The New York Court of Appeals is scheduled to hear arguments Wednesday on the legality of a state regulation that limits the salaries of executives at state-contracted health care providers.

A decision from the Court of Appeals could strike down the regulation, which was promulgated after an executive order from Gov. Andrew Cuomo in 2012 limiting such salaries. The regulation, promulgated by the state Department of Health, was targeted at providers who receive Medicaid payments from the state.

The plaintiffs in the case are LeadingAge New York and the Coalition of New York State Public Health Plans, which began action in 2014 against the state Department of Health and then-Commissioner Nirav Shah. The two plaintiffs are represented, respectively, by David Luntz from Hinman Straub and Henry “Hank” Greenberg, a shareholder at Greenberg Traurig. Both are based in Albany.

Greenberg is well-positioned to argue the case. He served as general counsel at the state Department of Health for five years until 2000. He was also counsel to Cuomo when he served as state attorney general from 2007 to 2010.

The case will be argued before the court on Wednesday, the first day of regular session since June. The court considered hearing primary ballot challenges in August, but allowed only one appeal to proceed.

It's another case before the state's highest court to determine the reach of executive authority in state government.

There are two provisions of the regulation the court will consider: a “hard cap” and a “soft cap” on the executive salaries and administrative costs at covered providers in New York.

A covered provider is defined as a service provider that receives more than $500,000 in state funds or state-authorized payments, namely from Medicaid, over a two-year period. The company must also receive at least 30 percent of its in-state revenues from the state to be considered a covered provider.

Under the hard cap, covered providers cannot use state money to pay their executives more than $199,000 per year. They also cannot use state money to pay for administrative costs that exceed 15 percent of their expenses.

The soft cap places the same limits on covered providers regardless of the funding source, including public and private revenues, except under certain conditions. Providers can apply for a waiver to either cap, but approval is not guaranteed.

If the covered provider wants to pay an executive more than $199,000 per year, their salary cannot be higher than 75 percent of comparable executives in the same service industry. Data on corresponding salaries is either produced or identified by DOH and the state Division of Budget. A higher salary can also be approved by the provider's board of directors, or similar governing body, but the comparability data must also be considered in that case.

The Court of Appeals is expected to resolve two conflicting decisions on the soft cap from the Appellate Division, Third and Second Departments. The Second Department, in 2015, upheld both the hard and soft caps in a different case. The Third Department, in 2017, upheld the hard cap but struck down the soft cap.

The appeal is from the Third Department decision, which tested the authority of DOH through Boreali v. Axelrod, a landmark 1987 Court of Appeals decision about the regulatory powers of executive agencies within state government. The case was over a rule promulgated by the Public Health Council, a unit within DOH, that banned smoking at certain indoor areas that are open to the public, such as restaurants, stores, etc. The court ruled that the PHC had exceeded its regulatory authority and that only the Legislature was able to enact such a ban.

The Third Department came to a similar conclusion on the soft cap, saying in its decision that the provision “cannot pass constitutional muster.” The court said the agency could not limit administrative costs and executive pay for covered providers who use a variety of funding sources to finance those expenses.

That left the hard cap in place but created a conflict between the two appellate decisions on the soft cap.

In appealing the Third Department's decision, Luntz argued that neither the hard nor soft cap should pass the Boreali test because the Legislature has not granted the executive branch the power to promulgate such rules.

“No statute authorizes the Department to cap the compensation third party businesses pay their executives or to regulate how these private businesses use revenues earned from the Medicaid program for services provided,” Luntz wrote.

Luntz also argued that the limits are unconstitutional because of how the Medicaid program functions. Medicaid funding sent to providers comes in the form of reimbursements for services rendered instead of grants. Just because the state is the entity paying the bill doesn't mean they get to say how that money is spent, Luntz said.

“Title to those funds belongs to the providers and the State may not by some regulatory alchemy magically transmute these funds into 'State funds' that it can then control,” Luntz wrote.

Assistant Solicitor General Matthew Greico wrote the state's brief to the Court of Appeals in April. He argued that parts of the state's Public Health Law, enacted by the Legislature, give DOH the power to regulate how public funds are spent, regardless of where they end up.

“The plaintiffs' arguments to the contrary fundamentally mischaracterize the nature and purpose of [the regulation], and disregard DOH's authority—and responsibility—to ensure that public funds are appropriately and cost-effectively spent for their intended purposes,” Greico wrote.

A decision in the case from the Court of Appeals is expected in October.