Source: https://casetext.com/brief/13f76fa0-in-the-matter-of-leadingage-new-york-inc-et-al-appellants-respondentsvnirav-shah-as-commissioner-of-health-et-al-respondents-appellants-proceeding-no-1-in-the-matter-of-coalition-of-new-york-state-public-health-plans-et-al-appellants-respond-1
Timestamp: 2020-04-07 03:23:27
Document Index: 778552454

Matched Legal Cases: ['art 1002', 'art 1002', 'art 1002', 'art 1002', 'ART 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'ART 1002', 'art 1002', 'art 1002', 'art 1002', 'ART 1002', 'art 1002', 'art 1002', 'ART 1002', '§ 508', '§ 32', '§ 201', '§ 206', '§ 2550', '§ 2805', '§ 2808', '§ 3610', '§ 4402', '§ 4403', '§ 363', '§ 363', '§ 363', '§ 364', '§ 163', '§ 86', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 504', '§ 504', '§ 504', '§ 504', '§ 504', '§ 504', '§ 504', '§ 430', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', '§ 1002', 'art 1002', 'art 1002', '§ 1002', 'art 1002', 'art 1002', '§ 2805', '§ 4402', '§ 163', '§ 201', '§ 206', '§ 363', '§ 504', '§ 2550', '§ 2805', '§ 3610', '§ 4403', '§ 504', '§ 504', '§ 504', '§ 504', '§ 504', '§ 504', '§ 504', '§ 504', '§ 504', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', '§ 363', '§ 201', '§ 201', '§ 206', '§ 122', '§ 206', 'art 1002', 'art 1002', '§ 1002', 'art 1002', 'art 1002', '§ 1002', 'art 1002', '§ 1002', '§ 1002', '§ 1002', 'art 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', '§ 1002', '§ 1002', 'art 1002', 'art 1002', '§ 201', '§ 206', '§ 163', '§ 363', '§ 32', 'art 1002', 'art 1002', 'art 1002', 'art 1002', '§ 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', '§ 1002', 'art 1002', '§ 1002', 'ART 1002', 'art 1002', '§ 201', '§ 206', '§ 363', 'art 1002', 'art 1002', '§ 201', 'art 1002', '§ 206', '§ 163', 'art 1002', 'art 1002', '§ 504', '§ 504', '§ 1002', 'art 1002', 'art 1002', 'art 1002', '§ 363', '§ 363', '§ 364', '§ 504', 'art 1002', 'art 504', '§ 504', '§ 504', 'art 504', '§ 363', '§ 201', 'art 1002', 'art 1002', '§ 504', '§ 201', '§ 430', '§ 363', '§ 364', '§ 32', 'art 1002', '§ 508', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', '§ 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', '§ 1002', 'art 1002', '§ 1002', '§ 1002', 'art 1002', '§ 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', '§ 2808', 'art 1002', '§ 2808', 'art 1002', '§ 2808', 'art 1002', '§ 2808', '§ 86', '§ 86', '§ 2808', 'art 1002', 'art 1002', 'art 1002', 'ART 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', '§ 1002', 'art 1002', 'art 1002', 'art 1002', '§ 1002', 'art 1002', '§ 58', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', '§ 1002', 'art 1002', 'art 1002', 'art 1002', 'ART 1002', 'art 1002', 'art 1002', 'art 1002', '§ 1002', 'art 1002', '§ 1002', '§ 1002', 'art 1002', '§ 1002', 'art 1002', '§ 1002', 'art 1002', 'art 1002', 'art 1002', 'art 1002', 'ART 1002', 'art 1002', '§ 1002', '§ 1002', 'art 1002', '§ 1002', 'art 1002', '§ 1002', '§ 1002', '§ 1002', '§ 504', '§ 504', 'art 1002', '§ 1002', '§ 1002', 'art 1002', 'art 1002', '§ 1002', '§ 1002', 'art 1002', '§ 500', '§ 500', '§ 1002', 'ART 1002', '§ 363', '§ 201', '§ 508', '§ 1002', '§1002', '§ 1002', '§ 1002', 'art 425', 'art 98', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002', '§ 1002']

No. APL-2017-00150 To be argued by: MATTHEW W. GRIECO 20 minutes requested State of New York Court of Appeals Proceeding No. 1 In the Matter of the Application of LEADINGAGE NEW YORK, INC., et al., Appellants–Cross-Respondents, For a Judgment Pursuant to Article 78 of the Civil Practice Law & Rules -against- NIRAV SHAH, as Commissioner of Health, et al., Respondents–Cross-Appellants. . Supreme Court, Albany County, Index No. 5333/13 . Proceeding No. 2 In the Matter of the Application of COALITION OF NEW YORK STATE PUBLIC HEALTH PLANS, et al., Appellants–Cross-Respondents, For a Judgment Pursuant to Article 78 of the Civil Practice Law & Rules -against- NEW YORK STATE DEPARTMENT OF HEALTH, et al., Respondents–Cross-Appellants. . Supreme Court, Albany County, Index No. 5352/13 . BRIEF FOR STATE RESPONDENTS–CROSS-APPELLANTS BARBARA D. UNDERWOOD Solicitor General STEVEN C. WU Deputy Solicitor General MATTHEW W. GRIECO Assistant Solicitor General of Counsel ERIC T. SCHNEIDERMAN Attorney General State of New York Attorney for State Respondents 28 Liberty Street New York, NY 10005 (212) 416-8014 (212) 416-8962 (facsimile) Dated: April 4, 2018 i TABLE OF CONTENTS Page TABLE OF AUTHORITIES ............................................................. v PRELIMINARY STATEMENT ........................................................ 1 QUESTIONS PRESENTED ............................................................ 4 STATEMENT OF THE CASE ......................................................... 5 A. DOH’s Obligation to Select Fiscally Responsible Private Entities for Public-Health Programs .................. 5 B. The Regulation at Issue Here: 10 N.Y.C.R.R. Part 1002 .................................................................................. 9 1. DOH’s development of Part 1002 ............................. 9 2. Requirements of Part 1002 ..................................... 11 a. Executive compensation .................................. 12 b. Administrative expenses ................................. 14 c. Waivers ............................................................ 15 d. Termination of noncompliant providers ......... 16 C. Prior Unsuccessful Challenges to Part 1002 ................. 17 D. Procedural History ......................................................... 18 1. Supreme Court decision ......................................... 19 2. Appellate Division decision .................................... 21 ARGUMENT .................................................................................. 24 ii Page POINT I DOH’S BROAD RESPONSIBILITY OVER PUBLIC HEALTH-CARE SPENDING AUTHORIZES PART 1002 .............................................. 25 A. The Legislature Has Expressly Delegated Authority to DOH to Ensure That Private Providers in Public-Health Programs Dedicate Their Resources to Program Services. ........................... 27 1. The Public Health Law specifically empowers DOH to oversee the use of public-health funds. .... 27 2. DOH is authorized to consider a prospective provider’s fiscal responsibility when it approves that provider’s participation in public-health programs. ......................................... 28 3. DOH’s power to regulate spending in specific state programs—especially Medicaid— authorizes it to adopt Part 1002. ............................ 31 4. Other statutory delegations confirm that DOH has authority to regulate the public financing of private health-care providers. ............................ 35 B. DOH Acted Well Within Its Statutory Authority When It Adopted Part 1002 to Guide Its Own Decisions in Selecting Service Providers. ...................... 36 1. Part 1002 guides DOH’s own decisions in selecting providers, rather than dictating purely private business decisions. .......................... 37 2. Part 1002 establishes a flexible benchmark— not a hard cap—to assess the reasonableness of compensation. ..................................................... 39 iii Page 3. Legislative authority for Part 1002 is inherent in DOH’s authority to oversee the funding of public health providers, and did not require express statutory mention of executive compensation or administrative expenses. ............ 42 C. The Other Statutory Arguments Raised by the LeadingAge Plaintiffs Are Meritless. ............................ 45 POINT II PART 1002 IS A CONSTITUTIONAL EXERCISE OF DOH’S AUTHORITY TO REGULATE ITS OWN EXPENDITURE OF PUBLIC HEALTH FUNDS ........................................................................... 49 A. DOH Did Not Improperly Write Part 1002 on a Blank Slate. .................................................................... 50 B. Part 1002 Does Not Improperly Balance Political, Social, and Economic Values. ........................................ 52 C. This Case Does Not Involve the Kind of Protracted Legislative Deadlock Required to Establish Boreali’s Third Factor. ................................................... 55 D. DOH Adopted Part 1002 Based on Its Comprehensive Expertise Regulating Public Health-Care Spending. .................................................. 58 E. This Court Has Never Relied on Boreali to Restrain an Agency’s Supervision of a Program That It Has Been Delegated Authority to Administer. .................................................................... 61 POINT III THE APPELLATE DIVISION CORRECTLY REJECTED THE CLAIM THAT PART 1002 IS ARBITRARY AND CAPRICIOUS ........................ 64 iv Page A. The Plaintiffs’ Challenge to Part 1002’s Rationality Is Premature. .................................................................. 64 B. Part 1002 Is a Rational Response to Past Misuse of Funds and Rising Medicaid Costs. ................................. 69 POINT IV THE APPELLATE DIVISION ERRED IN HOLDING ONE SUBSECTION OF PART 1002 BEYOND DOH’S AUTHORITY .............. 72 CONCLUSION ................................................................................ 77 ADDENDUM: 10 N.Y.C.R.R. pt. 1002 v TABLE OF AUTHORITIES Cases Page(s) Agencies for Children’s Therapy Servs., Inc. v. New York State Dept. of Health, 136 A.D.3d 122 (2d Dep’t 2015) ......................................... passim Boreali v. Axelrod, 71 N.Y.2d 1 (1987) ..................................................... 3, 20, 56, 62 Bourquin v. Cuomo, 85 N.Y.2d 781 (1995) ........................................................... 27, 56 Concerned Home Care Providers, Inc. v. New York State Dept. of Health, 134 A.D.3d 1065 (2d Dep’t 2015) ......................................... 17, 18 Ellicott Group LLC v. State of N.Y. Exec. Dept. Off. of Gen. Servs., 85 A.D.3d 48 (4th Dep’t 2011) ................................................... 30 Goodwin v. Perales, 88 N.Y.2d 383 (1996) ................................................................. 44 Greater N.Y. Taxi Assn. v. New York City Taxi & Limousine Commn., 25 N.Y.3d 600 (2015) ...................................................... 50-52, 62 Long Term Care Pharm. Alliance v. Ferguson, 362 F.3d 50 (1st Cir. 2004) ........................................................ 38 Matter of Acevedo v. New York State Dept. of Motor Vehs., 29 N.Y.3d 202 (2017) ......................................................... passim Matter of Blossom View Nursing Home v. Novello, 4 N.Y.3d 581 (2005) ................................................................... 46 Matter of Broidrick v. Lindsay, 39 N.Y.2d 641 (1976) ................................................................. 30 vi Cases Page(s) Matter of Catholic Med. Ctr. of Brooklyn & Queens v. Department of Health of State of N.Y., 48 N.Y.2d 967 (1979) ................................................................. 71 Matter of Fullilove v. Beame, 48 N.Y.2d 376 (1979) ................................................................. 30 Matter of Fullilove v. Carey, 48 N.Y.2d 826 (1979) ................................................................. 30 Matter of Gen. Elec. Capital Corp. v. New York State Div. of Tax Appeals, Tax Appeals Trib., 2 N.Y.3d 249 (2004) ............................................................. 42, 62 Matter of Jewish Home & Infirmary of Rochester v. Commissioner of N.Y. State Dept. of Health, 84 N.Y.2d 252 (1994) ................................................................. 47 Matter of Koch v. Sheehan, 21 N.Y.3d 697 (2013) ................................................................. 32 Matter of Medical Socy. of State of N.Y. v. Serio, 100 N.Y.2d 854 (2003) ............................................................... 58 Matter of Medicon Diagnostic Labs. v. Perales, 74 N.Y.2d 539 (1989) ................................................................. 32 Matter of Nakia L., 81 N.Y.2d 898 (1993) ................................................................. 65 Matter of New York State Health Facilities Assn. v. Axelrod, 77 N.Y.2d 340 (1991) ......................................................... passim Matter of New York State Ch., Inc. Associated Gen. Contrs. of Am. v. New York State Thruway Auth., 88 N.Y.2d 56 (1996) ................................................. 25, 26, 28, 29 vii Cases Page(s) Matter of New York Statewide Coalition of Hispanic Chambers of Commerce v. New York City Dept. of Health & Mental Hygiene, 23 N.Y.3d 681 (2014) ............................................... 49, 53, 62, 63 Matter of Nicholas v. Kahn, 47 N.Y.2d 24 (1979) ................................................................... 42 Matter of NYC C.L.A.S.H., Inc. v. New York State Office of Parks, Recreation & Historic Perserv., 27 N.Y.3d 174 (2016) ..................................................... 24, 49, 57 Matter of Sigety v. Ingraham, 29 N.Y.2d 110 (1971) ................................................................. 38 Perkins v. Lukens Steel Co., 310 U.S. 113 (1940) .................................................................... 43 Subcontractors Trade Assn. v. Koch, 62 N.Y.2d 422 (1984) ................................................................. 30 Under 21, Catholic Home Bur. for Dependent Children v. City of New York, 65 N.Y.2d 344 (1985) ................................................................. 30 Statutes Ch. 436, 1997 N.Y. Laws 2806 ....................................................... 10 Ch. 549, 2013 McKinney’s N.Y. Laws 1400 ................................... 57 Not-for-Profit Corporation Law § 508 ............................................ 35 Public Health Law § 32 ....................................................................................... 21, 35 § 201(1) ............................................................................... passim § 206 ................................................................................... passim § 2550 ........................................................................................... 7 § 2805 ....................................................................................... 6, 7 viii Statutes Page(s) Public Health Law (cont’d) § 2808 ................................................................................... 45, 46 § 3610 ....................................................................................... 6, 7 § 4402 ........................................................................................... 6 § 4403 ....................................................................................... 6, 7 Social Services Law § 363 ........................................................................................... 21 § 363-a ................................................................................ passim § 363-c ............................................................................ 21, 32, 35 § 364 ............................................................................... 21, 32, 35 State Finance Law § 163 ...................................................... 7, 21, 29 Regulations 10 N.Y.C.R.R. § 86-2.10 ..................................................................................... 46 § 1002.1(a) ............................................................................ 12, 14 § 1002.1(b) ................................................................ 12, 14, 54, 60 § 1002.1(d) ................................................................ 11, 12, 31, 37 § 1002.1(h) .................................................................................. 12 § 1002.1(i) ................................................................................... 14 § 1002.2(a) .................................................................................. 15 § 1002.3(a) ................................................................ 13, 72, 73, 76 § 1002.3(b) .......................................................................... passim § 1002.3(e) .................................................................................. 12 § 1002.4(a) .......................................................................... passim § 1002.4(b) ...................................................................... 15, 53, 65 § 1002.5(a) .................................................................................. 12 § 1002.6(b) .................................................................................. 16 § 1002.6(c) .................................................................................. 16 § 1002.6(d) ............................................................................ 16, 37 ix Regulations Page(s) 18 N.Y.C.R.R. pt. 504 .................................................................................. 32, 33 § 504.1(a) .......................................................................... 8, 33, 34 § 504.1(b) ................................................................................ 7, 33 § 504.1(d) .......................................................................... 9, 31, 33 § 504.2(c) ................................................................................ 8, 74 § 504.3(i) ....................................................................................... 9 § 504.4 .......................................................................................... 8 § 504.5(a) .................................................................... 8, 31, 33, 74 pt. 504, Refs & Annos (Westlaw) ............................................... 33 34 N.Y. Reg. 42 (Oct. 31, 2012) ...................................................... 10 35 N.Y. Reg. 36 (Mar. 13, 2013) ..................................................... 10 35 N.Y. Reg. 16 (Apr. 10, 2013) ...................................................... 10 35 N.Y. Reg. 12 (May 29, 2013) ...................................................... 10 42 C.F.R. § 430.0 ............................................................................ 35 Miscellaneous Authorities Black’s Law Dictionary (8th ed. 2004) ........................................... 65 N.Y. Office of the Governor, Waiver Step-by-Step Guide (rev. Jan. 20, 2015), at https://executiveorder38.ny.gov/content/waiver-step- step-guide ................................................................................... 66 N.Y. State Dep’t of Health, eMedNY: Provider Enrollment, at https://www.emedny.org/info/ProviderEnrollment/ .............. 33 N.Y. State Dep’t of Health, Strengthening New York’s Public Health System for the 21st Century (Dec. 2003), at https://www.health.ny.gov/press/reports/century/ph_21st cent.pdf ....................................................................................... 70 x Miscellaneous Authorities Page(s) N.Y. State Div. of the Budget, 2016-17 Executive Budget Briefing Book (2017), at https://www.budget.ny.gov/pubs/archive/fy17archive/eBu dget1617/fy1617littlebook/BriefingBook.pdf ............................. 69 N.Y. State Div. of the Budget, FY 2019 Enacted Budget, at https://www.budget.ny.gov/pubs/archive/fy19/enactfy19. html#enactedBills ........................................................................ 5 N.Y. State Health Found., Health Care Costs & Spending in N.Y. State (2014), at https://nyshealthfoundation.org/wp- content/uploads/2017/12/health-care-costs-in-NYS-chart- book.pdf ...................................................................................... 70 N.Y. State Procurement Council, N.Y. State Procure_ment Bulletin: Best Practices—Determining Vendor Responsibility (April 2009), at https://nyspro.ogs.ny.gov/sites/default/files/uploaded/OS CBestPracticeforVendorResponsibility.pdf ................................. 7 PRELIMINARY STATEMENT The Legislature has long delegated to the New York State Department of Health the responsibility to oversee the expenditure of scarce state funds for New York’s public-health programs, including Medicaid. A key component of DOH’s statutory responsi- bility is its selection of the private entities that will provide health- care services to needy New Yorkers. For decades, DOH has chosen such entities in part by evaluating their fiscal responsibility to ensure that they do not waste or misdirect state funds. This case involves one such regulation, 10 N.Y.C.R.R. Part 1002, which DOH adopted to ensure that public funding is provided to companies that use state funds principally for program services—i.e., health-care services for the beneficiaries of Medicaid and other programs— rather than overhead. The Appellate Division, Third Department upheld the rule almost in its entirety. This Court should affirm, while reinstating the one subsection of the regulation that the court below erroneously declared invalid. The core rationale behind Part 1002 is that public funding for health-care services should be used predominantly for the direct 2 provision of services to needy New Yorkers, rather than for overhead expenses. To achieve that purpose, Part 1002 requires DOH to choose companies that pay annual salaries of no more than $199,000 to executives who are not involved in providing health- care services to New Yorkers. Part 1002 likewise requires DOH to choose companies that devote fifteen percent or less of their overall expenditures to administrative expenses that cannot be attributed to the provision of program services. This regulation reflects the commonsense judgment that companies that spend less on execu- tive compensation and administrative expenses will spend more on providing health care. The Appellate Division correctly upheld Part 1002 as consistent with the Legislature’s intent to benefit needy New Yorkers, rather than to enrich the executives at private providers. And the Appellate Division correctly held that multiple, overlapping statutes authorize DOH’s adoption of Part 1002 to fulfill the Legislature’s broad mandate to ensure that public funds are used to provide health-care services through Medicaid and similar programs. Because Part 1002 thus falls squarely within 3 DOH’s delegated authority, it does not violate the separation-of- powers doctrine identified in Boreali v. Axelrod, 71 N.Y.2d 1 (1987). The plaintiffs’ arguments to the contrary fundamentally mischaracterize the nature and purpose of Part 1002, and disregard DOH’s authority—and responsibility—to ensure that public funds are appropriately and cost-effectively spent for their intended purposes. Indeed, this Court has never relied on Boreali to invalidate an agency’s regulation of a program that it has been delegated comprehensive authority to supervise. Doing so here would be fundamentally inconsistent both with the Legislature’s broad delegation of power to DOH to oversee the financial health of Medicaid and other public-health programs, and with DOH’s long history of supervising the appropriate expenditure of billions of dollars of state funds in such programs. And plaintiffs’ repeated assertion that Part 1002 improperly interferes with their private compensation decisions ignores DOH’s reasonable concern that excessive executive compensation and administrative expenses will divert scarce state resources away from the needy New Yorkers who are the intended beneficiaries of such funding. 4 Finally, this Court should reinstate the one subsection of Part 1002 that the Third Department declared invalid, 10 N.Y.C.R.R. § 1002.3(b). Section 1002.3(b) complements the rest of Part 1002 by considering whether the provider’s overall spending on executive compensation—from both state and non-state funds— demonstrates the fiscal prudence it is reasonable to expect of a company that seeks substantial public funding. QUESTIONS PRESENTED 1. Whether the Department of Health may choose to direct public-health funding to companies that pay reasonable rather than excessive executive compensation, in order to ensure that taxpayer money allocated for public-health services is primarily spent on those services. The Appellate Division answered in the affirmative. 2. Whether 10 N.Y.C.R.R. Part 1002 is consistent with the separation of powers. The Appellate Division answered in the affirmative, except with respect to § 1002.3(b). 5 3. Whether Part 1002 has a rational basis. The Appellate Division answered in the affirmative. 4. Whether subsection 1002.3(b) of Part 1002 is constitutional. The Appellate Division answered in the negative. STATEMENT OF THE CASE A. DOH’s Obligation to Select Fiscally Responsible Private Entities for Public-Health Programs DOH is responsible for overseeing a number of state programs that provide medical services to needy New Yorkers—the most prominent program being Medicaid. The money entrusted to DOH for public-health programs in Fiscal Year 2019—including federal Medicaid funds—will be approximately $152.7 billion. See N.Y. State Div. of the Budget, FY 2019 Enacted Budget (internet).1 Private entities play a central role in delivering publicly funded health-care services to needy New Yorkers. DOH directs a substantial portion of the funds that it administers to private 1 For sources available on the internet, full URLs appear in the table of authorities. All sites last visited April 4, 2018. 6 entities (such as nursing homes and hospitals) that directly provide such services under agreements with DOH and with local govern- ments acting on DOH’s behalf. See, e.g., Public Health Law (PHL) §§ 2805, 3610. DOH also enters into agreements with other private entities, such as health maintenance organizations, that help to administer New York’s public-health programs by, among other responsibilities, serving as intermediaries between beneficiaries and approved health-care providers. See PHL §§ 4402, 4403(1). To ensure that funds primarily reach those in need, DOH adheres to a broad variety of quality and cost controls. A critical part of DOH’s process is its careful evaluation of private entities before approving (or continuing to approve) them to participate in New York’s public-health programs—and thus to receive scarce state funding. As explained more fully below (see infra at 27-36), multiple statutes require DOH to ensure that scarce state funds are primarily spent on obtaining the public-health services that the Legislature intended to provide, and direct DOH to enter into agreements only with “responsible” business entities that DOH determines will satisfy this condition based on DOH’s assessment 7 of their “financial ability, legal capacity, integrity, and past performance.” State Finance Law (SFL) § 163(1)(c), (9)(f); see also PHL § 201(1)(o), (p); id. § 206(3), (6); Social Services Law (SSL) § 363-a(2). DOH thus has a long history of carefully scrutinizing a prospective provider’s way of doing business before determining that it is responsible enough to be entrusted with state funds, including by studying a provider’s past performance and its assets and liabilities. N.Y. State Procurement Council, N.Y. State Procure- ment Bulletin: Best Practices—Determining Vendor Responsibility 12 (April 2009) (internet). The process for the Medicaid program—the predominant source of state funding for the plaintiffs here—is illustrative.2 See 18 N.Y.C.R.R. § 504.1(b)(1). The Medicaid application process takes into account not only whether the applicant is “qualified to provide medical care,” but also whether it “can provide reasonable 2 All DOH-administered public-health programs covered by the regulation at issue here have application or approval processes. See, e.g., PHL § 2550 (approval process for Early Intervention Program for developmentally disabled children); § 2805 (approval process for hospitals); § 3610 (approval process for long term home health-care programs); § 4403 (approval process for health maintenance organizations). 8 assurance that public funds will be properly utilized.” Id. § 504.1(a). DOH may require the applicant to provide supplemental information about its “ability . . . to be financially responsible.” Id. § 504.2(c). DOH may set distinct requirements for different types of providers or for providers in different geographic areas. Id. § 504.2(c). Once an application is complete, DOH must investi- gate the applicant, id. § 504.4(a)-(d), after which it may grant the application and enroll the provider, or deny the application “if it is in the best interest of the medical assistance program to do so,” id. § 504.4(e). “In determining whether to enter into a [Medicaid] contract with an applicant,” DOH considers a lengthy list of factors, including any factor relating to the applicant’s “ability . . . to be fiscally responsible to the program.” Id. § 504.5(a)(13). An applica- tion may be denied based on “any other factor which may affect the effective and efficient administration of the program,” including the existing availability of Medicaid services in the applicant’s geogra- phic location. Id. § 504.5(a)(14). If DOH approves the application, the applicant “contracts with the department to participate” in 9 Medicaid. Id. § 504.1(d)(7). “By enrolling the [applicant] agrees . . . to comply with the rules, regulations and official directives of the department.” Id. § 504.3(i). Participants in the Medicaid program must re-enroll every five years. B. The Regulation at Issue Here: 10 N.Y.C.R.R. Part 1002 1. DOH’s development of Part 1002 In January 2012, Governor Andrew Cuomo issued Executive Order 38 (“EO 38”) to a number of his direct appointees, including the Commissioner of Health, instructing them to ensure that taxpayer funds allocated for services to needy New Yorkers are primarily spent on those services, rather than on overhead, including executive compensation (Record on Appeal [“R.”] 105- 107). In response to EO 38, DOH began to develop and draft a regulation, which is now codified at 10 N.Y.C.R.R. Part 1002. Before adopting Part 1002, DOH published a proposed rule and accepted public comments for a full year, and then made multiple rounds of 10 revisions in response to those comments,3 before adopting the final rule in May 2013 (see R. 109-154). As authority for Part 1002, DOH cited the following statutory provisions (see R. 112): ● SSL § 363-a(2), which empowers DOH to regulate the expenditure of Medicaid funds received from the federal government;4 ● PHL § 201(1)(o), which directs DOH to “regulate the financial assistance granted by the state in connection with all public health activities”; ● PHL § 201(1)(p), which empowers DOH to “receive and expend funds made available for public health purposes pursuant to law”; ● PHL § 206(3), which empowers DOH “on behalf and in the interest of the health of the people of the state [to] enter into such contracts or agreements with individuals . . . associations, [and] corporations . . . as may be deemed necessary and advisable to carry out the general intent and 3 See 34 N.Y. Reg. 42 (Oct. 31, 2012) (revised rule with assessment of public comment); 35 N.Y. Reg. 36 (Mar. 13, 2013) (revised rule with assessment of public comment); 35 N.Y. Reg. 16 (Apr. 10, 2013) (revised rule); 35 N.Y. Reg. 12 (May 29, 2013) (notice of adoption with assessment of public comment). All of the versions of the proposed rule throughout the revision process—including all public comments and DOH responses—are reproduced in full in the record (see R. 949-1122). 4 Medicaid was originally supervised by the former Department of Social Services (DSS). In 1997, Medicaid oversight was transferred to DOH, and DSS was disestablished. See Ch. 436, § 122(a), (e), 1997 N.Y. Laws 2806, 2922-23. Any residual reference in a statute or regulation to DSS authority over Medicaid is now treated as a reference to DOH. See id. 11 purposes of the public health law,” and to use such contracts to “provide for payment by the state, within the limit of funds available, for . . . services”; and ● PHL § 206(6), which allows DOH to “enter into contracts” with corporations for specific kinds of services, including home care, paramedical services, and nursing services. 2. Requirements of Part 1002 Part 1002—which is set forth in full in the Appendix to this brief—applies to a defined list of “covered provider[s],” which principally encompasses direct providers of health-care services (such as hospitals, nursing homes, and ambulance services), and also includes health-maintenance or managed-care organizations that coordinate care between beneficiaries and direct providers. See 10 N.Y.C.R.R. § 1002.1(d)(3). Only those providers that have elected to receive state funding and that derive a substantial amount of their revenue from taxpayer money are governed by Part 1002’s requirements. Specifically, Part 1002 extends to any entity or individual that: (a) has entered into a voluntary agreement “to render program services, State funds or State-authorized payments”; (b) receives an average of $500,000 or more in state 12 funding for such purposes across a two-year period; and (c) receives at least thirty percent of its in-state revenue from state funds or state authorized-payments over the same two-year period. See 10 N.Y.C.R.R. § 1002.1(d).5 Part 1002 requires that each such “covered provider” file an annual report with DOH demonstrating its compliance with the following rules. Id. § 1002.5(a). a. Executive compensation The executive-compensation requirements apply to any “director, trustee, managing partner, or officer” whose work “cannot be attributed directly to the provision of program services” and “whose executive compensation during the reporting period exceed[s] $199,000.” Id. § 1002.1(a), (b). “Program services” are “those services rendered by a covered provider or its agent directly to and for the benefit of members of the public,” id. § 1002.1(h), and 5 A covered provider must also incorporate the terms of Part 1002 into its agreement with a subcontractor or agent that will receive sufficient state funds from the covered provider to be subject to the rule in its own right. See 10 N.Y.C.R.R. § 1002.3(e). 13 the $199,000 figure reflects the highest salaries paid to executives in the federal government (R. 106).6 Unless a covered provider obtains a waiver (see infra), it may “not use State funds or State-authorized payments for executive compensation given directly or indirectly to a covered executive” for work unrelated to program services “in an amount greater than $199,000 per annum.” Id. § 1002.3(a). In addition to obtaining a waiver, a covered provider may also use non-state funds to pay a covered executive more than $199,000 if it certifies that the salary was approved by a board of directors (or similar entity) with at least two independent members and is not greater than the 75th percentile of compensation paid to comparable executives at other providers in the same area and service sector. Id. § 1002.3(b).7 6 DOH “shall review this figure annually to determine whether adjustment is necessary based on appropriate factors,” including changes in the cost of living and other factors. 10 N.Y.C.R.R. § 1002.3(a). 7 Plaintiffs refer to sections 1002.3(a) and 1002.3(b) as a “hard cap” and a “soft cap,” respectively, but these are misnomers. Both provisions set benchmarks that are adjustable according to similar flexible standards. See infra at 39-41, 74-75. The distinction between the two provisions is that a provider must apply for a waiver in order to use state funds to pay a salary above the $199,000 benchmark, whereas a provider may use non-state funds to pay a salary above $199,000 even without a waiver if the provider satisfies 14 b. Administrative expenses “Administrative expenses” are expenses that “cannot be attributed directly to the provision of program services,” including legal expenses, technology costs, and the like. Id. § 1002.1(a). As relevant here, an employee’s salary is deemed a program services expense—and not an administrative expense—to the extent that the salary supports the employee’s work directly providing services to the public, or the employee’s work otherwise “contributes directly to the quality or scope of the program services offered.”8 Id. § 1002.1(i)(1)(i). In addition, compensation of “supervisory person– nel” is treated as program services expenses to the extent that the work relates to “particular programs” and involves improving “the quality or scope of the program services provided by other personnel.” Id. § 1002.1(i)(1)(ii). Every covered provider must certify in its annual report that at least eighty-five percent of its the provisions of § 1002.3(b) relating to the independence of the board of directors and use of salary comparability surveys. 8 In the latter category, the regulation expressly identifies a hospital or similar service provider’s “chairs of departments, heads of service, chief medical officers, directors of nursing, or similar types of personnel” as employees “fulfilling administrative functions that are nevertheless directly attributable to and comprise program services.” 10 N.Y.C.R.R. § 1002.1(b). 15 total expenses are “program services expenses rather than administrative expenses.” Id. § 1002.2(a). c. Waivers Any covered provider may apply for a waiver of any of the above benchmarks for salary or administrative expenses based on “good cause.” Id. § 1002.4(a)-(b). Executive-compensation waivers may be granted based on a number of potentially relevant factors, including how the executive’s proposed compensation compares to that of executives in similar positions in the same geographic area; the extent to which being unable to pay the executive the proposed salary would have a negative effect on the provider’s ability to provide high-quality program services; the complexity of the covered provider’s operations and program services provided; the rigor and independence of the process that the covered provider uses to set its executive salaries; the qualifications and experience required for the position and possessed by the candidate or incumbent; and any efforts by the provider to secure an executive with the same levels of experience and expertise at a lower level of compensation. Id. § 1002.4(a)(2). 16 A waiver may be granted on a long-term basis or for a single reporting period, as warranted by the circumstances. Id. § 1002.4(a). DOH and the Division of the Budget (DOB) must decide a waiver application within sixty days of receiving the application. Id. § 1002.4(a)(3). d. Termination of noncompliant providers When DOH determines that a covered provider may not be in compliance with the standards for administrative expenses or executive compensation, it must afford the provider six months to achieve compliance. Id. § 1002.6(b)-(c). Thereafter, DOH may (i) “where possible and consistent with federal and state laws,” redirect the public funds paid to that provider to program services. Id. § 1002.6(d)(2)(i); (ii) suspend, modify, or revoke the provider’s license to deliver DOH program services, id. § 1002.6(d)(2)(ii); or (iii) suspend, modify, or terminate contracts or other agreements with the provider, id. § 1002.6(d)(2)(iii). 17 C. Prior Unsuccessful Challenges to Part 1002 The current cases are the latest efforts by covered providers to challenge Part 1002 as exceeding DOH’s statutory authority. An earlier round of litigation ended more than two years ago, when the Second Department rejected essentially the same arguments the plaintiffs raise here, and this Court declined to review those decisions. See Agencies for Children’s Therapy Servs., Inc. v. New York State Dept. of Health, 136 A.D.3d 122, 135 (2d Dep’t 2015) (“ACTS”) (declaring that Part 1002 is valid in its entirety); Concerned Home Care Providers, Inc. v. New York State Dept. of Health, 134 A.D.3d 1065, 1066 (2d Dep’t 2015) (“CHCP”) (declaring that EO 38 and Part 1002 “are not unconstitutional, void ab initio, or violative of the separation of powers doctrine”). In ACTS and CHCP, the Second Department held that DOH has authority to adopt Part 1002 based on statutes with a common “underlying purpose” of ensuring that DOH “obtain[s] high-quality services with limited available funds.” ACTS, 136 A.D.3d at 130. Part 1002 “directly furthers the purposes of those statutory provisions by ensuring that the DOH awards service contracts to 18 agencies that will use most of the tax dollars they receive directly on the provision of services.” Id. at 131. The court thus held Part 1002 to be an appropriate guideline for DOH to use in “making decisions as to the providers it will engage to provide public health services on behalf of the State.” Id. at 131. The plaintiffs in both ACTS and CHCP filed notices of appeal, but this Court, on its own motion, dismissed the appeals for lack of a substantial constitutional question. See ACTS, 26 N.Y.3d 1132 (2016); CHCP, 27 N.Y.3d 941 (2016). The plaintiffs then moved for leave to appeal; this Court denied those motions. See ACTS, 27 N.Y.3d 907 (2016); CHCP, 27 N.Y.3d 907 (2016). D. Procedural History This appeal involves two cases that were brought separately in Supreme Court, Albany County and consolidated by that court. The plaintiffs in Matter of LeadingAge New York, Inc. v. Shah (“LeadingAge plaintiffs”) are nursing homes, assisted-living programs, home-care agencies, and trade associations of these providers (R. 43-46, 48-54). The plaintiffs in Matter of Coalition of New York State Public Health Plans v. New York State Department 19 of Health (“Coalition plaintiffs”) are three trade associations whose members are health-care plans, health maintenance organizations, and long-term care plans (R. 639, 645-647). Both the LeadingAge plaintiffs and the Coalition plaintiffs receive significant state funds—primarily via Medicaid (R. 770). In September 2013, both sets of plaintiffs filed their complaints against DOH seeking declarations that Part 1002 is invalid because it is unconstitutional as well as arbitrary and capricious (R. 43-103, 639-670). 1. Supreme Court decision In November 2015—a few weeks before the Second Department decided ACTS and CHCP—Supreme Court, Albany County (Hartman, J.) declared Part 1002 to be valid, with the exception of one subsection (R. 3-29). Supreme Court held that the regulation was a valid exercise of DOH’s statutory responsibility to ensure that taxpayer money appropriated for services and care of the needy is actually spent for those purposes rather than on overhead, and observed that the agency “routinely” regulates spending on public-health services (R. 16). 20 Supreme Court also rejected the plaintiffs’ facial challenge to Part 1002 as arbitrary and capricious (R. 25-28). The court held that the proper way to address any perceived irrationality in the regulation would be through an as-applied C.P.L.R. article 78 petition after DOH has had “the opportunity to apply [Part 1002] in the context of a particular provider” (R. 27). However, Supreme Court declared one subsection of the regulation invalid: 10 N.Y.C.R.R. § 1002.3(b), which limits executive salaries paid in whole or in part through non-state funds to $199,000 unless the covered provider obtains a waiver or the salary was not greater than the 75th percentile of salaries at comparable providers and was approved by an independent board based on a comparability study (R. 20-24). See supra at 12-13. Supreme Court interpreted § 1002.3(b) as an attempt to regulate a company’s use of private funds and deemed it improper policymaking under Boreali v. Axelrod, 71 N.Y.2d 1, 11-12 (1987). (See R. 21-22). 21 2. Appellate Division decision The Third Department affirmed (see Record on Appeal Addendum [“RA.”] 11-28). Consistent with the Second Department’s reasoning in the earlier challenges to Part 1002, the Third Department held that Part 1002 is a reasonable exercise of DOH’s statutory authority to oversee the expenditure of public health funds;9 to assign contracts to private providers “within the limit of funds available;”10 and to promulgate regulations under the enabling statutes of particular public-health programs, such as Medicaid11 (RA. 18-19). Like the Second Department, see ACTS, 136 A.D.3d at 130, the Third Department agreed that DOH is not required to identify a statute that “expressly authorizes the creation of the administra- tive cost and executive compensation limits” (RA. 19). It pointed out that the plaintiffs “admit the breadth of DOH’s authority over the use of public health funds” and its statutory “mandate to regulate 9 PHL § 201(1)(o), (p). 10 PHL § 206(3); SFL § 163(1)(c), (9)(f). 11 SSL §§ 363, 363-a(2), 363-c(1)(a), 364(1)(b); PHL §§ 32(6), 201(1)(v). 22 what it pays for and how it spends money on the public health” (RA. 20) (quotation marks omitted). The Third Department thus rejected the plaintiffs’ Boreali arguments, finding that DOH had not attempted to impose its own policy views but had instead faithfully carried out its “statutory obligation to ensure that scarce taxpayer dollars are used efficiently and for the benefit of those who are the recipients of the services” (RA. 20-21). The court also rejected the plaintiffs’ contention that Part 1002’s exceptions and waiver provisions involved impermissible policymaking by DOH. To the contrary, the court held that these provisions furthered the rule’s purpose of guiding DOH to select providers that will offer quality services at reasonable costs (RA. 22). For example, the court pointed out that waivers are available “when the inability to pay a particular salary would damage the quality of program services in the provider’s local area” (RA. 22). The court further found no violation of Boreali based on the Legislature’s consideration of a single proposed bill similar to Part 1002. (RA. 23). The court found nothing close to “the repeated and 23 extensive failed legislative attempts” that characterized legislative debates over the smoking restrictions at issue in Boreali (RA. 24). The court also rejected the plaintiffs’ arbitrary-and-capricious challenge as “utterly devoid of merit” given the “empirical evidence and sound agency judgment” supporting Part 1002 (RA. 27). The court pointed out that the rule had been adopted after a state task force found that “certain service providers had used state funds to pay themselves excessive compensation instead of using such funds in furtherance of public health programs” (RA. 27). The court also noted that New York has experienced a surge in per capita Medicaid spending that is twice the national average (RA. 27). In any event, as did Supreme Court, the Third Department found the plaintiffs’ arbitrary-and-capricious claims “too speculative” to be brought in a facial challenge (RA. 28). Finally, although it upheld almost all of Part 1002, the Third Department affirmed the portion of Supreme Court’s order striking down § 1002.3(b), the provision relating to the payment of compensation with all funds, including non-state funds. The plaintiffs appeal, and DOH cross-appeals (see RA. 1-10). 24 ARGUMENT The Appellate Division correctly upheld most of Part 1002 as a lawful exercise of DOH’s statutory authority to (1) ensure the efficient and appropriate expenditure of billions of dollars of state public-health funds, (2) approve the private entities that will provide or administer public-health services, and (3) supervise state public-health programs, including Medicaid. Specifically, Part 1002’s benchmarks for reasonable executive compensation and administrative expenses help DOH to select those private entities that will dedicate their resources predominantly to providing health-care services to needy New Yorkers—thus directly benefitting the population that the Legislature intended to serve. Part 1002 accordingly satisfies the requirement of Boreali and its progeny that an agency act within “the parameters of the power granted by the legislature.” Matter of NYC C.L.A.S.H., Inc. v. New York State Office of Parks, Recreation & Historic Perserv., 27 N.Y.3d 174, 178 (2016). The Appellate Division erred, however, in invalidating one subsection of Part 1002 as violating Boreali. Contrary to the court’s 25 reasoning, that subsection, § 1002.3(b), complements the rest of Part 1002 and should thus likewise be upheld. The rationale that led the Appellate Division to uphold the rest of the regulation applies equally to § 1002.3(b): it is a guideline for DOH’s own decisions about how best to responsibly spend public-health funds. POINT I DOH’S BROAD RESPONSIBILITY OVER PUBLIC HEALTH- CARE SPENDING AUTHORIZES PART 1002 Part 1002 is a valid exercise of DOH’s authority under several closely related provisions of the Public Health Law and Social Services Law that share the common “underlying purpose” of ensuring that the State can “obtain[ ] high-quality services with limited available funds” (RA. 19) (quotation marks omitted). See Matter of New York State Ch., Inc. Associated Gen. Contrs. of Am. v. New York State Thruway Auth., 88 N.Y.2d 56, 67 (1996). In its notice of rulemaking (see R. 1080), DOH identified the three categories of statutory authority that authorize the rule: ● its spending authority—DOH’s statutory power to “regulate the financial assistance granted by the state in connection with all 26 public health activities” and to “receive and expend funds made available for public health purposes pursuant to law,” PHL § 201(1)(o)-(p); ● its contract authority—DOH’s statutory power to “enter into such contracts or agreements” with private providers “as may be deemed necessary and advisable to carry out the general intent and purposes of the public health law . . . within the limit of funds available,” PHL § 206(3), (6); and ● its program authority—the statutory power to “make such regulations, not inconsistent with law, as may be necessary to implement” specific programs that DOH oversees, including Medicaid, SSL § 363-a(2). Through these delegations of statutory authority, the Legislature unambiguously directed DOH “to assure prudent use of public moneys and to facilitate the acquisition of high quality goods and services at the lowest possible cost,” Matter of New York State Ch., 88 N.Y.2d at 67. As both the Second and Third Departments have agreed, Part 1002 implements this legislative policy by ensuring that “‘DOH awards service contracts to agencies that will 27 use most of the tax dollars they receive directly on the provision of services rather than upon administrative overhead and executive compensation’” (R. 20 (quoting ACTS, 136 A.D.3d at 130)). DOH thus acted consistently with the Legislature’s “basic policy decisions,” Bourquin v. Cuomo, 85 N.Y.2d 781, 785 (1995) (quotation marks omitted), when it adopted Part 1002. A. The Legislature Has Expressly Delegated Authority to DOH to Ensure That Private Providers in Public- Health Programs Dedicate Their Resources to Program Services. 1. The Public Health Law specifically empowers DOH to oversee the use of public-health funds. The Public Health Law not only empowers DOH to “receive and expend funds” for public health purposes but affirmatively instructs the agency to “regulate the financial assistance granted by the state in connection with all public health activities.” PHL § 201(1)(o)-(p). The Legislature has thus expressly delegated to DOH the authority and responsibility to oversee the public funding of New York’s health programs. This delegation rebuts the plaintiffs’ suggestion that DOH’s authority is limited to matters of substantive health policy. 28 See LeadingAge Br. at 36-38, Coalition Br. at 49-51. To the contrary, the State provides or supports health care to its residents largely through supplying “financial assistance” to health-care providers or other privately run entities. One of DOH’s most important responsibilities is thus to supervise this financial assistance by ensuring the proper use of scarce state funds. As the courts rightly held (see RA. 18-20; R. 16-17), Part 1002 is consistent with DOH’s long-standing authority to regulate spending on public- health services. 2. DOH is authorized to consider a prospective provider’s fiscal responsibility when it approves that provider’s participation in public-health programs. DOH’s express authority to enter into contracts or other agreements with private providers also empowers it to evaluate such providers’ fiscal responsibility “to assure prudent use of public moneys and to facilitate the acquisition of high quality goods and services at the lowest possible cost.” Matter of New York State Ch., 88 N.Y.2d at 67. The Legislature has specifically directed DOH to consider “the limit of funds available” when selecting the entities 29 that will provide state-funded services. PHL § 206(3). Furthermore, “[p]rior to making an award of contract,” any state agency, including DOH, must determine that the contractor is “responsible,” which requires an assessment of “the financial ability, legal capacity, integrity, and past performance” of the contractor. SFL § 163(1)(c), (9)(f). Part 1002 guides DOH in making these determinations by allowing it to assess whether a provider will responsibly use its resources when participating in public- health programs. Contrary to the plaintiffs’ assertion (see LeadingAge Br. at 29- 31; Coalition Br. at 34-35), this Court has never held that agencies are prohibited from using their contracting power as a source of regulatory authority. Rather, this Court has held only that an agency’s contract decisions cannot be driven by social goals “such as remedying racial and gender bias” that are unrelated to either guarding the public fisc or promoting the purposes of the programs the agency administers. Matter of New York State Ch., 88 N.Y.2d at 76. The decisions of this Court upon which the plaintiffs rely all fall 30 into the social-issue category, which is utterly inapposite here.12 By contrast, Part 1002 is not a social program. Instead, it is a spending regulation that ensures the appropriate and efficient use of scarce state resources for programmatic purposes—in this case public health. That is a core concern for any exercise of the State’s contracting or procurement powers. The LeadingAge plaintiffs also contend (Br. at 29 & n.4) that DOH cannot rely on its statutory contracting authority with respect to them because they areMedicaid providers and thereforedo not have contracts with DOH. They are mistaken. DOH regulations expressly state that enrollment as a Medicaid provider is a “process by which an applicant contracts with the department to participate 12 Under 21, Catholic Home Bur. for Dependent Children v. City of New York, 65 N.Y.2d 344 (1985) (regulation forbidding city contractors from discriminating based on sexual orientation); Subcontractors Trade Assn. v. Koch, 62 N.Y.2d 422 (1984) (regulation requiring ten percent of contracts to be given to local businesses); Matter of Fullilove v. Beame, 48 N.Y.2d 376 (1979) (affirmative action regulation); Matter of Fullilove v. Carey, 48 N.Y.2d 826 (1979) (same); Matter of Broidrick v. Lindsay, 39 N.Y.2d 641 (1976) (same). The LeadingAge plaintiffs (see Br. at 30-31) also point to a lower-court decision that similarly involved a regulation that was intended to confer a benefit on workers—not to protect the State’s resources or advance the goals of an agency program. See Ellicott Group LLC v. State of N.Y. Exec. Dept. Off. of Gen. Servs., 85 A.D.3d 48 (4th Dep’t 2011) (requirement that contractors pay prevailing wages to workers even where prevailing wage law did not apply). 31 in [Medicaid] as a provider of medical care, services or supplies.” 18 N.Y.C.R.R. § 504.1(d)(7); see also id. § 504.5(a) (listing factors for DOH to consider “[i]n determining whether to enter into a contract with an applicant”). Thus, every approved Medicaid provider necessarily has a “contract or other agreement” with the State to provide services, 10 N.Y.C.R.R. § 1002.1(d), and it was appropriate for DOH to rely on the statutes governing its contracting decisions to support Part 1002. 3. DOH’s power to regulate spending in specific state programs—especially Medicaid— authorizes it to adopt Part 1002. As the courts below correctly recognized (see RA. 18-19; R. 13), DOH’s authority to regulate specific programs—including Medicaid — strongly supports DOH’s authority to adopt Part 1002. Medicaid is of particular relevance to this case, as the plaintiffs here receive the vast majority of their public funds in the form of state and federal Medicaid funds. The Medicaid provision cited in DOH’s rulemaking notice, SSL § 363-a(2), authorizes the agency to promulgate any regula- tions “as may be necessary to implement” Medicaid, “to identify . . . 32 methods to contain the growth of [M]edicaid spending,” id. § 363- c(1)(a), and to “audit[] payments to providers,” id. § 364(1)(b). This Court has squarely held that “the agency charged with the responsibility of administering the [M]edicaid program has inherent authority to protect the quality and value of services rendered by providers in that program.” Matter of Medicon Diagnostic Labs. v. Perales, 74 N.Y.2d 539, 545 (1989). Because Medicaid “uses public funds to provide medical services to needy people,” DOH has the responsibility to prevent those funds from being “diverted” away from that purpose. Id. (quotation marks omitted). And “when the government is paying for the medical care of disadvantaged citizens,” it may closely supervise providers to ensure proper use of “scarce Medicaid dollars.” Matter of Koch v. Sheehan, 21 N.Y.3d 697, 700 (2013) (citing Matter of Medicon, 74 N.Y.2d at 545). DOH has thus long used its statutory authority to set criteria for approving providers for the Medicaid program. See 18 N.Y.C.R.R. pt. 504. No entity can provide Medicaid services or receive Medicaid funds without DOH’s prior approval to be enrolled 33 as a provider, id. § 504.1(b)(1), (d)(12), (17), and a provider must revalidate its enrollment at least once every five years, see N.Y. State Dep’t of Health, eMedNY: Provider Enrollment (internet). Of particular relevance here, the approval process takes into account whether a provider will use public funds responsibly. For several decades—since long before Part 1002 was adopted—part 504 has required applicants who seek to become Medicaid providers not only to “demonstrate that they are qualified to provide medical care, services, or supplies,” but also to “provide reasonable assurance that public funds will be properly utilized.” Id. § 504.1(a) (eff. Jan. 5, 1987) (emphasis added). DOH reserves authority to deny an application if it concludes the provider will not be “fiscally responsible.” Id. § 504.5(a)(13). When DOH adopted part 504, it relied on the same sources of statutory authority it relies on here: its authority over Medicaid under SSL § 363-a, as well as its broader authority over spending and contracts set forth in PHL §§ 201 and 206. See 18 N.Y.C.R.R. pt. 504, Refs & Annos (Westlaw). Like such earlier regulations, Part 1002 faithfully executes the Legislature’s directive that DOH control Medicaid costs by 34 ensuring that DOH will offer public-health services only to providers that pay reasonable rather than unreasonable executive compensation and administrative expenses, thereby ensuring that public funds will be used primarily to provide services to New Yorkers in need, rather than to cover overhead costs unrelated to direct program services. Put another way, Part 1002 reflects DOH’s commonsense judgment that a provider that spends less on executive compensation and administrative expenses unrelated to direct program services will spend more of the public funds it receives directly on the medical needs of New Yorkers. It was thus reasonable for DOH to consider providers’ relative allocation of public funds between direct program services and other purposes to determine whether “public funds will be properly utilized” if the agency approves or retains a particular provider to receive taxpayer money. 18 N.Y.C.R.R. § 504.1(a). 35 4. Other statutory delegations confirm that DOH has authority to regulate the public financing of private health-care providers. As the Appellate Division recognized (see RA. 18-19), there are a number of other statutes—beyond those cited in DOH’s rulemaking—that confirm DOH’s authority to ensure that state funds are primarily directed to program services. As the single state agency charged with administering New York State’s Medicaid program, see PHL § 201(1)(v) and 42 C.F.R. § 430.0, DOH is empowered to “identify . . . . methods to improve the efficiency and effectiveness of existing service delivery” in the Medicaid program, SSL § 363-c(1)(c); to “audit[] payments to providers of care, services and supplies” under Medicaid, SSL § 364(1)(b); and to bring enforcement actions over misuse of Medicaid funds, PHL § 32(6).13 All of these statutes point to a clearly expressed legislative policy that 13 The SSL and PHL provisions authorize the rule as to all corporations contracting with the State, including both for-profit and not-for-profit corporations (see R. 987). Since Part 1002 expressly applies to both for-profit and not-for-profit entities (see R. 1000-1001), DOH’s rulemaking notice cited Not-for-Profit Corporation Law § 508 as “[a]dditional support” for the rule insofar as it affects not-for-profit corporations (see R. 1031). But because all of the plaintiffs here are (or represent) for-profit entities, the N-PCL has little relevance to this particular proceeding (cf. Coalition Br. at 26). 36 DOH should actively seek out new ways to reduce unnecessary Medicaid spending and ensure that existing spending is directed to program services. The Appellate Division’s citation of additional law not cited by DOH was in no way a “desperate” attempt to salvage the regulation, as suggested by the Coalition plaintiffs. See Br. at 25. To the contrary, the array of statutory support cited by the Appellate Division confirms that the Legislature has expressed, in multiple overlapping ways, its authorization of DOH to oversee public-health funding. B. DOH Acted Well Within Its Statutory Authority When It Adopted Part 1002 to Guide Its Own Decisions in Selecting Service Providers. The plaintiffs’ opposition to Part 1002 fails to recognize the Legislature’s broad delegation of authority to DOH to manage the fiscal health of New York’s public-health programs—including the fiscal responsibility of the private entities in such programs. Instead, the plaintiffs attack Part 1002 by fundamentally mischaracterizing the nature and effect of this regulation, and by asserting limitations on agency authority that this Court has repeatedly rejected. 37 1. Part 1002 guides DOH’s own decisions in selecting providers, rather than dictating purely private business decisions. The plaintiffs repeatedly mischaracterize Part 1002 as an improper interference with their purely private choices. But this argument ignores the direct connection between a provider’s expenditures on program services—a core state concern—and its expenditures on executive compensation and administrative expenses unrelated to such services. Thus, far from interfering with purely private choices unconnected to matters of public concern, Part 1002 instead properly guides DOH’s own decisions about which companies it should accept to receive state funds as part of Medicaid or other publicly financed health programs. Under Part 1002, every private company remains free to pay its executives whatever it wishes. But when such a company seeks to receive state funds for a significant percentage of its revenues, DOH will consider the reasonableness of the company’s executive salaries and administrative expenses as a factor in deciding whether to approve (or continue to approve) public funding of such a company. See 10 N.Y.C.R.R. §§ 1002.1(d)(1)-(2), 1002.4(a)(2), 1002.6(d)(2). 38 Because Part 1002 thus guides DOH’s decisions in approving or retaining providers, the plaintiffs are simply wrong in presenting the regulation as an effort at “downstream regulation of revenues earned by providers” (LeadingAge Br. at 57), or an attempt to “invade the inner-workings of private companies and cap their executive compensation” (Coalition Br. at 3). If a covered provider chooses to flout Part 1002, the provider will simply lose the privilege of receiving taxpayer funds to provide public services in the future. Such a result is an entirely reasonable consequence of a provider’s noncompliance with DOH’s terms and conditions. See Matter of Sigety v. Ingraham, 29 N.Y.2d 110, 115 (1971); Long Term Care Pharm. Alliance v. Ferguson, 362 F.3d 50, 59 (1st Cir. 2004) (Medicaid providers who “think that state reimbursement is inadequate . . . must vote with their feet.”). As this Court has made clear, it is perfectly appropriate for DOH to condition continued participation in the Medicaid program on compliance with agency regulations, and a provider’s contention that it will face “harmful financial consequences if ‘forced’ to comply with the regulations” does not make the regulation unduly intrusive if the regulation 39 applies only to voluntarily participating entities. Matter of New York State Health Facilities Assn. v. Axelrod, 77 N.Y.2d 340, 350 & n.3 (1991). 2. Part 1002 establishes a flexible benchmark— not a hard cap—to assess the reasonableness of compensation. The plaintiffs also mischaracterize Part 1002 as fixing executive compensation “across the board, without any consideration of the size and complexity of the organization, geographic location, or the type of service provider.” LeadingAge Br. at 61; see also Coalition Br. at 54. This assertion simply ignores the waiver provision of § 1002.4, which makes these very factors a permissible basis for exceptions from Part 1002’s requirements when an executive salary above $199,000 is reasonable. See 10 N.Y.C.R.R. § 1002.4(a)(2). DOH recognized that the salary a provider needs to pay in order to provide quality health services will vary according to “the nature, size, and complexity of the covered provider’s operations and the program services provided,” or because “the covered provider would be unable to provide the program services . . . at the same levels of 40 quality and availability.” 10 N.Y.C.R.R. § 1002.4(a)(2)(ii)-(iii). Part 1002 thus allows deviation from the $199,000 benchmark when justified on those grounds. A provider may also justify an above-benchmark salary by showing that the position requires significant experience or expertise, and that it was unable to find an executive of that quality at a lower salary. Id. § 1002.4(a)(2)(v)-(vi). As a result, far from setting a fixed cap on executive compensation, Part 1002 instead uses $199,000 as a default benchmark, while permitting providers to seek a waiver from that benchmark if there are good reasons for doing so. This Court has squarely approved of such a method of regulation, even when no statute expressly authorized the agency to set a numerical benchmark in the first place. For example, when DOH by regulation sought to require nursing homes to take their fair share of Medicaid patients, this Court upheld DOH’s use of a numerical benchmark —each nursing home would be expected to accept Medicaid patients at a rate that was seventy-five percent of the Medicaid admission rate in a given county—while allowing nursing homes to “deviate from the standard based on various factors.” Matter of New York 41 State Health Facilities, 77 N.Y.2d at 345-47. Although no statute instructed DOH to set such a default quota, this Court rejected a challenge by a coalition of nursing homes that argued that DOH had improperly imposed “rigid requirements” without statutory authority. Id. at 350. As this Court recognized, one of the permissible ways for an agency to administer a statutory scheme is to “set forth standards which represent ideal norms subject to modification.” Id. So too here. Charged with regulating the expenditure of limited public-health funds, DOH has identified $199,000—the highest salary permitted for most executives in the federal government—as a default norm for compensation at entities whose revenue depends in large part on taxpayer money. That norm is then subject to modification based on the very factors that the plaintiffs describe as relevant to setting compensation. Nothing in DOH’s constitutive statutes or this Court’s precedents concerning agency authority prohibited DOH from adopting this commonsense approach. 42 3. Legislative authority for Part 1002 is inherent in DOH’s authority to oversee the funding of public health providers, and did not require express statutory mention of executive compensation or administrative expenses. The plaintiffs argue that DOH lacked authority to consider executive compensation and administrative expenses absent an express legislative command authorizing such consideration. See LeadingAge Br. at 17; Coalition Br. at 22. But, as the courts below correctly recognized, DOH’s general authority to oversee the funding of public-health programs and the fiscal responsibility of private providers encompasses the more specific means it has chosen to accomplish these objectives. “The cornerstone of administrative law” is agencies’ “power to fill in the interstices” of a statutory scheme after the Legislature has established a general policy. Matter of Nicholas v. Kahn, 47 N.Y.2d 24, 31 (1979). Accordingly, “an agency can adopt regulations that go beyond the text of that legislation, provided they are not inconsistent with the statutory language or its underlying purposes.” Matter of General Elec. Capital Corp. v. New York State Div. of Tax Appeals, Tax Appeals Trib., 2 N.Y.3d 249, 254 (2004). 43 Here, DOH acted well within its general authority to supervise public-health programs and ensure the proper expenditure of public funds when it focused on a set of expenditures that directly affected the cost and quality of public-health services. Such discrete spending decisions are precisely the interstitial agency actions contemplated by Kahn and General Electric. It is both inevitable and commonplace for administrative agencies to make the granular decisions about how to allocate scarce funding to pursue broader public-policy goals announced by the Legislature. As the U.S. Supreme Court has recognized, although the Legislature may “lay down guide posts” to generally guide the expenditure of public funds, “the traditional principle” of American governance is to “leav[e] purchases necessary to the operation of our Government to administration by the executive branch of Government.” Perkins v. Lukens Steel Co., 310 U.S. 113, 127 (1940). This division of responsibilities respects the separation of powers. In its annual budget, the Legislature sets DOH’s overall funding and allocates that funding to particular programs or purposes. But the Legislature rarely becomes involved in the more 44 fact-specific, individualized decision-making over which providers are best suited to provide services using those funds. In the absence of such specific legislative direction, “[a]s a practical matter, it [i]s incumbent upon [an agency] to adopt rules and regulations” to perform its responsibilities. Goodwin v. Perales, 88 N.Y.2d 383, 395 (1996). DOH—like every other agency—makes numerous decisions about the appropriate expenditure of public funds on a program-by- program and case-by-case basis. These decisions necessarily rely on the agency’s own judgments about the best way to deliver high- quality and cost-effective health-care services to New Yorkers. Every year, the Legislature directs DOH to spend a certain amount of money, but no more, on health-care services; and as a practical matter DOH must use much of that money to pay private entities to deliver those services. DOH cannot responsibly decide how to spend money on private providers without taking into account the providers’ efficiency. It is thus routine for agencies to exercise quality control in their choice of providers, even without formal regulation. Part 1002, which simply expresses DOH’s intent to do business with providers 45 that spend taxpayer money effectively, thus fits squarely within the type of decisions that any agency charged with disbursing public funds must make. C. The Other Statutory Arguments Raised by the LeadingAge Plaintiffs Are Meritless. The LeadingAge plaintiffs raise a series of additional statutory arguments to contend that Part 1002 is inconsistent with the Legislature’s policy preferences. None of these arguments has merit. First, the LeadingAge plaintiffs err in contending (see Br. at 40- 46) that Part 1002 conflicts with PHL § 2808, which sets forth the formula for calculating Medicaid payments to residential health-care facilities. But Part 1002 and PHL § 2808’s rate-setting process complement rather than conflict with each other. Part 1002 guides DOH’s evaluation of the fiscal responsibility of providers in making the threshold determination of whether to approve or retain the provider in a public-health program at all, but it does not affect the payments made to providers once they are accepted. By contrast, PHL § 2808’s rate-setting process determines how much to pay providers once accepted but does not bear on whether they should be accepted 46 in the first instance. Put simply, the question of how much providers should be paid is distinct from the question of which providers should be paid. The LeadingAge plaintiffs are thus wrong to suggest that Part 1002 is unnecessary because § 2808’s rate-setting process fully resolves any concerns DOH may have about the quality or cost of Medicaid services. Medicaid rates for nursing homes are set prospectively, based on DOH’s estimate of a nursing home’s reasonable costs. 10 N.Y.C.R.R. § 86-2.10(c)(4)(iv); see id. § 86- 2.10(d)(4)(vi), (f)(3). Although a nursing home’s rate can be thereafter “adjusted for wage differentials, inflation and changes in the level of care required by its residents,” Matter of Blossom View Nursing Home v. Novello, 4 N.Y.3d 581, 585 (2005), the rate is unaffected by the services the nursing home actually provides. The rate-setting process thus does not guarantee that the prospective payments given to a nursing home are reliably spent on services to residents. Nothing in § 2808’s rate-setting process implies that DOH must close its eyes to how efficiently and effectively a provider will spend the state funds it receives from Medicaid rate payments. 47 Moreover, the case the LeadingAge plaintiffs cite (Br. at 44) for their unconditional “right to payment” once they are accepted into the Medicaid program is inapposite. Cf. Matter of Jewish Home & Infirmary of Rochester v. Commissioner of N.Y. State Dept. of Health, 84 N.Y.2d 252 (1994). That case concerned DOH’s authority to make retroactive downward adjustments to payments already made. Id. at 257-58. Nothing in Part 1002 alters the amount of any payments previously made to cover providers, or changes any rates. Instead, Part 1002 states that a provider that pays excessive compensation may not be selected to provide services in the future. Nothing in Jewish Home—or any other authority—entitles providers to the privilege of providing future services. Next, the LeadingAge plaintiffs argue that Part 1002 interferes with the business judgment rule and a legislative judgment that it is desirable for for-profit providers to take part in the health-care industry. See Br. at 47-51. But whatever statutory authority providers may have to set executive salaries, that authority does not give them the further entitlement to participate as providers in Medicaid (or other publicly financed health programs) if DOH 48 determines that their participation is not warranted. Nor does anything in DOH’s constitutive statutes purport to forbid DOH from considering a for-profit provider’s expenditures on executive compensation as part of its review of a provider’s ability to responsibly use public funds. Likewise, merely allowing for-profit providers to participate in Medicaid and other programs does not imply that DOH is precluded from considering whether these providers are fiscally responsible. Cf. LeadingAge Br. at 51-54. The legislative judgment cited by the LeadingAge plaintiffs establishes at most that for-profit providers are eligible to participate in public-health programs; that judgment does not give them an unqualified entitlement to participate, or disable DOH from exercising its statutory role as the custodian of scarce resources to ensure those resources are used to purchase services from the most efficient and cost-effective providers. 49 POINT II PART 1002 IS A CONSTITUTIONAL EXERCISE OF DOH’S AUTHORITY TO REGULATE ITS OWN EXPENDITURE OF PUBLIC HEALTH FUNDS Because DOH acted well within its delegated statutory authority, the plaintiffs’ challenge based on the separation-of- powers doctrine set forth in Boreali is meritless, as the courts below correctly held. The four “coalescing circumstances” that this Court evaluates in applying the Boreali doctrine confirm this conclusion. Matter of New York Statewide Coalition of Hispanic Chambers of Commerce v. New York City Dept. of Health & Mental Hygiene, 23 N.Y.3d 681, 696 (2014). These circumstances are: (1) whether the agency filled in details of a broad legislative policy or instead “wrote on a clean slate . . . without benefit of legislative guidance”; (2) whether the agency “made value judgments entailing difficult and complex choices between broad policy goals to resolve social problems”; (3) whether the legislature has persistently and unsuccessfully tried to reach agreement on the issue; and (4) whether the agency used “special expertise or competence in the field to develop the challenged regulation.” Matter of NYC C.L.A.S.H., 27 50 N.Y.3d at 179-80 (quotation marks and alterations omitted). Here, all four circumstances support Part 1002’s validity. A. DOH Did Not Improperly Write Part 1002 on a Blank Slate. The statutory arguments described above dispose of the plaintiffs’ contention that DOH wrote on a blank slate here rather than filling in the details of broad legislative policy. As this Court has held, an agency does not write on a blank slate when it issues a new rule in an area “that it has always regulated . . . as to almost every detail of operation.” Greater N.Y. Taxi Assn. v. New York City Taxi & Limousine Commn., 25 N.Y.3d 600, 611 (2015). Nor does an agency write on a blank slate when it fills in the interstices of a general legislative policy; it is well-established an agency’s powers are not limited to those “expressly conferred by its authorizing statute,” but also include powers “required by necessary implication.” Matter of Acevedo v. New York State Dept. of Motor Vehs., 29 N.Y.3d 202, 221 (2017) (quotation marks omitted). Accordingly, this Court has routinely upheld even extremely detailed regulations when an agency relies on a general grant of 51 statutory authority to oversee an existing program that it has long administered. For example, the New York City Taxi and Limousine Commission was permitted to adopt highly detailed specifications for the “Taxi of Tomorrow”—without detailed statutory guidelines for those specifications—because the legislative branch “has largely left taxi regulation to the TLC, with little interference.” Greater N.Y. Taxi, 25 N.Y.3d at 611. Similarly, this court upheld a detailed regulatory scheme by the Commissioner of Motor Vehicles to address drunk driving in light of the Legislature’s grant of sweeping discretion to the Commissioner over the relicensing of suspended drivers, subject only to the Commissioner’s weighing of “the interest of the public safety and welfare.” Matter of Acevedo, 29 N.Y.3d at 221-22 (quotation marks omitted). Here, as both the Second and Third Departments have correctly recognized in upholding Part 1002, the Legislature chose to “charge the DOH with making decisions as to the providers it will engage to provide public health services on behalf of the State with the limited funds available to it, and on what terms, while ensuring that sufficient high-quality services are delivered to all New Yorkers.” 52 ACTS, 136 A.D.3d at 131. The plaintiffs’ arguments to the contrary simply restate their challenges to DOH’s statutory authority, and fail for the same reasons.14 See supra Point I. B. Part 1002 Does Not Improperly Balance Political, Social, and Economic Values. Similarly, Part 1002 does not represent an impermissible balancing by DOH of social and economic concerns. The plaintiffs are wrong to assert that Part 1002 expresses DOH’s moral or policy objection to high executive salaries in the abstract. To the contrary, as explained above, Part 1002 focuses on executive salaries only in circumstances where it is reasonable to believe such expenditures are diverting resources from public-health purposes. The regulation thus 14 For essentially the same reasons, Part 1002 does not violate the non- delegation doctrine. Cf. LeadingAge Br. at 56-58. As this Court has explained, the non-delegation and separation-of-powers doctrines are best considered together, because they are two overlapping ways of approaching the same question: whether the agency has fulfilled a function that the New York Constitution reserves to the legislative branch. See Greater N.Y. Taxi, 25 N.Y.3d at 608. Under either doctrine, enabling legislation “need not be detailed or precise as to the agency’s role” when an agency is merely administering a program it has long regulated. Id. at 609. Here, it is enough that the Legislature has allocated funds to particular programs and directed DOH to use its spending, contracting, and program powers to ensure those funds are actually spent on those services. 53 faithfully executes the Legislature’s intent that DOH ensure the expenditure of scarce state resources on providing program services. The plaintiffs assert that Part 1002’s exemptions and waiver process show that DOH engaged in improper balancing (LeadingAge Br. at 18-25; Coalition Br. at 42-45), but they are mistaken. Exceptions to a regulation run afoul of this Boreali factor when an agency makes concessions that run counter to the regulation’s core purpose. See, e.g., Matter of New York Statewide Coalition, 23 N.Y.3d at 698. Here, by contrast, as both the Second and Third Departments have now found, the waiver provisions and exceptions in Part 1002 advance, rather than undermine, the purposes of the regulation and therefore do not reflect any impermissible political judgment (see RA. 22 (citing ACTS, 136 A.D.3d at 131)). For example, although Part 1002 allows for waivers based on the stated needs of a provider, it does not do so on the grounds that the provider will be adversely affected; rather, Part 1002 requires DOH to consider whether the inability to pay a particular salary would affect the availability or quality of program services the provider is able to offer in its region. See 10 N.Y.C.R.R. § 1002.4(b)(2). 54 Similarly, Part 1002’s exemptions for certain kinds of providers and employees exclude providers that do not trigger the concerns that animated the regulation’s adoption. For example, because Part 1002’s purpose was to ensure fiscal responsibility by private providers, the regulation excludes government-run providers, which are subject to other checks on excessive spending, including accountability through the electoral process. Part 1002 also excludes Pharmacies and medical equipment suppliers that provide products, not services, , but that exclusion reflects the fact that services and products raise different concerns. When DOH purchases a product, it can directly assess the quality and value of the physical object it has received, whereas prospective measures are better suited to ensure the quality and value of intangible services. And certain types of employees (such as heads of nursing departments) are categorically excluded because DOH reasonably determined—based on its expertise supervising the health-care industry—that these types of employees by their nature will always be directly involved in the provision of program services. See, e.g., 10 N.Y.C.R.R. § 1002.1(b); cf. Coalition Br. at 43-44. 55 The plaintiffs claim—without evidence—that large private hospitals will be unaffected by the rule because they do not receive a sufficient percentage of their revenue from state funds LeadingAge Br. at 23. Even if true, such a consequence would not reveal any improper political considerations. Contrary to the plaintiffs’ characterization, the exclusion of large hospitals would not be an “exemption” but instead an appropriate result of the overall rule—if a particular entity does not receive at least thirty percent of its revenue from state funds, the risk that any salary is being paid out of state funds (as opposed to private funds) is accordingly lessened. C. This Case Does Not Involve the Kind of Protracted Legislative Deadlock Required to Establish Boreali’s Third Factor. The third Boreali factor considers whether the Legislature has repeatedly but unsuccessfully tried to resolve the same problem targeted by a regulation. Matter of Acevedo, 29 N.Y.3d at 224. A challenger’s burden in establishing this factor is particularly steep, given that “[l]egislative inaction, because of its inherent ambiguity, affords the most dubious foundation for drawing positive inferences.” 56 Bourquin, 85 N.Y.2d at 787-88 (quotation marks omitted). A party that disagrees with a regulation cannot defeat it by pointing to the Legislature’s rejection of a few bills in the same subject area as the regulation. See, e.g., Matter of Acevedo, 29 N.Y.3d at 225 (regulation restricting relicensing of drunken drivers not barred where Legislature had rejected three bills regarding post-revocation relicensing). Rather, Boreali’s third factor is present only when there has been prolonged legislative deadlock on precisely the same subject where the agency has chosen to regulate—such as the situation in Boreali, where forty bills to prohibit smoking in specific public places failed over more than a decade, see 71 N.Y.2d at 7. No similar circumstance is presented here. The LeadingAge plaintiffs point to the Nonprofit Revitalization Act of 2013 (see Br. at 10-11, 32-33), but, as the Third Department correctly recognized (see RA. 24), that act was a general revision of the laws governing New York’s non-profit sector, and does not specifically address Part 1002’s goal of supervising the use of public funds paid to both for-profit and not-for-profit health-care providers. Indeed, only one out of the 132 sections of the act even touched on matters of executive compensation, 57 and all that it did was restrict not-for-profit employees from voting on their own compensation. See Ch. 549, § 58, 2013 McKinney’s N.Y. Laws 1400, 1423. The plaintiffs also assert that the Legislature in recent years has “considered scores of bills” that relate to “executive compensation” (Coalition Br. at 9 n.4 & n.5, 48; see also LeadingAge Br. at 33), but these bills again concern general reforms of the not-for-profit sector, rather than addressing DOH’s dealings with health-care providers, whether not-for-profit or for-profit, that receive state funds. Moreover, nearly all of these bills were simply proposed and never put to a vote in either the Assembly or the Senate. As this Court has made clear, it is “misleading” to describe the Legislature as having “considered and rejected” legislation when few of the bills in question have even “passed one house of that bicameral body, and it is unclear if the others were subject to any real legislative debate.” Matter of NYC C.L.A.S.H., 27 N.Y.3d at 183. The only on-point proposal that the plaintiffs have identified is the governor’s proposal of legislation at the same time that he issued EO 38. See LeadingAge Br. 33; Coalition Br. at 47-48. But a single 58 proposal that the Legislature did not vote on comes nowhere close to the years of failed proposals at issue in Boreali. See Matter of Acevedo, 29 N.Y.3d at 225 (three failed bills not enough). And the Legislature’s inaction cannot be interpreted as a rejection of DOH authority to regulate in this area. To the contrary, as is often true in areas subject to frequently changing regulation, legislative inaction often “evinces a legislative preference to yield to administrative expertise,” rather than a rejection of administrative action. Matter of Medical Socy. of State of N.Y. v. Serio, 100 N.Y.2d 854, 866 (2003). If anything, “the absence of any legislative interference” with Part 1002 in the five years since its adoption suggests, “to some degree, that the legislature approves of [DOH’s] actions,” Matter of Acevedo, 29 N.Y.3d at 225 (quotation marks omitted). D. DOH Adopted Part 1002 Based on Its Comprehensive Expertise Regulating Public Health-Care Spending. As the Appellate Division correctly recognized, the fourth Boreali factor weighs in favor of DOH because of its “special expertise in regulating public health care spending” (RA. 25). As the trial court found, DOH has “extensive expertise” in administering the limited 59 funds available for public health-care purposes in New York and ensuring those funds are put to “efficient use,” and it brought that experience to bear in developing not only the executive compensation benchmarks themselves but also “the waiver, reporting, and penalty provisions” (R. 19-20). As discussed above, multiple statutes vest DOH with the responsibility and obligation to oversee the expenditure of scarce state resources for public-health programs. A substantial portion of DOH’s work is thus addressed to the administration, supervision, and financing of various state health programs—programs that require billions of dollars to operate. And contrary to the LeadingAge plaintiffs’ contention, DOH’s expertise has long included developing criteria for evaluating the fiscal responsibility of service providers. See supra at 6-9, 32-34. Nothing in Boreali compels a court to disregard these core competencies. The plaintiffs are also wrong in arguing that DOH did not exercise its expertise because Part 1002 was simply a “verbatim implementation of the Governor’s Executive Order.” LeadingAge Br. at 25. As the Second Department correctly noted in ACTS, Part 1002 “did not merely restate” EO 38, but rather contained “vastly 60 more detailed” provisions that were “tailored to the health sector.” 136 A.D.3d at 132. Part 1002 was “the product of the DOH’s independent research into average levels of executive compensation and administrative expenses, its industry and program management expertise, and multiple revisions based on stakeholders’ concerns.” Id. And the resulting rule contains provisions that directly draw on DOH’s understanding of the health-care sector—for example, it identifies certain jobs that, by their nature, are inseparable from the direct provision of program services and thus need not be classified as covered executives. See, e.g., 10 N.Y.C.R.R. § 1002.1(b) (noting that hospital department chairs and heads of nursing departments are not covered executives). Thus, contrary to the plaintiffs’ argument, DOH did not simply adopt a policy choice made by the governor; rather, it made its own judgment about how best to direct taxpayer money to program services. The plaintiffs also make the unusual argument that Part 1002 should be struck down because DOH coordinated its rulemaking activities with other agencies, with the result that those agencies incorporated DOH’s language into their own regulations. See 61 LeadingAge Br. at 37-38; Coalition Br. at 50. As DOH explained in its assessment of public comments, it took care to work closely with other agencies to ensure that Part 1002 operates efficiently and does not subject entities to conflicting rules when dealing with different agencies (R. 149). This coordination is precisely what a Senate committee encouraged state agencies to do, in light of the fact that “many organizations have contracts with multiple State agencies, and conflicting regulations routinely create compliance difficulties” (R. 198). It would be perverse if Boreali were applied in a manner that discourages agencies from exchanging information to ensure that their regulations impose consistent mandates. No principle requires that result. E. This Court Has Never Relied on Boreali to Restrain an Agency’s Supervision of a Program That It Has Been Delegated Authority to Administer. The plaintiffs’ reliance on the four Boreali circumstances is also inapt for a more fundamental reason. As this Court’s post-Boreali decisions have made clear, Boreali’s “overall focus” is meant to identify a particular kind of regulatory overreach: when an agency has “attempted to resolve difficult social problems concerning matters 62 of personal autonomy” by imposing the agency’s own social-value judgments on the general public. Greater New York Taxi, 25 N.Y.3d at 612-13. This Court has never applied Boreali to invalidate an agency’s traditional and familiar regulation of a program that it administers, even when the regulation goes “beyond the text of [the enabling] legislation.” Matter of General Elec., 2 N.Y.3d at 254. Both Boreali and the more recent decision in Statewide Coalition involved far-reaching social regulations that “interfere[d] with commonplace daily activities preferred by large numbers of people” in a manner that necessarily required the agency to “wrestle with complex value judgments concerning personal autonomy and economics.” Matter of New York Statewide Coalition, 23 N.Y.3d at 699. In Boreali, the New York State Public Health Council sought to use its regulatory power to resolve the divisive question of where New Yorkers should be allowed to smoke, and would have completely banned smoking in a wide variety of indoor areas throughout the State. 71 N.Y.2d at 7. In Statewide Coalition, the New York City Board of Health imposed a hard cap on the size of containers for 63 sugary beverages in an effort to constrain or influence consumer choice. 23 N.Y.3d at 698-99. Part 1002 is a far cry from the sweeping regulations struck down in Boreali and Statewide Coalition. The regulation at issue here, unlike the social-issue regulations in those cases, (1) addresses DOH’s administration of public programs that the Legislature expressly directed the agency to supervise; (2) is limited to state funding and state programs; (3) affects only providers that voluntarily elect to participate in state-managed health care programs in which they receive substantial state funds and thus willingly subject themselves to agency oversight; and (4) advances the Legislature’s policy goals by ensuring that money allocated for health-care programs is primarily directed to providing services within those programs. The concerns about agency overreach that animated Boreali are thus simply not present when, as here, an agency adopts a regulation not “to effectuate some goal of social engineering . . . [but] for the purely practical purpose of attempting to make a legislative program work.” Matter of New York State Health Facilities, 77 N.Y.2d at 349. 64 POINT III THE APPELLATE DIVISION CORRECTLY REJECTED THE CLAIM THAT PART 1002 IS ARBITRARY AND CAPRICIOUS This Court will uphold an administrative regulation as long as it “has a rational basis and is not unreasonable, arbitrary or capricious.” Matter of Acevedo, 29 N.Y.3d at 226 (quotation marks omitted). To meet the “heavy burden” of challenging a regulation as irrational, a challenger must show that it is “so lacking in reason” that it is “essentially arbitrary.” Id. (quotation marks omitted). Here, the plaintiffs’ challenge is both premature and baseless. A. The Plaintiffs’ Challenge to Part 1002’s Rationality Is Premature. The lower courts correctly found that the plaintiffs’ arbitrary- and-capricious challenge is premature and should be brought, if at all, in a subsequent C.P.L.R. article 78 proceeding alleging that DOH has unreasonably applied Part 1002 to a particular provider. The plaintiffs’ challenge here rests on the untested—and baseless—assumption that DOH will apply Part 1002 as a “cap” rather than as a flexible benchmark. As DOH has explained (see supra at 39-41; see also supra at 13 n.7), that characterization is 65 simply incorrect, because the rule provides extensive flexibility for providers to pay their executives the salaries necessary to ensure continued provision of quality health services, if they can satisfy the reasonable criteria in § 1002.4’s waiver provision. If a provider believes that DOH has wrongly denied “a request to deviate from or to adjust the standard,” an article 78 proceeding will be available to air that grievance. Matter of New York State Health Facilities, 77 N.Y.2d at 350 n.3. (To date, no provider has brought a proceeding challenging Part 1002 as applied.) There is no indication that the waiver process will be unduly burdensome. Indeed, DOH removed its original “compelling circum- stances” standard for granting a waiver because it agreed with several public comments on its initial draft of the rule that such a standard would be too demanding (R. 1004). DOH amended the regulation to require only “good cause” to obtain a waiver (R. 1004); see 10 N.Y.C.R.R. § 1002.4(a)-(b). The term “good cause” is generally understood to mean simply a valid reason. Cf. Matter of Nakia L., 81 N.Y.2d 898, 901 (1993) (the words “good cause” mean something less demanding than “special circumstances”); Black’s Law 66 Dictionary 235 (8th ed. 2004) (defining “good cause” to mean “[a] legally sufficient reason”). In other words, a waiver is available to a company that supplies DOH with an explanation for an above-benchmark salary that has a reasonable basis in the factors set forth in § 1002.4(2)— including but not limited to job qualifications, geographic area, service sector, company size, and independence of the corporate board. As DOH explained during the rulemaking, “the Department expects that waiver requests will be reasonable, and that the application will adequately document the need and justification for the wavier application” (R. 1006).15 The agency also emphasized that concerns about the “unreliability of waivers” were “misplaced,” because the rule was intentionally designed to provide clear standards for waiver eligibility and to allow long-term waivers so 15 A guide to the waiver application form is available online. See N.Y. Office of the Governor, Waiver Step-by-Step Guide (rev. Jan. 20, 2015) (internet). A waiver can be obtained by filling out a convenient online waiver form that contains easy-to-fill dialog boxes in which a provider can offer its rationale for going above the guidelines, why that decision was unavoidable, how the inability to pay the proposed salary would affect program services, and other considerations. Id. at 6. The website then allows the service provider to upload any supporting documentation the provider wishes to include. Id. at 9. 67 that providers will be able to assure executives that their salaries will continue to be paid (R. 1001-1002). Nor does Part 1002 irrationally substitute the Department’s judgment for that of private companies’ governing bodies. See LeadingAge Br. at 61. The rule allows companies to provide salary comparability data, see 10 N.Y.C.R.R. § 1002.4(a)(2)(i), (iv), and as DOH explained in its rulemaking notice, the procedures in the rule will cabin DOH’s discretion (R. 1001-1002). If DOH is unable to competently evaluate waiver requests based on the data companies choose to provide, that too can be challenged in an article 78 proceeding. Equally speculative—at best—is the plaintiffs’ contention that the regulations will be counterproductive by reducing the quality of services offered to needy New Yorkers. See LeadingAge Br. at 61-65; Coalition Br. at 52-53. Part 1002 expressly takes into account whether a provider “would be unable to provide the program services . . . at the same levels of quality and availability” if it were unable to pay a particular salary. 10 N.Y.C.R.R. § 1002.4(a)(2)(ii). There is no reason to prejudge the efficacy of this 68 provision in this facial challenge. DOH, in its judgment, has determined that the quality of services will be improved by directing that services be provided through providers that pay reasonable, rather than excessive, compensation. If that judgment proves mistaken in a particular case, judicial review is available to correct such an error. When a regulation establishes a standard and “permit[s] consideration of financial factors in deciding whether a participating [provider] may deviate from the standard,” the regulation is not irrational merely because potential caprice in application of the rule might cause “harmful financial consequences.” Matter of New York State Health Facilities, 77 N.Y.2d at 350 n.3. And facial challenges are particularly disfavored when a provider is subject to a regulation only because it voluntarily participates in a publicly funded program such as Medicaid. See id. at 350. This pre-enforcement challenge is simply the wrong vehicle for the plaintiffs’ speculation about potential adverse consequences in the future. 69 B. Part 1002 Is a Rational Response to Past Misuse of Funds and Rising Medicaid Costs. In any event, both empirical evidence and sound agency judgment support Part 1002. The regulation was adopted after a task force determined that some service providers had used state funds to pay themselves excessive compensation instead of directing those funds to public-health programs (see R. 156-164, 166-167, 396-397). For example, in 2009, a joint investigation by the Office of the Attorney General and the United States Attorney’s Office revealed that a Medicaid provider had paid inflated salaries by falsely portraying employees responsible for organization fund- raisers as “group home administrative workers” and by inflating certain employees’ professional credentials (R. 159). That provider had four executives receiving salaries of $500,000 or higher, while its competitors had at most one executive at that pay level (R. 161). Moreover, even ignoring such fraudulent conduct, broader evidence about health-care spending also supports the need to reduce spiraling health-care costs. During the 2016-17 fiscal year, DOH’s budget included $4.1 billion in regular program funding and $63 billion in state Medicaid funds. See N.Y. State Div. of the 70 Budget, 2016-17 Executive Budget Briefing Book 83 (2017). Fifteen years ago, those numbers were far lower—$1.4 billion and $37.8 billion, respectively. See N.Y. State Dep’t of Health, Strengthening New York’s Public Health System for the 21st Century 17-18 (Dec. 2003) (internet). Indeed, in recent years, New York’s per capita Medicaid spending has been nearly twice the national average—for example, in 2009, New York spent an average of $8,960 per enrollee, compared to a national average of $5,527 per enrollee. N.Y. State Health Found., Health Care Costs & Spending in N.Y. State 31 (2014) (internet). Of particular relevance to this case, a 2014 study using federal data identified the specific sectors that are driving this deviation from the national average: it is New York’s level of spending on nursing homes, home health care, and personal care that “comprises the majority of the difference between New York and average U.S. spending.” Id. at 3-4; see also id. at 35 (chart). In response to both specific instances of abuse and general- spending data, it was rational for DOH to take regulatory steps ensuring that the public funds are directed to services rather than to excessive salaries or overhead. 71 In crafting a regulation, DOH “is not confined to factual data alone but may also apply broader judgmental considerations based upon the expertise and experience of the agency.” Matter of Catholic Med. Ctr. of Brooklyn & Queens v. Department of Health of State of N.Y., 48 N.Y.2d 967, 968-69 (1979). Here, DOH reasonably applied its expertise and experience in funding a wide array of health programs to conclude that a provider that pays its top executives excessive salaries for work unrelated to program services is an inappropriate recipient of state funding primarily intended to provide those services. Through a flexible system of benchmarks and waivers, Part 1002 provides DOH with a tool to ensure that when state funds are used to pay a high level of compensation, it is because a provider has a demonstrated need to pay that salary to deliver the services it has agreed to provide. Finally, Part 1002 is not irrational because it focuses on the particular issue of excessive salaries at health-care providers, as opposed to medical suppliers, pharmacies, or government-run providers. Even assuming that the same salary concerns exist in those industries—and the aforementioned evidence suggests 72 specific reasons for DOH to focus on provider salaries first—an agency may reasonably choose to adopt a regulation targeting “part of a perceived concern.” Matter of New York State Health Facilities, 77 N.Y.2d at 350. POINT IV THE APPELLATE DIVISION ERRED IN HOLDING ONE SUBSECTION OF PART 1002 BEYOND DOH’S AUTHORITY Part 1002 identifies two complementary benchmarks for DOH to use when reviewing the fiscal responsibility of a provider of public-health services that relies “to a significant degree” on taxpayer dollars (R. 1216-1217). The provisions that the Appellate Division upheld, including § 1002.3(a), set a default $199,000 benchmark for executive compensation paid from state funds. The sole provision that the Appellate Division invalidated, § 1002.3(b), more generally allows DOH to assess whether the provider’s spending on executive compensation from all sources raises any red flags about the provider’s fiscal responsibility. Specifically, executive compensation above $199,000 paid in whole or in part from non-state sources requires a waiver under Part 1002 73 unless it is (a) approved by a board of directors (or similar entity) with at least two independent members, and (b) not greater than the 75th percentile of compensation paid to comparable executives at other providers in the same area and service sector. 10 N.Y.C.R.R. § 1002.3(b). In other words, a salary above $199,000 from non-state funds triggers Part 1002 if it is facially excessive and not subject to any independent review. In a brief discussion (see RA. 26), the Appellate Division held that § 1002.3(b) exceeded DOH’s powers because it was beyond the agency’s expertise and unduly interfered with corporations’ internal decision-making processes. Because § 1002.3(b) is supported by the same principles as the rest of the rule—and complements the benchmark set by § 1002.3(a)—this Court should reverse and uphold its validity. The Appellate Division erred in assuming that DOH’s interest in the fiscal responsibility of providers is limited to their use of state funds, and does not extend to their excessive use of non-state funds. To the contrary, the Medicaid provider enrollment process has long permitted DOH to ask an applicant to provide information relevant 74 to its overall capacity “to be financially responsible.” See 18 N.Y.C.R.R. § 504.2(c). The plaintiffs do not dispute that this review already considers providers’ private conduct: for example, DOH can deny enrollment as a Medicaid provider to an applicant that has previously been suspended by a private insurer, see id. § 504.5(a)(2), and DOH would surely be able to consider whether a provider has defrauded private patients. DOH’s consideration of these factors reflects the commonsense notion that a provider’s irresponsible decisions, even as to their private conduct or use of non-state funds, is material to whether that provider will be responsible when providing Medicaid or other public-health services. A service provider’s excessive spending on executive compensation is also relevant to this assessment of overall fiscal responsibility. If a provider spends extravagantly on executive compensation—even out of private funds—it may be a red flag that the provider will spend state funds irresponsibly as well. At a minimum, such spending warrants scrutiny and a request that the provider demonstrate the reasons for its spending. For example, if 75 a provider pays an executive a salary that is much higher than the average compensation for similar executives in the same field and geographic area, or if a high salary was not approved by an independent board of directors, it is reasonable for DOH to be concerned that the provider lacks appropriate fiscal standards. And a provider has a full and fair opportunity to address those concerns by invoking the same waiver procedures that apply to the rest of Part 1002, and justifying its non–state-funded executive compensation with reference to the size of the provider, the nature of its services, the qualifications for the position, and other logically relevant factors. See 10 N.Y.C.R.R. § 1002.4(a)(2). A provider that cannot justify a facially excessive salary under these standards may have deeper fiscal-management issues that would reasonably support a decision by DOH to look elsewhere to provide public- health services. Moreover, absent § 1002.3(b), a provider could rely very heavily on state funding but certify its compliance with the rest of Part 1002 via improper accounting—i.e., by stating in its annual report that no state funds above $199,000 were used to pay 76 executive compensation. As recognized by the portions of Part 1002 that the lower courts upheld, DOH has a legitimate interest in preventing even such indirect use of state funds to pay excessive compensation. See 10 N.Y.C.R.R. § 1002.3(a). Section 1002.3(b) thus complements DOH’s review of prospective providers’ overall fiscal responsibility. The Appellate Division’s conclusion to the contrary rests on an artificial and incorrect separation between state and non-state funds that failed to acknowledge DOH’s interest in evaluating whether a provider’s overall spending on executive compensation—from whatever financial source—demonstrates the fiscal prudence it is reasonable to expect of a company that seeks substantial public funding. 77 CONCLUSION This Court should affirm the Appellate Division order in all respects except that it should reverse that court’s declaration that § 1002.3(b) of Part 1002 is invalid. Dated: New York, New York April 4, 2018 BARBARA D. UNDERWOOD Solicitor General STEVEN C. WU Deputy Solicitor General MATTHEW W. GRIECO Assistant Solicitor General of Counsel Respectfully submitted, ERIC T. SCHNEIDERMAN Attorney General State of New York Attorney for Respondents- Cross-Appellants By: ____________________________ MATTHEW W. GRIECO Assistant Solicitor General 120 Broadway New York, NY 10271 (212) 416-8014 Reproduced on Recycled Paper /s/ Matthew W. Grieco AFFIRMATION OF COMPLIANCE Pursuant to the Rules of Practice of the New York Court of Appeals (22 N.Y.C.R.R.) § 500.13(c)(1), Matthew W. Grieco, an attorney in the Office of the Attorney General of the State of New York, hereby affirms that according to the word count feature of the word processing program used to prepare this brief, the brief contains 13,976 words, which complies with the limitations stated in § 500.13(c)(1). ______________________________ Matthew W. Grieco /s/ Matthew W. Grieco ADDENDUM § 1002.1CHAPTER XI LIMITS ON ADMINISTRATIVE EXPENSES CHAPTER XI Limits on Administrative Expenses and Executive Compensation PART Limits on Administrative Expenses and Executive Compensation PART 1002 LIMITS ON ADMINISTRATIVE EXPENSES AND EXECUTIVE COMPENSATION (Statutory authority: Social Services Law, § 363-a[2]; Public Health Law, §§ 201[l][o], [p], 206[3] and 206[6]; Not-for-Profit Corporation Law, § 508) 1002 Sec. 1002.1 Definitions. Limits on administrative expenses. Limits on executive compensation. Waivers. Reporting. Penalties. 1002.2 1002.3 1002.4 1002.5 1002.6 Historical Note Part (§§ 1002.1-1002.6) filed May 14, 2013 eff. July 1, 2013. §1002.1 Definitions. For purposes of this Part: (a) Administrative expenses are those expenses authorized and allowable pursuant to ap¬ plicable agency regulations, contracts or other rules that govern reimbursement with State funds or State-authorized payments that are incurred in connection with the covered provider’s overall management and necessary overhead that cannot be attributed directly to the provision of program services. (1) Such expenses include but are not limited to the following expenses, if otherwise au¬ thorized and allowable pursuant to applicable agency regulations, contracts or other rules that govern reimbursement with State funds or State-authorized payments: (i) that portion of the salaries and benefits of staff performing administrative and coordination functions that cannot be attributed to particular program services, including but not limited to the,executive director or chief executive officer, financial officers such as the chief financial officer or controller and accounting personnel, billing, claiming or ac¬ counts payable and receivable personnel, human resources personnel, public relations personnel, administrative office support personnel, and information technology personnel, where such expenses cannot be attributed directly to the provision of program services; (ii) that portion of legal expenses that cannot be attributed directly to the provision of program services; and (iii) that portion of expenses for office operations that cannot be attributed directly to the provision of program services, including telephones, computer systems and networks, professional and organizational dues, licenses, permits, subscriptions, publications, audit services, postage, office supplies, conference expenses, publicity and annual reports, insur¬ ance premiums, interest charges and equipment that is expensed (rather than depreciated) in cost reports, where such expenses cannot be attributed directly to the provision of program services. (2) Administrative expenses do not include: (i) capital expenses, including but not limited to non-personal service expenditures for the purchase, development, installation, and maintenance of real estate or other real prop¬ erty; or 06-20-2017 14,337 Health TITLE 10 HEALTH§ 1002.1 (ii) property rental, mortgage or maintenance expenses; or (iii) taxes, payments in lieu of taxes, or assessments paid to any unit of government; or (iv) equipment rental, depreciation and interest expenses, including expenditures for vehicles and fixed, major movable and adaptive equipment that is expensed (rather than depreciated) in cost reports; or (v) expenses and equipment that is expensed rather than depreciated in cost reports of an amount greater than $10,000 that would otherwise be administrative, except that they are ei¬ ther non-recurring (no more frequent than once every five years) or not anticipated by a covered provider (e.g., litigation-related expenses). Such expenses shall not be considered administrative expenses or program expenses for purposes of this regulation; or (vi) that portion of the salaries and benefits of staff performing policy development or research. (b) Covered executive is a compensated director, trustee, managing partner, or officer whose salary and/or benefits, in whole or in part, are administrative expenses, and any key employee whose salary and/or benefits, in whole or in part, are administrative expenses and whose execu¬ tive compensation during the reporting period exceeded $199,000. For the purposes of this defi¬ nition, the terms director, trustee, officer, and key employee shall have the same meaning as such terms in the Internal Revenue Service’s instructions accompanying Form 990, Part VII. If the number of key employees employed by the covered provider who meet this definition exceeds 10, then the covered provider shall report only those 10 key employees whose executive compensation is the greatest during the reporting period and no other key employees shall be considered covered executives. Clinical and program personnel in a hospital or other entity providing program services, including chairs of departments, heads of service, chief medical of¬ ficers, directors of nursing, or similar types of personnel fulfilling administrative functions that are nevertheless directly attributable to and comprise program services shall not be considered covered executives for purposes of limiting the use of State funds or State-authorized payments to compensate them. In the event that a covered provider pays a related organization to perform administrative or program services, the covered executives of the related organization shall also be considered covered executives of the covered provider for purposes of reporting and compli¬ ance with these regulations if more than 30 percent of such a covered executive’s compensation is derived from State funds or State-authorized payments received from the covered provider. In such a circumstance, the related organization shall not be subject to the limitations on the use of State funds or State-authorized payments for administrative expenses in section 1002.2 of this regulation solely as a result of having covered executives. (c) Covered operating expenses shall mean the sum of program services expenses and administrative expenses of a covered provider as defined in this section. (d) Covered provider is an entity or individual that: (1) has received pursuant to contract or other agreement with the department, or with an¬ other governmental entity, including county and local governments, or an entity contracting on its behalf, to render program services, State funds or State-authorized payments during the covered reporting period and the year prior to the covered reporting period, and in an average annual amount greater than $500,000 during those two years; and (2) at least 30 percent of whose total annual in-state revenues for the covered reporting pe¬ riod and for the year prior to the covered reporting period were from State funds or State- authorized payments. This percentage shall be calculated as a percentage of the total annual revenues derived from and in connection with the provider’s activities within New York State, irrespective of whether the provider derives additional revenues from activities in another state. The source of such revenues shall include those from sources outside New York State if such revenues were derived from or in connection with activities inside New York State, including, for example, contributions by out-of-state individuals or entities for in-state activities. Where applicable, a provider’s method of calculating in-state revenues for purposes of determining tax liability or in connection with completion of its financial statements shall be deemed acceptable by the department for the purpose of applying this paragraph. (3) For purposes of these regulations, the term covered provider shall exclusively mean the following facilities and entities: hospitals and nursing homes, both as defined in Public Health 14,338 Health 06-20-2017 § 1002.1CHAPTER XI LIMITS ON ADMINISTRATIVE EXPENSES Law article 28; home care services agencies, licensed home care agencies, certified home health agencies, residential health care facilities, long term home health care programs, AIDS home care programs, all as defined in Public Health Law article 36; hospice residences as defined in Public Health Law article 40; assisted living residences and enhanced assisted liv¬ ing residences as defined in Public Health Law article 46-B; ambulance services and advanced life support first response services as defined in Public Health Law article 30; adult day health care as defined in 10 NYCRR part 425; health maintenance organizations, as defined in article 44 of the Public Health Law and other entities approved to operate by the department under article 44 of the Public Health Law; intermediate care facilities as defined in article one of the Social Services Law; entities conducting evaluations or providing services in the early intervention program established in title II-A of article 25 of the Public Health Law; and as¬ sisted living programs as defined in section 461-1 of the Social Services Law; or an indepen¬ dent practice association or a manajgement contractor, as such terms are defined in 10 NYCRR Part 98, that is a related organization to a covered provider. A facility or entity listed in this definition shall not be considered a covered provider unless such provider meets the require¬ ments in paragraph (2) of this subdivision and has received State funds or State-authorized payments to provide program services during the most recent reporting period and in the year prior to that period, and in an average annual amount greater than $500,000 during those two years. (4) For purposes of this Part, the method of accounting used by the entity or individual in the preparation of its annual financial statements shall be used, except that an entity or individ¬ ual that otherwise reports to the department using a different method of accounting shall use such method. (5) An entity or individual that receives State funds or State-authorized payments directly from a managed care organization subject to the oversight of the department shall be deemed to receive State funds or State-authorized payments pursuant to contract or other agreement with the department, or with another governmental entity, to render program services. (6) The following providers shall not be considered covered providers: (i) State, county, and local governmental units in New York State, and tribal govern¬ ments for the nine New York State recognized nations, and any subdivisions or subsidiaries of the foregoing entities; (ii) individuals or entities providing child care services who are in receipt of child care subsidies pursuant to title 5-C of article 6, or section 410 of the Social Services Law, except that such providers may be considered a covered provider if it also receives State funds or State-authorized payments that are not child care subsidies pursuant to title 5-C of article 6, or section 410, of the Social Services Law and would otherwise satisfy the criteria in this definition; (iii) individual professional(s), partnerships, S corporations, or other entities, at least 75 percent of whose program services paid for by State funds or State-authorized payments are provided by the individual professional(s), by the partner(s), or by the owner(s) of the corporation or entity, rather than by employees or independent contractors employed or retained by the entity, as determined by the amounts obtained in State funds or State- authorized payments for such program services; (iv) individuals or entities providing primarily or exclusively products, rather than ser¬ vices, in exchange for State funds or State-authorized payments, including but not limited to pharmacies and medical equipment suppliers. For the purpose of applying this exception, the percentage of revenues derived from products rather than from services shall be used; ( ( and (v) entities within the same corporate family as a covered provider, including parent or subsidiary corporations or entities, except where such a corporation or entity would otherwise qualify as a covered provider but for the fact that it has received its State funds or State-authorized payments from a covered provider rather than directly from a governmental agency. (e) Covered reporting period shall mean the provider’s most recently completed annual reporting period, as defined herein, commencing on or after July 1, 2013. (f) Department means the New York State Department of Health. ( 06-20-2017 14,339 Health § 1002.1 TITLE 10 HEALTH (g) Executive compensation shall include all forms of cash and noncash payments or benefits given directly or indirectly to a covered executive, including but not limited to salary and wages, bonuses, dividends, distributions to a shareholder/partner from the current reporting period’s 1 earnings where such distributions represent compensatory or guaranteed payments or compensa¬ tory partnership profits allocation or compensatory partnership equity interest for services rendered during such reporting period, and other financial arrangements or transactions such as personal vehicles, housing, below-market loans, payment of personal or family travel, entertain¬ ment, and personal use of the organization’s property, reportable on a covered executive’s W-2 or 1099 form, except that mandated benefits (e.g., Social Security, worker’s compensation, unemployment insurance and short-term disability insurance), and other benefits such as health and life insurance premiums, and retirement and deferred compensation plan contributions that are consistent with those provided to the covered provider’s other employees shall not be included in the calculation of executive compensation. For the purposes of this definition, such benefits shall be considered consistent with those provided to other employees where the intended value of the benefit is substantially equal, even where the cost to the covered provider to provide such a benefit may differ. With respect to employer contributions to retirement and deferred compensa¬ tion plans that are not consistent with those provided to other employees, executive compensa¬ tion shall be deemed to include only those amounts contributed or accrued during the reporting period for the benefit or intended benefit of the covered executive, even if not reported on the executive’s W-2 or 1099 for that reporting period (but not those amounts that vested during such period but were contributed or accrued prior to the period). (h) Program services are those services rendered by a covered provider or its agent directly to and for the benefit of members of the public (and not for the benefit or on behalf of the State or the awarding agency) that are paid for in whole or in part by State funds or State-authorized funds. Program services shall not include: (1) policy development or research; or (2) staffing or other assistance to a State agency or local unit of government in such agency’s or government’s provision of services to members of the public. (i) Program services expenses are those expenses authorized and allowable pursuant to ap¬ plicable agency regulations, contracts or other rules that govern reimbursement with State funds or State-authorized payments that are incurred by a covered provider or its agent in direct con¬ nection with the provision of program services. (1) Such expenses include but are not limited to the following expenses, if otherwise au¬ thorized and allowable pursuant to applicable agency regulations, contracts or other rules that govern reimbursement with State funds or State-authorized payments: (i) that portion of the salaries and benefits of staff providing particular program services, including for example, employees or contractors providing direct care to individuals receiv¬ ing services, and supervisory personnel and support personnel whose work is attributable to a specific program in whole or in part and contributes directly to the quality or scope of the program services provided; (ii) that portion of the salaries and benefits of quality assurance and supervisory person¬ nel whose work is attributable in whole or in part to particular programs and contributes to the quality or scope of the program services provided by other personnel and related expen¬ ses; and (iii) that portion of expenses incurred in connection with and attributable to the provi¬ sion of particular program services, including for example, travel costs to and from the ; residences of individuals receiving services, direct care supplies, public outreach or educa¬ tion or personnel training to facilitate program services delivery, information technology and computer services and systems directly attributable to program services such as, for example, electronic patient records systems to facilitate improved patient care or computer systems used in program services delivery or documentation of program services provided, quality assurance and control expenses, and legal expenses necessary to accomplish particu¬ lar program service objectives. (2) Program services expenses do not include: (i) capital expenses, including but not limited to non-personal service expenditures for the purchase, development, installation, and maintenance of real estate or other real prop¬ erty; or ! 14,340 Health 06-20-2017 § 1002.1CHAPTER XI LIMITS ON ADMINISTRATIVE EXPENSES (ii) property rental, mortgage or maintenance expenses, except where such expenses are made in connection with providing housing to members of the public receiving program ser¬ vices from the covered provider; or (iii) taxes, payments in lieu of taxes, or assessments paid to any unit of government; or (iv) equipment rental, depreciation and interest expenses, including expenditures for vehicles and fixed, major movable and adaptive equipment that is expensed (rather than depreciated) in cost reports; or (v) expenses of an amount greater than $10,000 that would otherwise be administrative, except that they are either non-recurring (no more frequent than once every five years) or not anticipated by a covered provider (e.g., litigation-related expenses). Such expenses shall not be considered administrative expenses or program expenses for purposes of this regula¬ tion; or (vi) that portion of the salaries and benefits of staff performing policy development or research. (j) Related organization shall have the same meaning as the same term in Schedule R of the Internal Revenue Service’s Form 990 except that for purposes of this regulation a related organi¬ zation must have received or be anticipated to receive State funds or State-authorized payments from a covered provider during the reporting period. (k) Reporting period shall mean, at the provider’s option, the calendar year or, where ap¬ plicable, the fiscal year used by a provider. However, where a provider is required to file an an¬ nual cost report with the State, reporting period shall mean the reporting period applicable to said cost report, and the date required for timely submission of said cost report shall control and be the date required for the submission of the EO No. 38 disclosure form in the event such form is required to be filed pursuant to section 1002.5 of this Part. (1) State-authorized payments refer to those payments of funds that are not State funds but which are distributed or disbursed upon a New York State agency’s approval or by another governmental unit within New York State upon such approval, including but not limited to the Federal and county portions of Medicaid program payments approved by the State agency. The department shall publish a list of government programs whose funds shall be considered State- authorized payments prior to the effective date of this regulation. For purposes of this regulati State-authorized payments shall not include any payments solely for the following purposes: (1) procurement contracts awarded on a lowest price basis pursuant to section 163 of the State Finance Law; (2) awards to State or local units of government except to the extent such funds or pay¬ ments are used by such government unit to pay covered providers to provide program services through a contract or other agreement; (3) capital expenses, including but not limited to non-personal service expenditures for the purchase, development, installation, and maintenance of real estate or other real property, or equipment; f ( on, (4) direct payments of State funds or State-authorized payments, or provision of vouchers or other items of monetary value that may be used to secure specific services selected by the individual, or health insurance premiums including but not limited to New York State Health Insurance Program (NYSHIP) premium payments, or Supplemental Security Income (SSI) payments, to or on behalf of individual members of the public; (5) wage or other salary subsidies paid to employers to support the hiring or retention of their employees; (6) awards to for-profit corporations or other entities engaged exclusively in commercial or manufacturing activities and not in the provision of program services; (7) policy development or research; or (8) funds expressly intended to pay exclusively for administrative expenses, including but not limited to Community Service Program core contract funding for HIV/AIDS services programs. (m) State funds are those funds appropriated by law in the annual State budget pursuant to article VII, section 7 of the New York State Constitution. The department shall publish a list of ( 06-20-2017 14,341 Health TITLE 10 HEALTH§ 1002.1 government programs whose funds shall be considered State funds prior to the effective date of this regulation. For purposes of this Part, State funds shall not include any payments solely for the following purposes: (1) procurement contracts awarded on a lowest price basis pursuant to section 163 of the State Finance Law; (2) awards to State or local units of government except to the extent such funds or pay¬ ments are used by such government unit to pay covered providers to provide program services through a contract or other agreement; (3) capital expenses, including but not limited to non-personal service expenditures for the purchase, development, installation, and maintenance of real estate or other real property, or equipment; (4) direct payments of State funds or State-authorized payments, or provision of vouchers or other items of monetary value that may be used to secure specific services selected by the individual, or health insurance premiums including but not limited to New York State Health Insurance Program (NYSHIP) premium payments, or Supplemental Security Income (SSI) payments, to or on behalf of individual members of the public; (5) wage or salary subsidies paid to employers to support the hiring or retention of their employees; (6) awards to for-profit corporations or other entities engaged exclusively in commercial or manufacturing activities and not in the provision of program services; (7) policy development or research; or (8) funds expressly intended to pay exclusively for administrative expenses, including but not limited to Community Service Program core contract funding for HIV/AIDS services programs. Historical Note Sec. filed May 14, 2013 eff. July 1, 2013. § 1002.2 Limits on administrative expenses. (a) Limits on allowable administrative expenses. No less than 75 percent of the covered operating expenses of a covered provider paid for with State funds or State-authorized payments shall be program services expenses rather than administrative expenses. This percentage shall increase by five percent each year until it shall be no less than 85 percent in 2015 and for each year thereafter. In determining whether an expense is a program service expense or an administra¬ tive expense, a covered provider may allocate a portion of the expense to each type if such al¬ location is supported by the nature of the expense. Such allocation may include allocation of por¬ tions of an employee’s time and compensation to administrative or program services. Commencing on July 1, 2013, the limits on allowable administrative expenses pursuant to this Part shall be effective and applicable to each covered provider on the first day of each provider’s respective covered reporting period. (b) Subcontractors and agents of covered providers. The restriction on allowable administrative expenses in subdivision (a) of this section and the reporting requirements in sec¬ tion 1002.5 shall apply to subcontractors and agents of covered providers if and to the extent that such a subcontractor or agent has received State funds or State-authorized payments from the covered provider to provide program or administrative services during the reporting period and would otherwise meet the definition of a covered provider but for the fact that it has received State funds or State-authorized payments from the covered provider rather than directly from a governmental agency. A covered provider shall incorporate into its agreement with such a subcontractor or agent the terms of these regulations by reference to require and facilitate compliance. Upon request, covered providers shall promptly report to the funding or authorizing agency the identity of such subcontractors and agents, along with any other information requested by that agency or by the department or its designee. A covered provider shall not be held responsible for a subcontractor’s or agent’s failure to comply with these regulations. (c) Covered providers receiving State funds or State-authorized payments from county or lo¬ cal government or from entity contracting on its behalf. The department or its designee, rather i 1 14,342 Health 06-20-2017 § 1002.3CHAPTER XI LIMITS ON ADMINISTRATIVE EXPENSES than the county or local unit of government or an entity contracting on behalf of such govern¬ ment, shall be responsible for obtaining the necessary reporting from and compliance by such covered providers, and shall issue guidance to affected county and local governments to set forth the procedures by which the department or its designee shall do so. (d) Covered providers with multiple sources of State funds or State-authorized payments. If a covered provider receives State funds or State-authorized payments from multiple sources, the provider’s compliance with the restriction on allowable administrative expenses in subsection (a) of this section shall be determined based upon the total amount of program services expenses and administrative expenses paid for by such funding received from all of such sources. As set forth in section 1002.5, the covered provider shall report all of such State funds and State-authorized payments, and the expenses paid for by such funding, in the form and at the time specified by the department or its designee. (e) Other limits on administrative expenses. If the contract, grant, or other agreement is subject to more stringent limits on administrative expenses, whether through law or contract, such limits shall control and shall not be affected by the less stringent limits imposed by these regulations. However, the definition and interpretation of terms in this Part shall not be affected or limited by the definition or interpretation of terms in other regulations or agreements. Historical Note Sec. filed May 14, 2013 eff. July 1, 2013. § 1002.3 Limits on executive compensation. (a) Limits on executive compensation. Except if a covered provider has obtained a waiver pursuant to section 1002.4 of this Part, a covered provider as defined in this regulation shall not use State funds or State-authorized payments for executive compensation given directly or indirectly to a covered executive in an amount greater than $199,000 per annum, provided, however, that the department shall review this figure annually to determine whether adjustment is necessary based on appropriate factors and subject to the approval of the Director of the Divi¬ sion of the Budget. Commencing on July 1, 2013, the limits on executive compensation pursuant to this Part shall be effective and applicable to each covered provider on the first day of each covered provider’s respective covered reporting period. (b) Except if a covered provider has obtained a waiver pursuant to section 1002.4 of this Part, where a covered provider’s executive compensation given to a covered executive is greater than $199,000 per annum (including not only State funds and State-authorized payments but also any other sources of funding), and either: (1) greater than the 75th percentile of that compensation provided to comparable execu¬ tives in other providers of the same size and within the same program service sector and the same or comparable geographic area as established by a compensation survey identified, provided, or recognized by the department and the Director of the Division of the Budget; or (2) was not reviewed and approved by the covered provider’s board of directors or equiva¬ lent governing body (if such a board or body exists) including at least two independent direc¬ tors or voting members (or, where a duly authorized compensation committee including at least two independent directors or voting members conducted such review on behalf of the full board, such actions were not reviewed and ratified by such board), or such review did not include an assessment of appropriate comparability data; then such covered provider shall be subject to the penalties set forth in section 1002.6 of this Part. To determine whether a covered provider or related organization may be subject to penal¬ ties, such provider shall provide, upon request by the department or its designee, contempora¬ neous documentation in a form and level of detail sufficient to allow such determination to be made. (c) Program services rendered by covered executives. The limit on executive compensation pursuant to this section shall not be applied to limit reimbursement with State funds or State- authorized payments for reasonable compensation paid to a covered executive for program ser¬ vices, including but not limited to supervisory services performed to facilitate the covered provider’s program services, rendered by the executive outside of his or her managerial or policy¬ making duties. Documentation of such program services rendered shall be used by the covered ( ( ( 06-20-2017 14,343 Health § 1002.3 TITLE 10 HEALTH provider to determine that percentage, if any, of the covered executive’s compensation that is at¬ tributable to program services and that compensation shall not be considered in the calculation of his or her executive compensation. Such documentation shall be maintained and provided to the < department or its designee upon request. Clinical and program personnel in a hospital or other entity providing program services, including chairs of departments, heads of service, chief medi¬ cal officers, directors of nursing, or similar types of personnel fulfilling administrative functions that are nevertheless directly attributable to and comprise program services shall not be considered covered executives for purposes of limiting the use of State funds or State-authorized payments to compensate them. (d) Covered providers with multiple sources of State funds or State-authorized payments. If a covered provider receives State funds or State-authorized payments from multiple sources, the provider’s compliance with the limits on executive compensation in subdivision (a) shall be determined based upon the total amount of such funding received and the reimbursements received from all sources of State funds or State-authorized payments. As set forth in section 1002.5 of this Part, the covered provider shall report all of such State funds and State-authorized payments in the form specified by the department or its designee. (e) Subcontractors and agents of covered providers. The limits on executive compensation in subdivision (a) and (b) of this section and the reporting requirements in section 1002.5 of this Part shall apply to subcontractors and agents of covered providers if and to the extent that such a subcontractor or agent has received State funds or State-authorized payments from the covered provider to provide program or administrative services during the reporting period and would otherwise meet the definition of a covered provider but for the fact that it has received State funds or State-authorized payments from the covered provider rather than directly from a governmental agency. A covered provider shall incorporate into its agreement with such a subcontractor or agent the terms of these regulations by reference to require and facilitate compliance. Upon request, covered providers shall promptly report to the funding or authorizing agency the identity of such subcontractors and agents, along with any other information requested by that agency or by the department or its designee. A covered provider shall not be held responsible for a subcontractor’s or agent’s failure to comply with these regulations. (f) Covered providers receiving State funds or State-authorized payments from county or lo¬ cal government or an entity contracting on its behalf. The department or its designee, rather than the county or local unit of government or an entity contracting on behalf of such govern¬ ment, shall be responsible for obtaining the necessary reporting from and compliance by such covered providers, and shall issue guidance to affected county and local governments to set forth the procedures by which the department or it designee shall do so. (g) Other limits on executive compensation. If the contract, grant, or other agreement is subject to more stringent limits on executive compensation, whether through law or contract, such limits shall control and shall not be affected by the less stringent limits imposed by these regulations. However, the definition and interpretation of terms in this Part shall not be affected or limited by the definition or interpretation of terms in other regulations or agreements. (h) A covered provider’s contract or other agreement with a covered executive agreed to prior to July 1, 2012 shall not be subject to the limits in this section during the term of the contract, except that: (1) covered providers must apply for a waiver for any contracts or agreements with covered executives for executive compensation that exceeds or otherwise fails to comply with these regulations if such contracts or agreements extend beyond April 1, 2015; and (2) renewals of such contracts or agreements after the completion of their term must comply with these regulations. ; Historical Note Sec. filed May 14, 2013 eff. July 1, 2013. § 1002.4 Waivers. (a) Waivers of limit on executive compensation. The department or its designee and the Director of the Division of the Budget may grant a waiver to the limits on executive compensa- 14,344 Health 06-20-2017 § 1002.4CHAPTER XI LIMITS ON ADMINISTRATIVE EXPENSES tion in section 1002.3 of this Part for executive compensation for one or more covered execu¬ tives, or for one or more positions, during the reporting period and, where appropriate, for a lon¬ ger period upon a showing of good cause. To be considered, an application for such a waiver must comply with this subdivision in its entirety. (1) The application must be filed no later than concurrent with the timely submission.of the covered provider’s EO No. 38 disclosure form required pursuant to section 1002.5 of this Part for the reporting period for which the waiver is requested. The application shall be transmitted in the manner and form specified by the department or its designee and the Director of the Division of the Budget. The department shall consider untimely waiver applications where a reasonable cause for such delay is shown. (2) The following factors, in addition to any other deemed relevant by the department or its designee and the Director of the Division of the Budget, shall be considered in the determina¬ tion of whether to grant a waiver: (i) the extent to which the executive compensation that is the subject of the waiver is comparable to that given to comparable executives in other providers of the same size and within the same program service sector and the same or comparable geographic area; (ii) the extent to which the covered provider would be unable to provide the program services reimbursed with State funds or State-authorized payments at the same levels of quality and availability without obtaining reimbursement for executive compensation given to a covered executive in excess of the limits in section 1002.3 of this Part; (iii) the nature, size, and complexity of the covered provider’s operations and the program services provided; (iv) the provider’s review and approval process for the executive compensation that is the subject of the waiver, including whether such process involved a review and approval by the board of directors or other governing body (if such a board or body exists), whether such review was conducted by at least two independent directors or independent members of the governing body, whether such review included an assessment of comparability data includ¬ ing a compensation survey, and contemporaneous substantiation of the deliberation and de¬ cision to approve such executive compensation; (v) the qualifications and experience possessed by or required for the covered execu- tive(s) or position(s), respectively; and (vi) the provider’s efforts, if any, to secure executives with the same levels of experi¬ ence, expertise, and skills for the positions of covered executives at lower levels of compensation. (3) A waiver to the limits set forth in section 1002.3 of this Part shall be granted only where a covered provider has demonstrated good cause supporting such a waiver, and has provided any documentation requested by the department or its designee or the Director of the Division of the Budget to support such a waiver. Unless additional information has been requested but not received from the covered provider, a decision on a timely submitted waiver application shall be provided no later than 60 calendar days after submission of the application. (4) If granted, a waiver to a covered provider shall remain in effect for the period of time specified by the department or its designee and the Director of the Division of the Budget for the covered executive position(s) at issue, but shall be deemed revoked when: (i) the executive compensation that is the subject of the waiver increases by more than five percent in any calendar year; or (ii) upon notice provided at the discretion of the department or its designee as a result of additional relevant circumstances. (5) Unless already publicly disclosed, information provided by a covered provider to the department in connection with a waiver application regarding the limits on executive compensation shall not be subject to public disclosure under the State’s Freedom of Informa¬ tion Law. (b) Waivers of limit on reimbursement for administrative expenses. The department or its designee and the Director of the Division of the Budget may grant a waiver to obtain reimburse- ( ( 06-20-2017 14,345 Health TITLE 10 HEALTH§ 1002.4 ment for administrative expenses incurred during the reporting period and thereafter in excess of the limit set forth in section 1002.2 of this Part upon a showing of good cause. To be considered, an application for such a waiver must comply with this subdivision in its entirety. (1) The application must be filed no later than concurrent with the timely submission of the covered provider’s EO No. 38 disclosure form for the period for which the waiver is requested, as required pursuant to section 1002.5 of this Part. The department shall consider untimely waiver applications where a reasonable cause for such delay is shown. (2) The following factors, in addition to any others deemed relevant by the department or its designee and the Director of the Division of the Budget, shall be considered in the determi¬ nation of whether to grant a waiver: (i) the extent to which the administrative expenses that are the subject of the waiver are necessary or avoidable; (ii) evidence that a failure to reimburse specific administrative expenses that are the subject of the waiver would negatively affect the availability or quality of program services in the covered provider’s geographic area; (iii) the nature, size, and complexity of the covered provider’s operations and the program services provided; (iv) the provider’s efforts to monitor and control administrative expenses and to limit requests for reimbursement for such costs; and (v) the provider’s efforts, if any, to find other sources of funding to support its administrative expenses and the nature and extent of such efforts and funding sources. (3) A waiver to the limit set forth in section 1002.2 of this Part shall be granted only where a covered provider has demonstrated good cause supporting such a waiver, and has provided any documentation requested by the department or its designee or the Director of the Division of the Budget to support such a waiver. Unless additional information has been requested but not received from the covered provider, a decision on a timely submitted waiver application shall be provided no later than 60 calendar days after submission of the application. (4) If granted, a waiver granted to a covered provider shall remain in effect only for the reporting period, except that the covered provider may request in its waiver application and the department or its designee and the Director of the Division of the Budget may grant an exten¬ sion of the effective period of such waiver when the waiver is granted. (5) Unless already publicly disclosed, information provided by a covered provider to the department in connection with a waiver application regarding the limit on administrative ex¬ penses shall not be subject to public disclosure under the State’s Freedom of Information Law. (c) Denial of waiver request. (1) If the department or its designee or the Director of the Division of the Budget proposes to deny a request for waiver made pursuant to this section the applicant shall be given written notice of the proposed denial, stating the reason or reasons for such proposed denial. Such notice shall be sent by certified mail and shall be a final determina¬ tion to be effective 30 calendar days from the date of the notice, unless reconsideration is requested. (2) If the department or its designee or the Director of the Division of the Budget provides a notice of proposed denial, the applicant may request reconsideration of the proposed denial by submitting a written request for reconsideration within 30 calendar days of the date of the notice of proposed denial. Submission of a request for reconsideration within 30 calendar days shall stay any action to deny an applicant’s request for a waiver, pending a decision regarding such request for reconsideration, and shall stay any action to enter into a contract or other agreement. Any vouchers submitted by the applicant for payment by the department during which such reconsideration is pending may be considered incomplete at the department’s discretion. (3) The written request for reconsideration shall be signed by the owner(s) or chief execu¬ tive officer of the applicant, and shall include all information the applicant wishes to be considered, including any written documentation that would controvert the reason(s) for the denial or disclose that the denial was based upon a mistake of fact. (4) If the applicant properly seeks reconsideration of the proposed denial, the department or its designee or the Director of the Division of the Budget shall review the proposed denial i i i 14,346 Health 06-20-2017 § 1002.6CHAPTER XI LIMITS ON ADMINISTRATIVE EXPENSES and shall issue a written determination after reconsideration. The determination after reconsideration may affirm, revoke, or modify the proposed denial. Such determination shall be a final decision. Historical Note Sec. filed May 14, 2013 eff. July 1, 2013. § 1002.5 Reporting. (a) Reporting by covered providers. Beginning after the effective date of this regulation, covered providers shall submit a completed EO No. 38 disclosure form for each covered report¬ ing period. Such form shall be submitted no later than 180 calendar days following the covered reporting period, unless otherwise authorized. Such form shall be submitted in the manner and form specified by the department or its designee. Covered providers shall further provide the in¬ formation requested in that form, and any other information requested, upon the request of the department or its designee at any time during the term of or prior to the execution of any contract or agreement with such provider. (b) Covered providers receiving State funds or State-authorized payments from county or lo¬ cal government or an entity contracting on behalf of such government must report directly to the department as required by this section. The county or local government shall advise such covered providers of their obligation to report directly to the department under this section, but shall not be responsible for receiving or forwarding such reports to the department. (c) Failure to report. A covered provider’s failure to submit a completed EO No. 38 disclosure form, or to provide additional or clarifying information at the request of the depart¬ ment or its designee, may result in the termination or non-renewal of a contract or agreement for State funds or State-authorized payments. \ Historical Note Sec. filed May 14, 2013 eff. July 1, 2013. . § 1002.6 Penalties. (a) Notice of preliminary determination of non-compliance. Whenever it is determined that a covered provider may not be in compliance with the requirements of section 1002.2 or 1002.3 of this Part and has not obtained a waiver, the provider shall be notified in writing of the basis for that determination. Such notice shall provide the covered provider with an opportunity and a pro¬ cedure to submit additional or clarifying information within 30 calendar days of the provider’s receipt of such notice to demonstrate compliance with this Part. Failure to submit additional or clarifying information within the required time period shall result in the determination of non- compliance becoming final. (b) Corrective action period. If the determination of non-compliance becomes final as set forth in subdivision (a) of this section or if the department or its designee determines, after reviewing and considering any information submitted by the covered provider, that such provider is not in compliance with the requirements of section 1002.2 or 1002.3 of this Part, the provider shall receive notice of such determination and a notice to cure. Such notice shall allow the covered provider a period of not less than six months to correct the violation(s) identified (the corrective action period) prior to additional enforcement action or penalties being imposed, and shall require that the covered provider submit within 30 calendar days a corrective action plan (CAP) for approval by the department or its designee. (c) Corrective action plan. Within 30 calendar days of receipt of the covered provider’s CAP, the department or its designee shall either approve such CAP or request clarification or alterations. The covered provider shall make such alterations to the CAP as may be reasonably required by the department or its designee. Once the CAP has been approved and the covered provider notified, and unless otherwise provided in the approved CAP, the covered provider shall have six months to complete the CAP and comply with this Part. (d) Failure to cure. At the conclusion of the period for implementation of an approved CAP, the department or its designee may request information from the covered provider to determine whether the CAP has been fully and properly completed. If it has been so completed, the matter i ( 06-20-2017 14,347 Health ! § 1002.6 TITLE 10 HEALTH shall be considered closed and no further action on the part of the department or the provider shall be required. If the department or its designee determines that the CAP has not been fully and properly implemented within the designated corrective action period, the department or its designee shall provide written notice to the provider and may take one or more of the following actions, taking into account the seriousness of the violations, the nature of the provider’s ser¬ vices, and the provider’s efforts to correct the violations, if any: (1) At its sole discretion, modify the CAP and/or extend the time for the provider to complete implementation. (2) Issue a final determination of non-compliance, together with a notice of the sanctions which the department seeks to impose. Such sanctions may include: (i) Redirection of State funds or State-authorized payments to be used to provide program services, where possible and consistent with Federal and State laws; (ii) Suspension, modification, limitation, or revocation of the provider’s license(s) to operate program(s) for the delivery of program services; (iii) Suspension, modification or termination of contracts or other agreements with the covered provider; and (iv) Any other lawful actions or penalties deemed appropriate by the department or its designee. (e) Opportunity for appeal. Within 30 calendar days of receipt of a final determination of noncompliance and notice of proposed sanctions, a covered provider may request an administra¬ tive appeal by submitting a written request to the name and address set forth in the notice. The request must include a detailed explanation of the legal and factual bases for the provider’s chal¬ lenge to the determination and all documentation in support of the provider’s position. If a request for an administrative appeal is not made within the required 30 calendar days, the deter¬ mination of noncompliance shall become final and the proposed sanction shall be imposed. Un¬ less the department seeks to impose a sanction for which an administrative hearing is otherwise required by statute or regulation, the covered provider’s appeal shall be limited to an administra¬ tive review of the record. Following the review, the covered provider shall be provided with a final written determination setting forth the findings of fact and conclusions of law that support the determination. If the provider is found to be non-compliant, the proposed sanction may be imposed forthwith. ! Historical Note Sec. filed May 14, 2013 eff. July 1, 2013. I 5 14,348 Health 06-20-2017