deputy Solicitor General
MATTHEW W. GRIECO
Assistant Solicitor General
of Counsel
BARBARA D. UNDERWOOD
Attorney General
State of New York
Attorney for State Respondents
28 Liberty Street
New York, NY 10005
(212) 416-8014
(212) 416-8962 (facsimile)
Dated: June 5, 2018
i
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES .............................................................. ii
PRELIMINARY STATEMENT ........................................................ 1
ARGUMENT ...................................................................................... 3
THE DEPARTMENT OF HEALTH ACTED WELL WITHIN ITS
STATUTORY AUTHORITY IN PROMULGATING 10 N.Y.C.R.R.
§ 1002.3(B) ..................................................................................... 3
A. Section 1002.3(b), Like the Rest of Part 1002,
Derives from DOH’s Statutory Authority to
Safeguard the Fiscal Health of Public-Health
Programs. .......................................................................... 3
1. Section 1002.3(b) complements the rest of
Part 1002 by identifying an additional red flag
warranting further scrutiny by DOH into the
fiscal decision-making of a provider seeking
substantial state funds.............................................. 4
2. The plaintiffs’ arguments against DOH’s
statutory authority are meritless. ............................ 8
B. Section 1002.3(b) Is Consistent with the
Constitutional Separation of Powers. ............................ 11
CONCLUSION ................................................................................ 17
ii
TABLE OF AUTHORITIES
Cases Page(s)
Boreali v. Axelrod,
71 N.Y.2d 1 (1987) ....................................................................... 12
Greater N.Y. Taxi Assn. v. New York City Taxi & Limousine
Commn.,
25 N.Y.3d 600 (2015) ................................................................... 12
Matter of Health Ins. Assn. of Am. v. Corcoran,
154 A.D.2d 61 (3d Dep’t 1990) ............................................... 12-13
Matter of New York State Health Facilities Assn. v. Axelrod,
77 N.Y.2d 340 (1991) ............................................................. 14, 16
Matter of New York Statewide Coalition of Hispanic
Chambers of Commerce v. New York City Dept. of Health
& Mental Hygiene,
23 N.Y.3d 681 (2014) ................................................................... 12
Statutes
Public Health Law
§ 201(1) .......................................................................................... 3
§ 206 ............................................................................................... 3
Social Services Law § 363-a .............................................................. 3
Regulations
10 N.Y.C.R.R.
§ 670.3(c) ...................................................................................... 15
§ 1002.3(a) ..................................................................................... 7
§ 1002.3(b) ........................................................................... passim
§ 1002.4(a) ............................................................................... 8, 15
iii
Regulations Page(s)
18 N.Y.C.R.R.
§ 504.2(c) ................................................................................. 5, 13
§ 504.4(e) ....................................................................................... 6
§ 504.5(a) ....................................................................................... 5
Miscellaneous Authorities
State of New York, Acceptable Compensation Surveys, at
https://executiveorder38.ny.gov/sites/default/files/EO_38
_Survey_Options_6-25-14.pdf .................................................... 14
State of New York, Guidance: Executive Order #38 and
Related Regulations (Nov. 2015), at
https://executiveorder38.ny.gov/sites/default/files/doc
uments/EO38ProviderGuidance_10-17-15.pdf .......................... 14
PRELIMINARY STATEMENT
When a prospective provider of public health services pays
executive compensation that is facially excessive and not subject to
any independent review, 10 N.Y.C.R.R. § 1002.3(b) authorizes the
Department of Health (DOH) to scrutinize more closely that
provider’s fiscal decision-making. This provision applies regardless
of whether the provider pays such excessive compensation out of
state or non-state funds. The plaintiffs’ continued objection to
§ 1002.3(b) rests on the untenable premise that DOH must turn a
blind eye to a provider’s financial choices if those choices involve (in
part) the expenditure of non-state funds. But DOH reasonably
determined that its statutory responsibility to protect the fiscal
health of public-health programs requires it to conduct a more
searching inquiry into providers whose spending from any source of
funds raises red flags—including, as relevant here, the payment of
executive salaries far out of line with comparable providers. This
Court should accordingly reinstate § 1002.3(b).
The plaintiffs’ arguments largely do not distinguish between
§ 1002.3(b) and the rest of Part 1002—an implicit acknowledgment
2
that all of the challenged provisions of Part 1002 stem from the
same legal authority and serve the same underlying policy
purposes. As DOH explained in its principal brief, DOH intended
§ 1002.3(b) to work in tandem with the other provisions of Part
1002 to focus the agency’s attention on particularly questionable
financial decisions made by health-care providers that are seeking
approval to receive substantial amounts of taxpayer money. The
provisions of Part 1002 upheld by the courts below require DOH to
more closely scrutinize a provider’s reasons for using state funds to
pay executive compensation above $199,000. Section 1002.3(b)
identifies a closely related red flag: when a provider pays executive
compensation, from whatever source of funds, well out of line with
comparable providers and without adequate procedural safeguards.
Either scenario raises legitimate concerns that the provider will be
a worse steward for public funds than a provider that pays more
reasonable and comparable executive salaries. And DOH acts well
within its statutory authority when it responds to these concerns
by inquiring into whether the provider has adequate justifications
for such facially excessive executive compensation.
3
ARGUMENT
THE DEPARTMENT OF HEALTH ACTED WELL WITHIN
ITS STATUTORY AUTHORITY IN PROMULGATING
10 N.Y.C.R.R. § 1002.3(B)
A. Section 1002.3(b), Like the Rest of Part 1002,
Derives from DOH’s Statutory Authority to
Safeguard the Fiscal Health of Public-Health
Programs.
Contrary to the plaintiffs’ contentions, DOH has statutory
authority to adopt § 1002.3(b). As DOH has explained, § 1002.3(b)
complements the rest of Part 1002, and is supported by the same
sources of statutory authority: DOH’s power to regulate state
health spending;1 to choose the private providers to whom it will
award contracts paid for with limited public funds;2 and to
supervise specific state programs, including Medicaid.3 See Br. for
State Respondents-Cross-Appellants (“DOH Main Br.”) at 73; see
also id. at 25-27. This Court should reverse the lower courts’
holding that § 1002.3(b) exceeds DOH’s authority under these
provisions.
1 See Public Health Law (PHL) § 201(1)(o)-(p).
2 See PHL § 206(3), (6).
3 See Social Services Law (SSL) § 363-a(2).
4
1. Section 1002.3(b) complements the rest of
Part 1002 by identifying an additional red flag
warranting further scrutiny by DOH into the
fiscal decision-making of a provider seeking
substantial state funds.
DOH’s principal brief detailed the statutory provisions that
authorize—and, indeed, obligate—the agency to closely scrutinize
the fiscal decision-making of private providers before approving
them to receive substantial amounts of taxpayer money to operate
public-health programs. As the brief explained, DOH’s authority
allows it to consider whether a covered provider has directly
allocated too much of its public funding to pay the salaries of its top
executives for reasons unrelated to program services. See DOH
Main Br. at 27-48. But DOH’s interest in overseeing public-health
programs also justifies its consideration of a provider’s overall
payment of compensation from all sources, including non-state
funds. The plaintiffs are mistaken in arguing that DOH is required
to disregard such spending altogether. See Reply Br. for
LeadingAge Appellants-Cross-Respondents (“LeadingAge Reply
Br.”) at 32-33; Reply Br. for Coalition Appellants-Cross-
Respondents (“Coalition Reply Br.”) at 21-22.
5
First, a provider’s profligate and disproportionate spending on
executive compensation unrelated to program services, even out of
non-state funds, raises the reasonable concern that the provider
may make similarly poor choices about its expenditure of taxpayer
dollars. For example, the same directors, officers, and other
personnel may be making decisions about spending from all
sources, and may be guided by the same organizational directives
and subject to the same internal controls (or lack thereof). For
similar reasons, as DOH has explained (DOH Main Br. at 73-74), it
is routine for DOH to consider a prospective provider’s conduct in
the private sector in evaluating whether it will be a responsible
steward of public funds. For example, as part of its overall
consideration of a Medicaid provider’s capacity “to be fiscally
responsible,” 18 N.Y.C.R.R. § 504.2(c), DOH will consider whether
a provider has defrauded private patients, and will take into
account whether a provider has been in good standing with private
insurance companies, see id. § 504.5(a)(2).4 Section 1002.3(b)
4 Under § 504.2(c), DOH has long reserved the option to ask a
prospective Medicaid provider for a “provision of information” about either the
6
represents a similar judgment that a provider’s facially excessive
executive compensation merits further scrutiny when it is out of
line with comparable providers’ and not subject to review by
independent directors.
At minimum, DOH could reasonably prefer to select providers
that pay more reasonable executive compensation over providers
whose compensation decisions are out of line with others’ in the
industry. A provider that responsibly limits its use of non-state
funds to pay executive salaries unconnected to program services
will necessarily spend that money for other purposes—including
expenditures that would redound to the benefit of public-health
beneficiaries, such as better training and resources for doctors and
other medical professionals, improved customer services, or
streamlined billing practices. Section 1002.3(b) thus helps DOH
further identify those providers whose financial choices promote
applicant’s ability to provide quality services or its ability to be fiscally
responsible. At the same time, DOH has reserved the right to deny a provider
the privilege of participating in Medicaid “if it is in the best interest of the
[Medicaid] program to do so.” 18 N.Y.C.R.R. § 504.4(e)(2).
7
rather than undermine the purposes of New York’s public-health
programs.
Second, § 1002.3(b) reasonably reflects DOH’s interest in
ensuring that providers do not “directly or indirectly” leverage state
funds to pay excessive executive compensation. 10 N.Y.C.R.R.
§ 1002.3(a) (emphasis added). As DOH has explained (DOH Main
Br. at 75-76), because money is fungible, a provider could use
improper accounting to credit particular executives’ compensation
in part or in whole to non-state revenue when, in reality, that non-
state revenue was available for such compensation only because
state funding in some other area freed up that money. The scrutiny
authorized by § 1002.3(b) thus ensures that state funds are not
indirectly leveraged to pay excessive compensation.
In short, § 1002.3(b) works in conjunction with the rest of Part
1002 by ensuring that DOH will closely scrutinize executive
salaries, regardless of the source of funding, if those salaries exceed
compensation from comparable providers and were not set by a
reliable independent process. See 10 N.Y.C.R.R. § 1002.3(b)(1)-(2).
Such facially excessive salaries are not altogether forbidden by
8
§ 1002.3(b); instead, the company is required only to justify that
salary in light of the nature and size of the provider’s operations,
the qualifications of the position, the need to pay a particular salary
to maintain the quality of program services, and other relevant
factors. See 10 N.Y.C.R.R. § 1002.4(a)(2). Given the legitimate
concerns raised by a provider’s potentially questionable financial
decisions about executive compensation, it is reasonable for DOH
to require such additional justification before approving a provider
to receive public funds.
2. The plaintiffs’ arguments against DOH’s
statutory authority are meritless.
The plaintiffs’ principal argument (see Coalition Reply Br. at
3, 7-11; LeadingAge Reply Br. at 20-24) is that the sources of
statutory authority cited above—which DOH also relied upon in its
rulemaking notice (see Record on Appeal [“R.”] 949, 987)—are not
specific enough to authorize § 1002.3(b). But as DOH has explained
(see DOH Main Br. at 42-45), the Legislature need not specifically
mention executive compensation for DOH to have authority to
consider a provider’s compensation choices. To the contrary,
9
scrutiny of a provider’s financial choices is an inherent part of
DOH’s delegated authority to supervise public-health programs
and oversee spending and contracting in such programs. Executive
compensation is simply another form of spending that is relevant to
DOH’s exercise of that authority.
The LeadingAge plaintiffs rightly concede that DOH’s broad
statutory authority over public contracts—including in the
Medicaid program—allows it to evaluate a provider’s fiscal
responsibility. See LeadingAge Reply Br. at 10; see also id. at 7-10.
Indeed, the plaintiffs acknowledge that DOH was authorized to
promulgate a separate regulation, 18 N.Y.C.R.R. pt. 504, which
governs the screening of Medicaid providers. That regulation was
adopted pursuant to the same sources of statutory authority relied
on here. See DOH Main Br. at 33.
The plaintiffs argue that § 1002.3(b) exceeds DOH’s statutory
authority because it is no longer necessary for DOH to scrutinize
their financial decisions once they have been approved to act as
service providers. See LeadingAge Reply Br. at 2, 7-10, 14. But
DOH does not scrutinize providers only upon their initial
10
application to join a public-health program. To the contrary, all
providers must regularly renew their applications (see DOH Main
Br. at 7-9), and a determination that a provider was sufficiently
responsible to warrant an initial contract does not prohibit DOH
from determining that a provider’s executive compensation levels
have, over time, become so excessive that the provider no longer
qualifies as fiscally responsible. The fact that § 1002.3(b) is not part
of the same application process provided for in Part 502 and 504 is
immaterial (cf. LeadingAge Reply Br. at 8): nothing restricts DOH
from adopting new screening rules in a new regulation rather than
by amending an existing one.
The plaintiffs also criticize the courts below (and DOH’s
principal brief) for mentioning a number of statutes not cited in the
rulemaking notice. As DOH has explained (see DOH Main Br. at 25-
36), the statutes cited in the rulemaking notice (see R. 949, 987) are
more than sufficient to support § 1002.3(b)’s validity. The lower
courts’ citation to other statutes merely confirms the breadth of
DOH’s responsibility to oversee public-health programs. There is
thus no “scavenger hunt” for sources, as the Coalition plaintiffs put
11
it (see Coalition Reply Br. at 3), but rather multiple, overlapping
confirmations that the Legislature intended for DOH to scrutinize
providers’ financial decisions in deciding whether they can be
entrusted with substantial taxpayer money.
B. Section 1002.3(b) Is Consistent with the
Constitutional Separation of Powers.
The plaintiffs’ challenges to § 1002.3(b) on separation-of-
power grounds largely restate their arguments against Part 1002
as a whole, and fail for similar reasons. See DOH Main Br. at 49-
63. As DOH has previously explained, the regulation at issue here
operates in an area where agencies routinely exercise primary
responsibility. See DOH Main Br. at 42-45, 50-51, 76. The
legislative branch typically makes broad policy judgments about
which public health programs to establish and how much funding
to allocate to each program. Executive agencies then make the more
granular decisions that ensure that the funding provided by the
Legislature reaches its intended programs and is not improperly
diverted to another goal. The selection of the private contractors
that will provide publicly funded services in public programs is thus
12
a classically executive action that does not in any way intrude on
the Legislature’s prerogatives. Cf. Matter of New York Statewide
Coalition of Hispanic Chambers of Commerce v. New York City
Dept. of Health & Mental Hygiene, 23 N.Y.3d 681, 699 (2014);
Boreali v. Axelrod, 71 N.Y.2d 1, 11-12 (1987).
The “coalescing circumstances” that in some cases indicate
improper agency policymaking are thus simply not present here. Cf.
Boreali, 71 N.Y.2d at 11. Contrary to the plaintiffs’ arguments
about the first two Boreali factors (see Coalition Reply Br. at 23;
LeadingAge Reply Br. at 32-33), DOH did not improperly assume
the Legislature’s policy role or write on a blank slate. When, as
here, an agency regulates in a field that the Legislature has
instructed it to oversee, it is necessarily “not writing on a clean
slate,” but instead carrying out a statutory responsibility delegated
by the Legislature.5 Greater N.Y. Taxi Assn. v. New York City Taxi
& Limousine Commn., 25 N.Y.3d 600, 611 (2015).
5 The plaintiffs assert (see Coalition Reply Br. at 17) that this Court has
previously invalidated an agency’s regulation of an existing program based on
an analysis of the Boreali factors, but they are mistaken. In that case, decided
shortly after Boreali itself, this Court summarily affirmed a Third Department
decision that striking down an Insurance Department regulation. See Matter
13
Here, plaintiffs do not dispute that DOH has statutory
authority to scrutinize a provider’s “ability to provide high-quality
care, services and supplies and to be financially responsible.” 18
N.Y.C.R.R. § 504.2(c).6 Section 1002.3(b) faithfully carries out this
responsibility by directing taxpayer funds to providers whose
reasonable spending on overall executive compensation suggests
that they will provide quality public health services in a fiscally
responsible manner.
The plaintiffs also err in contending (see Coalition Reply Br.
at 22-23) that § 1002.3(b) is an improper exercise in policymaking
because it includes a $199,000 benchmark and allows providers to
show compliance by comparing their salaries to a compensation
of Health Ins. Assn. of Am. v. Corcoran, 154 A.D.2d 61 (3d Dep’t), aff’d on op.
below, 76 N.Y.2d 995 (1990). But the regulation that case banned the use of
HIV testing in insurance underwriting because of the social and psychological
impact on patients and the stigma the disease carried. Id. at 65-66. The
Insurance Department’s consideration of such social issues implicated
Boreali’s core concerns in a manner that § 1002.3(b) focus on fiscal oversight
does not.
6 The Coalition plaintiffs incorrectly argue (see Coalition Reply Br. at 23)
that DOH relies on Part 504, rather than a statute, as “authorizing”
§ 1002.3(b). Part 504 is just another example of a similar regulation that DOH
lawfully adopted pursuant to the sources of statutory authority at issue here.
14
survey.7 As this Court has specifically held, an agency does not
exceed its general statutory authority by setting specific numerical
benchmarks, provided that those benchmarks are “ideal norms
subject to modification” based on statutorily relevant factors.
Matter of New York State Health Facilities Assn. v. Axelrod, 77
N.Y.2d 340, 345-47, 350 (1991). Section 1002.3(b) works in precisely
this way: the $199,000 compensation benchmark is a default, but a
provider may exceed it if the compensation was set by an
independent body and supported by a compensation survey that
7 The Coalition plaintiffs are incorrect in stating (see Coalition Reply Br.
at 23) that DOH has not identified appropriate compensation surveys. DOH
has released public guidance explaining several different appropriate
compensation surveys. First, the State has identified three specific databases
that collect compensation data; a survey based on any one of those databases
is considered valid. See State of New York, Acceptable Compensation Surveys
(internet). Second, providers may retain “other entities that have the capacity
and regularly provide such salary surveys, including CPA or consulting firms.”
Id. Third, a provider may conduct its own compensation survey, provided that
the survey takes into account salary-relevant factors including types of
services rendered, number of employees in an organization, geographic area,
education level, experience required, and others. See State of New York,
Guidance: Executive Order #38 and Related Regulations at 41 (Nov. 2015)
(internet). These options were adopted in consultation with providers
themselves following the promulgation of the regulations, in order to give
providers “maximum flexibility to utilize compensation surveys that they deem
appropriate to meet the requirements of the regulations.” Acceptable
Compensation Surveys, supra.
15
studied relevant factors, or if the provider obtains a waiver, see 10
N.Y.C.R.R. §§ 1002.3(b), 1002.4(a).8
Section 1002.3(b)’s use of a numerical benchmark thus
parallels the DOH regulation this Court upheld in New York State
Health Facilities Association. The regulation at issue there
provided as a default that a “reasonable percentage of Medicaid
patient admissions” at a nursing home would be “75 percent of the
annual percentage of all residential health care facility admissions”
in the same area. 10 N.Y.C.R.R. § 670.3(c)(2). Other subsections
then allowed a nursing home to submit a “written plan” to DOH
proposing adjustments to the admission ratio, which could be
“increased or decreased” based on relevant “factors” including local
patient need, the intensity of care required by the mix of patients
the nursing home typically serves, and the financial impact on the
facility. Id. § 670.3(c)(3)-(4). This Court rejected a Boreali challenge
brought by nursing homes, interpreting the rule to set “flexible
8 The LeadingAge plaintiffs therefore are wrong to say that § 1002.3(b)’s
requirements “are imposed in the first instance, before any consideration of
the[ ] factors” supporting a waiver. LeadingAge Reply Br. at 10. To the
contrary, a provider may request a waiver at any time—in advance of the
compensation period, at the end of it, or on a standing basis.
16
standards,” not “rigid minimums.” Matter of New York State Health
Facilities Assn., 77 N.Y.2d at 345. So too here: the $199,000
benchmark is not a strict “cap,” but instead a limit above which a
provider must provide additional justification to continue receiving
substantial state funds.
With respect to the third Boreali factor—legislative
inaction—the plaintiffs simply repeat the arguments from their
principal brief with respect to the rest of Part 1002 (see Coalition
Reply Br. at 24; LeadingAge Reply Br. at 32), and DOH’s principal
brief already responds to those arguments (see DOH Main Br. at
55-58).
Finally, with respect to the fourth Boreali factor—use of
agency expertise—the Coalition plaintiffs are mistaken in arguing
(Coalition Reply Br. at 24) that DOH lacks relevant expertise in
regulating health care providers. As previously explained, “[a]
substantial portion of DOH’s work” involves the financial side of
supervising the health industry, and its “expertise has long
included developing criteria for evaluating the fiscal responsibility
of service providers.” DOH Main Br. at 59. Because § 1002.3(b)
17
works in tandem with the rest of Part 1002 to guide DOH’s
evaluation of providers’ fiscal choices, it reflects the same expertise
that supports the rest of the challenged regulation.
CONCLUSION
This Court should affirm the Appellate Division order in all
respects except that it should reverse that court’s declaration that
§ 1002.3(b) of Part 1002 is invalid.
Dated: New York, New York
June 5, 2018
STEVEN C. WU
Deputy Solicitor General
MATTHEW W. GRIECO
Assistant Solicitor General
of Counsel
Respectfully submitted,
BARBARA D. UNDERWOOD
Attorney General
State of New York
Attorney for Respondents-
Cross-Appellants
By: ____________________________
MATTHEW W. GRIECO
Assistant Solicitor General
28 Liberty Street
New York, NY 10005
(212) 416-8014
Reproduced on Recycled Paper
/s/ Matthew W. Grieco
AFFIRMATION OF COMPLIANCE
Pursuant to the Rules of Practice of the New York Court of Appeals (22
N.Y.C.R.R.) § 500.13(c)(1), Matthew W. Grieco, an attorney in the Office of
the Attorney General of the State of New York, hereby affirms that according
to the word count feature of the word processing program used to prepare
this brief, the brief contains 3,120 words, which complies with the limitations
stated in § 500.13(c)(1).
______________________________
Matthew W. Grieco
/s/ Matthew W. Grieco