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Salary Cap Called Illegal by NY Health Agencies

ALBANY, N.Y. (CN) - New York nursing homes and assisted living facilities want a state judge to block new rules that cap their administrative costs and executive salaries.

The nonprofit and for-profit agencies, numbering more than 200, sued Gov. Andrew Cuomo and state health commissioner Nirav Shah for overstepping their bounds with the regulations, which took effect July 1.

"By issuing the executive order and regulations, respondents have exceeded their authority, circumvented the legislative process and improperly usurped the legislative function in an attempt to nullify existing statutory protections and impose their own views about how and to what extent the state should have a role in regulating the internal decisions of for-profit and not-for-profit entities in New York state," the agencies say in a complaint filed in Albany County Supreme Court.

The plaintiffs include six statewide associations that represent licensed nursing homes, assisted living programs and home care agencies, as well as 200 individually named service providers.

According to the 60-page complaint, the new rules stem from a program bill the governor released last year as part of his proposed 2012-13 state budget. The bill requires any organization with a state contract to spend at least 75 percent of the state money received on providing care and services, rather than to internal expenses like administrative costs and executive pay.

And no agency may use any portion of state funds to pay executive salaries that exceeded $199,000, according to the complaint.

The proposal "was met with an immediate outcry from for-profit and not-for-profit businesses and other stakeholders," the complaint states, leading Cuomo to recognize the bill faced a tough fight in the Legislature.

So he issued Executive Order 38 - which mirrored the bill - a few weeks later instead, the agencies say. He then directed commissioners like Shah at the Department of Health to implement regulations and carry out the order.

The plaintiffs contend New York law clearly puts the governance of for-profit and not-for-profit organizations in the hands of their own governing bodies - usually boards of directors.

"The Legislature has explicitly provided that the authority to manage the affairs of these entities belongs to the entity, which is exercised through the governing board," the complaint states. "This includes the right to hire and fix compensation for the entity's officers, directors and employees.

"As long as an entity's directors have not breached their fiduciary obligations to the entity, the exercise of their powers for the general interests of the entity many not be questioned," the agencies continue. "The decisions of governing boards (including decisions about compensation) cannot be disturbed unless they were made in bad faith or not with due care." (Parentheses in complaint.)

But the executive order "constitutes impermissible policy-making by executive fiat, without any valid constitutional or statutory authority," according to the agencies, adding that it is also an attempt by Cuomo "to contradict and nullify the clear policy choices of the Legislature. As such, the executive order violates the separation-of-powers doctrine."

Likewise, the groups say that regulations capping expenses and pay at agencies under contract with the Department of Health "impermissibly conflict with" current state law.

"The challenged regulations are an unprecedented intrusion on corporate activity and the business decisions concerning executive compensation," the agencies say in the complaint. "There is no statutory or other legal authority for the respondents' attempt to seize control of the internal compensation practices of entities that contract with the Department of Health or other state agencies."

The focus on pay and expenses "penalizes providers that efficiently operate their programs and obtain high-quality executives to lead their programs, and is plainly irrational and counterproductive to the goal of ensuring that New Yorkers receive high-quality services," the complaint states.

The agencies ask the court to enjoin Cuomo and Shah from enforcing the new regulations, and to declare the executive order and the regulations capricious and unconstitutional.

A Health Department spokesman did not return a phone call or email seeking comment on the lawsuit.

Cuomo said his executive order would "prevent public funds from being diverted to excessive compensation and unnecessary administrative costs, and will ensure that taxpayer dollars are being used to help New Yorkers in need," according to a news release archived on the governor's website.

The agencies are represented by David Luntz of Hinman Straub and Cornelius Murray of O'Connell and Aronowitz, both in Albany.

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