' 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 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 NIRAY R. SHAH, M.D., M.P.H., as Commissioner of The New York State Department of Health, Respondents-Appellants. 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: December 18, 2017 DISCLOSURE STATEMENT PURSUANT TO 22 NYCRR § 500.1(f) Appellant-Respondent LEADINGAGE NEW YORK, INC. states that it is a New York not-for-profit corporation, and its parent is LeadingAge, Inc. Appellant-Respondent has the following subsidiaries and/or affiliates: • LeadingAge New York ProCare, LLC, a New York limited liability company. • LeadingAge New York Services, Inc., a New York business corporation. • LeadingAge New York Technology Solutions, LLC, a New York limited liability company. • Foundation for Long Term Care, Inc., a New York not-for-profit corporation. • Adult Day Health Care Council, Inc., a New York not-for-profit corporation. Appellant-Respondent NEW YORK STATE HEALTH FACILITIES ASSOCIATION, INC. states that it is a New York not-for-profit corporation with no parents or subsidiaries, which has the following affiliates: • Foundation for Quality Care, Inc., a New York State not-for-profit corporation. i • New York State Health Facilities Services Corp., a New York business corporation. • Health Facilities Insurance Agency, Inc., a New York business corporation. ii STATEMENT OF JURISDICTION The Court of Appeals has jurisdiction to hear the present appeal pursuant to CPLR Section 5601(b)(1), because substantial constitutional questions are directly and necessarily involved in the resolution of the Questions Presented. Following letter briefs submitted to the Court by the parties regarding this Court’s subject matter jurisdiction, by letter dated October 18, 2017, this Court elected to retain jurisdiction and proceed in the normal course of briefing and argument. The Questions Presented by Appellants-Respondents were initially raised by Appellants-Respondents in their Verified Petition and Complaint (R. 43-423), preserved in Appellants-Respondents’ appeal to the Third Department (see Notice of Appeal filed December 15, 2015 at R. 30), addressed by the Third Department in its Opinion and Order dated June 22, 2017 (R.A. 11), and preserved in Appellants-Respondents’ Notice of Appeal to this Court filed July 21, 2017 (R.A. 1). iii STATEMENT CONCERNING RELATED LITIGATION In the courts below, this proceeding was consolidated and decided with another proceeding, entitled Matter of the Application of Coalition of New York State Public Health Plans, et al. v. New York State Department of Health et al, Index No. 5352-13 (“Proceeding No. 2”). Petitioners in Proceeding No. 2 filed a Notice of Appeal to this Court from the same Opinion and Order of the Appellate Division, Third Department that is the subject of the present appeal. iv TABLE OF CONTENTS Page No. DISCLOSURE STATEMENT PURSUANT TO 22 NYCRR § 500.1(f) STATEMENT OF JURISDICTION iii STATEMENT CONCERNING RELATED LITIGATION iv QUESTIONS PRESENTED 1 PRELIMINARY STATEMENT 3 SUMMARY OF FACTS 8 POINT I 16 THE REGULATIONS ARE INVALID UNDER BOREALI V. AXELROD 16 A. The Regulations reflect the executive branch’s own value judgments about the appropriate choices between broad political, social and economic concerns B. The Department wrote on a clean slate, without the benefit of Legislative guidance C. The Regulations were promulgated following the Legislature’s failure to enact the Governor’s policy through statute, and touch on difficult social issues over which there is a long history of legislative wrangling D. The Regulations do not require the Department’s special expertise or technical competence . 18 25 32 36 POINT II 39 THE REGULATIONS ARE INVALID BECAUSE THEY DIRECTLY CONFLICT WITH WELL-ESTABLISHED CONSTITUTIONAL LIMITS OF ADMINISTRATIVE RULEMAKING 39 A. The Regulations are invalid because they conflict with the statutorily expressed policy choices of the Legislature 39 v i. The Regulations conflict with the payment mechanisms established by the Legislature ii. The Department lacks authority to regulate executive compensation because New York statutes expressly vest for-profit and not-for-profit corporations with discretion to determine compensation. .40 .46 1. New York State N-PCL, BCL, and LLCL expressly vest covered entities with discretion to determine executive compensation, and the Department lacks authority to promulgate regulations which contradict statutes 2. The Regulations conflict with the Legislature’s policy determination that the participation of for-profit providers in the health care industry is beneficial and desirable .47 51 B. The Department’s otherwise broad grant of authority to regulate the Medicaid program is circumscribed here because the Legislature has retained for itself the right to fill in the details and has expressly limited the Department’s rule-making authority C. Interpreting the Department’s enabling legislation so broadly as to allow it to intrude on the entirely private business affairs of private entities violates the separation of powers doctrine ; 54 56 59POINT III THE REGULATIONS ARE ARBITRARY AND CAPRICIOUS 59 The Regulations are arbitrary and capricious because, under the payment methodologies established by the Legislature for long-term care providers, the State does not reimburse nursing homes or assisted living providers for executive salaries or administrative costs The Executive Order and Regulations establish arbitrary caps on executive compensation and administrative expenses that have no rational basis in fact or law The Regulations are arbitrary and capricious because they unfairly discriminate and disadvantage providers who serve primarily beneficiaries of State programs A. 59 B. 61 c. 63 66CONCLUSION vi 59CERTIFICATION OF COMPLIANCE vii TABLE OF AUTHORITIES Page No. Cases Agencies for Children’s Therapy Sews., Inc. v. New York State Dept, of Health, 136 AD3d 122 (2d Dep’t 2015) Albany Area Builders Ass’n v. Town of Guilderland, 74 N.Y.2d 372 (1989) Auerbach v. Bennett, 47 N.Y.2d 619 (1979) . Boreali v. Axelrod, 71 N.Y.2d 1 (1987) Bourquin v. Cuomo, 85 N.Y.2d 781 (1995) Campagna v. Shaffer, 73 N.Y.2d 237 (1989) City of New York v. Stone, 11 A.D.3d 236 (1st Dept 2004) Clove Lakes Nursing Home v. Whalen, 45 N.Y.2d 873 (1978) Connolly v. O’Malley, 17 A.D.2d411 (IstDep't 1962) Consol. Edison Co. v. Dep’t of Envtl Conserv., 71 N.Y.2d 186 (1988) Ellicott Grp., LLC v. NYS Office of General Services, 85 A.D.3d 48 (4th Dep’t 2011) Finger Lakes Racing Assoc, v. NYS. Racing & Wagering Bd., 45 N.Y.2d 471 (1978) . Freer v. Mayer, 223 A.D.2d 667, 668 (2d Dep’t 1996) Greater N.Y. Taxi Assn., 25 N.Y.3d 600 (2015) Jewish Home and Infirmary of Rochester, New York, Inc. v. Commissioner of New York State Dept, of Health, 84 N.Y.2d 252(1994) Jewish Mem’l Hosp. v. Whalen, 47 N.Y.2d 331 (1979) Kahal Bnei Emunim & Talmud Torah Bnei Simon Israel v. Town of Fallsburg, 78 N.Y.2d 194(1991) Levandusky v. One Fifth Ave. Apartment Corp., 75 N.Y.2d 530 (1990) Matter of Consolation Nursing Home, Inc. v. Commissioner of New York State Department of Health, 85 NY2d 326 (1995) . Matter ofDMNMgt. Servs., LLC v. Daines, 79 AD3d 37 (3d Dept 2010) Matter ofL. Newstand, Inc. v. State Liquor Auth., 151 A.D.2d 483 (2d Dep’t 1989) Matter ofLeadingAge New York, Inc. v Shah, 153 A.D.3d 10 (3d Dep’t 2017) , Matter of New York State Assn, of Counties v Axelrod, 78 NY2d 158 (1991) Matter of New York State Health Facilities Assn. v. Axelrod, 77 N.Y.2d 340(1991) Matter of NYC C.L.A.S.H., Inc. v. New York State Off of Parks, Recreation & Historic Preserv., 27 N.Y.3d 147 (2016) . 20, 29 40 48 passim .16,40 49 40 45 39, 40 16 29,30 40 47 18 passim 59 49 48 59 45 46 4 59, 63, 65 30,34 18 viii Matter of Sullivan Fin. Group, Inc. v. Wrynn, 94 AD3d 90 (2012) Matter of Visiting Nurse Serv. ofN.Y. Home Care v. New York State Dept of Health, 5 NY3d 499 (2005) N.Y. Statewide Coalition of Hispanic Chambers of Commerce v. N.Y,C. Dep’t of Health and Mental Hygiene,110 A.D.3d 1 (1st Dep’t 2013) N.Y. Statewide Coalition of Hispanic Chambers of Commerce v. NYC. Dep’t of Health and Mental Hygiene, 23 N.Y.3d 681 (2014) Nicholas v. Kahn, 47 N.Y.2d 24 (1979) Packer Collegiate Inst. v. Univ. of State of New York, 298 N.Y. 184 (1948), People v. Grasso, 11 N.Y.3d 64 (2008) Pollitz v. Wabash R. Co., 207 N.Y. 113 (1912) Rapp v. Carey, 44 N.Y.2d 157 (1978) . Subcontractors Trade Ass’n v. Koch, 62 N.Y.2d 422 (1984) Under 21, Catholic Home Bureau for Dependent Children v. Koch, 65 N.Y.2d 344(1985) 51 45 17,38 passim 17 56 47, 48, 49 48 16, 40, 54,56 29,30,31,40 29,30 Other Authorities 1NYCRR§ 400.1 1NYCRR Part 400 7NYCRR § 513.3 10 NYCRR§ 1002.1... 10 NYCRR § 1002.2.., 10 NYCRR § 1002.3 ... 10 NYCRR § 1002.4... 10 NYCRR §1002.6..., 10 NYCRR 86-2.17(a) 10 NYCRR Part 86-2... 19 NYCRR Part 144.... 9 NYCRR Part 2658.... 9 NYCRR Part 6157.... BCL § 202(10) BCL § 701 BCL §717 BCL § 201 BCL §510 CPLR § 5601(b)(1) LLCL § 202(h) LLCL § 401 LLCL § 409 25, 38 37 25 7, 12, 22 12 12, 13 13 13 42, 43 55 37 37,38 37 47 47 47 52 52 iii 47 47 47 ix N.Y. Environmental Conservation Law § 3-0306 N.Y. L. 2011, ch. 59, §§ 2, 4, 28 (Part H) N-PCL § 202(12) N-PCL § 508 N-PCL § 701 N-PCL § 717 N-PCL § 109 NY UCC§ 9-201 PHL § 201 PHL§ 206(3), (6) PHL § 2807 PHL § 2808 PHL §2853 PHL § 3605(6) PHL § 3614 SSL § 363-a SSL §461-1 SSL §461-b State Finance Law §18 State Finance Law § 163 50 54 47 52 47 47 51 50 27, 28, 57 29 ..7,35,44.....passim 52, 53, 54 52 34, 42, 55......27, 28 52 52 50 22, 28 x QUESTIONS PRESENTED 1. Whether the Department of Health usurped the Legislature’s authority when it imposed sweeping policy changes that reflect the Executive Branch’s balancing of economic and social concerns, absent enabling legislation authorizing it to do so, and in response to repeated consideration of the same issues by the Legislature, by promulgating regulations riddled with exceptions that have no relationship to public health concerns and that did not involve any special expertise? A. Yes. 2. Q. Whether absent specific legislative authorization, the Department of Health may impose restrictions on how health care providers can and cannot spend funds earned by them as reimbursement for services rendered in the past? A. No, 3, Q. Whether the Third Department erred in holding that the Department of Health’s restriction on executive compensation and administrative expenses for private entities was valid, despite clear and substantial conflicts with the Legislature’s policy choices as expressed in the Not-for-Profit Corporation Law, Business Corporation Law, and the Limited Liability Company Law, 1 which vest decision-making power on compensation with the governing bodies of private entities? A. Yes. 4. Q. Whether the Third Department erred in upholding that the restriction on executive compensation and administrative expenses, which will have no impact whatsoever on the cost of the Medicaid program or the services rendered by Appellants-Respondents, and which was promulgated without reliance on any evidence of industry practices, and disproportionately discriminates and disadvantages providers who primarily serve beneficiaries of State programs? A. Yes. 2 PRELIMINARY STATEMENT Do the Commissioner of Health and the Governor have the power to dictate how private health care providers spend their own money? That is the important constitutional question raised in these appeals. More specifically, this Court must decide whether the Governor can legally order the Commissioner of Health to issue regulations that (a) prohibit nursing homes, adult living facilities, and certified home health agencies participating in the Medicaid program from paying their employees more than a specific level of compensation, and (b) direct how those providers should allocate their own funds between direct program and administrative expenses. In this litigation, those providers and their representative trade associations (“Appellants-Respondents”) have challenged such unprecedented regulations and the claim by the Governor and the Commissioner that they have the power to control how providers may spend reimbursement paid to them for services already provided to Medicaid patients, notwithstanding the fact that there is no dispute that title to and ownership of such funds received for services rendered in the past is vested exclusively in the providers. That, however, is not all the power the Respondents-Appellants claim. In addition, they assert the right to control how providers spend not only the money received from the State for services already rendered, but also the authority to 3 regulate how those providers spend money received from other non-State sources- e.g., private payors and health insurance companies. Although the Legislature has delegated considerable regulatory oversight to the Department of Health (the “Department”) with respect to the administration of the Medicaid program, the Legislature has not gone so far as to empower the Department to dictate to providers how much they can pay their own employees or how they should otherwise spend their own funds. This is true not only with respect to reimbursement received from the State for services already rendered to Medicaid patients, but even more so with respect to the expenditure of funds that are not now I and never were “State funds.” The Appellate Division had no difficulty in unanimously striking down the Respondents-Appellants’ claims of authority with respect to the regulation of expenditures by providers of revenue received from non-State sources. Matter of LeadingAge New York, Inc. v Shah, 153 A.D.3d 10 (3d Dep’t 2017). It found that the State’s interest in such funds was far too attenuated and that there was no statutory authority for such power. A majority of the Appellate Division ruled, however, that the Respondents-Appellants could regulate the expenditure of funds received from State sources even though they could find no express legislative authority for such control. It ruled that such authority could be exercised because it was “not inconsistent” with the Department’s enabling legislation. 4 The Appellate Division’s conclusion that just because the proposed regulations are “not inconsistent” with the Department’s broad enabling statutes, the Department is free to regulate in any area it wishes, is an open-ended invitation to administrative overreach without specific legislative authority. The Executive Branch does not have inherent authority to act except where the State Constitution has specifically delegated such authority. Otherwise, its only source of power comes from the Legislature. The Respondents-Appellants are guilty of such overreach. Imposing restrictions that micromanage providers without the requisite legislative authority violates the separation of powers principle that is a critical part of this State’s constitutional blueprint. See, e.g., Boreali v. Axelrod, 71 N.Y.2d 1 (1987), N.Y. Statewide Coalition of Hispanic Chambers of Commerce v. N.Y.C. Dep’t of Health and Mental Hygiene, 23 N.Y.3d 681 (2014) (hereinafter “ Statewide Coalition”). This is especially the case where, as the Record in this case makes clear, the Legislature repeatedly passed up several opportunities to impose the very type of expenditure caps the regulations now seek to impose. Additionally, even if not inconsistent with the broadly worded enabling statutes themselves, the Regulations are invalid because they conflict with other policy choices of the Legislature as articulated in state statutes, including the Not- For-Profit Corporation Law (“N-PCL”), Business Corporation Law (“BCL”), 5 Limited Liability Company Law (“LLCL”), and various payment-related provisions of the Public Health Law (“PHL”) that dictate the limited and only circumstances under which a provider’s otherwise unfettered right to payment can be conditioned. In holding that the PHL did not prohibit the Department from controlling how a provider spent payments received, the Third Department relied exclusively on precedent involving either legislatively authorized post-audit adjustments or the common law right to recoup payments to which a provider was never entitled in the first instance. These cases simply do not stand for the proposition that the Department may go beyond the PHL and impose additional restrictions on a provider’s unfettered right to payment. Indeed, such a proposition was rejected by this Court in Jewish Home and Infirmary of Rochester, New York, Inc. v. Commissioner of New York State Dept, of Healthy 84 N.Y,2d 252 (1994) (hereinafter “ Jewish Home and Infirmary”). The Medicaid program is not, as the Respondents-Appellants imply, a grant program where the State distributes funds in advance and in trust to providers and then directs them how to expend those funds. If it were, then the claim that the State has the right to control the expenditures of Medicaid funds would have more traction. But that is not the case. Providers submit claims to the State for reimbursement after services have been rendered to Medicaid recipients. There are exceptions whereby payments are specifically earmarked to be spent in a 6 certain manner, but those are the exceptions that prove the rule. See, e.g., PHL § 2807(18). Otherwise, in the absence of specific legislative direction, the rest of the Medicaid funds are expended to reimburse providers for services already rendered, which the providers are then free to expend as they see fit, to manage their operations. Title to those funds belongs to the providers and the State may not by some regulatory alchemy magically transmute these funds into “State funds” that it can then control. See 10 N.Y.C.R.R. § 1002.1(1), (m). Even if the Respondents-Appellants had such power, the regulations enacted are irrational and lack any connection to the stated purposes of saving money because, as highlighted by Justice Mulvey in his dissent at the Appellate Division, under existing Medicaid reimbursement methodologies, the amount that facilities pay their executives, and how they apportion other expenditures between program and administration, do not in any way affect the amount of reimbursement the facilities receive. This Court has granted all parties leave to appeal. 7 SUMMARY OF FACTS The Governor’s Executive Order and the Department’s Regulations represent the culmination of a lengthy political campaign by the Governor against executive compensation within private entities across several industries, including health care providers. The Governor’s efforts to restrict executive compensation and administrative expenses began with the Governor’s Task Force on Not-For- Profit Entities, which was established in response to what the Governor claimed were reports of “startlingly excessive salaries and compensation packages for executives at not-for-profits.” (R. 156-64).1 In January 2012, the Governor introduced legislation, as part of his 2012-13 budget bill (the “Budget Bill”), to curb and regulate executive compensation among private entities that derive revenue from the State, including both for-profit and not-for-profit entities. (R.178-79). The Budget Bill included a proposal to impose caps on administrative costs and executive compensation within these entities. Id. The Executive Order. The Budget Bill proposal was met with an immediate outcry from for-profit and not-for-profit businesses and other stakeholders. (R. 60-61 at f 44), In 1 Numbers in parentheses preceded by “R” or “RA” refer to the numbered pages of the Record on Appeal. 8 response to this political opposition, the day after the Governor submitted his proposed budget (January 18, 2012), the Governor issued Executive Order 38 (the “Executive Order”), which directed the commissioners of various state agencies that provide State financial assistance or State-authorized payments (hereinafter “State Funds”) to promulgate regulations imposing caps on executive compensation and administrative costs. The language in the Executive Order was virtually identical to the language in the Budget Bill. (R. 105-06, 178-79). The Legislature’s rejection of the Governor’s budget bill, and ongoing debate about whether and how best to address executive compensation and administrative expenses. Despite the Governor’s issuance of the Executive Order, the Legislature continued to debate executive compensation and administrative costs within for- profit and not-for-profit entities. This debate included not only the consideration and ultimate rejection of the Budget Bill (R. 63 at 54), but other legislative proposals for addressing executive compensation and administrative expenses. Some of these legislative proposals were similar to the Governor’s proposal while others proposed different approaches to addressing executive compensation and administrative costs. (R. 248-381). On February 6, 2012, while the Budget Bill was being considered by the Legislature, and before the April 2012 deadline imposed by the Executive Order for agencies to promulgate implementing regulations, the Senate Standing 9 Committee on Investigations and Government Operations held a public hearing to “investigate the compensation levels of executives at not-for-profit organizations,” to “examine if these pay levels are appropriate,” and to “solicit suggestions for changes necessary to ensure that taxpayer funds are not wasted on excessive salaries.” (R. 182-83). In addition, on February 16, 2012, the Senate Government Operations Committee issued a report with recommendations substantially different from the language of the Executive Order and Budget Bill. (R. 185-246). Following the Legislature’s rejection of the Governor’s Budget Bill proposal, the Legislature continued to review the issue of executive compensation and administrative expenses. In 2012 and in subsequent years, the Legislature has considered several bills addressing executive compensation and administrative expenses (R. 248-317), has repeatedly rejected the approach set forth by the Governor (R. 63-64 at 315-382), and has instead adopted an alternative approach to executive compensation in recently passed legislation (R. 319-382). In June 2013, both houses passed the Nonprofit Revitalization Act (A.8072), which comprehensively reforms New York’s N-PCL. In the Nonprofit Revitalization Act, the Legislature had the opportunity to establish monetary caps on executive compensation within not-for-profit corporations, but instead decided to maintain the more flexible standard that such compensation must be “reasonable” and added the requirement that “[n]o person who may benefit from 10 such compensation may be present at or otherwise participate in any board or committee deliberation or vote concerning such person’s compensation . . . .” (R. 319-82). This legislation made no changes to the BCL, N-PCL, or the existing deference accorded to the good faith decisions of the governing boards of not-for- profit and for-profit corporations. The Challenged Regulations. In accordance with the strict directives of the Executive Order, on May 30, 2012, the Department released proposed regulations capping executive compensation and administrative expenses by imposing limitations on how providers could spend payments that they had earned for providing health care services. (R. 384-91). Following several rounds of public comment, on May 29, 2013, the Department published a Notice of Adoption of the Regulations as a new Part 1002 of Title 10 of the New York Codes, Rules and Regulations (“NYCRR”). (R. 405-07). The Regulations were effective July 1, 2013. Id. The Regulations, which apply to both for-profit and not-for-profit entities, impose caps on executive compensation and administrative expenses on “covered providers.” “Covered providers” are defined in the Regulations as any entity or individual (i) that has received, “pursuant to contract or other agreement” with the Department or another governmental entity, an annual average of at least $500,000.00 in State Funds during a two year period and (ii) for whom at least 11 thirty (30) percent of total annual in-state revenues during that same period constituted State Funds. 10 NYCRR § 1002.1. The Department, however, categorically excluded many providers from the reach of the Regulations. In virtually all cases, the exemptions are based on political exigencies, unrelated to the claimed regulatory purpose. For example, the Regulations exclude providers that are run by state, county or local governmental units, certain individuals or entities providing child care services, certain individual professionals, partnerships and S Corporations, and individuals and entities providing primarily products (e.g. pharmacies and medical equipment suppliers). Id. at § 1002.1(d)(6). (R. 405). The Department offered no explanation for these categorical exclusions. (R. 405-07). Covered providers are subject to caps on both administrative expenses and executive compensation. The Regulations impose a “Hard Cap” on the total operating expenses of a covered provider by precluding providers from using more than 25% of State funds or State-authorized payments to pay for administrative expenses (with the 25% cap decreasing annually until it reaches 15%). § 1002.2. (R. 405-06). With respect to executive compensation, the Regulations impose both a “Hard Cap” on the amount of executive compensation that can be paid for using State Funds or State-authorized payments and a “Soft Cap” that limits the total amount of executive compensation regardless of source. § 1002.3. (R. 406). 12 For the individual providers who participate in and receive payments from the State’s Medicaid program for services rendered to Medicaid recipients, the Hard Cap prohibits them from using state funds to pay for compensation given to a covered executive (as defined in the Regulations) in an amount greater than $199,000.00 per year. § 1002.3(a). Executive compensation is also subject to a Soft Cap in that if total executive compensation is above $199,000.00 (regardless of the source of funds from which it is paid), it cannot be “greater than the 75th percentile of that compensation provided to comparable executives ....” § 1002.3(b). In addition, executive compensation is not permitted above $199,000.00 (regardless of source of funds) unless it has been “reviewed and approved by the covered provider’s board of directors or equivalent governing body (if such board or body exists) including at least two independent directors or voting members” and that review included “an assessment of appropriate comparability data ____ ” § 1002.3(b). This Soft Cap was annulled by the Appellate Division (R.A. 25-26). Absent a waiver from the Department, a covered provider that violates the Regulations faces severe sanctions, up to and including revocation of the provider’s license and/or termination of the provider’s contract. § 1002.6. If a waiver is denied, the provider must request an administrative reconsideration, and may then bring an Article 78 proceeding if the original denial is upheld. § 1002.4. 13 The Decision of the Courts Below. In September of 2013, Appellants-Respondents filed a hybrid Article 78 and declaratory judgment action. After the denial of Respondents-Appellants’ motion to dismiss, an answer was served and, upon cross-motions for summary judgment, the matter was decided by Supreme Court, Albany County (Hon. Denise Hartman, Acting Supreme Court Justice) in November of 2015. (R. 3-28). The court denied the petitions to the extent they challenged the Hard Cap portion of the Executive Order Regulations (i.e. the Hard Cap on both executive compensation and administrative expenses). (R. 16-20). However, Supreme Court granted the petitions with respect to the Soft Cap. (R. 20-24). The court declared that the Soft Cap regulation was promulgated in excess of the Department’s authority and, therefore, violated the separation of powers doctrine. Id. Both parties appealed to the Appellate Division, Third Department. On June 22, 2017, the Appellate Division issued its Opinion and Order. (R. 11). The majority opinion affirmed the decision of the Supreme Court, invalidating the Soft Cap, but upholding the Hard Cap. While conceding that none of the statutes relied upon by Respondents-Appellants expressly authorized the creation of administrative costs and executive compensation limits, the majority held that the executive branch nevertheless had the authority to issue the regulations so long as they did not expressly conflict with the enabling legislation, notwithstanding the 14 fact that the Legislature itself had eschewed the option to impose such limits on several occasions. (R.A. 17-25). Justice Mulvey issued a separate opinion concurring in part and dissenting in part. He agreed with the majority that the Department acted in excess of its authority with respect to the Soft Cap. Justice Mulvey otherwise dissented, and would also annul the Hard Cap as being in violation of the Separation of Powers Doctrine, and arbitrary and capricious. He found that none of the statutes relied upon by the Department gave it the authority to control how providers could spend earned revenue for past services, citing as well the “Legislature’s signals on this issue to the contrary.” (R.A. 28-33). Both parties have appealed to this Court. 15 POINT I THE REGULATIONS ARE INVALID UNDER BOREALI V AXELROD New York’s system of government is founded on the fundamental principle of separation of powers, in which power is distributed among the three branches of government with a system of checks and balances that prevents excessive concentration of power in one branch. Rapp v. Carey, 44 N.Y.2d 157, 162-63, 167 (1978). The authority to make laws and establish the policy of the state is the exclusive province of the Legislature. N.Y. Const, art. Ill, § 1. The Executive Branch, in contrast, is charged with administering and enforcing the laws created by the Legislature. Id. at art. IV; Bourquin v. Cuomo, 85 N.Y.2d 781, 784 (1995). The separation of powers doctrine prohibits the Legislature from delegating its lawmaking functions to another branch of government. N.Y. Const, art. III. However, “[i]n certain technical areas, where flexibility is required to enable an administrative agency to adapt to changing conditions, it is sufficient if the Legislature confers broad power upon the agency to fulfill the policy goals embodied in the statute, leaving it up to the agency itself to promulgate the necessary regulatory details.” Consol. Edison Co. v. Dep’t of Envtl Conserv., 71 N.Y.2d 186, 191 (1988). In such cases, the Legislature can endow administrative agencies “with the power to fill in the interstices in the legislative product by 16 prescribing rules and regulations consistent with the enabling legislation” Nicholas v. Kahn, 47 N.Y.2d 24, 31 (1979). In Boreali, this Court articulated four “coalescing circumstances” that indicate that an administrative agency has gone beyond its proper sphere of interstitial rulemaking: (1) “a regulatory scheme laden with exceptions based solely upon economic and social concerns,” (2) an administrative agency that writes “on a clean slate, creating its own comprehensive set of rules without benefit of legislative guidance,” rather than “merely filling in the details of broad legislation describing the overall policies to be implemented,” (3) action by an administrative agency in an area which the Legislature has tried and failed to address, and (4) the need for the agency’s special expertise or technical competence. Boreali, supra at 11-14. These factors are to be “interpreted as indicators of the usurpation of the legislature, rather than a talismanic rule of four required elements that must all be present in every case.” N.Y. Statewide Coalition of Hispanic Chambers of Commerce v. N.Y.C. Dep’t of Health and Mental Hygiene, 110 A.D.3d 1, 9 (1st Dep’t 2013), affirmed 23 N.Y.3d 681 (2014). No statute authorizes the Department to cap the compensation third party businesses pay their executives or to regulate how these private businesses use revenues earned from the Medicaid program for services provided. All four factors, considered together, clearly establish that the Department exceeded the 17 scope of existing legislative policy in violation of the constitutional separation of powers by stretching the principle of interstitial rule-making beyond the breaking point. While the Third Department correctly invalidated the Soft Cap, for the reasons discussed below, the Third Department erred by upholding the Hard Cap under Boreali. A. The Regulations reflect the executive branch’s own value judgments about the appropriate choices between broad political, social and economic concerns. The first factor articulated by this Court in Boreali is whether the agency “did more than balance costs and benefits according to pre-existing guidelines, but instead made value judgments entailing difficult and complex choices between broad policy goals to resolve social problems.” Matter of NYC C.L.A.S.H., Inc. v. New York State Off. of Parks, Recreation & Historic Preserv., 27N.Y.3d 147, 179- 180 (2016), quoting Greater N.Y. Taxi Assn., 25 N.Y.3d 600, 610 (2015). The challenged Regulations fall squarely within the concerns expressed by this Court. In Boreali, this Court struck down smoking regulations, in part, because “to the extent that the agency ha[d] built a regulatory scheme on its own conclusions about the appropriate balance of trade-offs between health and cost to particular industries in the private sector, it was acting solely on its own ideas of sound public policy and was therefore operating outside of its proper sphere of authority.” Boreali, supra at 12. 18 The Regulations were promulgated at the direction of the Governor, following an executive order that directed thirteen separate state agencies, not just the Department, to promulgate broad, sweeping regulations capping executive compensation across a range of industries. The Executive Order, in turn, came on the heels of a series of New York Times articles about highly compensated executives and was issued in direct response to the public outrage that resulted from those articles. Indeed, the Executive Order reflects the culmination of a lengthy political campaign by the Governor against compensation paid to executives within private for-profit and not-for-profit businesses across industries. The real motivation for the Regulations is apparent when one considers that the Regulations as a whole attempt to cap executive compensation even when paid for with revenues derived from purely private sources. Indeed, the Third Department correctly held that “by attempting to regulate executive compensation from all sources, DOH was acting on its own ideas of sound public policy.” Opinion and Order, p. 16. The challenged Regulations do not constitute the kind of mundane, highly technical subject matter for which there is little social or political interest (which generally survives analysis under this factor). Instead, they represent the executive branch’s efforts to unilaterally address politically contentious social issues and 19 balance competing concerns that are within the exclusive purview of the Legislature. The Third Department characterized the Hard Cap as a technical issue regarding the appropriate limits on administrative costs and executive compensation paid for with state funds or state authorized payments, and not one that implicated “broad political, social, and economic concerns beyond its purview.” Decision, p. 10, quoting Agencies for Children’s Therapy Servs., Inc. v. New York State Dept, of Health, 136 AD3d 122, 130 (2d Dep’t 2015). However, the Hard Cap should not be viewed in a vacuum. Considered as a whole (including both the Hard Cap and Soft Cap), and in the context of the circumstances preceding their promulgation, it becomes apparent that politically charged, broad social and economic issues (not technical concerns about public health funding) were the real focus of the Regulations. This factor also favors invalidating the Regulations under Boreali because they constitute a regulatory scheme constructed by the Department to curb executive compensation based “on its own conclusions about the appropriate balance of trade-offs” without legislative authorization. Boreali, supra at 12. “Striking the proper balance among health concerns, cost and privacy interests, however, is a uniquely legislative function.” Id. at 12. As in Boreali, and Statewide Coalition, instead of acting solely with a view towards public health 20 considerations, the EO 38 Regulations represent the Department’s value judgments between promoting health services for New York residents, and non-health related economic costs and concerns, including the freedom of private health care providers to manage their internal compensation. In the March 13, 2013 Revised Rule Making notice, the Department stated that the Regulations were proposed “because the State of New York directly or indirectly funds with taxpayer dollars a large number of tax exempt organizations and for-profit entities that provide critical services to New Yorkers in need and the goal is to ensure that taxpayers’ dollars are used properly, efficiently, and effectively to improve the lives of New Yorkers.” (R. 396-97). The Department stated: The Department . . . believes [the Regulations] strike a proper balance between supporting the underlying policy of the regulation while minimizing die impact on affected entities and providing sufficient guidance. Id. Even assuming, arguendo, that this was the real goal of the Regulations (a contention contradicted by the inclusion of the Soft Cap), this type of weighing the costs to taxpayers and the impact on providers falls squarely within the type of decision-making reserved to the Legislature. Boreali, supra at 12. Balancing such concerns is uniquely a legislative function, and can only be undertaken by an 21 administrative agency if the agency has been given legislative guidelines for weighing those concerns. Boreali, supra at 12. The Third Department erred in holding that the inclusion of various exceptions in the Regulations did not amount to impermissible legislative compromises. As the dissent at the Third Department correctly points out: DOH has not cited any specific guidelines other than its broad responsibility for state health care spending and its authority to review providers’ overall fiscal responsibility per State Finance Law § 163 (1) (c) and (9) (f). (R.A. 30). Moreover, the Third Department specifically addressed only the waiver provision, holding that the inclusion of the waiver provision in the Regulations does not amount to a political concession because it allows a waiver only when “the inability to pay a particular salary would damage the quality of program services in the provider’s local area.” (R.A. 22). However, the waiver provision is far from the only exception included in the Regulations. Indeed, the Hard Cap is more laden with exceptions based on economic and social concerns than the smoking ban in Boreali or the sugary drink limit in Statewide Coalition. The exceptions contradict the stated purposes of the Regulations and clearly reflect a political compromise. Government-run nursing homes are excluded from the reach of the Regulations, as are pharmacies and medical equipment suppliers. 10 NYCRR § 1002.1(d). For example, the Albany 22 County Nursing Home is categorically exempted from the Regulations, merely because it is run by Albany County, while the Appellants-Respondents’ nursing homes herein located in and around the Albany area, which serve the same resident population and compete for the same executive leadership, are subject to the artificial caps set forth in the Regulations. Since the entire salary of the executives running Government-run entities would be paid for with taxpayer funds, capping executive compensation within these entities would yield the biggest savings to taxpayers. Without explanation, they are completely exempted. Virtually all large private hospitals, a group that receives more state Medicaid funds than any other provider group (R. 66-67 at fflf 65-66), are exempted from the Regulations because of the exclusion of providers whose State Funds do not reach 30% of their total revenues. Only those hospitals in poor areas with high Medicaid populations are likely to fall within the definition of “covered provider.” Not coincidentally, hospitals in these low income areas are predominantly government-owned and are, therefore, also exempt from the Regulations. (R. 66 at If 65). The Department’s purported justification for the Regulations, that requiring providers to dedicate a larger portion of State Funds to direct care will benefit public health and reduce costs, is blatantly undermined by excluding those very providers who receive the largest portion of such funds. 23 As this Court held in Boreali, the conclusion that an agency has operated out of its proper sphere of authority is “particularly compelling . . . where the focus is on administratively created exemptions rather than on rules that promote the legislatively expressed goals, since exemptions ordinarily run counter to such goals and, consequently, cannot be justified as simple implementations of legislative values.” Boreali, supra at 12. The various exceptions contained within the Regulations contradict the stated goals of the Regulations and reflect impermissible balancing of fiscal issues, socio-economic concerns, and political expediencies, rather than implementation of the Department’s public health related responsibilities. The exceptions set forth in the Regulations are analogous to those in the New York City Board of Health’s “Sugary Drinks Portion Cap Rule,” which was struck down by this Court. Statewide Coalition, supra. As this Court explained: By restricting portions, the Board necessarily chose between ends, including Public Health, the economic consequences associated with restricting profits...tax implications for small business owners, and personal autonomy with respect to the choices of New York City residents...this necessarily implied a relative valuing of health considerations and economic ends, ...the value judgments entailed difficult and complex choices between broad policy goals - choices reserved to the legislative branch. Statewide Coalition, 23 N.Y.3d 681, 698 (2014). This is precisely what the Respondents-Appellants did in this case. The Regulations reflect the Respondents-Appellants’ own balancing of issues, socio- 24 economic concerns, political expediencies, and political concerns that have no nexus to public health, and contain multiple exceptions and exemptions that are not based on public health concerns. In fact, virtually verbatim exceptions have been included in the regulations promulgated by other agencies under the Executive Order. See, e.g., 1 NYCRR § 400.1; 7 NYCRR § 513.3. It is, therefore, clear that such exceptions have no relationship to public health concerns and are, instead, mere expressions of the Executive Branch’s social and economic agenda. B. The Department wrote on a clean slate, without the benefit of Legislative guidance. An administrative agency exceeds the scope of its authority when it writes on a clean slate, articulating its own vision of what public policy ought to be, rather than filling in the details of broad legislation describing the overall policies to be implemented. Boreali, supra at 13. As noted above, the Regulations reflect a nearly verbatim implementation of the Executive Order. The Governor, however, does not have the authority to enact broad policy for the State or to grant the Department the authority to fill in the details of that policy. Rather, any authority for the Regulations must come from the Legislature. Boreali, supra at 6. In its Notice of Adoption, the Department purported to derive its authority from certain broad provisions of the SSL, PHL and the N-PCL. Therefore, the Third Department was tasked with assessing whether the Department’s Regulations fit within the scope of authority provided for in sections of the PHL, 25 SSL, and N-PCL identified by the Department. Statewide Coalition, supra at 12. Notably, none of the statutes cited as authority by the Department even mention executive compensation. In evaluating the scope of the Department’s authority, the Third Department correctly found that, with respect to the Soft Cap, the Department had ventured outside of its legislative mandate. However, the Third Department incorrectly found with respect to the Hard Cap that the “Legislature has given the Department of Health broad authority to regulate the financial assistance that the State provides for public health programs” and merely fulfilled “its statutory mandate to ‘administer taxpayer funding programs efficiently to get the biggest bang for the buck in the delivery of health care and services.” (R.A. 12). As noted in Point III, infra, the Third Department’s holding is flawed as a matter of fact and law, because the restrictions imposed through the Regulations will have no impact on the cost of the Medicaid program. Although the Third Department did not specifically rely on all of the statutory provisions cited by the Department in its Notice of Adoption, since the Respondents-Appellants have also appealed the Third Department’s invalidation of the Soft Cap, Appellants-Respondents have addressed each of the statutes relied on by the Department in its Notice of Adoption below. 26 The Department’s reliance on the N-PCL is easily disposed of. Nothing in the N-PCL, or any other statute, grants the Department any authority to enforce the N-PCL. Therefore, the N-PCL cannot be used as a statutory basis for the Regulations.2 SSL § 363-a(2) and PHL § 201(l)(o), (p), also used by the Department as a pretext for the challenged Regulations, are inapposite. PHL § 201 gives the Department the authority, as provided by law, to regulate financial assistance granted to the state for public health activities and to receive and expend the State’s public health funds. SSL § 363-a(2) grants the Department authority to promulgate regulations, not inconsistent with law, to implement the Medicaid program. These statutes do not provide the Department with statutory authority for several reasons. First, although the Soft Cap has been invalidated by the Third Department, when the Hard Cap is considered along with and in the context of the companion Soft Cap, it is clear that the Regulations were intended to reach well beyond the Medicaid program and the State’s public health funds to cap executive compensation even if that compensation is not paid for through the use of State Funds. There is nothing in the statutory language, or any rational interpretation of 2 For the reasons set forth in Point II, the N-PCL does not provide any authority for capping executive compensation or administrative expenses and, if anything, the Regulations conflict with and circumvent the N-PCL. 27 that language, to support the contention that regulation of executive compensation not paid for with State funds falls within the intended scope of SSL § 363-a or PHL § 201. Second, as Section 363-a(2) clearly states, any regulations promulgated pursuant to this section must be consistent with law. As addressed in detail in Point II, infra, the Regulations are inconsistent with the N-PCL, BCL and several provisions of the SSL and PHL. Likewise, PHL § 201 only gives the Department authority to regulate the State’s public health funds to the extent provided for by law. The Public Health Law does not mention corporate decision-making and employee compensation, let alone “describe the over-all policies to be implemented.” Boreali) supra at 13. Nor does it grant the Department any authority to regulate under what circumstances a provider’s right to revenues earned for services provided can be conditioned, regulated or limited. Indeed, as discussed in Point II, infra, the Department’s authority in this area has been explicitly limited by the Legislature. As such, Section 201 is unavailing. Respondents-Appellants have also asserted that the Department was authorized to promulgate the Regulations under State Finance Law §163. However, as Justice Mulvey correctly noted in his dissent, “DOH’s authority to control its own expenditures cannot be reasonably interpreted as authority to 28 control how providers spend earned revenues for past services.” (R.A. 31).3 Finally, PHL § 206(3), (6), which gives the Department the authority to contract with entities to carry out the PHL and provide healthcare services, also does not provide authority for the Regulations. The Department has not capped administrative costs and executive compensation through contract provisions within individual providers. Rather, the Department has capped administrative expenses and executive compensation by regulation, including providers who do not have contracts with the Department.4 As such, the Department’s power to contract is irrelevant in the context of this litigation. Moreover, even a broad grant of authority to enter into contracts cannot be used to create new social policy or to impose new requirements on private entities not otherwise required by law, Subcontractors Trade Ass’n v. Koch, 62 N.Y.2d 422 (1984) (hereinafter “ Subcontractors”); Under 21, Catholic Home Bureau for Dependent Children v. Koch, 65 N.Y.2d 344 (1985); see also Ellicott Grp., LLC v. NYS Office of General Services, 85 A.D.3d 48 (4th Dep’t 2011). Put simply, this Court has explicitly 3 In Agencies for Children’s Therapy Services, the Second Department cited State Finance Law Section 163(9)(f) as authority for the Regulations. See 22 N.Y.S.3d at 530. That section of the Finance Law provides that the Department may make a determination of responsibility of a proposed contractor receiving state funds, See State Fin. Law § 163(9)(f). But the statute sets forth what “responsibility” criteria the Department can use, and executive compensation is not one of them. See id. § 163(l)(c). The text of the statute dispenses with the Department’s claim that it can legislate executive compensation under the guise of contractor “responsibility.” 4 Most Medicaid providers, for example, do not have contracts within the State, but would still be subject to the Regulations. 29 rejected the notion that the power to enter contracts includes the power to regulate through those contracts in ways not authorized by the Legislature. Subcontractors, supra. The Third Department disregarded Appellants-Respondcnts’ argument, holding that the Subcontractors and its progeny apply only to non-fiscal, social goals. Fundamentally, Subcontractors, supra, Under 21, supra and Matter of New York State Health Facilities Assn. v. Axelrod, 77 N.Y.2d 340 (1991) all stand for the proposition that the executive branch cannot do by contract what it cannot do by regulation. As such, at its heart, the inquiry is whether the Legislature has granted the Department the authority to direct and restrict how Appellants- Respondents can spend the revenues they earn for providing health care services, and how much they can pay their executives, whether by contract or by regulation. Subcontractors Trade Ass’n, supra at 842 (“In the case before us, we are called upon to decide ... at what point an exercise of executive power becomes an unlawful infringement upon the legislative function.”). The answer is clearly no. Certainly administrative actions that address difficult social issues are most likely to invoke this type of analysis. However, the Third Department’s effort to distinguish Subcontractors and its progeny goes too far, precluding this type of analysis when the issues in question happen to have a fiscal component. Notably, the prevailing wage requirements at issue in Ellicott Grp., LLC v. NYS Office of 30 General Services, supra, a case involving leases entered into by a state administrative agency, involved fiscal issues. It is illogical to conclude that an administrative agency can use its power to contract to impose any requirement it wants, as long as it has a fiscal component. Under the Third Department’s decision, Subcontractors and its progeny would permit the Department from imposing any contractual requirement it wanted, so long as it addressed a fiscal issue. Viewed in context, including the public outcry over the salaries of certain health care executives that was the impetus of the Regulations, and considering that the Department’s goal of controlling executive compensation within private companies regardless of the source of funds, it was improper to characterize the Regulations as devoid of any social concerns. The challenged Regulations address much more than technical issues concerning the state fisc, and reached into broader, highly contentious political issues of wealth distribution, free market capitalism versus governmental intervention, and the business judgment rule at the heart of self-governance within private sector corporations. The Hard Cap makes no mention of the prices the Department pays for services, or the quality of those services rendered. Rather, the Hard Cap impermissibly dictates how a covered provider may pay its employees after the services have been rendered. 31 The right to engage in interstitial rule-making does not give administrative agencies carte blanche to do whatever they wish. If the challenged Regulations are not annulled, there would be little restraint on fiscal policymaking by the Executive branch. In particular, upholding the Hard Cap would open the door to all manner of agency intervention in areas previously reserved for the Legislature, merely because state funds are nominally involved. Upholding the Hard Cap would subvert the principles articulated in Boreali and its progeny, since no limiting principle would restrain State agencies from promulgating regulations that extend far beyond the enabling statutes. C. The Regulations were promulgated following the Legislature’s failure to enact the Governor’s policy through statute, and touch on difficult social issues over which there is a long history of legislative wrangling. The Court of Appeals noted in Boreali that where the Legislature has repeatedly tried and failed to reach agreement on the goals and methods of addressing a societal problem, the Executive Branch cannot “take it upon itself to fill the vacuum and impose a solution of its own.” Boreali, supra at 13. Such legislative wrangling is indicative of a difficult public policy issue for the legislative branch to resolve. As discussed in detail in the Summary of Facts (see pp. 8-15, supra) and Point II, infra, the Legislature has a long history of wrangling with the policy decisions surrounding the appropriate degree of governmental interference with 32 private business decisions, executive compensation, administrative costs, the benefits and draw-backs of the participation of for-profit businesses in the health care industry, and how and to what extent a provider’s right to payment can be encumbered, all issues directly implicated by the Regulations. Not only did the Legislature reject a virtually verbatim proposal submitted by the Governor one day prior to issuing the Executive Order (R. 181-246), but the Legislature has continued to grapple with issues related to executive compensation since then, considering the issue several times in the context of numerous bills with varying approaches. (R. 248-52, 255, 315-17). The history of the Legislature’s consideration and ultimate rejection of several bills regarding executive compensation and administrative expenses, and its recent passage of a bill that adopts an approach to executive compensation that retains the existing deference to the business judgment decisions of governing boards, further establishes that this is an issue for the Legislature, not an executive agency. This Court has confirmed that “failed legislative action” concerning the specific subject matter demonstrates that an agency’s attempt to take it upon itself to fill the vacuum and impose a solution of its own is improper. Statewide Coalition, supra. The Third Department disregards much of this history by pointing out that with the exception of one bill, none of the proposed bills made it past committee. The court’s apparent conclusion that this fact establishes a lack of true legislative 33 focus on this issue is not supported by any evidence in the record and, if anything, ignores the fact that bills are almost never brought to a vote unless the sponsor already knows he or she has the votes to pass the bill. As such, the failure of any of the aforementioned bills to be brought to a vote is consistent with the complexity and political challenges attendant to any effort to change the law relating to corporate decision making. The present debate must also be viewed in the larger context of the Legislature’s longstanding active role in setting policy in areas at the heart of the Regulations, including the types of entities that can participate in the health care industry (see N.Y.S. Health Facilities Ass’n v. Axelrod, supra; R. 424-452), how to use payment-related mechanisms to control costs, and when and under what circumstances a provider’s right to payment is qualified or limited. PHL § 3614; PHL §2808. Viewed in this context, it is clear that the Legislature did not intend the broad statutes upon which the Department relies, and which have nothing to do with executive compensation or administrative costs, to confer upon the Department the right to dictate how providers may use revenues to which they are indisputably entitled, or meddle with the internal affairs of private businesses in ways that have no impact on the state budget (see Point III, infra). Indeed, this Court has previously held that the Department cannot add additional qualifications or limitations to a provider’s right to payments that are not 34 specifically provided for in the Public Health Law. Jewish Home and Infirmary, supra at 262. By prohibiting Appellants-Respondents from spending these payments on executive compensation and administrative costs, that is exactly what the Department has done. In Jewish Home and Infirmary, the Department sought to retroactively apply a new recalibration adjustment that was not provided for in PHL § 2807 and 2808. This Court held: In short, viewed in realistic terms, the legislative history demonstrates that Public Health Law § 2808(1l)'s sponsors regarded section 2807(7)(a) as having application well beyond the “normal rate-making process,” that those sponsors perceived a need to modify the existing rule precluding retroactive rate adjustments and that, despite extensive discussion between the interested lobbying elements, no agreement could be reached about the proper resolution of the recalibration adjustment problem. This situation is reminiscent of that presented in Boreali v. Axelrod, 71 N.Y.2d 1, 13, 523 N.Y.S.2d 464, 517 N.E.2d 1350, in which, despite considerable lobbying by the various interested factions, efforts to achieve a legislative compromise failed. In Boreali, we rejected an attempt to circumvent the legislative process by resort to administrative rule-making. Here, respondents are attempting to circumvent the legislative process by invoking the judiciary's power to construe an existing statute. As in Boreali, we reject the present circumvention effort by declining to read into Public Health Law § 2807(7)(a) an exception that respondents were unable to obtain through the legislative process. Id. at 263. Although Jewish Home and Infirmary involved a retroactive adjustment that had specifically been the subject of discussion during the adoption of PHL §2808, this Court’s holding confirms that decisions about how and to what extent a provider’s otherwise unfettered right to payments earned can be limited or 35 regulated is a policy matter for the Legislature. Any further attempt by the Department to regulate or restrict the use of funds received by private businesses for services rendered is impermissible. D. The Regulations do not require the Department’s special expertise or technical competence. The final factor that the Court looked at in Boreali was whether the issue at hand was the type of highly technical issue appropriate for interstitial rulemaking. This factor strongly supports the annulment of the Hard Cap. When an agency addresses an issue that is not particularly technical and could have been addressed directly by the Legislature, the agency has likely exceeded its authority and usurped the Legislature’s role. Boreali, supra at 14. Here, the Third Department incorrectly concluded that “DOH’s expertise is manifested by the comprehensive nature of the subject regulations, which include not only the limits on administrative costs and executive compensation, but also the waiver, reporting and penalty provisions,” (R.A. 25) noting the extensive public comment received. The dissent correctly noted that the majority held that with respect to the Soft Cap the Department lacked any expertise in the area of executive compensation. However, the source of funds used to pay that executive compensation is irrelevant to the issue of what is an appropriate amount of compensation, given factors such as the surrounding area, cost of living, relative experience and complexity of the internal operations of the provider. To the extent 36 that the Department has any relevant expertise, it is in properly calculating rates of reimbursement pursuant to the PHL. As pointed out, however, by Justice Mulvey’s dissent in the Appellate Division, the amount of executive compensation paid or administrative expense incurred by a provider has no effect on reimbursement. Further, the numerous attempts by the Legislature to decide for itself the appropriate controls on executive compensation and the detailed payment methodology statutes developed by the Legislature demonstrate that the Legislature is more than capable of resolving these issues for itself, and the technical expertise of the Department is unnecessary. The Third Department’s decision also ignores the fact that the Department is only one of thirteen state administrative agencies that promulgated regulations that impose virtually identical caps on executive compensation and administrative expenses, utilize the same arbitrary thirty percent threshold for defining “covered provider,” and include virtually identical caps, definitions, and exceptions. Through these regulations, identical requirements have been imposed on vastly different industries regulated by agencies such as the Division of Criminal Justice Services (9 NYCRR Part 6157), Department of Agriculture and Markets (1 NYCRR Part 400), Division of Housing and Community Renewal (9 NYCRR Part 2658), and the Department of State (19 NYCRR Part 144). 37 The Regulations implemented by these agencies were simply not tailored to the unique needs, concerns, and technical considerations of the individual entities and industries that they regulate. Rather, they take a blunderbuss approach, by using virtually verbatim language, often entirely inappropriate for the particular agency’s regulated industry. See, e.g., 1 NYCRR § 400.1; 9 NYCRR § 2658.3. Given that these exemptions have been applied across the board by all implementing administrative agencies and the industries they regulate, no colorable claim can be made by the Department that these exemptions reflect any specialized health-related expertise of the Department. The Regulations are analogous to the Soda Ban that was struck down in Statewide Coalition, which was drafted, written and proposed by the Mayor of the City of New York and did not involve “any scientific or health expertise” of the agency. Statewide Coalition, 110 A.D.3d at 16. 38 POINT II THE REGULATIONS ARE INVALID BECAUSE THEY DIRECTLY CONFLICT WITH WELL-ESTABLISHED CONSTITUTIONAL LIMITS OF ADMINISTRATIVE RULEMAKING Even if the broadly worded enabling statutes relied on by the Appellate Division could be construed generally as authorizing the Department to engage in rulemaking on this subject matter, the inquiry does not stop there. Instead, the Department’s exercise of that authority even under such broad enabling statutes is limited by certain fundamental constitutional separation of powers principles. First, the Department does not have the authority to promulgate regulations that directly conflict with the Legislature’s clear policy choices. Second, the Legislature’s generally broad grant of authority is circumscribed where, as here, the regulations promulgated by the Department touch on an area in which the Legislature has retained for itself the right to legislate the details. Third, the Legislature’s grant of authority to the Department cannot be interpreted so broadly as to contain virtually no limitations. As explained below, the Regulations at issue in the present appeal violate all three of these fundamental principles. A. The Regulations are invalid because they conflict with the statutorily expressed policy choices of the Legislature. Administrative agencies such as the Department cannot promulgate regulations that conflict with the statutes enacted by the Legislature, even under the broadest of enabling statutes. Connolly v. O’Malley, 17 A.D.2d 411, 417 (1st 39 Dep’t 1962); see also City of New York v. Stone,11 A.D.3d 236, 237 (1st Dep’t 2004). When members of the executive branch act inconsistently with the policy determinations of the Legislature, including by imposing rules that conflict with legislative policy, they violate the separation of powers doctrine and their actions are preempted. Bourquin, supra at 785; Subcontractors, supra at 425. The courts routinely strike down administrative regulations that are in conflict with existing statute, even when there is an otherwise broad grant of authority to the administrative agency. Connolly, supra at 417; Finger Lakes Racing Assoc, v. N.Y.S. Racing & Wagering Bd., 45 N.Y.2d 471, 481 (1978). The prohibition against regulations that conflict with existing statute is similar to the concept of preemption in the context of local laws enacted by municipalities pursuant to legislatively delegated authority. Albany Area Builders Ass’n v. Town of Guilderland, 74 N.Y.2d 372 (1989). Such acts are invalid because they have the effect of nullifying, rather than enforcing, the law. Rapp, supra at 164-65. i. The Regulations conflict with the payment mechanisms established by the Legislature. The Regulations conflict with the Medicaid reimbursement provisions of the PHL, which already contemplate the reasonableness of the costs being reimbursed and set forth the limited circumstances under which a provider’s right to payments earned is conditional. As explained below, the Regulations conflict with these payment schemes because (1) the Regulations ignore the fact that as a result of the 40 Legislatively crafted payment methodologies, payments to Appellants- Respondents have already been calculated to reimburse only for reasonable and necessary costs of providing services (and, thus, by definition, are not being used to pay for excessive costs), and (2) the mechanism through which the Regulations cap executive compensation and administrative compensation - by limiting how a provider can spend payments duly earned in accordance with these payment methodologies - conflicts with the provider’s statutory unfettered right and title to those payments, except only to the extent specifically provided by the Legislature. Medicaid payments to nursing homes, for example, are governed by a lengthy, complicated and detail-oriented section of the PHL-PHL §2808. A summary review of the legislative history of Section 2808 confirms that the Legislature has repeatedly wrangled with, revisited and revised the payment structure for nursing homes over the years in an effort to ensure quality and cost- efficiency, among other goals. 2011 brought yet another substantial overhaul by the Legislature of the nursing home payment methodology (L. 2011, Ch. 59, part H, § 95), with the Legislature adopting a statewide pricing methodology in which the non-capital components of the rate paid to nursing homes are based on statewide price components derived from allowable operating costs for a base year selected by the commissioner. PHL § 2808(2-c)(a). The capital cost component 41 continued to be based on allowable costs as calculated based on nursing home bi¬ annual cost reports. PHL § 2808-b, §2808(2-c). Medicaid reimbursement for certified home health agencies (“CHHAs”) and assisted living programs (“ALPs”) is based on a similar concept, in which industry data and reports are used to establish a rate that is determined by the commissioner of health to be appropriate, and approved by the state director of the budget, adjusted for certain provider and patient characteristics. PHL § 3614. In 2012, the Legislature implemented, through PHL §3614, an episodic payment system for CHHAs based on a “statewide base price ... for each sixty day episode of care” subject to various adjustments. PHL §3614(13). The Department asserts that the purported goal of the Regulations is to ensure that payments made to providers are used to provide direct services to patients, and not for excessive or unreasonable administrative costs or compensation. (R. 396-97). However, the statewide payment methodology has a built-in, legislatively designed process for ensuring that the payments made to nursing homes include only the reasonable and necessary costs of providing services. Part 86-2 of the Department’s regulations implementing this payment methodology includes a detailed explanation of “allowable costs” that may be included in the statewide price components. Pursuant to the Department’s regulations, “[t]o be considered as allowable in determining reimbursement rates, 42 costs shall be properly chargeable to necessary patient care” (10 NYCRR 86- 2.17(a)) and must meet a number of criteria designed to ensure that costs included are reasonable, customary and reasonably related to the efficient production of the service. 10 NYCRR 86-2.17. As such, by definition, the rates established pursuant to this statewide pricing methodology do not cover excessive executive compensation or administrative expenses. In promulgating the Regulations, the Department flatly ignored the fact that payments to nursing homes represent reimbursement for what has been determined, through the mechanisms chosen by the Legislature, to represent only costs that are reasonable, necessary and not excessive. In addition, the Regulations contravene the Legislature’s delineated remedial system for addressing the potential inclusion of unallowable costs-adjustments following cost report audits (see NY PHL § 2808(11)). As a result, the Regulations directly conflict with the Legislature’s policy choices. Furthermore, the Regulations impermissibly conflict with PHL § 2808 because a nursing home has an unfettered right to the payments earned by it pursuant to PHL § 2808, with the exception only of certain statutorily delineated exceptions. Under the PHL, the commissioner of health must notify each nursing home of its provisional rate, following approval by the state director of the budget, at least sixty days prior to the beginning of the established period for which the rate 43 will apply. PHL § 2807(7). That rate is considered provisional in that it remains subject to change under certain limited circumstances, including adjustments based on, among other things, audits by the Department. NY PHL § 2808(11). Nursing homes are entitled to the published rates except in those limited circumstances delineated in PHL § 2808(11). No other conditions or adjustments may be imposed on a provider’s right to payment. See Jewish Home and Infirmary supra. In direct contravention of this well-established right to payment, and this Court’s holding in Jewish Home and Infirmary, the Department, through the Regulations, has imposed further limitations and conditions on Appellants- Respondents’ right to payment not contemplated by the Legislature and, in doing so, the Department has exceeded its authority. The Department flatly ignored the fact that when a provider receives payment under one of these statutes, it has fully performed all of its obligations to be entitled to that payment. The Department’s efforts are akin to entering into a contract to build a house, in which the price is based on an agreed-to reasonable estimation of the costs of materials, overhead, administrative costs and profits, and then, after the house is built, demanding that the contractor use the revenue earned to build another house. In a footnote, the Third Department dismisses the Appellants-Respondents’ argument that the Department lacks the authority to regulate how providers such as 44 Appellants-Respondents may use revenues they earn pursuant to these statutes. However, a review of the cases cited by the Third Department in support of its rationale buttresses Appellants-Respondents’ position. All three of the cases cited by the Third Department ~ Matter of Visiting Nurse Serv. of N.Y. Home Care v. New York State Dept of Health (5 NY3d 499 [2005]) (hereinafter uVNST)t Clove Lakes Nursing Home v. Whalen, 45 N.Y.2d 873 (1978) (hereinafter “ Clove Lakes”), and Matter ofDMNMgt Servs., LLC v. Daines, 79 AD3d 37 (3d Dep’t 2010) (hereinafter“DMN Mgt. Servs”)-involve the Department’s right to recoup overpayments following statutorily authorized adjustments to rates under the narrow circumstances specifically articulated by the Legislature in PHL § 2808 (rate adjustments permitted as a result of audits and rate appeals), and the state’s exercise of its “common-law right to recover unauthorized or improper payments.” DMN Mgt. Servs., supra at 39. The cited cases do not stand for the proposition that the Department may impose additional restrictions or regulations on revenues duly earned for services rendered by health care providers not expressed in PHL §2808. Indeed, this Court previously held that payments earned by nursing homes under § 2808 may only be subject to adjustments specifically provided for by the Legislature, and that neither the Department through regulation, nor the court through interpretation, could add to those limited circumstances. Jewish Home and Infirmary, supra', see also 45 Matter ofL. Newstand, Inc. v. State Liquor Auth., 151 A.D.2d 483 (2dDep’t 1989). At the time of payment, Appellants-Respondents have done everything required of them to earn that revenue, subject only to potential adjustments in accordance with NY PHL § 2808(11), and the Department has no right, whether by regulation or contract, to direct what Appellants-Respondents do with these duly earned revenues. ii. The Department lacks authority to regulate executive compensation because New York statutes expressly vest for-profit and not-for-profit corporations with discretion to determine compensation. The Hard Cap is also invalid because it conflicts with the N-PCL, BCL, and LLCL. These statutes expressly empower covered entities to determine the appropriate level of executive compensation. Further, in attempting to effectively make for-profit businesses operate like non-profit corporations by requiring them to reinvest funds earned in the provision of additional services, the Regulations run afoul of the Legislature’s decision to support the participation of for-profit businesses in the health care industry, and the Legislature’s own policy decisions about when and how to cap administrative expenses. The Regulations deeply undermine this legislative policy by imposing an arbitrary limit to executive compensation. 46 1. New York State N-PCL, BCL, and LLCL expressly vest covered entities with discretion to determine executive compensation, and the Department lacks authority to promulgate regulations which contradict statutes. The Legislature, through the N-PCL, BCL, and LLCL, has explicitly left decisions about the internal operations of private entities, including the establishment of executive compensation, to the governing boards of such organizations. See BCL § 202(10); N-PCL § 202(12); LLCL § 202(h). The only limit imposed by the Legislature pertains to not-for-profit corporations, and requires only that compensation be reasonable and commensurate with services performed. N-PCL §202(12). Notably, the Regulations set a fixed and arbitrary $199,000 compensation limit which does not serve to ensure that compensation be “reasonable” or “commensurate with services performed.” Under New York statutes, governance of these entities, including decisions about executive compensation and operating costs, is left to the entities’ governing body. BCL § 701; N-PCL § 701; LLCL § 401. The decisions of the governing bodies of these entities are protected from scrutiny, provided they are made in good faith and with due care. N-PCL § 717; BCL § 717; LLCL § 409. The Legislature has elected to protect the decisions of a governing board, including decisions pertaining to the operating budgets of these corporations and executive compensation, unless fault (e.g. bad faith) is demonstrated. See People v. Grasso, 11 N.Y.3d 64, 71 (2008); Freer v. Mayer, 223 A.D.2d 667, 668 (2d Dep’t 1996). 47 “[T]he rule is closely tailored to the open-ended decision making within a virtually limitless universe of economic options that typifies business choices: ‘Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to [the directors’] honest and unselfish decision, for their powers therein are without limitation and free from restraint.’” Levandusky v. One Fifth Ave. Apartment Corp., 75 N.Y.2d 530, 544-45 (1990), quoting Auerbach v. Bennett, 47 N.Y.2d 619, 629 (1979) and Pollitz v. Wabash R. Co., 207 N.Y. 113, 124(1912). The Regulations are out of harmony with these legislative choices because they limit the authority of a governing board to make decisions about administrative expenses and executive compensation, and impose a per se rule that compensation and administrative budgets are excessive if they exceed the arbitrary caps established by the Regulations, even if the governing body’s decisions were made in good faith. See Grasso, supra at 71 (noting that abandoning the knowledge requirement and the business judgment rule would “impose a type of strict liability”). The Regulations impermissibly shift decisions about executive compensation and administrative costs away from the governing boards of covered providers to the Department. For example, a private corporation may determine 48 that it is in the corporation’s best interests to recruit the “best of the best” for their executive leadership, including national industry leaders, which in some cases may require offering compensation packages above the “75th percentile” of other comparable executives (the limit arbitrarily imposed by the Regulations). However, the board cannot do so without facing penalties unless the Department agrees that exceeding the cap is appropriate and grants the entity a waiver. This violates both the existing statutory authority and the protection of private business judgment at the heart of corporate activity and decision-making. The Department does not have authority to alter the Legislature’s statutory scheme in these ways. See Grasso, supra at 72; Kahal Bnei Emunim & Talmud Torah Bnei Simon Israel v. Town ofFallsburg, 78 N.Y.2d 194, 204 (1991); Campagna v. Shaffer, 73 N.Y.2d 237, 243 (1989) (“The agency cannot make unlawful what the Legislature still has on the books as lawful.”). The Third Department summarily dismissed Appellants-Respondents’ arguments with respect to the N-PCL, BCL, and LLCL because these statutes include language making corporate powers subject to limitations contained in other statutes, holding that the trial court properly interpreted this limitation as extending to duly promulgated regulations including the Regulations at issue. As an initial matter, for the reasons discussed in Point I above, the Regulations were not duly 49 promulgated and, therefore, cannot impose further limits on the corporate powers afforded by these statutes. More importantly, there is no language in the N-PCL, BCL, LLCL, or the Department’s enabling legislation suggesting a legislative intent to delegate to the Department the authority to modify or limit these provisions of the BCL, N-PCL, or LLCL, thus indicating a legislative intent to retain the right to modify the powers granted by these statutes. Indeed, where the Legislature wishes to make a statute subject to promulgated regulations, it has explicitly said so. See, e.g. NY UCC § 9-201 (“In case of conflict between this article and a rule of law, statute, or regulation the rule of law, statute, or regulation controls.”); N.Y. State Finance Law § 18 (“Unless provided otherwise by contract, statute or regulation, a debtor owing a debt to any state agency shall pay”); N.Y. Environmental Conservation Law § 3-0306 (“Unless otherwise provided by statute or regulation, failure to provide notice as herein described shall in no way affect the ordinary proceedings of the department.”). In contrast, with respect to the relevant provisions of the BCL and N-PCL, the Legislature provided only that these statutes were subject to other statutes. Had the Legislature wished to also allow for modification of these statutorily granted powers by regulation, it would have said so. It did not. As such, it has clearly retained for itself the right to modify or limit the corporate powers provided for 50 therein and the Department has no authority to promulgate regulations inconsistent with the statutes enacted by the Legislature. This intention is clearly evidenced by Section 110 of the BCL, which states “The legislature reserves the right, at pleasure, to alter, amend, suspend or repeal in whole or in part this chapter ... .” N- PCL 109 contains a virtually identical provision. The only case cited by the Third Department-Matter of Sullivan Fin. Group, Inc. v. Wrynn, 94 AD3d 90, 97 (2012)- simply does not stand for the proposition that a regulation can modify a statute made subject only to other statutes. Rather, Matter of Sullivan Fin. Group, Inc. merely stands for the general proposition that a regulation that is within the broad grant of legislatively delegated authority is permissible provided it does not conflict with a positive provision of law. If Respondents-Appellants nevertheless claim the power to tell providers what they cannot pay executives, it inexorably follows that they can also dictate what businesses must pay other employees. It begs the question as to what, if any, limits exist on what they can do by executive fiat. 2. The Regulations conflict with the Legislature’s policy determination that the participation of for-profit providers in the health care industry is beneficial and desirable. The purported goal of the Regulations is to force providers to shift more of their operating budget from executive compensation and other administrative costs 51 to program services. (R. 105-06,384-402). However, while not-for-profit providers are generally prohibited from making anything other than an incidental profit, and are required to reinvest any such incidental profit into their programs instead of distributing them to members, directors or officers (N-PCL § 508)5, no such requirements or prohibitions are imposed by law on for-profit corporations (BCL §§ 201, 510). In many cases, a distribution of profits is made as a return on equity investment, since the executive assumed the risk of enterprise profit or loss. (R. 76 at f 107). The Regulations impermissibly limit the ability of for-profit businesses to distribute profits through bonuses for work performed by executives, and require reinvestment of that profit instead into specific program services (i.e. those provided to beneficiaries of State funded programs). Effectively, the Regulations seek to turn covered for-profit providers into not-for-profit providers. These efforts directly conflict with the Legislature’s explicit provision for the participation of for-profit businesses, with all of the protections afforded them under the BCL in the health care industry. The Legislature has authorized for- profit entities to deliver Medicaid services, while retaining the unfettered right to set executive compensation and create operating budgets. See SSL § 461-1; PHL § 2853; PHL § 3605(6); SSL §461-b. 5 Decisions about how to reinvest those incidental profits were left to the governing boards. 52 When the Legislature amended the Social Services Law (“SSL”) to permit for-profit corporations to operate adult care facilities and assisted living programs, which are eligible to receive reimbursement from the Department under the State’s medical assistance (“Medicaid”) program, the Legislature specifically acknowledged that permitting health care providers to operate at a profit is consistent with the State’s longstanding policy. (R. 428-29) (referring to the prohibition of business corporations operating adult care facilities as “archaic” and noting that “[b]usiness corporations have long ago been permitted to operate acute care hospitals, nursing home facilities, and diagnostic and treatment centers . . . .”). In addition, there are multiple references in the bill jacket of this Legislation to the quality of services and costs savings associated with for-profit corporations. (R. 430-31) (“Patient care in medical facilities operated by business corporations has been on par with other providers and certainly at competitive, if not lower costs.”). The Department cannot, by executive rulemaking, override the Legislature’s policy and seek to curb profit-making activities of businesses that have specifically been authorized by the Legislature to provide health care services as proprietary businesses. The Legislature has also taken action in the past, where it has deemed appropriate, to limit the profit-making activities of providers. For example, in PHL § 2853, the Legislature imposed limits on the profit-making activities of certain 53 nursing home operators. As recently as 2011, the Legislature, in the budget, limited the profits of a CHHA by imposing a ceiling limitation on payments for services to CHHAs and payment rate adjustments to CHHAs that exceeded the ceilings. N.Y. L. 2011, ch. 59, §§ 2, 4, 28 (Part H). The limitations imposed on the profit-making activities of nursing home operators set forth in PHL § 2853, and the ceilings imposed on payments to CHHAs in 2011, provide a clear indication that if the Legislature wishes to impose limits on the profits of for-profit health care providers, it knows how to do so. As such, the Legislature has clearly reserved for itself decisions about how and when to limit the profits of long-term care providers. If the Department determines that an individual entity fails to meet quality standards or other requirements of care, the Department has the authority to ensure that those standards of care are met through the enforcement of existing rules and regulations. However, artificially capping salaries and administrative expenses inappropriately penalizes high quality operators which operate efficiently, and is precisely the kind of executive lawmaking proscribed under Rapp v. Carey, supra and its progeny. B. The Department’s otherwise broad grant of authority to regulate the Medicaid program is circumscribed here because the Legislature has retained for itself the right to fill in the details and has expressly limited the Department’s rule-making authority. In holding that the Department could regulate how providers spend the payments earned by them outside of the bounds of the PHL, the Third Department 54 read into PHL §2808 and § 3614 an additional restriction on a provider’s right to payment that was not contemplated by the Legislature. This Court has previously rejected similar efforts, holding that the Legislature’s detailed payment scheme could not be supplemented by the Department or the courts. Jewish Home and Infirmary, supra. Moreover, in implementing the statewide pricing methodology for nursing homes, the Legislature explicitly and further limited the Department’s rulemaking authority, directing the commissioner of health to develop the implementing regulations “in consultation with the nursing home industry and advocates for residential health care facility residents” and “provide notification concerning such regulations to the chairs of the senate and assembly health committees, the chair of the senate finance committee and the chair of the assembly ways and means committee.” NY PHL §2808(2-c)(d). In accordance with the narrow grant of authority contained in PHL § 2808, the Department, in consultation with the regulated industry, developed regulations to implement the statewide pricing methodology, which are promulgated at 10 NYCRR Part 86-2. The challenged Regulations, which effectively further regulate the payments received by providers in ways not contemplated by the Legislature, and outside of the collaborative approach required by the Legislature, intrude into an area expressly reserved by the Legislature. As such, they should be invalidated. 55 c. Interpreting the Department’s enabling legislation so broadly as to allow it to intrude on the entirely private business affairs of private entities violates the separation of powers doctrine. “While the separation of powers doctrine gives the Legislature considerable leeway in delegating its regulatory powers, enactments conferring authority on administrative agencies in broad or general terms must be interpreted in light of the limitations that the Constitution imposes.” Boreali, supra at 9. Therefore, it is well-settled that “the Legislature is powerless to delegate the legislative function unless it provides adequate standards.” Rapp, supra at 162; Packer Collegiate Inst. v. Univ. of State of New York, 298 N.Y. 184, 189 (1948). “Thus there must be a clearly delimited field of action and, also, standards for action therein.” Packer, supra at 189. “Without such standards there is no government of law, but only government by men left to set their own standards, with resultant authoritarian possibilities.” Rapp, supra at 162. For example, in Packer, this Court annulled a statute that required private schools be “registered under the regulations prescribed by the board of regents.” Packer, supra at 188. Finding the statute to be unconstitutional, the Court reasoned that “[i]t is impossible, from any examination of this subdivision, or of the section or the article in which it appears, or of the whole Education Law, to know what aspects or activities of the schools were to be governed by the regulations, much less what the regulations were to accomplish, or what were to be their limits.” Id. 56 at 189, As such, the Legislature is required to make it possible “to discover what authority was intended to be turned over,” Id. at 189. Simply granting the bare authority to regulate is insufficient; the Legislature must make known the purposes of any such regulations as well as the limits of the agency’s authority. Here, the Third Department’s interpretation of the PHL permits downstream regulation of revenues earned by providers. PHL § 201 says nothing about controlling the salaries of executives in private businesses and provides no limitation on the purported authority to downstream regulation of earned revenues. For example, PHL § 201(o) simply states that the Department may “regulate the financial assistance granted by the state;” it does not provide any policy goals for such regulation, or any limits to this broad authority. No other statute provides any guidance to the Department for how such downstream regulation should be implemented. As such, if these broadly worded enabling statutes are construed as granting the Department the authority to regulate earned revenues, they effectively grant the Department unfettered authority to regulate virtually all areas of corporate activity, and supplant its judgment about the business operations of private providers as it sees fit. Indeed, most decisions made by covered providers involve some use of money, including hiring personnel, acquiring property, conducting litigation, and even selecting vendors. If the Appellate Division’s interpretation is accepted, the 57 only conceivable limit on the Department’s ability to regulate the use of state- derived funds on such activities is whether the Department finds that such regulation would promote efficiency or further the public health. Providers receiving State funds would be left to guess at the nature and extent of the limitations the Department could place on the future uses of its revenues. Accordingly, the Third Department’s interpretation unconstitutionally permits a wholesale delegation of legislative authority. 58 POINT III THE REGULATIONS ARE ARBITRARY AND CAPRICIOUS An administrative regulation should be annulled if it does not have a rational basis or is unreasonable, arbitrary and capricious. Matter o/N.Y.S. Assn, of Counties v Axelrod, supra at 166; see also Matter of Consolation Nursing Home, Inc. v. Commissioner of New York State Department of Health, 85 NY2d326, 331- 332 (1995). “Administrative rules are not judicially reviewed pro forma in a vacuum, but are scrutinized for genuine reasonableness and rationality in the specific context.” Matter ofN.Y.S. Assn, of Counties v. Axelrod, supra at 166. Regulations that are based on speculation and erroneous assumptions, and that lack an evidentiary basis are arbitrary and capricious and should be annulled. See Jewish Mem'l Hosp. v. Whalen, 47 N.Y.2d 331, 343 (1979). A. The Regulations are arbitrary and capricious because, under the payment methodologies established by the Legislature for long-term care providers, the State does not reimburse nursing homes or assisted living providers for executive salaries or administrative costs. The stated purpose of the Executive Order and Regulations is to ensure that the State does not pay for excessive compensation or excessive administrative expenses. However, as discussed in Point II, supra, nursing homes, assisted living providers and CHHAs are entitled to a set payment rate for services provided, regardless of the amount that the particular provider spends on executive 59 compensation or administrative costs. Therefore, capping these costs has no impact on the cost of the Medicaid program and yields no savings. There is simply no nexus between the Medicaid payments to nursing homes, assisted living programs, and CHHAs, and the amount of compensation that these providers pay their executives or their administrative costs. The dissenting opinion of the Third Department emphasizes this, stating that the Regulations are “voidable as arbitrary and capricious, since DOH has furnished no evidence to establish any linkage between the costs paid by these providers for executive compensation and administration and the problems identified by the Governor in his Executive Order.” (R.A. 33). To be sure, DOH has the authority to limit the amount of employee compensation it will reimburse; it is quite another matter, however, to dictate what an employer may choose to pay its employees. Regardless of the size of the salary drawn by a provider’s executive, that provider will still be entitled to the same rate for services rendered. As such, imposing caps on executive compensation and administrative costs, measures which drastically impact Appellants-Respondents, when such caps have no impact at all on the purported goal of the Department, is plainly arbitrary and capricious. 60 B. The Executive Order and Regulations establish arbitrary caps on executive compensation and administrative expenses that have no rational basis in fact or law. The Regulations are replete with arbitrary policy decisions and standards. Perhaps most obvious is the cap on executive compensation, set arbitrarily at $199,000.00, to the extent it is paid for with State funds, and below the 75th percentile of comparable executives to the extent it is above $199,000.00, regardless of the source of funds used to pay the compensation. These caps apply across the board, without any consideration of the size and complexity of the organization, geographic location, or the type of service provider. While the Regulations include a waiver provision, at best this waiver provision sets up a system in which the Department substitutes its judgment for the judgment of the governing bodies of private enterprises about what is appropriate compensation for its executives. The Respondents have not provided any rationale or statutory authority for how or why they capped executive compensation and administrative expenses at these particular levels, or how they “have any connection to reducing state health care expenditures or to the more efficient use of taxpayer funds in the delivery of services.” (R.A. 33-34 [Mulvey, dissenting]). Moreover, forcing providers who receive State funds to pay their executives below the 75th percentile will, if anything, have a negative effect on the quality of services available to beneficiaries of the State’s programs. Providers will be 61 prohibited from recruiting and retaining top executives with the most experience and success in the industry, which necessarily requires that they offer a salary commensurate with their talent level.6 The Regulations ignore the reality that the quality and efficiency of services is directly related to the quality and experience of the provider’s executives and managerial staff. Since the Regulations will, if anything, be counterproductive to the purported goals of the Regulations, they are arbitrary and capricious. Likewise, the 30% threshold for the definition of covered provider, set without any articulated basis by the Department, arbitrarily exempts some of the largest recipients of State funds (i.e., hospitals). (R. 66-67 at 65-66). The Department has not provided any justification or scientific or factual support for this arbitrary cut-off. Likewise, the Department has offered no rational, health- based explanation for its exclusion of government-run entities, pharmacies, medical supply companies, and others who are categorically excluded, despite the fact that they constitute a huge portion of the provider community that receives funding from the Department. 6 The New York Times article that was the impetus of the Executive Order and Regulations recognized that the generous compensation packages offered by the organization that was the focus of the article allowed the organization to recruit and retain exceptional staff and experienced executives, and, in turn, provide quality services. (R. 156-64). 62 In fact, the entire justification provided for Regulations, that there have been “certain instances” of providers that have used State funds to pay excessive compensation and administrative expenses, does not provide a sufficient evidentiary basis for the sweeping and dramatic policy changes resulting from the regulation of executive pay and administrative costs within thousands of businesses across New York State. The Department merely recites, verbatim, the statement in the Executive Order that “such abuses . . . harm both the people of New York who are paying for such services, and those persons who must depend upon such services to be available and well-funded.” (R. 384-91). The Respondents do not offer even a single example of a recipient of State funded programs that was harmed as a result of excessive compensation or administrative expenses, even among these alleged “bad apples.”7 The Regulations are, therefore, without any evidentiary support and should be annulled. N.Y.S. Assn, of Counties v. Axelrod, supra at 168. C. The Regulations are arbitrary and capricious because they unfairly discriminate and disadvantage providers who serve primarily beneficiaries of State programs. 7 fn fact, Senator Carl Marcellino acknowledged, in an interview conducted on February 23, 2012 while the Governor’s budget proposal was pending, that (1) the vast majority of not-for- profit organizations were “out there working hard, many of them are underpaid . . .” and (2) that even with respect to those few non-profits that had paid excessive compensation, there had been no complaints from the recipients of their services. Available at http://www.nvsenate.gov/video/2012/mar/01/news-views-senator-marcellino-executive- compensation-non-profit-oreanizations. As noted previously, the New York Times article that was the impetus of the Governor establishing the Task Force acknowledged that program beneficiaries had not suffered. 63 The Regulations are also arbitrary and capricious because they unfairly discriminate against those providers who primarily serve the State’s most vulnerable populations. By creating a “Hard Cap” on use of State Funds for executive compensation, the Department has set up a regulatory scheme whereby the more that a provider dedicates itself to serving the State’s indigent population or underserved areas, the more restrictive the Regulations are, making the provider more disadvantaged in the marketplace for talented management as defined in the Regulations. A provider located in a poor neighborhood, for example, is more likely to have a resident population that consists of primarily, if not exclusively, Medicaid beneficiaries. Ironically, this provider will be forced to cap its executive’s compensation at $199,000.00 because it has no other source of funds with which it can pay that executive, and the Regulations impose a “Hard Cap” on the use of State Funds to pay executive compensation. In contrast, a comparable provider in a relatively affluent area is likely to have additional sources of revenue that are not state funds and state-authorized payments, which allows greater flexibility to offer compensation above the $199,000.00 threshold. In fact, if the provider in the affluent region derives more than seventy percent of its revenue from private funds (such as private insurance), it will not be subject to the Regulations at all. 64 The (presumably) unintended consequence will be that a provider in poorer socio-economic areas of the state, which already faces challenges recruiting quality executives due to location alone, will struggle even more to recruit and retain qualified executives. In fact, the more that a provider focuses on serving the needs of the indigent, the more the provider’s ability to compete for quality executives will be hindered by the Regulations. The provider with a low-income resident population will have little, if any, funds available to compensate an executive over the artificial $199,000 cap. Disadvantaging providers who serve the poor, and who are willing to do business in underserved areas, is clearly contrary to public policy goals, harmful to the recipients of the Department’s programs, and blatantly inequitable, irrational, arbitrary and capricious. This provides a further reason why the Regulations should be annulled. N.Y.S. Assn, of Counties v. Axelrod, supra at 168. The Regulations are arbitrary, capricious, and an abuse of discretion. 65 CONCLUSION Appellants-Respondents respectfully request that the Third Department’s opinion and order be reversed, to the extent that the court below upheld the Hard Cap portion of the Regulations, that the Regulations be annulled and the implementation of the Regulations be enjoined, along with such other and further relief as may be just and proper. Dated: Albany, New York December 18, 2017 KNMAN STRAUB P.&N By DAVID T. LUNTZ Attorneys for LeadingAge Appellants-Respondents 121 State Street Albany, NY 12207 (518) 436-0751 O’CONNELL & ARONOWITZ, P.C. By CORNELIUS D. MURRAY Attorneys for LeadingAge Appellants-Respondents 54 State Street Albany, New York 12207 (518) 462-5601 66 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 statement of the status of related litigation, corporate disclosure statement, table of contents, table of authorities, statement of questions presented, and this certification) contains 13,999 words, as calculated by Microsoft Word. Dated: December 18, 2017 David T. Luntz Attorneys for Appellants-Respondents 121 State Street Albany, NY 12207 (518) 436-0751 67 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 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 } LAURIE DINGMON, 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 Saratoga, New York. That on the 18th day of December, 2017, deponent served three true copies of the LeadingAge Appellants-Respondents’ Brief and Record on Appeal 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 120 Broadway New York, NY 10271-0332 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, )Vÿ?wvo5'V'~- C7Laurie Dingmon Sworn to before me this 18th day of December, 2017. KATIE L, WALLNotary Public, State of New YorkReg. #01WA6253406Appointed in Rensselaer Countv.My Commission Expires 12/19 JDrANotary Public 4834-4715-2985, v, 1