The Advisors' Blog

– Liz Dunshee

In 2013, New York adopted some interesting regulations – capping executive pay at “covered providers” (hospitals, health insurers & other entities that provide public benefits in exchange for state funds). The rules were – of course – challenged, and a NY appellate court recently issued its opinion in LeadingAge New York v. Shah.

The court found the pay cap was okay to the extent that the costs are paid for by state funds – but that it’s unconstitutional to restrict executive pay that’s funded by non-state dollars. Since another court previously upheld the full pay cap, this opinion creates a split in the NY Appellate Division.

This Greenberg Traurig memo gives more background. Here’s an excerpt:

The 2013 regulations established a “hard cap” prohibiting Covered Providers from using state funds to provide compensation greater than $199,000 to any Covered Executive, as well as a “soft cap,” which prohibits the Covered Executive from receiving more than $199,000 — regardless of the source of the funds — unless, the compensation: (1) is no greater than the 75th percentile of compensation provided to comparable executives affiliated with comparable providers, consistent with the findings in a compensation survey recognized by the Division of Budget; and (2) has been approved by the Covered Provider’s board of directors or other governing body, including at least two independent directors or members.

In partially upholding the cap, the court found that the Department of Health has broad statutory authority to regulate the use of public funds, enter into contracts, and “ensure the provision of ‘high-quality medical care,” particularly in the Medicaid program. Justice Peters acknowledged, however, that “none of the . . . statutes expressly authorize[] the creation of the administrative cost and executive compensation limits.” But authority exists simply because they “are not inconsistent with the . . . statutory provisions or their underlying purpose of obtaining high-quality services with limited available funds.”

However, “by attempting to regulate executive compensation from all sources, DOH was acting on its own ideas of sound public policy; venture[d] outside [its] legislative mandate to manage the efficient and effective use of taxpayer money for health care and related services; [and] has no special expertise in administering regulations governing overall executive compensation or competence in regulating corporate governance as much.” Thus, this portion of the pay cap violates the separation of powers doctrine and is invalid.