In the Matter of Martin H. Handler, M.D., P.C., Appellant,v.Thomas P. DiNapoli, as Comptroller of the State of New York, et al., Respondents.BriefN.Y.April 2, 2013 App. Div. Third Dept. Nos. 510692; 510690 Court of Appeals of the State of New York IN THE MATTER OF THE APPLICATION OF MARVIN H. HANDLER, M.D., P.C., Petitioner-Appellant, -AGAINST- THOMAS DINAPOLI, COMPTROLLER OF THE STATE OF NEW YORK, Respondent-Respondent, UNITED HEALTHCARE INSURANCE OF NEW YORK, Respondent. IN THE MATTER OF THE APPLICATION OF SOUTH ISLAND ORTHOPAEDIC GROUP, P.C., Petitioner-Appellant, -AGAINST- THOMAS DINAPOLI, COMPTROLLER OF THE STATE OF NEW YORK, AND UNITED HEALTHCARE INSURANCE OF NEW YORK, Respondents-Respondents. BRIEF FOR RESPONDENT DINAPOLI BARBARA D. UNDERWOOD Solicitor General ANDREW D. BING Deputy Solicitor General ZAINAB A. CHAUDHRY Assistant Solicitor General of Counsel ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney for Respondent DiNapoli The Capitol Albany, New York 12224 (518) 474-3429 (telephone) (518) 473-8963 (facsimile) Dated: September 23, 2013 Reproduced on Recycled Paper i TABLE OF CONTENTS PAGE TABLE OF AUTHORITIES ............................................................................... iii PRELIMINARY STATEMENT............................................................................1 QUESTIONS PRESENTED.................................................................................5 CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED..............6 STATEMENT OF THE CASE.............................................................................7 A. The Empire Plan’s Medical Program is Administered by United HealthCare Pursuant to Contract With the State .............7 B. The Comptroller Audits United’s Payments for Services Provided By Petitioners..................................................................11 C. Petitioners Challenge the Comptroller’s Authority in These Article 78 Proceedings ...................................................................16 D. The Appellate Division Upholds the Comptroller’s Authority to Review Petitioners’ Billing Records ...............................................18 E. Upon Remittal, Supreme Court Upholds the Comptroller’s Findings...........................................................................................19 ARGUMENT POINT I THE STATE CONSTITUTION AND STATUTES AUTHORIZED THE COMPTROLLER’S LIMITED EXAMINATION OF PETITIONERS’ BILLING RECORDS........20 A. The Comptroller’s Mandatory Audit Authority Includes Pre- and Post- Audit of Payments Pursuant to State Contracts .................................................................21 ii Table of Contents (cont’d) PAGE ARGUMENT, POINT I (cont’d) B. The Comptroller’s Limited Examination of Petitioners’ Records was Constitutionally Authorized Because it was Necessary for an Effective Comptroller’s Audits of United ................................................................................26 C. The Charter Schools and Blue Cross Cases Do Not Prohibit the Comptroller’s Limited Examination of Petitioners’ Records ..............................................................33 POINT II ALTERNATIVELY, THE COURT SHOULD PERMIT UNITED TO PURSUE THE COMPTROLLER’S RECOMMENDATIONS AS TO PETITIONERS EVEN IF THE COURT FINDS THAT THE EXAMINATIONS WERE UNAUTHORIZED......................38 CONCLUSION ................................................................................................45 iii TABLE OF AUTHORITIES PAGE CASES ASA Institute of Business and Computer Tech., Matter of v. McCall, 281 A.D.2d 849 (3d Dep’t 2001)................................................................25 Blossom View Home, Matter of v. Novello, 4 N.Y.3d 581 (2005)...................................................................................41 Blue Cross & Blue Shield of Cent. N.Y. v. McCall, 89 N.Y.2d 160 (1996).........................................................................passim Blue Cross & Blue Shield of Cent. N.Y. v. McCall, 218 A.D.2d 140 (3d Dep’t 1996)...........................................................37,39 Boyd, Matter of v. Constantine, 81 N.Y.2d 189 (1993).................................................................................43 Brown v. Group Health, Ins., 17 Misc.3d 1113 (A)(U), 2007 WL 2984005 (New York Co. Sup. Ct. 2007)...................................................................10 Carlon, Matter of v. Regan, 98 A.D.2d 544 (3d Dep’t), aff’d as modified, 63 N.Y.2d 1011 (1984)...............................................................................24 Daleview Nursing Home, Matter of v. Axelrod, 62 N.Y.2d 30 (1984)...................................................................................26 Dinallo, Matter of v. DiNapoli, 9 N.Y.3d 94 (2007)............................................................................. 22,38n Elmira Business Institute, Inc. v. New York State Dept. of Educ., 116 A.D.2d 133 (3d Dep’t 1986), aff’d for reasons stated, 70 N.Y.2d 758 (1987).................................................................................25 Gibson, Matter of v. Koehler, iv 165 A.D.2d 768 (1st Dep’t 1990)...............................................................43 Table of Authorities (cont’d) PAGE CASES Goldin, Matter of v. Greenberg, 49 N.Y.2d 566 (1980).............................................................................. 42n Handler, Matter of v. DiNapoli, 88 A.D.3d 1187 (3d Dep’t 2011)........................................................passim Handler, Matter of v. DiNapoli, 19 N.Y.3d 953 (2012).................................................................................19 Harvey v. State, 200 Misc. 233 (Ct. Cl.), aff’d, 279 A.D. 708 (4th Dep’t 1951), aff’d, 303 N.Y. 976 (1952) .........................................................................24 McCall, Matter of v. Barrios-Paoli, 93 N.Y.2d 99 (1999)...................................................................................22 N.Y. Charter Schools Assn., Matter of v. DiNapoli, 13 N.Y.3d 120 (2009).........................................................................passim N.Y. World’s Fair 1964-1965 Corp., Matter of v. Beame, 22 A.D.2d 611 (1st Dep’t), aff’d, 16 N.Y.2d 570 (1965) ...........................23 Quayle v. State, 192 N.Y. 47 (1908).....................................................................................23 Parochial Bus Sys. v. Bd. of Educ. of City of N.Y., 60 N.Y.2d 539 (1983).................................................................................39 People v. Adams, 53 N.Y.2d 1 (1981).....................................................................................43 People v. Calloway, 71 A.D.3d 1493 (4th Dep’t), lv. denied, v 15 N.Y.3d 748 (2010).................................................................................42 Table of Authorities (cont’d) PAGE CASES Save The Pine Bush, Matter of v. New York State Dept. of Envt’l Conservation, 289 A.D.2d 636 (3d Dep’t 2001)................................................................39 Schneckloth v. Bustamonte, 512 U.S. 218 (1973) ...................................................................................42 Signature Health Center LLC, Matter of v. Hevesi, 13 Misc. 3d 1189 (Albany Co. Sup. Ct. 2006) .....................................25,26 South Island, Matter of v. DiNapoli, 88 A.D.3d 1186 (3d Dep’t 2011)...........................................................18,19 South Island, Matter of v. DiNapoli, 19 N.Y.3d 955 (2012).................................................................................19 STATE CONSTITUTION N.Y. Const., art. V, § 1 ................................................................................passim STATE STATUTES C.P.L.R. article 78 .............................................................................................2,16 § 2304 ................................................................................................40 § 5601(d) ................................................................................................19 Civil Service Law § 167 ..................................................................................................8 § 167(7) .....................................................................................3,6,20,35 Insurance Law art. 4 ................................................................................................10 vi Table of Authorities (cont’d) PAGE STATE STATUTES (cont’d) State Finance Law § 8(1) ................................................................................................23 § 8(2) ................................................................................................23 § 8(7) ................................................................................................23 § 9 ........................................................................................passim § 111 ................................................................................................23 § 112(2) ................................................................................................23 L. 2011, ch. 62, Part A ..................................................................................... 10n UNITED STATES CONSTITUTION Fourth Amendment ............................................................................................43 MISCELLANEOUS A Summary report on Auditing the New York State Health Insurance Program - New Focus and Future Directions, www.osc.state.ny.us/audits/allaudits/093008/08s130.pdf (Office of the St. Comp., Report No. 2008-S-130) .......................... 11n,30n 8 Report of 1938 New York State Constitutional Convention Committee on Problems Relating to Executive Administration and Powers ........ 22n 14 Report of Temporary State Commission on the Constitutional Convention on State Government (1967) ................................................24 [NYSHIP] Selected Manually-Processed Claims, http://osc.state.ny.us/audits/allaudits/093006/05s56.pdf (Office of St. Comp., Report No. 2005-S-56) ......................................... 33n [NYSHIP] - United HealthCare’s Payment of Non-Participating vii Provider’s Facility Fee Claims, http://osc.state.ny.us/audits/allaudits/093010/07s110.pdf (Office of St. Comp., Report No. 2007-S-110) ....................................... 33n Table of Authorities (cont’d) PAGE MISCELLANEOUS (cont’d) United Health Care Duplicate Payments for Evaluation and Management Procedures, http://psc.state.ny.us/audits/allaudits/093006/05s59.pdf (Office of St. Comp., Report No. 2005-S-59) ......................................... 33n United Health Care [NYSHIP] Overpayments for Services Provided by Dr. Handler and Dr.Moschetto, http://osc.state.ny.us/audits/allaudits/093010/09s23.pdf (Office of the St. Comp., Report No. 2009-S-23) ................................... 17n United Health Care [NYSHIP] Overpayments for Services Provided by South Island Orthopedic Group, P.C., http://osc.state.ny.us/audits/allaudits/093009/08s173.pdf (Office of the St. Comp., Report No. 2008-S-173) ................................. 17n United Health Care [NYSHIP] Waiving Out-of-Pocket Expenses, http://osc.state.ny.us/audits/allaudits/0930007/06s60.pdf (Office of St. Comp., Report No. 2006-S-60) ......................................... 33n PRELIMINARY STATEMENT In this case two health care providers challenge the authority of the New York State Comptroller to examine their records, even though their records are indisputably relevant to the Comptroller’s constitutional responsibility to determine whether the State’s payments to its contract vendors are proper. The State contracts with United HealthCare (“United”) to administer health insurance benefits for state and local government employees under the State’s Empire Plan. United processes and pays for Empire Plan claims using funds it receives from the State for that purpose. Petitioners, a cardiology practice (Marvin H. Handler, M.D., P.C.) and an orthopaedic practice (South Island Orthopaedic Group, P.C.) are nonparticipating providers with respect to the Empire Plan. Thus, when United processes claims for services provided by petitioners to Empire Plan members, it is with the understanding that the members themselves must pay to petitioners another portion of the charges, namely the applicable deductible and coinsurance amounts in accordance with the Empire Plan’s benefit design. In 2009, as part of broader audits of the New York State Health Insurance Program, the Comptroller conducted audits of United’s thousands of claim payments for services provided to Empire Plan members by petitioners to determine if those payments were appropriate under United’s contract with the State. As part of this audit, the Comptroller examined, with petitioners’ consent, 2 fewer than 200 of each petitioner’s billing records relating to the claims paid by United. Following the review, the Comptroller determined that petitioners had routinely overstated their charges in the following manner: they waived the deductible and copay charges to members while nonetheless including those waived amounts in the stated charges which they provided for submission to United to support the members’ claims to United for payment. The Comptroller found that this practice caused United to overpay those claims, because petitioners’ stated charges exceeded the amounts they actually charged their Empire Plan patients. The Comptroller further determined that United’s overpayments were effectively charged to the State, because they increased the amount that the State was required to pay to United under the contract between the State and United. After the Comptroller issued his findings, petitioners brought these article 78 proceedings, asserting that because they are private entities that have no contract with the State and receive no state funds, the Comptroller has no authority under the State Constitution to examine any of their billing records, even those relevant to the claims submitted to United in connection with services that petitioners provided to state and local employees who have health insurance through the Empire Plan. Petitioners sought an order enjoining the Comptroller and United from communicating or using the results of the audit 3 and from taking steps to implement the recommendations related to the investigation. Although Supreme Court did not grant all the requested relief, it set aside the audit and prohibit United from taking any action based upon those results. But the Appellate Division, Third Department reversed, concluding that the examinations were necessary and relevant as part of the Comptroller’s audit of United to determine if United overpaid any claims for services that petitioners provided to Empire Plan patients. This Court should affirm. Article V, § 1, of the State Constitution requires the Comptroller to audit all vouchers before payment, prohibits the payment of State funds without the Comptroller’s audit, and provides that the Legislature may define the Comptroller’s powers and duties regarding these audits. From this audit authority necessarily follow the Comptroller’s well-settled powers to audit payments to the State’s contract vendors and to retrospectively audit, or “post-audit,” State contract expenditures to ensure that the contracts are complied with and the State is receiving its money’s worth. In particular, in defining the Comptroller’s powers and duties, the Legislature has specifically required him to audit the State’s payments to employee health insurance vendors and authorized him to obtain by subpoena records that are relevant to any matter within the scope of his inquiry or investigation. See Civil Service Law § 167(7); State Finance Law § 9. 4 These provisions authorized the Comptroller to obtain and examine relevant billing records from petitioners during his audit of the State's payments to its health insurance contract vendor United. Any claim overpayments by United result in a direct cost to the State in the form of higher insurance premiums because the State is directly charged by United for all claims paid by United under the contract, and the State pays United in full for all such claims. In order properly to audit the State's payments to United, the Comptroller must be able to verify the correctness of the amounts of the claims that United pays. This required the Comptroller to examine petitioners’ billing records to determine whether their stated charges accurately reflected the amounts actually charged, and so the Comptroller conducted a very limited review of a small portion of petitioners’ billing records. Contrary to petitioners’ claim, these examinations were in no way comparable to full-scale “performance audits” of their practices. Thus, the Comptroller was authorized to conduct these limited examinations to ensure that the State paid the correct amounts under its contract with United. Alternatively, if this Court concludes that the Comptroller did not have the authority to examine petitioners’ billing records as part of its audit of United, the Court should nevertheless leave the Comptroller’s findings undisturbed and permit United to recoup the overpayments from petitioners and otherwise 5 implement the Comptroller’s recommendations. Petitioners acquiesced and cooperated with the Comptroller’s examinations, and did not challenge the Comptroller’s authority until after the examinations were complete and the reports issued. The Comptroller conducted the examinations in the good faith belief that he had the necessary authority, a belief that was vindicated by the unanimous Appellate Division decisions in his favor. And on remittal from the Appellate Division, Supreme Court confirmed the Comptroller’s findings as to the existence and amount of the overpayments. Under these circumstances, no valid purpose would now be served by suppressing the Comptroller’s findings and pretending that the overpayments did not happen. These conclusions provide an alternative ground for affirmance of the Appellate Division’s orders in these cases. Accordingly, this Court should affirm the Appellate Division. QUESTIONS PRESENTED 1. Whether the Comptroller’s power under the State Constitution and statutes to audit payments that the State makes to its contract vendors authorized the Comptroller’s limited examinations of petitioners’ billing records relevant to his audit of payments that the State made to United resulting from Empire Plan claims for petitioners’ services. 6 2. Alternatively, whether, if this Court concludes that the Comptroller’s examinations were unauthorized, the Court should nevertheless leave the Comptroller’s findings undisturbed and permit United to pursue the recommendations in the Comptroller’s reports. CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED Article V, section 1 of the New York State Constitution provides in relevant part: The comptroller shall be required: (1) [t]o audit all vouchers before payment and all official accounts; (2) to audit the accrual and collection of all revenues and receipts; and (3) to prescribe such methods of accounting as are necessary for the performance of the foregoing duties. The payment of any money of the [S]tate, or of any money under its control, or the refund of any money paid to the [S]tate, except upon audit by the comptroller, shall be void . . . . In such respect the [L]egislature shall define the powers and duties. . . . State Finance Law § 9 provides in relevant part: The comptroller, deputy comptrollers and assistant deputy comptroller, or either of them, may issue a subpoena or subpoenas requiring a person or persons to attend . . . and be examined in reference to any matter within the scope of the inquiry or investigation being conducted by the comptroller, and, in a proper case, to bring with him, a book or paper. A subpoena issued under this section shall be regulated by the civil practice law and rules. . . . 7 Civil Service Law § 167(7) provides: The amounts required to be paid to any contracting corporation under any contract entered into pursuant to the provisions of this article [entitled “Health Benefits for State and Retired State Employees”] shall be payable from such health insurance fund as audited by and upon the warrant of the comptroller on vouchers certified or approved by the president. STATEMENT OF THE CASE A. The Empire Plan’s Medical Program is Administered by United HealthCare Pursuant to Contract With the State The New York State Health Insurance Program (“NYSHIP”) provides health insurance coverage to active and retired State employees, as well as participating local government and school district employees, and their dependents. The Empire Plan is the primary health benefit plan for NYSHIP. The New York State Department of Civil Service contracts with United to insure and administer the Medical Program of the Empire Plan (R177-178).1 In effect, United acts as an agent of the State to pay medical providers (R178). Under the contract, the State makes payments to United to cover the cost of the claims and the cost of administering the program. The State is directly charged for and pays United in full for all claims paid by United (R105, 177-178). To the extent 1 Numbers in parentheses preceded by “R” refer to pages in the Joint Record on Appeal. 8 United overpays any claims, those overpayments are charged to the State (R105- 106, 177-178). United has an obligation to adjudicate claims in accordance with the benefit plan design as defined by the State in the Empire Plan Certificate of Coverage (R105). If, upon audit, it is determined that the payment of a claim falls outside of the requirements of the Plan, the State can direct United to recover the payment. (R93, 105, 109-138, 178; see also R775, 809-810, 920-921, 924-953). See also Civil Service Law § 167. United contracts with certain health care providers who agree to accept payments, at rates established by United, to furnish medical services to Empire Plan members. United pays these “participating providers” directly based on claims they submit for the services rendered. Members are required to pay a nominal co-payment to the participating provider for certain services rendered. (R93, 105, 178, 775, 809-810, 920-921). Members may also choose to receive services from “nonparticipating providers” (“NPPs”). The claims submitted to United for services provided by NPPs usually include service fee rates that are higher than the fee rates that participating providers agree to accept for the same services.2 In accordance 2 Participating providers agree to accept service fee rates that are generally lower than the fees that NPPs charge because service payments are made directly to the provider instead of the member. Thus, participating providers avoid the problems related to the collection of large unpaid balances from patients. (R93-93, 776). 9 with the Empire Plan benefit plan, United pays NPP claims at 80% of the “reasonable and customary” charge for the services provided, which is the lowest of the actual amount of the provider’s billed charges, the provider’s usual charge for the same or similar service, or the usual charge of other providers in the same or similar geographic area. As required by the Empire Plan benefit plan design, when United pays a claim from an NPP, the payment is made to the member. The member is then expected to use the funds to compensate the NPP. (R93, 105-106, 179, 775, 810-811, 921.) To encourage members to use participating providers, and thereby lower costs, the Empire Plan benefit design requires members to pay higher out-of- pocket costs, in the form of deductibles and co-insurance, when they use NPPs. After the member meets an annual deductible, United pays the member 80% of the reasonable and customary cost of the service. The member is then responsible for paying the remaining portion of the reasonable and customary charge for the service (i.e., the co-insurance), as well as any amount charged in excess of the reasonable and customary charge. The member is also responsible for settling any unpaid balance with the NPP, including any other out-of-pocket amounts owed. (R93, 117, 179, 775, 810-811, 932.) Waiver of a member’s deductible and co-insurance amounts by NPPs is “not permitted” under the Empire Plan (R117, 932), and the practice of 10 systematically waiving members’ payments renders it impossible for United to administer the Empire Plan as it was designed by the State (R106). If an NPP waives the applicable (and required) member payments for any deductible and co-insurance amounts, and accepts the United payment as full payment for the service, then the claimed charge made to United for the service in fact exceeds the amount that the NPP actually charged the member. Thus, the claims submitted to United should be reduced by the amount of those uncollected payments to reflect the amount that the NPP actually charged (R106, 921). Further, there is a significant risk of additional increased costs to the State where NPPs waive the members’ out-of-pocket costs, because such a practice may encourage more members to go to out-of-network providers. See Brown v. Group Health, Ins., 17 Misc.3d 1113 (A)(U), 2007 WL 2984005, at *4 (New York Co. Sup. Ct. 2007) (describing financial disincentives for members using NPPs). Indeed, the New York State Insurance Department’s Office of General Counsel3 has long held in legal opinions dating back well over a decade that an NPP is required to collect any required co-insurance amounts and that routine waiver of deductibles and/or co-insurance as a common business practice may constitute insurance fraud in violation of Article 4 of the New York State 3 Effective October 3, 2011, the State Insurance Department is now consolidated as part of the State Department of Financial Services. See L. 2011, ch. 62, Part A. 11 Insurance Law. (R106-107, 140-154, 179-180, 196-203, 811, 829-836, 922, 955- 969, 1075-1081.) B. The Comptroller Audits United’s Payments for Services Provided By Petitioners As part of broader audits of NYSHIP, the Comptroller selected claims paid by United to a number of providers for review to determine if those payments were appropriate under United’s contract with the State (R172, 225, 803, 856).4 Petitioners were among the providers whose payments were selected for that review. The Handler practice is a medical practice consisting of two cardiologists, located in Great Neck, New York (R41, 45, 94). South Island is a medical practice consisting of three orthopedic surgeons, located in Cedarhurst, New York (R776). Both practices are NPPs with respect to the Empire Plan (R45, 94, 183, 810). Consequently, if an Empire Plan member is treated by either practice, the member is responsible for paying any applicable deductible and co- insurance amounts. When United processes claims for petitioners’ services to Empire Plan members, it is with the understanding and belief that members are liable for the part of petitioners’ charges representing the members’ out-of-pocket 4 The Comptroller also examined United’s payments for services provided by many other NPPs. See, e.g., A Summary report on Auditing the New York State Health Insurance Program – New Focus and Future Directions, www.osc.state.ny.us/audits/allaudits/093008/08s130.pdf (Office of the St. Comp., Report No. 2008-S-130, at 5, last accessed September 22, 2013). 12 obligations (R97, 185, 815). During the period January 1, 2004 through December 31, 2008, United made payments on 3,364 claims totaling approximately $4.9 million to Empire Plan members for services provided by Handler (R97, 185). And during the period January 1, 2001 through October 31, 2008, United made payments on 5,952 claims totaling approximately $4.3 million for services provided by South Island to Empire Plan members (R778, 815).5 The purpose of the audits of United’s claim payments was to determine whether United overpaid these claims because petitioners had routinely waived Empire Plan members’ out-of-pocket charges for those periods and, if so, to determine the amount of the resulting overpayments by United (R91, 172, 183, 774, 814). Auditors in the Office of the Comptroller (OSC) notified petitioners about the audits and scheduled site visits to interview practice administrators and review relevant records (R172, 183, 185, 225, 803-805, 816, 1657). Petitioners did not challenge the Comptroller’s authority at that time, but rather, cooperated fully with the examinations. The records that were reviewed by the OSC auditors included information related to petitioners’ patient billing records and collection attempts (R173-174, 186, 804-805). 5 The number of claims and dollar amounts reflect the claims that the Comptroller determined were relevant to his analysis. 13 In accordance with generally accepted government auditing standards, OSC auditors reviewed a limited number of randomly-selected records from each petitioner that were relevant to the question whether petitioners routinely waived the out-of-pocket costs for Empire Plan members and, consequently, whether petitioners’ invoices submitted to United on members’ claims for these services were inflated (R172-174, 180-186, 812-816). The auditors found that Handler’s records showed that Handler waived the Empire Plan members’ out- of-pocket costs for 152 of the 178 sampled records (R187, 191). South Island’s records showed that it waived the Empire Plan members’ out-of-pocket costs for 176 of the 186 sampled records (R817). The amounts not collected by petitioners from members were adjusted off their accounts, usually on the same day the account was credited for United’s payment to the member (R187, 191-192, 817, 826). Auditors found no efforts to collect from members the unreimbursed member’s portion of the stated charges. The only documented collection efforts found by auditors in the patient records were efforts to collect the amounts paid by United to the members, in a few cases in which the member had paid nothing at all to petitioners. (R188-190, 818.) Dr. Handler also told the auditors that he asks members to sign over checks that they receive from United (R173). From OSC’s random samples of records, the auditors identified overpayments to Handler amounting to $47,188, and overpayments of $97,332 to 14 South Island, resulting from claims that were excessive in the manner described (R97, 778, 820). In preparing their bills that accompanied the members’ claims to United, petitioners routinely reported the full base amounts for services and did not reduce them by the waived amounts representing members’ required out- of-pocket costs. The auditors concluded that petitioners intended to accept United’s payment (or that payment plus a nominal co-payment by the member) as payment in full (R190-192, 819, 826). The Comptroller’s reports explained how this practice caused an overpayment by United: For example, if [the practice] charged $125 for services provided to an Empire member, United would pay $100 (80 percent of $125). [The practice] accepted that amount as payment in full, and then waived the remaining $25 (co-insurance owed by the member) of their fee. However, [the practice’s] actual charge to United should have been $100 (the amount they actually intended to collect for the service), and United should have paid $80 (80 percent of $100) on the claim. Because United paid $100, [the practice] was overpaid by $20. (R98, 779, 820.) A projection of these overpayments to the entire population of relevant claims paid by United for services provided by each petitioner, using statistically valid sampling methods, indicated that an overpayment of $903,563 was made for services provided by Handler from January 1, 2004 through December 31, 2008 (R98), and an overpayment of $787,134 was made for 15 services provided by South Island from January 1, 2001 through October 31, 2008 (R779, 820). The Comptroller concluded that United overpaid claims regarding services provided by each petitioner because petitioners routinely waived Empire Plan members’ out-of-pocket expenses (R91, 774). Preliminary findings were sent to United for its review and response (R193, 583, 911-915). The Comptroller then published his final reports on May 5, 2009 and November 19, 2009, regarding the South Island and Handler overpayments, respectively. In those reports, the Comptroller explained the reason for the audits, how they were conducted, the findings, and his recommendations (R85-98, 193, 770-779, 826). The Comptroller recommended that United: 1. Recover from [each practice] the amount overpaid for services provided. 2. Formally advise [each practice] of the advantage of becoming a participating provider in the Empire Plan and ask [each practice] to become a participating provider. 3. Work with the Department of Civil Service to pursue an appropriate course of action to prevent [each practice] from waiving out-of- pocket costs in the future, if [they do] not become a participating Plan provider. (R98; see also R779). 16 C. Petitioners Challenge the Comptroller’s Authority in These Article 78 Proceedings After publication of the Comptroller’s reports, petitioners commenced separate article 78 proceedings challenging the Comptroller’s constitutional authority to conduct the examinations and also challenging particular aspects of the examinations and findings (R39-54, 623-633).6 In each case, the Comptroller answered and asserted as an objection in point of law that the petition failed to state a cause of action (R160-169, 794-800), and United moved to dismiss the petition (R102-107, 917-922). In both cases, Supreme Court ruled that the State Constitution did not authorize the Comptroller to examine petitioners’ billing records, and accordingly the court did not address petitioners’ other challenges to the Comptroller’s determinations (R16, 612-618). Supreme Court, Albany County (Lynch, J.), granted Handler’s petition, in part, “to the extent of setting aside the audit” on the ground that the Comptroller lacked the authority under the New York Constitution to conduct the examination because Handler is a private entity and does not directly receive state funds (R14-18). Although the court declined to grant injunctive relief, it stated that the audit, having been set aside, 6 Handler challenged the Comptroller’s constitutional authority in its petition (R40- 41, 47-49); South Island belatedly made the constitutional argument in its reply papers (R1607-1610, 1722-1723). 17 could not serve as a basis for implementing the recommendations in it (R17). Supreme Court, Albany County (Cahill, J.), granted South Island similar relief on similar grounds (R612-618). The court precluded United from relying on the Comptroller’s conclusions or recommendations in support of any recoupment or offset of funds to South Island (R617-618). However, in neither case did Supreme Court order the Comptroller to withdraw the published reports, which remain on the OSC website.7 Both decisions cited Matter of N.Y. Charter Schools Assn. v. DiNapoli [“Charter Schools”], 13 N.Y.3d 120 (2009), in support of their conclusion that the Comptroller was not authorized to examine petitioners’ billing records because the monies paid by the State to United “lost the imprimatur of ‘State funds’ before that money reached petitioner[s]” (R15-16, 614-615). The courts rejected the Comptroller’s arguments that petitioners waived their constitutional challenges by failing to object to the examinations and voluntarily participating in them, and that the Comptroller could have obtained petitioners’ records 7 See United Health Care [NYSHIP] Overpayments for Services Provided by Dr. Handler and Dr. Moschetto, http://osc.state.ny.us/audits/allaudits/093010/ 09s23.pdf (Office of the St. Comp., Report No. 2009-S-23, last accessed September 22, 2013); United HealthCare [NYSHIP] Overpayments for Services Provided by South Island Orthopedic Group, P.C., http://osc.state.ny.us/audits/allaudits/093009/08s173.pdf (Office of the St. Comp., Report No. 2008-S-173, last accessed September 22, 2013). 18 pursuant to subpoena under State Finance Law § 9 in connection with his audit of United (R14-15, 612-613, 615-616). D. The Appellate Division Upholds the Comptroller’s Authority to Review Petitioners’ Billing Records On appeal, the Appellate Division, Third Department, reversed in both cases and held that the Comptroller had the constitutional authority to examine petitioners’ billing records in connection with his audits of United’s payment of health insurance claims on behalf of the State (R1665-1670, 1679-1681). Matter of Handler v. DiNapoli, 88 A.D.3d 1187 (3d Dep’t 2011); Matter of South Island v. DiNapoli, 88 A.D.3d 1186 (3d Dep’t 2011). The Third Department found that (1) the Comptroller is constitutionally required to audit the payments that the State makes to United under the contract; (2) this mandatory audit authority necessarily includes post-audit accounting to confirm that any payments made were proper; (3) the Comptroller’s authority was not negated by the fact that State funds passed through United before making their way to petitioners because any claim overpayments by United are charged directly to the State; and (4) the Comptroller’s limited examination of NPP billing records related to Empire Plan members is necessary in order to determine the propriety of such payments. The court found that, contrary to petitioners’ characterization, this limited examination of petitioner’s billing records is not a “performance audit” of 19 petitioners’ practices, 88 A.D.3d at 1190-91, and thus this case is unlike the charter school audits at issue in this Court’s Charter Schools decision. The Appellate Division then remitted the matters to Supreme Court so that court could address petitioners’ specific challenges to the audit findings and methodology. 88 A.D.3d at 1191; 88 A.D.3d at 1187. This Court dismissed for lack of finality petitioners’ appeals as of right and motions for leave to appeal. See Handler, 19 N.Y.3d 953 (2012); South Island, 19 N.Y.3d 955 (2012). E. Upon Remittal, Supreme Court Upholds The Comptroller’s Findings Upon remittal, in both cases, Supreme Court held that the Comptroller’s findings had a rational basis, and dismissed the remainder of the petitions (R1671-1676, 1682-1688). In South Island, Supreme Court further held that the recovery of any overpayments was not barred by the statute of limitations (R1686-1687). Petitioners appealed directly to this Court under C.P.L.R. § 5601(d) for review of only the prior nonfinal orders of the Appellate Division, and this Court retained jurisdiction. Accordingly, Supreme Court’s rulings on remittal from the Third Department upholding the Comptroller’s findings are not before this Court. 20 ARGUMENT POINT I THE STATE CONSTITUTION AND STATUTES AUTHORIZED THE COMPTROLLER’S LIMITED EXAMINATION OF PETITIONERS’ BILLING RECORDS The State Constitution and statutes authorized the Comptroller’s limited examination of petitioners’ billing records in connection with his audit of the State’s payments to United attributable to the services that petitioners provided to Empire Plan members. Article V, § 1, of the Constitution directs the Comptroller to “audit all vouchers before payment” and provides that the “payment of any money of the state, or of any money under its control . . . except upon audit by the [C]omptroller, shall be void.” N.Y. Const., art. V, § 1. The Constitution further provides that the Legislature “shall define [these] powers and duties.” Id. In carrying out his duties, the Comptroller audits private entities such as United that contract with the State, and such audits may include both pre-audits and retrospective audits, known as “post-audits,” to ensure that the State’s payments to its contract vendor are proper and that the contract is being complied with. And in furtherance of the Constitution’s mandate that it define the Comptroller’s duties, the Legislature has specifically directed the Comptroller to audit payments to the State’s employee health 21 insurance contractor, see Civil Service Law § 167(7), and has authorized the Comptroller to subpoena persons and records “in reference to any matter within the scope of the inquiry or investigation being conducted by the [C]omptroller.” State Finance Law § 9. These provisions authorize the Comptroller’s limited examination of petitioners’ billing records in these cases. Thus, there is no merit to petitioners’ assertion (Br. at 1-2, 33-35) that the rulings below improperly “expand” the scope of the Comptroller’s audit authority beyond constitutional limits and would allow the audit of private entities who have no relationship to the State because they have no contract with the State or receive no money from the State. This case involves only the Comptroller’s authority to obtain relevant records from third parties during audits of the State’s payments to its contract vendors. In upholding the examinations of petitioners’ billing records, the Third Department properly applied well-settled principles of law regarding the Comptroller’s authority to pre- and post- audit its contract vendors and his authority to obtain from third parties information that is relevant to such audits. This Court should affirm. A. The Comptroller’s Mandatory Audit Authority Includes Pre- and Post- Audit of Payments Pursuant to State Contracts. The Comptroller’s constitutional authority includes the power to conduct 22 pre-audits and post-audits of payments that the State makes to its public or private contract vendors such as United in order to ensure that the payments are proper and in accord with the governing contract or program. The Comptroller is the State’s chief fiscal officer and a “vital part of the constitutional machinery for assuring accountability in the expenditure of [public] funds.” Matter of McCall v. Barrios-Paoli, 93 N.Y.2d 99, 104 (1999). Article V, section 1 of the New York State Constitution is the “wellspring of the Comptroller’s authority,” id. at 105, and sets forth the Comptroller’s duties, all of which “are in furtherance of the fundamental duty of the office to superintend the fiscal concerns of the State.” Matter of Dinallo v. DiNapoli, 9 N.Y.3d 94, 101 (2007) (quotations omitted).8 These duties include the mandatory duty “[t]o audit all vouchers before payment and all official accounts,” and “to prescribe such methods of accounting 8 The provisions of article V, section 1 relating to the powers and duties of the Comptroller were added to the Constitution in 1925 as part of a major streamlining and restructuring of state government. See generally 8 Report of 1938 New York State Constitutional Convention Committee on Problems Relating to Executive Administration and Powers, at 120-135 (summarizing the history of the reorganization). These provisions were not intended to limit the Comptroller’s core functions of audit and control. See McCall v. Barrios-Paoli, 93 N.Y.2d at 105-07. Instead, they were intended to protect the independent character of the Comptroller’s audit function by preventing the assignment of additional, unrelated duties, and by permitting the assignment of supervision of the accounts of political subdivisions and administrative duties incidental thereto, see id., neither of which are at issue in this case. 23 as are necessary for the performance” of that duty. N.Y. Const., art. V, § 1. The Legislature is authorized to define the scope of that duty and to assign to the Comptroller any administrative duties incidental thereto. See id.; State Finance Law §§ 8(1) (the Comptroller shall “[s]uperintend the fiscal concerns of the [S]tate”), (2) (the Comptroller “shall . . . audit . . . all accounts . . . and keep accurate and proper books”), (7) (the Comptroller “shall . . . [a]udit all vouchers” of a person to whom funds are payable). In addition, the Constitution prohibits the payment of money of the State or any money under its control, except upon audit of the Comptroller. See N.Y. Const., art. V, § 1; State Finance Law § 111; see also State Finance Law § 112(2) (Comptroller must approve contracts over $50,000 before they become effective). The Comptroller’s authority under these provisions to audit state contracts is long settled. This Court held over a century ago that a claim for payment for work done under a contract “must be presented to the [C]omptroller for audit.” Quayle v. State, 192 N.Y. 47, 53 (1908); see also Matter of N.Y. World’s Fair 1964- 1965 Corp. v. Beame, 22 A.D.2d 611, 617 (1st Dep’t), aff’d, 16 N.Y.2d 570 (1965) (city comptroller could subpoena employees and records of city contractor in connection with audit of the performance of the contract). As relevant here, the Legislature has required that the State’s payments for employee health insurance contracts are to be made from the State’s Health Insurance Fund “as 24 audited by and upon the warrant of the [C]omptroller.” Civil Service Law § 167(7). And the Comptroller’s oversight of state finances is not limited to prospective review. The Comptroller’s authority to audit all vouchers before payment and all official accounts (“pre-audit”) includes, by necessary implication, retrospective, or “post-audit,” authority to confirm that funds paid to grantees or pursuant to a contract have been correctly disbursed. See 14 Report of Temporary State Commission on the Constitutional Convention on State Government (1967) (“1967 Report”), at 170-71; see also Harvey v. State, 200 Misc. 233, 235 (Ct. Cl.) (recognizing Comptroller’s authority to conduct post-audits of accounts on claimant’s contract with the State), aff’d, 279 A.D. 708 (4th Dep’t 1951), aff’d, 303 N.Y. 976 (1952); cf. Matter of Carlon v. Regan, 98 A.D.2d 544, 546 (3d Dep’t), aff’d as modified, 63 N.Y.2d 1011 (1984) (Comptroller’s recoupment and offset authority implied from his express pre-audit authority). The Comptroller’s post-audit authority is necessarily very broad: A ‘comprehensive’ post-audit can help to determine how well the agency (or activity) under audit has carried out its responsibilities, and to serve as the basis for improved efficiency and economy. . . .Post-auditing . . . is designed to provide an independent review of financial operations and fiscal management. It can be done on a far broader basis than the pre-audit. Instead of auditing voucher by voucher, which is the pre-audit process, the post-audit can review an entire system or mode of operation. 25 1967 Report, at 170-71. In particular, a post-audit can identify “patterns of potential billing abuses that might not be identified examining an individual claim during the prepayment audit.” Matter of Signature Health Center LLC v. Hevesi, 13 Misc. 3d 1189, 1192-93 (Albany Co. Sup. Ct. 2006) (post-payment audits of Medicaid funds issued to health care providers fall “within the Comptroller’s constitutional and statutory audit authority and responsibilities” and are particularly appropriate given practicalities and magnitude of program). Thus, grantees of State monies, and those such as United receiving payments under contracts with the State – including both public and private entities – are subject to the Comptroller’s pre- and post- audits with respect to those state payments, whether or not those receiving the state funds are political subdivisions of the State. To ensure that the State is getting its money’s worth, the Comptroller’s audit authority necessarily includes an examination of compliance with the specific criteria of state-funded programs. See, e.g., Elmira Business Institute, Inc. v. New York State Dept. of Educ., 116 A.D.2d 133, 135 (3d Dep’t 1986), aff’d for reasons stated, 70 N.Y.2d 758 (1987) (the Comptroller is mandated to audit private institution’s compliance with Tuition Assistance Program grant requirements and payments are subject to disallowance and recoupment where requirements of program not followed); Matter of ASA Institute of Business and 26 Computer Tech. v. McCall, 281 A.D.2d 849 (3d Dep’t 2001) (same); Signature Health Center, 13 Misc. 3d 1189 (post-audit permissible where Comptroller noted trend within medical center’s billing practices that indicated impropriety with respect to Medicaid program requirements); cf. Matter of Daleview Nursing Home v. Axelrod, 62 N.Y.2d 30 (1984) (Medicaid overpayments to private nursing home recoverable). Accordingly, as the Third Department correctly recognized, 88 A.D.3d at 1190, New York’s Constitution and statutes authorize the Comptroller’s pre- and post-audit of the State’s contract payments to United in these cases. And, as we explain below, this authority necessarily includes the determination of the correctness of United’s payments of Empire Plan claims for services petitioners rendered, which payments are effectively reimbursed by the State under the contract. Thus, the Comptroller made the limited examinations of small portions of petitioners’ billing records that were relevant to his inquiry. B. The Comptroller’s Limited Examination of Petitioners’ Records was Constitutionally Authorized Because it was Necessary for an Effective Comptroller’s Audit of United. In order to verify the correctness of the State’s payments to United, the Comptroller must audit United’s payment of health insurance claims pursuant to its contract with the State. Because the State makes payments to United for United’s payment of claims submitted in connection with services performed by 27 NPPs like petitioners, if the NPPs’ bills are overstated, United makes a corresponding overpayment at the State’s expense (R178). These overpayments directly impact the State fisc. As the Appellate Division properly described the inquiry, “routine waivers of out-of-pocket costs to members effectively lower the customary fee charged,” resulting in inflated claims and overpayments by United and the State. 88 A.D.3d at 1188. Thus, in determining whether the payments that the State makes to United under the contract are proper, the Comptroller must determine whether the claim payments that United makes on behalf of the State are proper and in accordance with the requirements of the state contract and the provisions of state law. In particular, the Comptroller must ascertain whether United is overpaying under the contract for the treatment of Empire Plan members. See id. It necessarily follows that, in order to determine whether United’s payments of claims for NPP services are appropriate, the Comptroller must examine not only United’s records but also the records of the NPP to the extent they are relevant to that determination. This does not mean that the Comptroller conducts a full-scale audit of the NPP’s practice. Rather, the Comptroller performs a limited examination of the NPP’s records associated with United’s claim payments, including records regarding services rendered, billing charges, and actual costs paid by Empire Plan members. 28 Under petitioners’ argument, the Comptroller would be unable to review relevant records in the hands of third parties in connection with an audit where, as here, the third parties were private entities that did not directly contract with the State and did not directly receive state funds. But that is not the law. Had petitioners not voluntarily turned over the billing records in question, the Comptroller could have subpoenaed them. The State Finance Law authorizes the Comptroller to subpoena records from any person or entity regarding “any matter within the scope of the inquiry or investigation being conducted.” State Finance Law § 9. Indeed, petitioners imply that the Comptroller’s examinations would have been proper had the Comptroller subpoenaed the records. See Br. at 2, 8 (emphasizing that the Comptroller did not subpoena their records). It follows that the Comptroller may request access to the relevant records before resorting to a subpoena, and here, subpoenas were not necessary because petitioners voluntarily complied with the Comptroller’s requests. Consequently, the Comptroller’s limited examination of petitioners’ records was proper. These records were relevant and reasonably related to the Comptroller’s examination of the propriety of United’s payments. As petitioners concede (Br. at 25), there would be no other way to verify the propriety of the payments made by United. But contrary to petitioners’ argument, that fact does 29 not transform the Comptroller’s limited examination of petitioners’ records into a full-scale performance audit of petitioners (Br. at 3-4, 15-16, 23-24, 32). The Comptroller’s examinations of petitioners’ records were narrow in scope. In each of these cases, there were thousands of claims generating payments by United of millions of dollars for services provided by petitioners. Yet in each case, the random sample examined by the Comptroller involved fewer than 200 billing records (R185, 816-817). The recommendations made by the Comptroller as a result of this investigation confirm that his examinations of petitioners’ records was narrow in scope, and were part of his audit of United. The Comptroller did not take action against petitioners nor did he recommend that any state agency do so. Instead, the Comptroller recommended that United take specified actions, including attempting to recover the amounts of the overpayments from petitioners, encouraging petitioners to become participating providers, and working with the Department of Civil Service to prevent future waivers of out-of-pocket costs if petitioners did not become participating providers (R98, 779). Petitioners provide no support for their characterization of the Comptroller’s limited examinations of their billing records as full-scale audits. Indeed, despite repeated assertions in their brief that the Comptroller’s examinations here were full “performance audits” (Br. at 8, 9, 14, 16, 26, 30, 38, 30 39-40), petitioners acknowledge that the examinations were limited to financial records related to claims submitted with respect to Empire Plan members, contradicting any claim that the Comptroller conducted performance audits of petitioners’ practices of the type at issue in Charter Schools. See, e.g., Br. at 8, 14, 29 (Comptroller conducted an audit of petitioners’ “financial billing records” or “billing records”); id. at 31 (“Comptroller’s reviews focused exclusively on [petitioners’] financial records”). Moreover, contrary to petitioners’ argument, a complete reading of the Comptroller’s reports establishes that the ultimate goal of the audits was “to quantify the overpayments made by United HealthCare” as a result of petitioners’ practice of routinely waiving Empire Plan members’ out-of-pocket costs (R91, 774). In fact, the title pages of the audit reports and the authority letters indicate that the audit is of “United HealthCare” and the “New York State Health Insurance Program” (R85, 89, 770, 772).9 And the reports’ use of 9 Even the 2008 report cited by petitioners (Br. at 30-31), which similarly explains the Comptroller’s review, as part of broader audits of NYSHIP, on overpayments to NPPs made by the State’s contracted insurance carriers, is entitled “A Summary Report on Auditing the New York State Health Insurance Program.” www.osc.state.ny.us/audits/allaudits/093008/08s130.pdf (Office of the St. Comp., Report No. 2008-S-130, last accessed September 22, 2013). To the extent that petitioners claim (Br. at 9) that such audits improperly turned the Comptroller into the publicly-funded auditing arm of United because United initially requested that the Comptroller look into its claim payments to South Island, the record indicates that the Comptroller ultimately determined to conduct both examinations (R182- 183, 856) and that the process was independent; United did not direct it in any way or have any input into which claims were selected for review (R814, 816). 31 the terms “audit” and (in one place) “performance audit” (R94, 776) in describing the examinations of petitioners’ billing records does not transform the examinations into a wide-ranging inquiry into all aspects of petitioners’ performance, as they suggest. The Comptroller was not investigating petitioners’ performance or effectiveness as medical providers, nor even performing a full-scale financial audit of petitioners. The facts of the actual examinations themselves are more important than the language used in the reports to characterize them. As explained above, those facts demonstrate that the Comptroller performed very limited examinations of petitioners’ billing records pursuant to his authority to examine records possessed by “a person or persons” that were relevant to a “matter within the scope of the inquiry or investigation being conducted by the [C]omptroller” (here, the United audit). State Finance Law § 9. The examinations were a reasonable and necessary part of the Comptroller’s audits of United rather than a full-scale audit of either petitioner. Consequently, the language of the Comptroller’s reports does not support petitioners’ argument that the Comptroller’s limited review of their billing records exceeded his constitutional authority. Nor does petitioners’ claim find any support in the fact that in auditing United, the Comptroller specifically examined payments made by United for services that petitioners provided, or that the Comptroller conducted the 32 examinations over a period of several years and with a number of different auditors (Br. at 3, 32). Petitioners’ argument rests on the mistaken premise that an investigation of overbilling by NPPs cannot be relevant to an audit of United and its payments, because the NPPs have no contractual relationship with the State. But that is incorrect for the simple reason that when a provider overstates its charges to United, it has the direct result of causing United to overpay the member and overbill the State. The only way to gather information about this overbilling is to examine the billing practices of the providers. It was reasonable to focus on NPPs, given the large number of NPPs providing services to Empire Plan members and the fact that NPP reimbursements tend to be significantly higher than the set fees for participating providers (R93, 775); moreover, the Comptroller had the discretion to evaluate any possible overpayments by United one NPP at a time. To date, many such overpayment examinations have been completed.10 Indeed, the Comptroller selected the Handler practice because it “was one of the largest non-participating providers” in terms of members’ out-of-pocket costs (R183). And no provision of law requires that the Comptroller use the same auditing staff for all such audits or the related examinations. 10 See note 9, infra. 33 There is no merit to petitioners’ claims (Br. at 29-32) that the Comptroller was not interested in United’s conduct and did not review any of its records in connection with these audits. The record indicates that the Comptroller’s office reviewed over 75,000 of United’s records relating to payment of claims made to the Handler practice (R184) and nearly 65,000 of United’s records relating to payment of claims made to South Island (R814-816). Moreover, the Comptroller had already conducted several other audits focused exclusively on United’s claim processing procedures with respect to NPPs and other matters.11 Thus, the Comptroller’s limited examinations of petitioners’ billing records in connection with its audit of United were within the Comptroller’s constitutional and statutory authority. C. The Charter Schools and Blue Cross Cases Do Not Prohibit the Comptroller’s Limited Examination of Petitioners’ Records. 11 See, e.g., United HealthCare [NYSHIP] Waiving Out-of-Pocket Expenses, http://osc.state.ny.us/audits/allaudits/093007/06s60.pdf (Office of St. Comp., Report No. 2006-S-60, last accessed September 22, 2013); [NYSHIP] – United HealthCare’s Payment of Non-Participating Provider’s Facility Fee Claims, http://osc.state.ny.us/audits/allaudits/093010/07s110.pdf (Office of St. Comp. Report No. 2007-S-110, last accessed September 22, 2013); United HealthCare Duplicate Payments for Evaluation and Management Procedures, http://osc.state.ny.us/audits/allaudits/093006/05s59.pdf (Office of St. Comp., Report No. 2005-S-59, last accessed September 22, 2013); [NYSHIP] Selected Manually- Processed Claims, http://osc.state.ny.us/audits/allaudits/093006/05s56.pdf (Office of St. Comp., Report No. 2005-S-56, last accessed September 22, 2013). 34 This Court’s decisions in Matter of N.Y. Charter Schools Assn. v. DiNapoli, 13 N.Y.3d 120 (2009), and Blue Cross & Blue Shield of Cent. N.Y. v. McCall, 89 N.Y.2d 160 (1996), do not support petitioners’ argument here, as they contend (Br. at 35-40). In Charter Schools, this Court held that legislation requiring the Comptroller to audit charter schools was unconstitutional because such a task was not an administrative duty that was incidental to the Comptroller’s constitutionally prescribed functions. Thus, the Court held that the charter school audits – which included audits of the effectiveness of those schools (called “performance audits”) – were not incidental to the Comptroller’s discretionary duty to supervise the accounts of school districts as political subdivisions. 13 N.Y.3d at 130-32. The Court also held that the audits were not supported by the Comptroller’s authority to pre-audit or post-audit state expenditures because the money paid by a school district to a charter school is no longer under the State’s control once the funds have been transferred. Id. at 133. This case is entirely unlike Charter Schools, as the Appellate Division correctly concluded. 88 A.D. 3d at 1190-91. In Charter Schools the Comptroller was asserting the authority to do a wide-ranging audit of an entity that was neither a state agency or a political subdivision; the Court held that this auditing authority could not be derived from the fact that the charter schools, though in some critical respects private in nature, received public funds from a 35 school district. Here, by contrast, the Comptroller is not attempting any such wide-ranging authority over the activities of the private medical providers on the basis of any receipt of public funds. To the contrary, he asserts the right to examine limited billing records in the hands of third parties only in order to verify that the State had paid the correct amount of money to United under its contract with United, an entity that contracts with the State to process and pay state employee health insurance claims. Unlike in Charter Schools, both the audit of United and the examination of third-party records relevant to that audit are within the Comptroller’s express constitutional and statutory powers. See Civil Service Law § 167(7) (directing the Comptroller to audit amounts paid pursuant to health insurance contracts); State Finance Law § 9 (authorizing the Comptroller to examine persons and records “in reference to any matter within the scope of [his] inquiry or investigation”). And also unlike in Charter Schools, which involved full-scale “performance audits” of the charter schools at issue there, in these cases, the Comptroller did not perform a full audit of either petitioner but examined only a small portion of their billing records (fewer than 200 each) related to Empire Plan claims paid by United. In contrast to the performance audits at issue in Charter Schools, the Comptroller’s examination of petitioners’ billing records was fiscal in nature and 36 very narrowly circumscribed. See Charter Schools, 13 N.Y.3d at 134 (Lippman, Ch. J., concurring) and 135-37 (Graffeo and Pigott, JJ., concurring). Similarly, contrary to petitioner’s contention (Br. at 37-38), the Appellate Division did not find that the Comptroller was auditing petitioners or any purported expenditure by them of public monies, but rather – as explained above – correctly determined that the Comptroller conducted only a “limited examination of [petitioners’] billing records” during the course of constitutionally mandated audits of United to confirm that the payments made to United by the State were proper. 88 A.D.3d at 1190.12 For all these reasons, the Charter Schools case does not support petitioners’ argument here. Similarly, Blue Cross & Blue Shield of Cent. N.Y. v. McCall, 89 N.Y.2d 160 (1996), does not support petitioners’ argument (Br. at 38-40).13 Unlike this case, 12 Petitioners seize (Br. at 25, 32-33) upon the Appellate Division’s use of the word “incidental” to support their view that the court below erroneously justified the examination of petitioners’ records as part of the Comptroller’s “incidental” powers under article V, § 1, of the State Constitution, which the Comptroller may exercise only at the specific direction of the Legislature. The context of the Appellate Division’s use of the term “incidental” establishes that the Appellate Division did not use the term in this constitutional sense. Rather, the Appellate Division used the term in further explaining its holding that the Comptroller’s limited examinations of petitioners’ billing records were related and necessary to the audit of United. 13 The Appellate Division distinguished Blue Cross on the ground that only the Comptroller had oversight in this area sufficient to secure public accountability. See 88 A.D.3d at 1191 n.* Although the State Insurance Department has jurisdiction to investigate insurance fraud, the Comptroller’s examination here is not based on or limited to questions of fraud. In any event, contrary to petitioners’ 37 the audits at issue in Blue Cross did not involve the fiscal affairs of the State because they did not involve audits of contracts with the State. Instead, the “administrative audits of private not-for-profit insurers” in that case furthered broader goals that were policy oriented and regulatory in nature. See id. at 167, 170; see also Blue Cross & Blue Shield of Cent. N.Y. v. McCall, 218 A.D.2d 140, 145 (3d Dep’t 1996) (“Defendants do not claim that the audits authorized by the challenged legislation involve the fiscal affairs of the State. Rather, the audits are a product of the State’s broad police powers to regulate insurers.”). In contrast, in this case, the State’s dollar-for-dollar premium payments to United to pay for services rendered by petitioners to Empire Plan members directly implicate the fiscal affairs of the State. Nothing in Blue Cross prevents the Comptroller from auditing the State’s payments made to and services provided by the State’s contract health insurance providers, including United, as well as Empire Blue Cross and Blue Shield – audits of which continue to this day (R177, 1650). In connection with these audits, the State may examine relevant records in the hands of third parties such as petitioners. State Finance Law § 9. contention (Br. at 6-7), the existence of another regulatory agency with oversight jurisdiction would not reduce the Comptroller’s independent constitutional and statutory authority to examine records in the hands of third parties that are relevant to the audits of the State’s payments to its contract vendors. 38 Thus, neither Charter Schools nor Blue Cross supports petitioners’ contention that their billing records are totally immune from the Comptroller’s scrutiny.14 POINT II ALTERNATIVELY, THE COURT SHOULD PERMIT UNITED TO PURSUE THE COMPTROLLER’S RECOMMENDATIONS AS TO PETITIONERS EVEN IF THE COURT FINDS THAT THE EXAMINATIONS WERE UNAUTHORIZED In the alternative, if this Court concludes that the Comptroller did not have the authority to examine petitioners’ billing records in connection with its audit of United, the Court should nevertheless affirm the Appellate Division’s orders, leaving the Comptroller’s findings undisturbed and permit United to pursue the recommendations in the Comptroller’s reports. Had petitioners wished to challenge the Comptroller’s authority before the examinations, they could have demanded that the Comptroller subpoena the records, and then moved to quash the subpoenas in court. Or they could have 14 Similarly, Matter of Dinallo v. DiNapoli, 9 N.Y.3d 94 (2007), does not support petitioners here. In that case, the Comptroller sought to audit the Insurance Department’s Liquidation Bureau, which acted in a private capacity as the receiver of distressed insurance companies. See id. at 102-03. This Court found that the assets of the distressed insurers were private property rather than state funds and were held by the Superintendent in his private capacity as receiver rather than in his capacity as a state officer. Consequently, the Court held that “because the liquidation of a distressed insurer has no impact on the State fisc, it does not implicate the Comptroller’s constitutional and statutory authority to superintend 39 brought a declaratory judgment action challenging the Comptroller’s authority. They did neither, but instead acquiesced and cooperated with the Comptroller’s examinations, objecting only after the Comptroller issued his findings. In addition, the Comptroller acted in the good faith belief that he had the necessary legal authority, a belief that was vindicated by the Appellate Division’s decisions here. And in both cases, on remittal from the Appellate Division, Supreme Court confirmed the Comptroller’s findings. Under these circumstances, petitioners having waived a prospective challenge to the Comptroller’s authority, no valid purpose would now be served by suppressing the Comptroller’s findings and pretending that the overpayments did not happen.15 This Court should affirm the Appellate Division’s orders on these alternative grounds. See, e.g,. Parochial Bus Sys. v. Bd. of Educ. of City of N.Y., 60 N.Y.2d 539, 545-46 (1983); Matter of Save The Pine Bush v. New York State Dept. of Envt’l Conservation, 289 A.D.2d 636, 637-38 (3d Dep’t 2001). Unlike the petitioners in both the Charter Schools and Blue Cross cases who challenged the Comptroller’s authority from the beginning, petitioners here consented to and fully cooperated in providing records relevant to the the fiscal affairs of the State.” Id. at 102. 15 The Appellate Division seemingly rejected this alternative argument, in a conclusory statement, see 88 A.D.3d at 1191, but that was both incorrect and unnecessary to the decision in light of the court’s holding that the examinations 40 examinations. Petitioners did not demand a subpoena and thus waived their right to adjudicate, via motions to quash, the question of the Comptroller’s authority before the examinations occurred. See State Finance Law § 9 (subpoena governed by the C.P.L.R.); C.P.L.R. § 2304 (motion to quash). Nor did they bring declaratory judgment actions to test the Comptroller’s authority before the examinations occurred. See, e.g., Charter Schools, 13 N.Y.3d at 128- 29 (charter schools challenged Comptroller's audit authority before the audit was conducted). Instead, petitioners allowed the Comptroller’s staff on-site access to the requested records, and also offered to provide additional information and documents (R172-174, 185-186, 803-805, 816, 1657). Handler raised no objection to the Comptroller’s examination either before, during, or after the site visit, until the filing of its petition here (R172). And following the site visit to its offices, South Island’s counsel sent at least three letters to the Comptroller’s office, none of which challenged the Comptroller’s authority to conduct his examination (R781-788). Indeed, South Island’s petition also did not challenge the Comptroller’s constitutional authority to conduct the examination; rather, South Island raised the constitutional challenge for the first time in its reply memorandum (R623-632, 1647). But by the time petitioners had raised these were authorized. 41 challenges, the Comptroller had completed the examinations and issued his reports and findings. Under the circumstances, if this Court concludes that the Comptroller lacked the authority to conduct the challenged examinations, the Court should for several reasons nevertheless permit United to pursue the Comptroller’s recommendations as to petitioners and should not suppress the Comptroller’s findings. First, because petitioners consented to the examinations they now challenge, and the information has already been made public, their belated challenge to the Comptroller’s investigation is now largely moot. See Matter of Blossom View Home v. Novello, 4 N.Y.3d 581, 584 n.1 (2005) (petitioner’s request for injunctive and declaratory relief with respect to challenged Department of Health audit was moot where audit completed). Although in Blossom View, this Court stated that questions of the use of the audit remained for the Court’s consideration, and such questions of future use are arguably also present here, the petitioner in Blossom View had immediately disputed the Department of Health’s audit authority when it announced its intention to conduct the audit and brought suit before the audit began. See id. at 590-91. Petitioners here did 42 not do so. By the time petitioners raised their objections to the Comptroller’s constitutional authority, the audit was finished and the results were public.16 Second, petitioners are analogous to those who consent to a search and then cannot then claim entitlement to suppression of the fruits of the search. See, e.g., People v. Calloway, 71 A.D.3d 1493 (4th Dep’t) (citing Schneckloth v. Bustamonte, 412 U.S. 218, 248 [1973]), lv. denied, 15 N.Y.3d 748 (2010). Petitioners should similarly be precluded from suppressing the results of the examinations after voluntarily providing the records and cooperating with the examinations. A contrary holding would encourage the entity whose records are sought to belatedly challenge the Comptroller’s authority to conduct an examination only if the results are unfavorable, rather than requiring it promptly to assert its claims before scarce state resources are expended. Third, the exclusion of illegally obtained evidence is not automatic outside the context of a criminal trial, and the balance of relevant factors strongly counsels against suppression here. Evidence seized without probable cause or a warrant, though subject to suppression in a criminal trial, is frequently 16 Nor does Matter of Goldin v. Greenberg, 49 N.Y.2d 566 (1980), preclude a finding that petitioners’ challenges are essentially moot. In Goldin, the city comptroller’s audit report was “interim,” not final, and the comptroller had commenced proceedings to enforce his subpoenas before the interim report was issued. See id. at 570. 43 admissible in civil proceedings when the court determines that the “societal costs of losing relevant and reliable evidence” outweigh the deterrent benefit resulting from exclusion. Matter of Gibson v. Koehler, 165 A.D.2d 768, 769 (1st Dep’t 1990); see also Matter of Boyd v. Constantine, 81 N.Y.2d 189, 195 (1993). And even in a criminal trial, evidence obtained without a warrant may be introduced if it was seized in good faith reliance upon the consent of an individual believed to have authority to provide that consent. See People v. Adams, 53 N.Y.2d at 1, 8-10 (1981). In the present cases, which do not involve a violation of the Fourth Amendment, the balance should strongly favor permitting the Comptroller’s and United’s use of the information concerning overpayments disclosed by the Comptroller’s examinations. Here, the deterrent effect of exclusion would be minimal because the Comptroller proceeded in good faith under the reasonable view that, in connection with the audits of United, he was authorized to examine petitioners’ records regarding claims submitted to United. The unanimous Appellate Division decisions in these cases vindicated the Comptroller’s view, and that remains the case even if this Court comes to a different conclusion. If the Court concludes otherwise, the Comptroller will comply with any ruling, and suppression of the evidence obtained here is not needed for deterrence. On the other hand, the harm resulting from suppression would be substantial. 44 Supreme Court has confirmed the rationality of the Comptroller’s findings, and it would serve no purpose now to preclude United from using this information, both retrospectively and prospectively, to address the overpayments that the Comptroller’s examinations have uncovered. The costs to the State and United of being forced to ignore the information regarding overpayments would be substantial. Consequently, even if this Court holds that the Comptroller’s examinations of petitioners’ records were not authorized, it should affirm the Appellate Division’s orders on these alternative ground. The Court should not suppress the Comptroller’s findings and should allow United to implement the Comptroller’s recommendations and to use the audit findings and other information uncovered during the audits to recover the calculated overpayments. 45 CONCLUSION For all the foregoing reasons, the order of the Appellate Division in each case should be affirmed. Dated: Albany, New York September 23, 2013 Respectfully submitted, ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney for Respondent DiNapoli By:___________________________ ZAINAB A. CHAUDHRY Assistant Solicitor General Office of the Attorney General The Capitol Albany, New York 12224 (518) 474-3429 BARBARA D. UNDERWOOD Solicitor General ANDREW D. BING Deputy Solicitor General ZAINAB A. CHAUDHRY Assistant Solicitor General Of Counsel Reproduced on Recycled Paper