New York Court Strikes Down Limits On Executive Compensation At For-Profit Human Service Organizations
OpenMinds june 8, 2014
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On April 9, 2014, the Nassau County Supreme Court struck down a 2013 state regulation limiting executive compensation at for-profit human service provider organizations holding state contracts. The ruling came in Agencies for Children’s Therapy Services, Inc. v. New York Department of Health (DOH). The court said the state had no authority to regulate executive compensation at for-profit state contractors; DOH and the Governor had overstepped their authority by creating policy that the legislature had not authorized. The state is expected to appeal.
In January 2012, Governor Cuomo issued Executive Order (EO 38), which directed multiple state agencies that contract with human and social service provider organizations to promulgate regulations to limit administrative costs and executive compensation eligible for reimbursement from the state. EO 38 affected the Office for People with Developmental Disabilities, Office of Mental Health, Office of Alcoholism and Substance Abuse Services, Office of Children and Family Services, Office of Temporary and Disability Assistance, Department of Health, Office for the Aging, Division of Criminal Justice Services, and Office of Victim Services. Each was to promulgate regulations and take any other actions with in the agency’s authority.
Agencies for Children’s Therapy (ACTS) is an non-profit association representing 33 for-profit companies that provide Early Intervention and other services to more than 25,000 children throughout the state. ACTs member organizations contract with the New York State Department of Health (DOH).
On January 1, 2013, the DOH promulgated a rule to regulate conflicts of interest in the Early Intervention program. DOH was concerned about potential conflicts because over 90% of evaluators in New York City and over 44% of evaluators in the rest of the state provide direct services to children they previously evaluated. The regulations prohibited the provider organization evaluating a child’s eligibility for services from coordinating the child’s treatment. In February 2013, ACTS obtained a preliminary injunction from the Nassau County Supreme Court to prevent DOH from enforcing the conflict of interest rule.
In July 2013, DOH promulgated a rule to implement EO 38 that required organizations providing Early Intervention services to cap executive compensation at $199,000 annually, and also limit administrative expenses to a capped percentage of revenue.
The regulations affected executives and employees of for-profit and non-profit entities for which revenues from state contracts represent least 30% of overall revenue. The regulations limited administrative expenses to 25% initially and decreasing over three years to 15%. After this rule was promulgated, ACTS moved for summary judgment, asking the court to invalidate both the conflict of interest rules and the compensation cap and administrative cost rules.
The issue before the court in the ACTS complaint was whether the two DOH regulations represented legislative policy making rather than administrative rule making. The decision noted that the legislature had considered, but not established policy to impose compensation and administrative cost limits on for-profit provider organizations reimbursed by state funds. In fact, EO 38 was issued after the legislature enacted the 2012 budget without the Governor’s proposal to give DOH and other agencies the authority to impose limits. As a result, the court said both the Governor and DOH exceeded their authority; in EO 38 and in promulgating rules to implement EO 38 they acted to implement a proposed policy that the legislature had specifically rejected.
The Early Intervention Law lacks language delegating authority to DOH to further regulate potential conflicts of interest between evaluators and service provider organizations.
The court said there was no evidence that the DOH used any special health-related expertise to create the conflict of interest regulations or the compensation and administrative cost rates. As a result, the court said the state cannot limit the compensation of executives at for-profit organizations that receive reimbursement from state funds. The cap on administrative services was also invalidated, as were the conflict of interest regulations.
A link to the full text of “Nassau County Supreme Court Order In Agencies for Children’s Therapy Services, Inc. v. New York Department of Health” may be found in The OPEN MINDS Circle Library at www.openminds.com/market-intelligence/resources/040814orderactsvnydoh.htm.
A link to the full text of “Preliminary Injunction In Agencies for Children’s Therapy Services, Inc. v. New York Department of Health” may be found in The OPEN MINDS Circle Library at www.openminds.com/market-intelligence/resources/021313actsvnydoh.htm.
A link to the full text of “New York State Department Of Health Regulations: Early Intervention Program Conflicts Of Interest” may be found in The OPEN MINDS Circle Library at www.openminds.com/market-intelligence/resources/010113nydohregscoiisprg.htm.
A link to the full text of “New York State Department Of Health Regulations: Early Intervention Program Executive Compensation & Administrative Costs” may be found inThe OPEN MINDS Circle Library at www.openminds.com/market-intelligence/resources/070113nydohregeiprgcompadmin.htm.
The full text of “New York Executive Order No. 38 Limits On State-Funded Administrative Costs & Executive Compensation” ” may be found in The OPEN MINDS Circle Library atwww.openminds.com/market-intelligence/resources/011812nyexecord38.htm.
For more information, contact:
- Steve Sanders, Executive Director, Agencies for Children’s Therapy Services, Inc., 90 State Street, Suite 700, Albany, New York 12207; 518-591-4659; Fax: 518-426-0535; E-mail: ssanders.acts@gmail.com; Website:http://agenciesforchildrenstherapyservices.org/
- Todd Geremia, Attorney, Jones Day, 222 East 41st Street, New York, New York 10017-6702; 212-326-3429; Fax: 212-755-7306; E-mail: trgeremia@jonesday.com; Website:www.jonesday.com/trgeremia; or Dave Petrou, Global Public Communications Manager, Jones Day, North Point, 901 Lakeside Avenue, Cleveland, Ohio 4114-1190; 216-586-1443; Fax: 216-586-7994; E-mail: drpetrou@jonesday.com; Website:www.jonesday.com/newsknowledge/pressroom
- Public Affairs Office, New York Department of Health, Corning Tower, Empire State Plaza, Albany, New York 12237; 518-474-7354; Fax: 518-473-7071; Website:www.nyhealth.gov