Third Time’s A Charm?: New York State Agencies Release Latest Revision of Proposed Regulations Restricting Executive Compensation and Administrative Costs of State-Funded Providers and Managed Care Plans

Mar 28, 2013


On March 13, 2013, the New York State Department of Health (“DOH”) along with 12 other State agencies released yet another iteration – the third version – of proposed regulations limiting the use of State funds for executive compensation and administrative expenses of health care providers and managed care plans (“Proposed Regulations (Version 3)”).  The proposed regulations would implement Executive Order No. 38 (the “Executive Order”), issued by Governor Andrew Cuomo last year, on January 18, 2012.  The Proposed Regulations (Version 3) supersede two earlier versions of the proposed regulations issued by DOH on October 31, 2012 (the “Proposed Regulations (Version 2)”)1 and May 30, 2012 (the “Proposed Regulations (Version 1)”).2  A full copy of the text of the Proposed Regulations (Version 3) is available on the DOH web site.  Comments are due 30 days from issuance, or April 12, 2013.3 

If adopted, the effective date of the Proposed Regulations (Version 3) would now be July 1, 2013 instead of April 1, 2013 under Version 2.  However, the limits would not be applicable to providers and managed care plans until the start of the first “covered reporting period”, or enforcement period, defined as the “most recently completed annual reporting period . . . commencing on or after July 1, 2013.”4  For those providers required to file cost reports, such as those participating in the Medicaid program, the first annual enforcement period begins January 1, 2014.  For providers that do not file cost reports, the first annual enforcement period begins, at the provider’s option, either the first day of the calendar year (i.e. January 1, 2014) or the first day of the provider’s fiscal year beginning on or after July 1, 2013 (i.e. sometime between July 1, 2013 and June 30, 2014).5  Significantly, providers seeking a waiver from the limits for any given period could do so, after the fact, by applying for a waiver on the date they submit the requisite disclosure report, known as the “EO#38 Disclosure Form”.  For providers that file cost reports, the deadline for submission of the EO#38 Disclosure Form would be concurrent with the deadline for filing the cost report; and for other providers, 180 days following the covered reporting period.6

According to the “Assessment of Public Comments”, released with the Proposed Regulations (Version 3), DOH made a variety of technical changes and clarifications in the latest version of the proposed regulations.7  Among other things, DOH removed “related organizations” from the key provisions of the executive compensation limits.8  Nonetheless, as described below, some important elements of the proposed regulations remain unclear, and DOH has promised to provide further guidance regarding certain aspects of the regulations, in some cases, before they “go live”.9 

For your convenience, we have attached links to our previous Clients & Friends Memoranda discussing Version 1 and Version 2 of the proposed regulations.  The remainder of this memorandum will discuss significant changes made in Version 3 in relation to topics addressed in our previous memoranda.  Another chart summarizing significant differences among the three sets of proposed regulations is again attached at the end of this memorandum.

Do the Proposed Regulations (Version 3) Apply to My Organization?

Covered Providers.  The Proposed Regulations (Version 3) still define “covered provider” as an entity that has received “State funds” or “State-authorized payments”:  (1) averaging over $500,000 a year during the covered reporting period and the prior year (Version 2 referenced the two year period prior to the reporting period); and (2) accounting for at least 30% of its total “in-state” revenue during the same time period.10  However, the list of facilities and entities that may be considered “covered providers” under the Proposed Regulations (Version 3) is exhaustive rather than illustrative.11  The only new type of entity added to the list of covered providers is an “independent practice association or management contractor, as such terms are defined in 10 N.Y.CR.R. Part 98, that is a related organization to a covered provider.”12  Thus, the regulated community at least can know with greater certainty what types of providers are subject to the limits in the proposed regulations. 

Related Organizations.  The Proposed Regulations (Version 3) delete the reference to “related organizations” in Section 1002.3(a), which establishes the baseline $199,000 limit on executive compensation.13  Likewise, the Proposed Regulations (Version 3) strike references to “related organizations” in Section 1002.3(b), which establishes the “safe harbor” (discussed below) for executive compensation that is above the $199,000 cap.14  The stricken language would suggest that only compensation paid to the covered executive by the “covered provider” itself would be counted toward the $199,000 threshold, and that the portion of compensation paid by any “related organizations” that are not themselves covered providers would be excluded.  Finally, “related organizations” are stricken from the provision in the Proposed Regulations (Version 3) that would expose covered providers to penalties for noncompliance with the safe harbor.15

On the other hand, the reference to “related organizations” was retained in Section 1002.1(d), which sets forth the definition of a “covered executive”.  As in the Proposed Regulations (Version 2), an executive of a covered provider’s “related organization”, paid by the covered provider to perform administrative or program services, would be considered a “covered executive” of the covered provider if more than 30% of that executive’s compensation was financed with State funds received from the covered provider.16  That is, the focus is on the source of funding for the executive’s compensation, from State dollars paid to a covered provider, and not on the executive’s nominal employer.  The Proposed Regulations (Version 3) clarify that a related organization of a covered provider would also not be subject to the limits on administrative expenses simply because it employs individuals who are deemed “covered executives” of the covered provider.17

Subcontractors and Agents.  In the Proposed Regulations (Version 3), the executive compensation and administrative cost limits continue to apply to “subcontractors” and “agents” of covered providers, regardless of whether they are “related” to the covered provider, provided the subcontractor or agent has received State funds through the covered provider to provide program or administrative services during the reporting period and would otherwise meet the definition of “covered provider”.18  Because the Proposed Regulations (Version 3) include an exhaustive list of “covered provider” types,  only subcontractors or agents of the type listed would be covered. 

Under the Proposed Regulations (Version 3), covered providers must report their subcontractors and agents only upon a funding agency’s request, but would still be required to incorporate the terms of the regulations into their agreements with subcontractors or agents.19  (Version 2 required reporting in all cases.)  Like the prior versions, Version 3 includes no grandfather clause applicable to existing subcontractor or agent contracts.  Version 3 does clarify that a covered provider will not be held responsible for a subcontractor’s or agent’s compliance with the regulations.20

Managed Care Contracting Providers.  As discussed in our November 8, 2012 memorandum, Version 2 extended application of the regulations to providers that contract with State-funded managed care plans to provide program services for a plan’s enrollees, if such providers met the $500,000 in-state revenue and 30% thresholds.21  Version 3 modifies this provision, it appears, by limiting its reach to providers who receive State funding “directly” from a managed care organization.22   The significance of this change is not clear: “downstream” providers of managed care organizations typically receive State funds indirectly, through a contract with MCO, and not as a “pass through” from the State to the MCO and on to the provider.  Clarification of DOH’s intent would be helpful.

What are the Limits on Executive Compensation?

Like the earlier versions, the Proposed Regulations (Version 3) would prevent a covered provider from using State funds or State-authorized payments to pay more than $199,000 per year in “executive compensation” to a “covered executive” (absent a waiver).23  “Executive compensation” includes payments and benefits reportable on a covered executive’s Form W-2, “Wage and Tax Statement”, or Form 1099 (used to report income other than wages).24  Version 2 referenced the Form W-2 only.  Version 3 continues to exclude mandated benefits, health and life insurance premiums, and qualified retirement plan contributions, but clarifies that contributions to 457(b) and 457(f) plans are to be excluded from the calculation as well.25

Grandfathered Employment Contracts.  The Proposed Regulations (Version 3) modify the provision for exempting, or “grandfathering”, certain employment contracts, to cover contracts entered into prior to July 1, 2012 (previously, April 1, 2012) and in effect through April 1, 2015 (previously, April 1, 2014).26  A waiver would be required if (i) the term of the employment contract extends beyond April 1, 2015 and (ii) the compensation levels would not comply with the regulations.  As before, any contract renewals would also have to comply with the regulations.27

Can A Covered Executive Be Paid More than the $199,000 Limit?

Version 3 retains the “safe harbor” for executive compensation paid by a covered provider that is above the $199,000 cap without applying for a waiver – and with non-State sources only – if (i) the compensation is below the 75th percentile for executives of comparable providers, established by a compensation survey recognized by DOH or the Division of the Budget (“DOB”); (ii) compensation is approved by the provider’s board of directors or governing body (if such a board or body exists),28 with at least two independent directors, relying on comparability data; and (iii) the above requirements are substantiated with sufficiently detailed contemporaneous documentation.29

Version 3, however, does not identify exactly what kinds of surveys or survey data will be acceptable to DOH or DOB, leaving covered providers with little guidance on how to ensure that their comparability studies will ultimately pass regulatory muster.  The Assessment of Public Comments does state that DOH “expects that it will be able to identify ‘safe harbor’ surveys of various covered providers,” but that the “use of such ‘safe harbor’ surveys will not be mandatory.”  Providers may use other surveys, presumably, so long as the surveys are “recognized” by DOH.30  It remains to be seen whether the state-sanctioned “safe harbor” surveys or survey data will account for the variability in the complexity of a provider’s corporate structure, the breadth of operations, geographical location, and myriad other factors, and whether DOH will view as suspect any survey other than its “safe harbor” surveys.

Can An Executive Be Paid Above the 75th Percentile?

The Proposed Regulations (Version 3) retain the provision that permits waivers for executive compensation within the top quartile upon a showing of “good cause”.31  However, waiver applications may be filed after the close of the reporting period, as late as the deadline for filing the provider’s EO#38 Disclosure Form, and need not be filed 90 days before the reporting period, as Version 2 would have required.  For those providers that choose to file after the fact, they face the same compliance quandary raised by Version 1 – covered providers will be uncertain whether the compensation at the level for which the waiver is being sought, if paid before or pending the waiver application, will be subject to recoupment (discussed below), if not penalties, if the waiver is ultimately denied.32  (The risk of penalties beyond recoupment would be mitigated by the proposed regulations’ generous cure provisions.) 

The deadline for DOH or DOB to determine a timely waiver application – 60 days – remains unchanged from Version 2 to Version 3. 

Is Executive Compensation Deemed Excessive Subject to Clawback Under the Proposed Regulations (Version 3)?

While the Proposed Regulations (Version 3) do not expressly provide for recoupment of executive compensation deemed excessive, the Assessment of Public Comments states that “compensation paid during pendency of [a waiver] request should not be exempt from recoupment.”33

What Are the Limits on Administrative Costs?

The Proposed Regulations (Version 3) do not significantly alter the limits on State funds used to pay for administrative costs, initially to 25% of total operating costs and lowering the cap by 5% per year to 15% by 2015.34  Waiver applications are also due concurrently with the timely submission of the cost report for the period  the waiver is requested.  (The same deadline was included in Version 2.)35

What is the Timeframe for Enforcement?

Any action to enforce the executive compensation or administrative expense limits would not be immediate – at no point earlier than the covered provider’s filing of the EO#38 Disclosure Form.  The earliest that covered providers could face sanctions based on information disclosed in a calendar-year 2014 report would be sometime in 2015. 

Can a Provider Appeal the Denial of a Waiver?

The Revised Proposed Regulations do not change the procedures that a provider must follow to request reconsideration of a waiver denial.36  See attached chart.

What Are the Reporting Obligations Under the Revised Proposed Regulations?

As noted earlier, for providers that file cost reports, the EO#38 Disclosure Form must now be filed at the same time as the provider’s cost report.  Organizations not required to file cost reports must submit the completed EO#38 Disclosure Form 180 calendar days following the covered enforcement period.  Providers may choose whether to use the calendar year or their fiscal year (if different) for reporting purposes.  According to the Assessment of Public Comments, DOH and other agencies, together with DOB, are developing a reporting system that will be operational prior to the effective date of the final regulations.37 

Are the Reports and Waiver Applications Subject to FOIL Disclosure?

In response to comments submitted to Version 2, the Proposed Regulations (Version 3) would now presumptively exempt waiver applications from disclosure under the State’s Freedom of Information Law, unless the information has already been publicly disclosed.38  The Proposed Regulations (Version 2) included essentially the opposite presumption, that the waiver applications would be disclosable unless one or more of the exemptions contained in the Public Officers Law could be shown to apply.  Like Version 2, however, the Proposed Regulations (Version 3) do not address the confidentiality of EO#38 Disclosure Reports.

What are the Penalties for Noncompliance?

The Revised Proposed Regulations do not change the penalties for noncompliance.  See attached chart.

What to Expect Next

With the third public comment period ending in mid-April, it is possible that final regulations could be adopted and become effective as of July 1, 2013, as contemplated in the Proposed Regulations (Version 3).  Regardless, DOH has promised to provide additional guidance on the following questions:  exactly what types of government funding will be considered “State funds” or “State‑authorized payments;”39 how will DOH assess compliance with the regulatory limits;40 what surveys or survey methodologies will be granted “safe harbor” status, and for which types of covered providers;41 and what will be the format and content for the requisite disclosures as well as for waivers.42  Stay tuned; there is more to come. 

1   Additional details about the Proposed Regulations (Version 2) were provided in a Clients & Friends Memorandum dated November 8, 2012.

2   Additional details about the Proposed Regulations (Version 1), including the events preceding their promulgation, were provided in a previous Clients & Friends Memorandum dated May 31, 2012.

3   N.Y. Reg. (March 13, 2013).  The Office for People with Developmental Disabilities (“OPWDD”) will accept comments through May 6, 2013.

4   Proposed Regulations (Version 3) section 1002.1(e).  The term “covered reporting period” is a new defined term added by the Proposed Regulations (Version 3).

5   Proposed Regulations (Version 3) sections 1002.1(e); 1002.1(k); 1002.2(a); 1002.3(a) of 10 N.Y.C.R.R.

6   Proposed Regulations (Version 3) section 1002.5.

7   Proposed Regulations (Version 3) sections 1002.4(a)(1); 1002.4(b)(1) of 10 N.Y.C.R.R.

8   Proposed Regulations (Version 3) section 1002.3(a) and (b) of 10 N.Y.C.R.R.

9   See generally Assessment of Public Comments.

10  Proposed Regulations (Version 3) section 1002.1(d)(2) of 10 N.Y.C.R.R.

11  Proposed Regulations (Version 3) section 1002.1(d)(3) of 10 N.Y.C.R.R.  Compare Version 2.

12  Id.

13  Proposed Regulations (Version 3) section 1002.3(a) of 10 N.Y.C.R.R.  As explained in the Summary of Assessment of Public Comments, Section 1002.3 was revised to “delete related organizations from its coverage.”

14  Proposed Regulations (Version 3) section 1002.3(b) of 10 N.Y.C.R.R.

15  Id.

16 Proposed Regulations (Version 3) section 1002.1(c) of 10 N.Y.C.R.R.    

17  Proposed Regulations (Version 3) section 1002.1(b) of 10 N.Y.C.R.R.

18 Proposed Regulations (Version 3) sections 1002.2(b); 1002.3(e) of 10 N.Y.C.R.R.

19  Proposed Regulations (Version 3) sections 1002.2(b); 1002.3(e) of 10 N.Y.C.R.R.

20 Proposed Regulations (Version 3) sections 1002.2(b); 1002.3(e) of 10 N.Y.C.R.R.

21  Proposed Regulations (Version 2) section 1002.1(d)(2) of 10 N.Y.C.R.R.

22  Proposed Regulations (Version 3) section 1002.1(d)(5) of 10 N.Y.C.R.R. (“An entity . . . that receives State funds or State-authorized payments directly from a managed care organization subject to the oversight of [DOH] shall be deemed to receive [funds] pursuant to contract . . . with [DOH] . . . to render program services”). (Emphasis added.)

23  Proposed Regulations (Version 3) section 1002.3 of 10 N.Y.C.R.R.

24  Proposed Regulations (Version 3) section 1002.1(g) of 10 N.Y.C.R.R.

25  Id.

26  Proposed Regulations (Version 3) section 1002.3(h) of 10 N.Y.C.R.R.

27  Id.

28  The language in parenthesis was added by Version 3.  See Proposed Regulations (Version 3) section 1002.3(b) of 10 N.Y.C.R.R.

29  Id.

30  Assessment of Public Comments, IV; Proposed Regulations (Version 3) section 1002.3(b) of 10 N.Y.C.R.R.

31  Proposed Regulations (Version 3) section 1002.4 of 10 N.Y.C.R.R.

32  Providers would have the option of delaying payment of executive compensation above the 75th percentile, pending approval of the waiver application.

33  Assessment of Public Comments, V.

34  Proposed Regulations (Version 3) section 1002.2 of 10 N.Y.C.R.R.

35  Proposed Regulations (Version 3) section 1002.4(b)(1) of 10 N.Y.C.R.R.

36  Proposed Regulations (Version 3) section 1002.5(e) of 10 N.Y.C.R.R.

37  Assessment of Public Comments, VI.

38  Proposed Regulations (Version 3) sections 1002.4(a)(5); 1002.4(b)(5) of 10 N.Y.C.R.R.

39  Proposed Regulations (Version 3) section 1002.1(l) and (m) of 10 N.Y.C.R.R

40  Assessment of Public Comments, I.

41  Assessment of Public Comments, IV.

42  Assessment of Public Comments, IV and V.


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