Healthcare Integration Advisors - Overcoming Obstacles Along the Continuum of Care

Last week, 13 New York State agencies, including the Department of Health, released proposed regulations designed to implement the Executive Order issued earlier this year by Governor Andrew Cuomo to limit executive compensation and administrative expenses at service providers that receive State funds or State-authorized payments of federal funds.  The proposed regulations are available for public comment from May 30 until July 16.

In their present form, the proposed regulations apply to providers that receive more than $500,000 and at least 30% of their annual funding from the State.  These limits would include the Federal as well as the State portion of Medicaid payments.  The regulations purport to prevent providers from spending more than $199,000 in State funds for the compensation of an executive. If a provider chooses to pay an executive more than $199,000 from other sources, the provider must keep compensation below the top 25% in the field as determined by a compensation survey identified or recognized by the applicable State agency.  The compensation limit includes cash and noncash benefits, such as wages, bonuses, housing, cars, below-market loans, educational benefits, family travel, and use of an organization’s property.  Mandatory benefits, such as health insurance premiums and pension contributions, are excluded.   

In addition, providers that pay an executive more than $199,000 must have the compensation approved by their boards of directors, including at least two independent directors, and must have performed a review of comparability data.  In cases where competitive imperatives or the complexity of a provider's operations require compensation that exceeds the limits, and in other specified circumstances, providers may apply for a waiver of the compensation limit.

Taking a page from the Affordable Care Act’s limit on health insurers’ overhead expenses, the proposed regulations would also require that at least 75% of a provider's State funds be utilized for program services rather than administrative costs. This percentage will increase by 5% each year until it reaches 85% in 2015.  Capital expenses are not affected by this restriction and waivers would be available in certain circumstances.

The proposed regulations further mandate that providers annually report the public funds they have received, the compensation of their executives and highest-paid employees, and their administrative expenses.  This information would be submitted electronically, using a State-wide form.

Sanctions for non-compliance would include (i) redirection of State funds,  (ii) suspension, limitation, or revocation of the provider’s license to operate/deliver program services, and (iii) suspension, limitation, or revocation of contracts between the State and the provider.

The press release from the Governor’s office, along with a link to the proposed regulations from the Department of Health, can be found here.  We will provide further guidance as these regulations are finalized.

Many general hospitals in New York participate in multi-provider health care delivery systems.  These networks are usually coordinated by parent entities (often another not-for-profit corporation) or natural persons (often a representative or representatives of a religious group or a similar organization) who are designated as the “member” or “members” of the network providers.  The role of a “member” is similar to shareholders in business corporations.  Thus, the “sole member” of a not-for-profit corporation is in the position of someone who owns all the stock in a business corporation.  Members, like shareholders, may be divided into classes, each with specific rights and obligations. 

The concept of one not-for-profit corporation being designated as a “member” of another not-for-profit corporation, and exercising the governance authority given to members under the NPCL, has provided the foundational legal basis and the structural building blocks for virtually all health care systems in the state of New York for at least the last 30 years.  The exercise of such membership-derived governance authority has never required the licensure of a hospital member as an “established” operator under the laws of New York or any other state.  This is because the governance rights of members involve areas of sponsor-level decision-making, not operational detail.  Thus, unlicensed members have no authority over such key operational areas as formation of corporate policies, regulatory compliance, standards of care, or medical staff credentialing. 

The exercise of membership rights is often referred to as “passive” control exercised by a “passive parent” entity, as compared to the exercise of authority over a hospital that requires licensure, often referred to as “active” control exercised by an “active parent” entity.

From time to time, the New York State Department of Health (DOH) and various special-interest advocacy groups have raised the question of whether the sponsoring members of hospitals hold and exercise operational control, thus requiring their establishment and licensure.  Raised for the first time in 1986, the question of membership rights over hospitals is again on the mind of DOH as a result of certain perceived governance and quality-of-care problems that DOH links to the passive-parent model.

This article provides a historical account of the active/passive parent rules, examines the current issues raised by DOH, and offers for consideration and debate certain remedial recommendations.

View PDF of the entire article

Reprinted with permission from: Health Law Journal, Winter 2012, Vol. 17, No. 1, published by the New York State Bar Association, One Elk Street, Albany, NY 12207