In his Executive Order 38, Governor Andrew Cuomo directed 13 state agencies, including the Department of Health (DOH), to issue regulations restricting the amounts of executive compensation and administrative expenses of health care and other service providers that receive state funding. The Health Department (and the other agencies) issued regulations that were to take effect on July 1, 2013. Three separate courts have now ruled on challenges to these regulations, with two upholding all or most of the regulations, and one striking them down.

Background

Following extensive press reports about excessive compensation and benefit packages for executives of a large not-for-profit agency that served the developmentally disabled and that depended heavily upon state Medicaid funding, in 2011 Governor Cuomo appointed a task force to investigate executive compensation at not-for-profit organizations that receive support from Medicaid or other taxpayer funding. The task force collected detailed information from thousands of not-for-profit organizations in New York that provide health and social services and receive Medicaid reimbursement or other state funding.

Before the task force issued a report, the governor included in his budget to the Legislature a bill to impose caps on executive compensation and administrative costs. Before the Legislature acted (it ultimately did not include this provision in the budget), on Jan. 18, 2012, the governor issued Executive Order No. 38 (EO 38) directing the Department of Health and other state agencies to promulgate regulations prohibiting not-for-profit and for-profit entities from using state funds for executive compensation exceeding $199,000 per year, and restricting the use of state funds for administrative costs. EO 38 is applicable to organizations deemed “Covered Providers”—entities that receive more than $500,000 in state funding where that funding accounts for at least 30 percent of the organization's revenue per year, in exchange for “Program Services” to be provided to the public.

In implementing the Health Department regulations, however, the department limited the application of the EO 38 restrictions to certain entities, including hospitals, nursing homes, home health agencies, residential health care facilities, long-term and AIDS care programs, hospices, assisted living residences, emergency service entities, and health maintenance organizations and other entities authorized pursuant to Article 44 of the Public Health Law.