The latest salvo in the fight over Medicaid-funded executive compensation was fired by Governor Cuomo in his 2012 budget proposal and in a parallel Executive Order.  Both the budget and the Executive Order purport to limit executive compensation to $199,000 per year for Medicaid providers.  Another provision allows the cancellation, without a hearing, of the Medicaid participation agreement of any provider found to be paying “excessive compensation.” 

How the cap will be implemented is unclear, especially in light of the fact that Medicaid is no longer a cost-based reimbursement system.  Implementing rules and regulations, which presumably will follow the requirements of the State Administrative Procedure Act, are due by April 27, 2012. 

The biggest risk is to agencies and providers having the greatest reliance on Medicaid revenue.  Because Medicaid is not a major source of revenue for most acute-care hospitals, it is possible, but by no means certain, that the compensation cap will have little effect on them.  The key is whether acute-care entities will be permitted to exceed the cap through the use of non-Medicaid funds. 

Both the Executive Order and the budget also cap the “administrative costs” of Medicaid providers in much the same way that the federal health reform legislation limits the administrative costs of insurance companies.  The Executive Order requires that 75% of state assistance go to direct patient care, with that percentage increasing 5% a year until April 1, 2015, when it will reach 85%.  This means that Medicaid providers will be limited to an administrative budget of 15%.  The question, of course, is how the terms “administrative costs” and “direct patient care” will be defined.  For example, what about the administrative costs of performance improvement activities?  Are these costs to be limited as administrative costs, or will the implementing regulations recognize them as being more in the category of “direct patient care”? 

The decision to include mirror provisions on executive compensation in both the Executive Order and the budget is revealing.  The Governor is undoubtedly hedging his political bet in the budget process by issuing the Executive Order.  The problem for the Governor is to identify the legal authority that permits him to cap executive compensation by fiat.  Also of highly dubious legality is the delegation to the Commissioner of Health of the authority to exclude Medicaid providers without a hearing and without any criteria to determine what constitutes excessive compensation.  Under what statute or constitutional provision is the Governor operating?  Stay tuned.