To be Argued by:
David T. Luntz, Esq.
(Time Requested: 20 Minutes)
NEW YORK STATE
COURT OF APPEALS
In the Matter of the Application of
LEADINGAGE NEW YORK, INC., NEW YORK STATE HEALTH FACILITIES
Appellants-Respondents,ASSOCIATION, INC., et al.
-against-
NIRAV SHAH, in his official capacity as Commissioner of the NEW YORK STATE
DEPARTMENT OF HEALTH, and ANDREW CUOMO, as Governor of the State of New York,
Respondents-Appellants.
For a Hybrid Action pursuant to CPLR Article 78 and for a Declaratory Judgment.
In the Matter of the Application of
COALITION OF NEW YORK STATE PUBLIC HEALTH PLANS, NEW YORK STATE
COALITION OF MANAGED LONG TERM CARE/PACE PLANS, and NEW YORK
Appellants-Respondents,HEALTH PLAN ASSOCIATION, INC.,
-against-
NEW YORK STATE DEPARTMENT OF HEALTH and NIRAV R. SHAH, M.D., M.P.H., as
Commissioner of The New York State Department of Health,
Respondents-Appellants.
RESPONSE/REPLY BRIEF OF
APPELLANTS-RESPONDENTS
Court of Appeals No. APL-2017-00150
Appellate Division No. 523308
Cornelius D. Murray, Esq.
O’Connell & Aronowitz
Attorneys for LeadingAge Appellants-Respondents
54 State Street
Albany, NY 12207
Phone -(518) 462-5601
Fax -(518) 462-2670
David T. Luntz, Esq.
Hinman Straub P.C.
Attorneys for LeadingAge Appellants-Respondents
121 State Street
Albany, NY 12207
Phone - (518) 436-0751
Fax -(518) 436-4751
Date Completed: May 21, 2018
TABLE OF CONTENTS
PRELIMINARY STATEMENT
POINT I
THE REGULATIONS ARE NOT A VALID EXERCISE OF DOH’S
AUTHORITY TO MAKE A “THRESHOLD DETERMINATION” OF A
PROVIDER’S FISCAL RESPONSIBILITY
A. The Regulations have nothing to do with the threshold determination,
made during the Medicaid application or renewal process, regarding
whether a provider is “fiscally responsible.”
B. The Department’s limited right to evaluate the fiscal responsibility of
Providers as part of its authority to contract does not give it the authority
to impose the Hard and Soft Caps
C. The Regulations directly affect payments to existing Medicaid
providers, in contravention of the Legislature’s policy decisions regarding
the structure of Medicaid payments and the limited circumstances under
which a provider’s right to payment is conditioned
POINT II
THE REGULATIONS ARE NOT A VALID EXERCISE OF DOH’S
AUTHORITY TO ENSURE THE QUALITY AND EFFICIENCY OF
MEDICAID SERVICES
POINT III
THE CHALLENGED REGULATIONS ARE ARBITRARY AND
CAPRICIOUS
A. The Regulations bear no relationship to the stated goal of ensuring
that providers “spend more” on providing health care
B. The premise of the Regulations that “more is better” is contrary to
DOH’s own policy
C. The Regulations have no connection to reducing Medicaid program
expenditures
D. The waiver process does not cure the arbitrary and irrational
character of the Regulations
POINT IV
THE APPELLATE DIVISION’S DECISION ANNULLING THE SOFT
CAP SHOULD BE UPHELD
1
6
6
7
10
14
20
20
25
25
25
28
28
30
32
32
i
34CONCLUSION
ii
TABLE OF AUTHORITIES
Cases
Bay Ridge Diagnostic & Analytical Laboratory, Inc. v. Smith, 71 A.D.2d 889 (2d
Dept. 1979)
Boreali v. Axelrod 71 NY2d 1 (1987)
Clove Lakes Nursing Home v. Whalen, 45 N.Y.2d 873 (1978) !
Matter of Birchwood Nursing Home v. Whalen, 70 A.D.2d 1020 (3d Dept. 1979)17
Matter of Citizens for an Orderly Energy Policy v. Cuomo, 582 N.Y.2d (1991)... 16
Odd Fellow & Rebekah Rehabilitation and Health Care Center, Inc. v.
Commissioner of Health, 107 A.D.3d 1095 (3d Dept. 2013)
Packer Coll. Inst. v. University of State ofN.Y, 298 N.Y.184 (1948) .10, 11, 13, 14
Rapp v. Carey, 44 N.Y.2d 157 (1978)
Other Authorities
18 N.Y.C.R.R. §540.6(a)(l)
18 N.Y.C.R.R. 504.1(a)
18 N.Y.C.R.R. 504.5
18 N.Y.C.R.R. 515.2
18 N.Y.C.R.R. 515.2 (b)(ll)
18 N.Y.C.R.R. 515.2(b)(1)(c)
18 N.Y.C.R.R. 515.2)(a)
18 N.Y.C.R.R. 515.3
18 N.Y.C.R.R. 518.1
18 N.Y.C.R.R. Part 518
PHL §201
PHL § 364
PHL §368-c
PHL § 201
PHL § 2808(2-b)(c)
PHL § 2808(2-c)
State Finance Law § 163
17
13
17
30
13
18
8
8
20
28
28
21
20,21
20
20,21
22
16
16
33
23
26
12
iii
PRELIMINARY STATEMENT
The issue presented to this Court is simple: Does the authority delegated to
the NYS Department of Health (“DOH” or the “Department”) over public health
funds and the Medicaid program authorize DOH to dictate how private businesses
make otherwise lawful, discretionary decisions unrelated to the services being
purchased by the Medicaid program, purely because the Department claims that
such decisions reflect on the overall “fiscal responsibility” of a provider? The
answer is clearly no.
DOH’s authority to control the expenditure of public health funds and ensure
the efficient use of those funds is not unlimited. Rather, DOH’s authority to
control such funds ends when a provider has fully performed its contractual
obligations, and DOH pays the provider for the services provided. At that point,
title to the payment vests in the provider, and DOH has no further right to that
money (other than the explicit statutory right to recoup the payment in the event
that the services paid for were not performed in accordance with applicable
requirements).
To allow DOH to dictate how those payments (and, in the case of the Soft
Cap, even revenues not earned from the State), rightfully earned by providers, can
be spent, would open the floodgates to limitless intrusion by DOH into the inner
1
workings of private businesses, and allow DOH to violate the property rights of
providers in ways clearly never contemplated by the Legislature.
Similarly, DOH cannot use its authority to evaluate the “fiscal
responsibility” of providers as part of the contracting process to justify such
intrusion. As an initial matter, the Regulations have absolutely nothing to do with
the provider application or renewal process in which such threshold determination
of “fiscal responsibility” is made. The Regulations, in direct contradiction of the
Legislature’s own policy choices, control how providers that have already been
determined to be fiscally responsible, can spend the payments they have earned for
services properly rendered. If DOH were permitted to stretch the State Finance
Law this far, it would open the doors to DOH dictating any number of private
business decisions based on what DOH deems to be the “right” or “responsible”
business decision.
Finally, Respondents-Appellants claim that the Regulations are within
DOH’s authority because of DOH’s responsibility to ensure the quality and
efficiency of Medicaid services. This is a red herring. As explained herein,
because of the reimbursement-based payment structures in place, the Challenged
Regulations (and the purported effort to require providers to do “more” with the
payments they receive) will have no impact on the cost of Medicaid services. Nor
2
can DOH’s purported concerns about quality be used as a justification for the
challenged Regulations.
DOH already has the authority to fully recoup payments for services that do
not meet DOH’s quality and other standards in their entirety. Likewise, DOH can
sanction or even exclude a provider who misuses Medicaid funds. Thus, these
Regulations, which dictate how providers must spend those funds they are entitled
to keep (i.e. payments for services performed in accordance with all of DOH’s
rules and regulations), affect only payments for services not afflicted with such
quality concerns.
Despite Respondents-Appellants’ claims to the contrary, there is simply no
statutory authority in the Public Health Law or State Finance Law that can, even
under the broadest of readings, be interpreted to permit DOH to continue to control
and dictate the expenditure of Medicaid dollars once title to those dollars changes
hands and they are no longer subject to recoupment by DOH. Otherwise DOH
would have the authority to establish the internal budgets of private businesses, as
there would be no distinction between the expenditures here-executive
compensation and administrative expenses-and other expenditures. All reflect on
the subjective evaluation of a provider’s “fiscal responsibility” in the sense used by
the Department. As Justice Mulvey correctly points out in his dissent (discussed
3
below), Respondents-Appellants’ broad reading of the State Finance Law is
improper and goes beyond what the Legislature intended.
Further, even if the enabling legislation at issue could be stretched as far as
the Respondents-Appellants claim, the Regulations should be annulled because
they are arbitrary and irrational. The range of providers subjected to the Hard Cap
and Soft Cap established in the Challenged Regulations is far reaching, from a
small home care provider in rural upstate New York to a large nursing home in
New York City. The cost of living and the ability to recruit and retain top talent,
varies greatly across New York State. The demands placed on an executive in a
small provider setting are completely different from those placed on the executives
of a large and complex provider.
Respondents-Appellants themselves explicitly acknowledge, both in their
brief to this Court and the waiver provisions of the Regulations themselves, that
numerous factors, such as size and complexity of a provider organization, and
geographic location, bear substantially on whether $199,000 is a reasonable salary
for a provider’s top executives. Instead of ensuring the integrity of Medicaid
providers, what the Regulations really do is disadvantage many of the State’s
largest Medicaid providers in the competition for experienced and qualified
executives, ironically forcing them to recruit lower tier executives, and introducing
into the Medicaid program the potential for the very character, competency and
4
responsibility concerns that Respondents-Appellants claim justify the Regulations.
Respondents-Appellants now claim that the caps are not mandates at all, but rather
flexible benchmarks used in the context of an informed “threshold” determination
about whether or not a provider is “responsible” and, thus, an entity with which the
Department should contract. Respondents-Appellants’ characterization is belied
by the plain language of the Regulations, which impose industry-wide restrictions
on how existing providers, already deemed to be fiscally responsible by the
Department, can use payments duly earned by them for services already provided.
Applying a single cap on the compensation that the executives of all these
providers can be paid is, on its face, unreasonable, arbitrary and irrational.
5
POINT I
THE REGULATIONS ARE NOT A VALID EXERCISE OF DOH’S
AUTHORITY TO MAKE A “THRESHOLD DETERMINATION” OF
A PROVIDER’S FISCAL RESPONSIBILITY
In a strained effort to find authority for the Hard and Soft Caps1 challenged
herein, and to distract this Court from the plain language of the Regulations,
Respondents-Appellants attempt to repackage both the Hard and Soft Caps as mere
“flexible benchmarks,” applied as part of the contracting process and informed by
the many factors relevant to the appropriateness of such benchmarks, when DOH
makes a threshold determination of a provider’s fiscal responsibility.
The problem with Respondents-Appellants’ characterization is three-fold.
First, the Regulations have nothing to do with the Medicaid contracting process
(i.e. the application or renewal process) during which such “threshold”
determination about a provider’s fiscal responsibility is made.
Second, the Department’s authority to evaluate the “fiscal responsibility” of
a provider, even if it is assumed, arguendo, that the Regulations were an
implementation of such objectives, cannot be stretched so far as to authorize the
Department to dictate internal, lawful business decisions based on the
Department’s own views about what constitutes a “responsible” decision.
The Hard Cap and Soft Cap are defined in Appellants-Respondents’ Principal Brief at p. 12.
6
Third, what the Regulations really do is dictate how providers already
accepted into the Medicaid program and deemed fiscally responsible by DOH can
spend payments duly earned by them, in direct contravention of the Legislature’s
policy determinations. The Hard and Soft Caps constitute a blanket mandate, not a
“flexible benchmark,” applied to payments to current Medicaid providers without
any consideration by the Department of the factors that are relevant to a
determination as to whether such mandates are appropriate.
A. The Regulations have nothing to do with the threshold determination,
made during the Medicaid application or renewal process, regarding
whether a provider is “fiscally responsible.”
Respondents-Appellants claim that DOH has the statutory authority to
impose the Hard and Soft Caps because it has the authority to make the threshold
determination of whether to contract with a provider in the first place (i.e. to decide
whether a provider is qualified and responsible to provide Medicaid services).
Respondents-Appellants claim that the Hard and Soft Caps constitute flexible
benchmarks considered in the context of this threshold determination, and have
nothing to do with payments made to providers once they are accepted into the
Medicaid program. Respondents-Appellants’ assertions are without merit and
contrary to the plain language of the Regulations.
In fact, the Regulations are untethered from the application or renewal
process during which a provider’s fiscal responsibility is evaluated, or the
7
“threshold” determination of whether the Medicaid program should contract with a
provider in the first place.
The Hard and Soft Caps are imposed only on those providers who have
already gone through the application process and have been accepted as a
participating provider. During that process, DOH has evaluated the character and
competence of such providers, the fiscal responsibility of such providers, and any
other appropriate factors. 18 N.Y.C.R.R. 504.1(a) (“Only qualified and
responsible persons may be enrolled as providers of care, services and supplies.”);
18 N.Y.C.R.R. 504.5. Indeed, every Appellant-Respondent in this proceeding
(other than the trade associations) has already been determined by DOH to be
fiscally responsible and qualified to participate in the Medicaid program.
The Regulations do not amend or add to the provisions of Part 502 (which
govern the information that must be disclosed by a provider upon application to the
Medicaid program) or Part 504 (governing the application process). The
Regulations simply have nothing to do with the application and renewal process,
and do not reflect an appropriate exercise of the Department’s authority to evaluate
the fiscal responsibility of a Medicaid provider, even if it is assumed arguendo that
the Department’s authority to do so permits DOH to consider the kinds of internal,
lawful, business judgments that are at issue here (a premise Appellants-
Respondents vehemently reject, for the reasons discussed in Point I.B).
8
Nor do the Hard and Soft Caps emulate the “flexibility” the Respondents-
Appellants insist characterizes the Regulations. The reality is that the Regulations
apply a blanket cap applicable to all existing Medicaid providers without
consideration for any of the factors Respondents-Appellants admit are relevant to
the reasonableness of such mandates, leaving it to providers who believe the cap is
unreasonable to request a waiver from the Department. The Respondents-
Appellants essentially make the argument that the Court should just trust that the
Department will disregard the language of the Regulations and apply these
mandates in a flexible way.
Respondents-Appellants attempt to assure the Court that the caps set forth in
the Regulations will not be imposed as inflexible mandates because the waiver
process will allow DOH to convert the industry-wide cap into a flexible
requirement. Respondents-Appellants note that to date, no provider has brought a
proceeding challenging Part 1002 as applied. (Respondents-Appellants Brief, p.
65). As there is no basis for this assertion in the Record, it is improper for
Respondents-Appellants to make such a statement to this Court. Respondents-
Appellants appear to be suggesting that this means the waiver process is being
implemented consistent with their claim of flexibility. However, Respondents-
Appellants notably do not actually confirm that waivers have been granted.
Indeed, to Appellants-Respondents’ knowledge, while waiver requests have been
9
submitted to the Department, the Department has failed to issue a decision one way
or another on those requests, thus preventing providers from bringing as-applied
challenges and leaving those providers in limbo.
Further, this waiver application and review process does not obviate the
problems with the Regulations because it sets up a system in which DOH
effectively confiscates the right to set compensation and administrative budgets
within the private providers that it regulates, and substitutes its judgment for the
business judgment of such private entities. It does not change the fact that the caps
are imposed in the first instance, before any consideration of these factors.
B. The Department’s limited right to evaluate the fiscal responsibility of
Providers as part of its authority to contract does not give it the
authority to impose the Hard and Soft Caps.
As noted above, even if the Regulations could somehow be tied to DOH’s
evaluation of a provider’s fiscal responsibility, the Regulations would fail under
separation of powers principles. Fundamentally, the interpretation of these powers
put forward by Respondents-Appellants amounts to a claim that DOH has virtually
limitless authority to evaluate providers based on its own views about the wisdom
of otherwise lawful, discretionary business decisions made by private companies.
Interpreting DOH’s enabling legislation in this way would render it akin to the
enabling legislation held unconstitutional in Packer Coll Inst. v. University of
State o/N.Y., in which this Court explained:
10
The statute before us is nothing less than an attempt to empower an
administrative officer, the State Commissioner of Education, to register
and license, or refuse to register and license, private schools, under
regulations to be adopted by him, with no standards or limitations of
any sort.
The Legislature must set bounds to the field, and must formulate the
standards which shall govern the exercise of discretion within the field.
Without the second rule as a corollary to the first rule there would be
no effective restraint upon unfair discrimination or other arbitrary
action by the administrative officer. ‘Thus there must be a clearly
delimited field of action and, also, standards for action therein. Here we
have neither. This is not really a question of what powers of control
over private schools may validly be delegated by the Legislature. It is
here impossible to discover what authority was intended to be turned
over. The commissioner is left ‘without check or guidance’ to do what
he will with these schools; and the statute's validity must be judged not
by what has been done under it but ‘by what is possible under it’.
Packer Coll. Inst. v. University of State o/N.Y., 298 N.Y.184, 189-90 (1948)
(internal quotation marks and citations omitted).
Under Respondents-Appellants’ analysis, DOH has the authority to deny a
contract to a private entity if, in DOH’s own judgment, the internal decisions of
that company were not “responsible.” Like the compensation levels and
administrative expenses targeted by the Regulations, these policy judgments
extend to perfectly lawful discretionary decisions, including decisions that have
nothing to do with public health or the areas in which DOH has particular
expertise. Indeed, the Regulations here purport to establish the appropriate amount
of compensation for the executives of private companies excluding compensation
attributable to the provision of health care services, and including all revenues of
the provider, even when they have no nexus to public health programs. Such
issues are clearly beyond DOH’s traditional expertise, yet DOH claims the right to
dictate such decisions based on its idea of what the right amount of non-service
related compensation would be.
As Justice Mulvey correctly points out in his well-reasoned dissent in the
court below, the authority to review the fiscal responsibility of a provider granted
by State Finance Law § 163, and relied on by Respondents-Appellants, “is
premised on the employment of criteria, including the provider’s financial ability,
legal capacity, integrity, and past performance’ (State Finance Law §163(l)(c)),
none of which has been shown to bear on these expenditures.” (RA. 31). Section
163 simply does not contemplate rejection of provider applications based on the
Department’s own policy ideas about the appropriateness of lawful, discretionary
business decisions of providers, without any further guidance from the Legislature.
Indeed, if this Court were to read DOH’s enabling statutes as permitting
DOH the authority to intrude on the lawful private business decisions of Medicaid
providers, based solely on its claim that it is indicative of “responsible” corporate
decision making, DOH would have unbridled authority to promulgate any
regulation it wishes, provided that DOH has decided that the subject matter is
relevant to DOH’s own views of what constitutes a “fiscally responsible” business.
12
Should a private company pay dividends to its owners? Make capital
improvements to its property? How should it obtain financing? Should it make
charitable contributions? How much? What kinds of benefits should it provide to
its employees? Should it exceed minimum wage for line staff and by how much?
Which law firms, accountants, or snow removal companies should it hire? Should
it settle a lawsuit or litigate?
All these decisions typically made by a provider are, according the
Respondents-Appellants’ argument, now subject to DOH’s and/or the governor’s
veto, as they all involve the expenditure of funds. Such a broad grant of authority
would effectively convert covered providers’ businesses into state-run provider
entities, and allow DOH vast regulatory power in areas for which it has no special
expertise, in violation of separation of powers principles. Boreali v. Axelrod, 71
NY2d 1, 9 (1987) (“Even under the broadest and most open-ended of statutory
mandates, an administrative agency may not use its authority as a license to correct
whatever societal evils it perceives.”); Packer, supra at 189; Rapp v. Carey, 44
N.Y.2d 157, 162 (1978).
The fundamental problem with the Challenged Regulations is not the
specific expenditure that has been targeted by DOH under the guise of “fiscal
responsibility,” but rather that DOH has attempted to control how providers make
internal business decisions, which opens the door to virtually limitless regulatory
13
authority for the Department. As this Court explained in Packer, a grant of
statutory authority “must be judged not by what has been done under it but ‘by
what is possible under it.’” Packer, supra at 190. DOH cannot direct how a
provider spends its own money merely by claiming that if the provider does not
spend it in a particular way, DOH will deem them not “fiscally responsible.” To
do so would stretch the boundaries of DOH’s statutory authority beyond the
breaking point, in violation of separation of powers principles.
C. The Regulations directly affect payments to existing Medicaid
providers, in contravention of the Legislature’s policy decisions
regarding the structure of Medicaid payments and the limited
circumstances under which a provider’s right to payment is
conditioned.
The Hard and Soft Caps give DOH carte blanche to dictate to current
Medicaid providers- those that have been fully evaluated, determined to be
fiscally responsible, and accepted into the Medicaid program-how they can spend
the revenues that they earn, whether earned by providing services to Medicaid
recipients or through other sources (by prohibiting the use of such payments to pay
executive compensation or fund administrative expenses beyond the caps).
Thus, the Respondents-Appellants’ claim that the Regulations do “not affect
the payments made to providers once they are accepted” (Respondents-Appellants’
Brief, p. 45), is plainly inaccurate. As explained at length in Appellants-
Respondents’ principal brief, the Regulations directly contradict the Legislature’s
14
policy choices about how and to what extent a Medicaid provider’s right to
payments can be restricted or regulated by DOH.
Payments that Appellants-Respondents receive have already been calculated
pursuant to the carefully crafted statutory and regulatory scheme to include only
amounts necessary to reimburse Appellants-Respondents for reasonable and
necessary costs of providing care. The Legislature has set clear parameters around
how DOH is permitted to control the expenditure of Medicaid dollars on
“unreasonable” executive compensation and administrative expenses: through the
rate setting methodologies discussed at length in Appellants-Respondents’ initial
brief.
The Legislature has not granted DOH the authority to regulate executive
compensation and administrative expenses in general within the provider
organizations, a highly controversial subject fraught with difficult-to-resolve policy
questions, far afield from the realm of the Department of Health’s expertise
(namely, the provision of health care services), that has been the subject of
frequent legislative debate (see R. 177-318). The Respondents-Appellants’
position that the Legislature has implicitly granted the Department authority to
resolve such a contentious issue outside of the bounds of the Department’s subject
matter expertise must be rejected. Nor is there reason to conclude that the
Legislature intended to grant DOH authority to dictate how providers can spend
15
payments duly earned by them and no longer within the control of the Department.
The exercise of authority by the Department here does not amount to merely
making the kinds of uncontroversial, “subsidiary policy choices” in the traditional
realm of the Department’s public health expertise and the Legislative delegation of
authority (see Matter of Citizens for an Orderly Energy Policy v. Cuomo, 582
N.Y.2d [1991]), but rather reflects the Department’s own efforts to expand its
regulatory authority to set policy, without further guidance from the Legislature, to
address the significant public, media and legislative attention recently directed at
executive compensation.
The existing authorizing statutes simply cannot be stretched as far as
Respondents-Appellants contend without opening the door to limitless policy¬
making authority in violation of the separation of powers doctrine. The
Regulations are an effort to reach into the inner workings of private companies in
order to control how those providers spend their own funds.
With respect to funds earned by providers from the Medicaid program, a
provider’s property rights in those funds remains provisional only to the extent of
the Department’s right to audit and recoup overpayments, an exception specifically
created by the Legislature. PHL § 364; PHL §368-c. Absent some basis for
recoupment, once a Medicaid provider has provided the services in question and is
paid for those services, title to the Medicaid funds used by the Department to pay
16
the provider vests in to the provider and those funds become private funds. See
Clove Lakes Nursing Home v. Whalen, 45 N.Y.2d 873 (1978) (discussing due
process necessary to adequately protect a provider’s property rights in payments
received during recoupment process); Matter of Birchwood Nursing Home v.
Whalen, 70 A.D.2d 1020 (3d Dept. 1979) (noting that a nursing home is entitled to
a hearing to contest a department’s audit “due to its property right in moneys
sought to be recouped”); Bay Ridge Diagnostic & Analytical Laboratory, Inc. v.
Smithy 71 A.D.2d 889 (2d Dept. 1979) (“Bay Ridge has never been notified of any
charges pending against it by DSS. It has provided the DSS with all the
verification requested. Thus, a proceeding in the nature of mandamus is an
appropriate remedy since it appears that the agency has an absolute duty to pay the
money owed to the petitioner.”).
DOH’s power to regulate the expenditure of State Medicaid dollars expires
at the point of payment, subject only to its statutory right to audit and recoup
payments to which a provider was not entitled in the first place, because those
funds, once duly earned, are no longer State Medicaid dollars. The provider has
done everything it is obligated to do to earn those funds and, absent some basis for
recoupment, the State has no further claim to those funds. In contravention of this
fact, the Department seeks to continue to exercise control over how those funds are
17
expended, directly and severely restricting a provider’s right to spend its own
earned revenues.
Respondents-Appellants mischaracterize the Regulations as attempting to
ensure that “prospective payments given to a nursing home are reliably spent on
services to residents.” (Respondents-Appellants’ Brief, p. 46). The
characterization of the payments at issue as prospective is simply untrue. The
payments at issue are not part of a grant program, where money is paid up front to
Appellants-Respondents, but title remains with DOH, and DOH is merely directing
how those funds can be used. In the Medicaid program, although the applicable
rate is calculated prospectively, nursing homes and other Medicaid providers are
paid retroactively, only after services have been rendered. 18 N.Y.C.R.R.
§540.6(a)(1) (“Claims for payment for medical care, services or supplies furnished
by any provider under the medical assistance program must be initially submitted
within 90 days of the date the medical care, services or supplies were furnished to
an eligible person . . .”). At the time of payment, the provider’s obligations to
provide services have been fulfilled and the provider has earned the payment.
In attempting to restrict how Appellants-Respondents can spend payments
duly earned by them for services previously provided, DOH contravened the limits
of DOH’s authority to regulate such payments (limited to the authority to audit and
recoup payments that did not meet DOH standards) and ignored the policy
18
decisions of the Legislature. In doing so, DOH violated separation of powers
principles and ran afoul of this Court’s holding in Boreali, supra and its progeny.
I
19
POINT II
THE REGULATIONS ARE NOT A VALID EXERCISE OF DOH’S
AUTHORITY TO ENSURE THE QUALITY AND EFFICIENCY OF
MEDICAID SERVICES
Respondents-Appellants also claim that DOH has the authority to impose the
Hard and Soft Caps by virtue of DOH’s authority to ensure the quality and
efficiency of Medicaid services. Appellants-Respondents do not contest the fact
that DOH is charged with ensuring the quality and efficiency of Medicaid services.
Rather, Appellants-Respondents’ objection is that the Regulations simply bear no
connection to these DOH purposes and go well beyond the bounds of the grant of
authority to DOH. As Justice Mulvey correctly points out in the court below,
“[wjithout legislative guidance, DOH reached its own conclusion that the measure
was justified by what it describes as spiraling health care costs and past misuse of
moneys paid to certain providers.” (RA-031).
DOH is only obligated to pay Medicaid providers for services that are
provided in an appropriate and acceptable manner, amount, type and quality. 18
N.Y.C.R.R. 515.2; 18 N.Y.C.R.R. 518.1. If a provider does not provide services
that meet these and other requirements set forth in DOH regulations, the provider
has no right to the payment at all, and has the obligation to self-disclose and return
such payment (or the payments can be recouped through an audit). See 18
N.Y.C.R.R. Part 518; 18 N.Y.C.R.R. 515.3. If a provider commits an unacceptable
20
practice (see 18 N.Y.C.R.R. 515.2)(a)), it can also be sanctioned or terminated
from the Medicaid program (see 18 N.Y.C.R.R. 515.3).
Thus, if quality of care problems exist, the Department can recoup the
related payments entirely, suspend or revoke the provider’s Medicaid contract, or
take numerous other remedial actions. Id. Indeed, the only payments that a i
provider is entitled to keep are payments for services that satisfy all of the
Department’s quality and other requirements. Thus, it is only these payments that
are the subject of the mandates in the Challenged Regulations as to how they can
be spent within the provider organization.
The court below points to concerns raised by Respondents-Appellants about
“certain service providers that had used state funds to pay themselves instead of
using such funds in furtherance of public health funds.” However, if these
“certain” providers did not provide the services they were paid for, or if the quality
of these services was inadequate or compromised in some way, the Department
had the full right and authority to (1) recoup such payments, (2) sanction those
providers, or (3) exclude them from the Medicaid program. 18 N.Y.C.R.R.515.3;
18 N.Y.C.R.R. Part 518. Moreover, concerns about “certain providers,” none of
which are Appellants-Respondents in this proceeding, cannot justify DOH’s
intrusion into the private internal business decisions of other Medicaid providers or
21
permit DOH to exercise continued control over funds for which it no longer has
title and has no right to recoup, at least not without authority from the Legislature.
The Department’s attempt to justify a blanket, program-wide mandate as to
how a provider can use revenues it has duly earned under the guise of quality and
service provision concerns should be rejected. Payments for substandard services
are already subject to full recoupment by the Department and the providers of such
!
services subject to potential exclusion from the Medicaid program. The challenged
Regulations, which address how providers can spend payments that are not
afflicted by such concerns and for which title has vested in the providers, have
nothing to do with quality of care.
DOH cannot rely on the broad and vaguely worded grants of authority
contained in PHL § 201 and its other enabling statutes for its authority to dictate
the internal business decisions of providers, or to prevent a provider from making
an otherwise lawful discretionary decision, particularly on matters not within the
Department’s own subject matter expertise. It certainly cannot intrude on the
property rights that providers have to payments duly earned by them merely by
claiming that it believes such intrusion will improve quality or efficiency.
Respondents-Appellants are asking this Court to adopt a very different view
of how the Medicaid program functions from the way it operates in reality. The
Legislature did not generally direct providers how to spend reimbursement they
22
receive for services provided. Instead, it directed them to provide certain services
to be supervised by DOH in exchange for which they will be reimbursed.
In cases where there is an exception to that general rule, it is the Legislature,
not DOH or the Executive, that directs providers how they must spend Medicaid
funds. See, e.g., Public Health Law § 2808(2-b)(c) (requiring that a specified
percentage of enhanced reimbursement must be allocated to recruit and retain non-
supervisory workers or direct care personnel). As can be seen by a review of Public
Health Law § 2808, it contains extremely complex and specific directives with
regard to how providers are reimbursed. Had the Legislature wanted to include a
provision mandating a ceiling on executive compensation, it could have done so but
chose not to. There is no room for interstitial rule-making by DOH. The provisions
in the Public Health Law and the State Finance Law relied upon by Respondents-
Appellants were never intended by the Legislature as a license to micromanage
providers to such an extent that the bureaucracy can eventually dictate what
employers can pay their own staff. If that prerogative exists at all, it belongs to the
Legislature, not to an administrative agency.
DOH’s authority must be read in the context of the further limitations and
guidance provided by the Legislature in other sections of the Public Health Law,
such as the payment statutes cited by Appellants-Respondents, and the limited
circumstances in which DOH is permitted to continue to exercise control over
23
payments made to providers. To ignore these further constraints and limitations
would convert PHL § 201 and the other statutes relied on by Respondents into a
mandate for policy making by executive fiat.
24
POINT III
THE CHALLENGED REGULATIONS ARE
ARBITRARY AND CAPRICIOUS
Respondents-Appellants posit that executive compensation and
administrative expenses constitute a diversion of state resources away from needy
New Yorkers. They claim that the “regulation reflects the common sense
judgment that companies that spend less on executive compensation and
administrative services will spend more on providing health care.” (Respondents-
Appellants’ Brief, p. 2).
As Justice Mulvey correctly noted in his dissent, and for the reasons
discussed below, both the Hard Cap and Soft Cap are arbitrary and capricious
because of the absence of any empirical evidence of the connection between the
caps and “reducing state health care expenditures or to the more efficient use of
taxpayer funds in the delivery of services.” (RA. 33-34). Since the Regulations
neither enhance quality nor reduce costs, there is no nexus between what they
require and the goal they seek to achieve and they are, therefore, arbitrary and
capricious.
A. The Regulations bear no relationship to the stated goal of ensuring that
providers “spend more” on providing health care.
As explained at length in Appellants-Respondents’ original brief to this
Court, under the Medicaid program’s reimbursement methodology, executive
25
compensation does not affect the level of reimbursement in any manner
whatsoever. See Affidavit of Richard Herrick, fflf 9-11 [R.A. 455]. See also Public
Health Law § 2808(2-c) (rates are calculated based on “allowable” operating costs I
which already exclude executive compensation above $199,000 / year). As
explained in Point III.C below, if providers spend more on direct service provision,
then the amounts reported in provider cost reports (which reflect the amounts spent
by providers in service provision) will likewise increase.
Moreover, the Regulations do nothing to ensure that a provider devotes any
particular proportion of a Medicaid payment to patient care. They may make for
good political “optics” but they do nothing to ensure quality or the redirection of
funds to direct services. The mere imposition of a ceiling on executive
compensation, in and of itself, does not require that the presumed “savings” be
redirected elsewhere to improve quality. Those savings could be retained by the
provider as profit, or spent on bonuses to other non-executive personnel, without
running afoul of the Regulations.
Ironically, even it is assumed arguendo that the Regulations require that any
“savings” from the caps on executive compensation and administrative expenses
be spent on direct care, the Regulations have set up a situation where relatively
smaller providers, with arguably less need to pay “larger” salaries to their top
26
executives, have more leeway to divert Medicaid payments towards executive
compensation.
Indeed, under the structure of the Regulations, a smaller provider (i.e. one
that just meets the $500,000 threshold to be a “covered provider”) could direct
virtually all of its Medicaid payments towards executive compensation without
violating the Regulations. By way of example, if a smaller provider had just two
executives paid $199,000 per year, it could direct $398,000 (80%) of its $500,000
in annual Medicaid revenue towards executive compensation without violating the
Regulations. In comparison, a provider with a larger Medicaid patient population
would be restricted to using only a minute proportion of its Medicaid payment for
executive compensation, despite the fact that a larger provider such as this has a
greater need for more experienced, higher paid executives.
Respondents’ unprecedented intrusion into the internal governance of
private companies through the Regulations does nothing to “ensure that public
funds are used to provide health-care services . . .” (Respondents-Appellants Brief,
p. 2). The Regulations are, thus, arbitrary, irrational and unreasonable, and should
be annulled.
27
B. The premise of the Regulations that “more is better” is contrary to
DOH’s own policy.
The very premise of the Respondents-Appellants’ justification for the
rationale of the Regulations — that more is better when it comes to service
provision — is contrary to the Department’s own stated policy and is, thus, arbitrary
and irrational on its face. By attempting to cause Appellants-Respondents to spend
“more” on service provision, without any evidence that the services Appellants-
Respondents are currently providing are somehow inadequate, DOH has placed
Appellants-Respondents in the precarious position of being mandated to provide
more services regardless of patient need, and risking being sanctioned by the
Department in any event for providing “excessive services,” itself an unacceptable
practice. 18 NYCRR 515.2(b)(1)(c) and (b)(ll).
C. The Regulations have no connection to reducing Medicaid program
expenditures.
The lower court’s holding that the Regulations are not arbitrary and
capricious is based in part on “data regarding spiraling health care costs,
particularly those associated with Medicaid.” (RA. 27). However, the mere fact
that Medicaid program costs have continued to grow does not justify the
Regulations, nor demonstrate how the challenged Regulations will reduce
Medicaid spending. As explained in Point I.C. above, because providers are
entitled to a pre-determined reimbursement rate for each unit of service provided
28
(and, thus, entitled to additional payments for additional units of service rendered),
the Medicaid program simply does not get “more bang for the buck” from the
Regulations.
If, as Respondents-Appellants contend, the rates received by providers are
prospectively calculated based on cost reports submitted by providers, which
reflect the actual costs incurred by providers in providing the services being
reimbursed, the Regulations would, if anything, cause an increase in Medicaid
costs. Assuming arguendo that the Regulations will cause providers to spend more
on direct service provision, the costs reflected in providers’ cost reports will, in
turn, increase. Increasing these costs will inevitably lead to an increase in
reimbursement rates being calculated based on these costs. Thus, by attempting to
mandate that more be spent on direct service provision, absent any indication that
Appellants-Respondents are not currently spending “enough” on service provision,
the Regulations would only factor unnecessary costs into the rate calculation
formula.
Similarly, the Respondents-Appellants have provided no evidence on the
record that “excessive” executive compensation and administrative costs have
caused or even contributed to the rising costs purportedly targeted by the
Regulations. As set forth in Appellants-Respondents’ principal brief, because of
the payment mechanisms in question, the rates that have been established for
29
Appellants-Respondents and other Medicaid providers cannot and do not include
any “excessive” costs. Rather, established rates have been predetermined by DOH
to represent reimbursement only for those costs that DOH has found to be
reasonably necessary for the provision of the services being reimbursed. See, e.g.,
Odd Fellow & Rebekah Rehabilitation and Health Care Center, Inc. v.
Commissioner of Health, 107 A.D.3d 1095 (3d Dept. 2013) (DOH’s disallowance
of uniform expenses in cost report for uniforms held in inventory for future use,
because substantial evidence supported DOH’s “determination that this expense
was not necessary for petitioner’s day-to-day operation . .
In fact, even if the caps in the Challenged Regulations will cause covered
providers to do “more” with the payments received, then it necessarily follows that
the costs reasonably necessary for the provision of those services will likewise
increase, ultimately resulting in increased rates and increased Medicaid
expenditures.
D. The waiver process does not cure the arbitrary and irrational character
of the Regulations.
The Hard Cap and Soft Cap mandates apply to small home care providers in
rural upstate New York, large nursing homes in New York City, and a range of
covered providers in between. The cost of living and the ability to recruit and
retain top talent, varies greatly across New York State and across provider types, as
do the demands placed on the executives in these varying settings. The
30
Regulations ignore this reality, and set the same caps for providers across the full
spectrum of size and complexity, a premise that is palpably unreasonable.
Respondents-Appellants dismiss this contention by pointing to the waiver
provisions, through which Respondents-Appellants can exempt a particular
provider from the caps for “good cause.” Allowing a completely unreasonable,
arbitrary and irrational requirement to stand, merely because providers have the
ability to go through a costly and uncertain waiver process, and an Article 78
proceeding if that waiver is denied, does not cure the fundamental
unreasonableness of the requirement in the first place.
Determining the appropriate amount of compensation for an executive of a
private health care provider requires a complicated, individualized analysis that
does not lend itself to the establishment of a general standard with occasional
deviations. Providers should not be relegated to waiver requests and individual as-
applied challenges. Respondents-Appellants’ argument turns the fundamental
precept that administrative action must be rational on its head, and would set a
dangerous precedent in which administrative agencies in this state can promulgate
any regulation, merely by providing for a waiver process in the event that the
regulations are irrational. State administrative agencies would effectively be able
to insulate promulgated regulations from facial challenges, no matter how
irrational.
31
POINT IV
THE APPELLATE DIVISION’S DECISION
ANNULLING THE SOFT CAP SHOULD BE UPHELD
The arguments presented in Points I and III above apply to the Soft Cap as
well as the Hard Cap. Like the Hard Cap, the Soft Cap is not imposed by the
Regulations as a mere benchmark, thoughtfully considered in the context of the
evaluation of enrollment or renewal applications. Rather, it is an across the board
mandate reconsidered in light of the various factors that weigh on the
reasonableness of its application only if a provider requests a waiver. Thus, for the
same reasons stated in Points I and III above, the Appellate Division’s opinion and
order, annulling the Soft Cap and holding that DOH had acted outside of its
legislative mandate, and acted on its own ideas of sound public policy, should be
upheld. (RA. 026).
Even if the Court could somehow interpret the statutory grant of authority
afforded to DOH to allow it to cap the use of Medicaid payments to pay executive
compensation and administrative expenses, that authority cannot be stretched to
reach the decisions of private providers regarding how they use private funds that
have no nexus to the Medicaid program or the State. Indeed, not even the
Governor’s Executive Order went this far, making no mention of limiting
compensation paid to executives with private funds. (R. 104-107).
32
Such an intrusion into the running of private businesses clearly was not and
could not be authorized by the Legislature. In doing so, the Department of Health
ventured outside its legislative mandates and acted on its own ideas of sound
public policy regarding issues for which it has no special expertise. As both
Supreme Court and the Appellate Division noted, “the ‘soft cap’ regulation
meddles significantly in the decision-making processes of corporations’ governing
bodies, both substantially by setting the ‘75 percentile’ rule and procedurally by
defining the approval processes themselves.” (RA 26; Opinion at p. 16). Thus, the
Soft Cap fails under this Court’s holding in Boreali v. Axelrod, supra, and the
Appellate Division properly affirmed Supreme Court’s annulment of the Soft Cap.
Further, extending DOH’s authority to evaluate the “fiscal responsibility” of
potential providers to include even funds that have absolutely no connection to the
State or the Medicaid program eliminates any restraints whatsoever in Public
Health Law § 201. Such an extension would create virtually limitless authority for
the Department to dictate the decisions of a private business just because the
Department, in its own policy judgment, would consider such a decision to be a
“responsible” business choice. If the Court were to agree with Respondents, all
internal business decisions would be fair game for Department of Health mandates
under the guise of what makes for a “responsible” provider.
33
CONCLUSION
The Third Department’s opinion and order should be reversed in part,
insofar as it upheld the Hard Cap portion of the Regulations, the Regulations
should be annulled in their entirety, the Respondents-Appellants should be
enjoined from further implementation of the Regulations, and this Court should
grant such other and further relief as may be just and proper.
Dated: Albany, New York
May 21, 2018
HINMAN STRAUB P.C.
By
DAVID T. LUNTZ
Attorneys for LeadingAge Appellants-Respondents
121 State Street
Albany, NY 12207
(518) 436-0751
O’CONNELL & ARONOWITZ, P.C.
Ut/locd /Hu*---,
CORNELIUS D. MURRAY /
By
Attorneys for LeadingAge Appellants-Respondents
54 State Street
Albany, New York 12207
(518) 462-5601
34
CERTIFICATION OF COMPLIANCE
In accordance with 22 NYCRR § 500.13 (c)(1), the undersigned hereby
certifies that the body of the above brief (exclusive of the table of contents, table of
authorities, and this certification) contains 6,974 words, as calculated by Microsoft
Word.
Dated: Albany, New York
May 21, 2018
HINMAN STRAUB P.C.
S~iBy
DAVID T. LUNTZ
Attorneys for LeadingAge Appellants-Respondents
121 State Street
Albany, NY 12207
(518) 436-0751
NEW YORK STATE
COURT OF APPEALS
In the Matter of the Application of
LEADINGAGE NEW YORK, INC., NEW YORK STATE HEALTH FACILITIES
ASSOCIATION, INC., et al. Appellants-Respondents,
-against-
NIRAV SHAH, in his official capacity as Commissioner of the NEW YORK STATE
DEPARTMENT OF HEALTH, and ANDREW CUOMO, as Governor of the State of New York,
Respondents-Appellants.
For a Hybrid Action pursuant to CPLR Article 78 and for a Declaratory Judgment.
In the Matter of the Application of
COALITION OF NEW YORK STATE PUBLIC HEALTH PLANS, NEW YORK STATE
COALITION OF MANAGED LONG TERM CARE/PACE PLANS, and NEW YORK
HEALTH PLAN ASSOCIATION, INC., Appellants-Respondents,
-against-
NEW YORK STATE DEPARTMENT OF HEALTH and NIRAV R. SHAH, M.D., M.P.H., as
Commissioner of The New York State Department of Health,
Respondents-Appellants.
AFFIDAVIT OF SERVICE
Court of Appeals No. APL-2017-00150
Appellate Division No. 523308
STATE OF NEW YORK }
} ss.:
COUNTY OF ALBANY }
ASHLY EIDECKER, being duly sworn, deposes and says that deponent is not a party to
the action, is over eighteen years of age and resides in the County of Schenectady, New York.
That on the 21st day of May, 2018, deponent served three true copies of Response/Reply Brief of
Appellants-Respondents on the following:
Henry M. Greenberg, Esq.
Greenberg Traurig, LLP
Attorneys for Coalition Appellants-Respondents
54 State Street
Albany, NY 12207
Matthew Grieco, Esq.
Assistant Solicitor General
Office of the Attorney General
of the State of New York
Attorney for Respondents-Appellants
28 Liberty Street
New York, NY 10005-1400
I
by depositing true copies of same, enclosed in a postpaid properly addressed envelope, in a post
office official depository under the exclusive care and custody of the United States Post Office
Department within the State of New York.
-AAALI
Ashly Ejaecker
Sworn to before me this 21st
day of May, 2018.
_ KATIE L. WALL
Notary Public, State of New York
Reg. #01WA6253406
Appointed in Rensselaer County
My Commission Expires 12/19,3-01ÿ
Notary Public
4820-4123-6326, v. 1
