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June 11, 2012

Cuomo's Rules Target High Earning Executives of Health Care and Human Services Providers

The Cuomo Administration published for public comment the highly anticipated rules that will restrict the means by which executive compensation can be funded and overall administrative costs of certain health and human services agencies. The "covered providers" targeted by the rules are those that i) receive at least 30% of their New York revenue from State funds; and ii) have State fund revenues that exceed $500,000 annually.

Commencing on January 1, 2013, covered providers will need to comply with the rules or face a penalty. Unless a provider obtains a waiver, neither a covered provider or related entity shall use state funds or state-authorized payments for executive compensation greater than $199,000.00 per annum. A covered provider is also required to use at least 75% of its State funds for program activities rather than administration. This figure will increase by five percent each year until it reaches 85% in 2015.

The regulations require covered providers to ensure executive pay is comparable to the compensation of executives for providers of the same size, service and similar geographic area. If executive compensation payable by any source of funding (not just state funds or state-authorized funds) is greater than $199,000 per annum, the entity may be subject to penalties if the compensation is greater than the 75th percentile of compensation for comparable executives according to a compensation survey or where the compensation was not approved by the Board of Directors. For purposes of these regulations, when calculating an executive's compensation, money earned for the performance of "program services" is excluded. For example, when an executive is also a physician, salary earned for medical services performed is excluded but salary earned for performing administrative/managerial services is included.

As referenced above, the onus for complying with the rules will fall largely on the board of directors for each covered provider. Executive compensation approved by the board of directors can exceed $199,000, but only after due consideration of the appropriate comparability data by the board. The regulations suggest that the Division of the Budget will endorse "compensation surveys" for this purpose. However, because this data is not yet available, as the January 1, 2013 deadline approaches, the board of directors may need to gather its own data to conduct this comparative compensation analysis.

Waivers are available to covered providers who can establish good cause as to i) why it should be able to pay an executive more than $199,000 with state funds or state authorized payments and/or ii) why it should be able to pay an executive more than $199,000 payable by any source of funding when such salary is in the upper 25% of compensation paid to executives in similar operations. Factors the Department of State will consider in connection with the waiver application include: the appropriate comparability data; the complexity, nature, and size of the covered provider's operations; the provider's efforts to secure an executive with the same skill set for a lower level of compensation; and the provider's internal approval process relating to executive compensation. Covered providers must submit waiver applications by October 1, 2012.

The administrative cost provisions of the rules will, in 2013, restrict allowable administrative costs to 25% of State fund revenues. This means that at least 75% of State funds must be expended for direct care or service to clients. By 2015, administrative costs must be reduced to 15% of expenses paid by State funds. Administrative costs include salaries and benefits of administrative personnel (including executive compensation), office expenses including insurance premiums, insurance charges, staff development, marketing, and legal fees not directly connected to the provision of program services.

The Department of State will also allow for waivers relating to the restrictions on administrative costs. The application process is identical to the process for the executive compensation waiver. When considering the administrative costs wavier, the Department will weigh: the extent to which the administrative costs are necessary and avoidable; evidence that the administrative expense is needed to secure the provision of quality services; the complexity, size and nature of the covered provider's services; and the provider's efforts to monitor and control administrative expenses. Another factor for obtaining such a wavier includes the provider's efforts to find alternative sources of funding (besides State funds) to cover the administrative costs. This suggests that administrative costs paid for by funds other than State funds are outside the calculations for purposes of determining the ratio of administrative costs versus program costs.

Penalties for noncompliance will accrue only after an entity receives a warning and has a chance to correct its operations. The Department will send the covered provider notice of non-compliance to which the covered provider has 15 days to submit clarifying information. Thereafter, if the Department determines that the covered provider is non-compliant, the covered provider will need to submit a "corrective action plan" within 15 days. This plan must illustrate how the covered provider intends to achieve compliance within six months. Failure to comply with the corrective action plan can result in a final determination of noncompliance, which can result in serious penalties including suspension of the provider's license to operate the program, termination of contracts and "redirection" of State funds.

Hiscock & Barclay, LLP is following the developments of these regulations closely. Please contact Melissa M. Zambri at (518) 429-4229 or, Chair of the Firm's Health Care and Human Services Practice Area, or David P. Glasel at (212) 784-5803 or, its Chair Emeritus, to discuss the impact of these regulations and required compliance.


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