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October 25, 2018

Court of Appeals Strikes Down "Soft" $199,000 Executive-Compensation Cap

In a closely watched case brought by LeadingAge New York, Inc. and the Coalition of New York State Public Health Plans, the state's highest court struck down the "soft" cap on executive compensation for Medicaid and other state-funded entities. Imposed by the Department of Health (DOH) in 2012, the soft cap prohibited Medicaid-funded health care and human services providers from paying their executives more than $199,000 even if paid with private funds, unless the provider had obtained a waiver from the DOH. Providers covered by the soft cap were those that received an average annual amount greater than $500,000 in state funds over a two-year period and received at least 30 percent of their in-state revenue from the state.

On October 18, 2018, the Court of Appeals held that the DOH exceeded its authority by attempting to restrict how covered providers use private funds to pay their executives. The court reasoned that the soft cap did not further the DOH's stated goal of using state funds to purchase affordable, quality care because it attempted to control how entities use their private funds. Under the decision, providers can now pay their executives more than $199,000 so long as the excess comes from non-public sources.

By contrast, the court upheld the "hard" cap on executive compensation that limits providers from using public funds to pay more than $199,000 without a waiver granted by the DOH. The court reasoned that a cap on the use of public funds was within the DOH's statutory authority because its intended goal was to ensure state funds were used for health care services rather than excessive executive salaries. Under the same logic, it also upheld the hard cap on administrative expenses that requires that no more than 15 percent be paid for with public funds. Providers may still apply for a waiver from these requirements, but approval is not guaranteed.

Providers should be on the lookout for amendments to the soft cap regulation, including those dealing with the provider's reporting requirements. In addition, guidance may be forthcoming from the DOH to assist providers in complying with the court's decision.

If you have any questions regarding the content of this alert, please contact Susan Benz, Health Care & Human Services Practice Area co-chair and partner, at, or another member of the firm's Health Care & Human Services Practice Area.


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