IMPORTANT Albany Update: Executive Compensation/Administrative Expenses Cap Regulation Adopted by NYS Agencies

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5/30/13 Albany Update: Executive Compensation/Administrative Expense Cap Regulations Adopted by State Agencies- Effective July 1, 2013

On May 29th, 13 state agencies issued Notices of Adoption for final regulations to limit spending for administrative costs and executive compensation for state funded not-for-profit and for-profit service providers. The regulations are designed to implement Executive Order 38, issued by Governor Cuomo in January 2012 to limit excessive compensation and administrative expenses at service providers that receive state funds or state-authorized payments of federal funds. Below is a summary of the provisions of the final rule followed by links to the full text of the NYSDOH adopted regulation and to the State Register to access each agency’s adopted rule which should not vary substantively from the NYSDOH regulation text.

 

The regulation takes effect July 1, 2013 for covered providers.  Please let us know if you have any questions.

 

Covered Providers:

The definition of covered provider in the regulation is as follows: “covered provider” shall exclusively mean the following facilities and entities: hospitals and nursing homes, both as defined in public health 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 living 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 assisted living programs as defined in section 461-l of the social services law; or an independent practice association or a management 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 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 and received at least 30% of their annual funding from the state.

The following providers shall not be considered covered providers:

  • State, county, and local governmental units in New York State, and tribal governments for the nine New York State recognized nations, and any subdivisions or subsidiaries of the foregoing entities;
  • 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;
  • Individual professional(s), partnerships, S Corporations, or other entities, at least seventy-five 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;
  • Individuals or entities providing primarily or exclusively products, rather than services, 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
  • 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.

 

Executive Compensation:

The regulations restrict covered providers from spending more than $199,000(to be reviewed annually) in state funds for the compensation of an executive. If a provider chooses to pay an executive more than $199,000 from other sources, the provider must keep compensation below the top 25 percent in the field or the Board of Directors including two independent directors or voting members much provide a review based upon comparability data (1002.3(b). A waiver discussed below provides exceptions to these provisions.

The definition of a covered executive (director, trustee, officer, and key employee) will have the same meaning as defined by the IRS under Form 990.  If the provider has more than ten key employees meeting the definition then only ten have to be reported under the regulations. In addition, clinical  and program personnel in a hospital or other entity providing program services including chairs of departments, heads of service, chief medical officers, directors of nursing or similar types of personnel fulfilling administrative functions shall not be considered covered executives.

Executive compensation will include under the regulations basically any income reportable on a covered executive’s W-2 form with the exception of mandated benefits, health and life premiums, and pension and deferred compensation plans consistent with other employees of the provider.

If a provider chooses to pay an executive more than $199,000 from other sources, the provider must keep compensation below the top 25 percent in the field, as determined by a compensation survey identified or recognized by the applicable state agency. Providers that pay an executive more than $199,000 must have the compensation approved by its board of directors, including at least two independent directors and must have performed a review of comparability data. In cases where competitive imperatives or the complexity of a provider’s operations require compensation that exceeds the limits and in other instances, providers may apply for a waiver (waiver information below).

 

Administrative Expenses:

The regulations require that commencing on July 1, 2013 at least 75% of a covered provider’s covered operating expenses paid for with state funds are for program services rather than administrative costs. This percentage will increase by 5% each year until it reaches 85% in 2015 and thereafter. Waivers will be granted in certain limited circumstances as defined in regulation.

It further defines Administrative expenses as those authorized and allowable pursuant to applicable 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.  Such expenses include but are not limited to:

  • that portion of 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 accounts 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;
  • that portion of legal expenses that cannot be attributed directly to the provision of program services; and
  • 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, staff development, publicity and annual reports, insurance 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.

 

The regulations recognize that a portion of expenses may be attributed directly to the provision of program services and therefore not included in the percentage cap on administrative expenses. The rule also expands upon list of what administrative expenses will not include:

  • 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
  • property rental or maintenance expenses; or
  • taxes or assessments paid to any unit of government, or, where applicable, distributions made to a shareholder to reimburse or offset the shareholder’s payment of taxes; or
  • equipment rental, depreciation and interest expenses, including expenditures for vehicles and fixed, major movable and adaptive equipment and equipment that is expensed (rather than depreciated) in cost reports; or
  • expenses of an amount greater than $10,000 that would otherwise be administrative, except that they are either non-recurring (no more frequent that once every five years) or not anticipated by a covered provider (unanticipated litigation-related expenses).  Such expenses shall not be considered administrative expenses or program expenses for purposes of the regulation; or
  • that portion of salaries and benefits of staff performing policy development or research.

 

In addition, the revised regulation includes a new definition of covered operating expenses to mean the sum of program services expenses and administrative expenses of a covered provider (as defined in regulation).

 

Under the regulation, program services expenses are those authorized and allowable pursuant to applicable 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 connection with the provision of program services.

 

Program services expenses include but are not limited to the following expenses, if otherwise authorized and allowable pursuant to applicable agency regulations, contracts or other rules that govern reimbursement with State funds or State-authorized payments:

  • that portion of salaries and benefits of staff providing particular program services, including for example employees or contractors providing direct care to clients, 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;
  • that portion of salaries and benefits of quality assurance and supervisory personnel 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 expenses; and
  • that portion of expenses incurred in connection with and attributable to the provision of particular program services, including for example, travel costs to and from client residences, direct care supplies, public outreach or education 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 particular program objectives.

 

Program services expenses do not include:

  • 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
  • property rental, mortgage or maintenance expenses, except where such expenses are made in connection with providing housing to members of the public receiving program series from the covered provider;
  • taxes or assessments paid to any unit of government or, where applicable, distributions made to a shareholder to reimburse or offset the shareholder’s payment of taxes; or
  • equipment rental, depreciation and interest expenses, including expenditures for vehicles and fixed, major movable and adaptive equipment; or
  • expenses of an amount greater than $10,000 that would otherwise be administrative, except that they are either non-recurring (no more frequent that once every five years) or not anticipated by a covered provider (unanticipated litigation-related expenses).  Such expenses shall not be considered administrative expenses or program expenses for purposes of the regulation; or
  • that portion of salaries and benefits of staff performing policy development or research.

 

The rule states that in determining whether an expense is a program service expense or an administrative expense, a covered provider may allocate a portion of the expense to each type if such allocation is supported by the nature of the expense.  Such allocation may include allocation of portions of an employee’s time and compensation to administrative or program services.

 

The rule clarifies that the requirement that the restriction on allowable administrative expenses shall apply to subcontractors and agents of covered providers if the subcontractor or agent has received State funds from the covered provider to provide program or administrative services during a reportable period and would otherwise meet the definition of a covered provider but for the fact that it has received State funds from the covered provider rather than directly from a government agency.

 

Finally, the rule adds other limits on administrative expenses.  It states if a 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 the regulations.

 

Reporting:

The regulation requires providers to report annually using an EO #38 Disclosure Form the public funds it has received, the compensation of its executives and highest-paid employees, and its administrative expenses. Providers can file reports electronically using a state-wide form, and they will not need to report to multiple agencies. This reporting requirement has been designed to avoid duplication with existing reporting requirements with which providers already must comply. The form is required to be submitted no later than 180 days following the covered reporting period, unless otherwise authorized.

Penalties/ Enforcement:

The regulation provide for an administrative review process in cases where a provider appears to be out of compliance.  Covered providers will have 30 days from receipt of a notice of non-compliance to submit additional or clarifying information.  If a determination of non-compliance becomes final, the provider will have an opportunity to correct any non-compliance over a period of at least 6 months prior to any penalties or actions being taken against them. The rule requires a provider to submit a corrective action plan within 30 days from notice of a determination of non-compliance.  If a violation is ultimately found and corrective action is not taken by the provider, the regulations include several potential actions, including redirecting the funding, suspension or imposing penalties.  Finally, providers will have 30 days from receipt of a final determination of non-compliance and notice of proposed sanctions to request an administrative appeal.

 

Waivers:

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 of the regulation during the term of the contract, except that covered providers must apply for a waiver for executive compensation that fails to comply with the regulation if the contract extends beyond April 1, 2015 and renewals of such contracts after the completion of the term must comply with the regulations.

 

Applications for waivers must be filed no later than concurrent with the timely submission of the covered provider’s EO#38 Disclosure Form for the period for which the waiver is requested.

 

Executive Compensation Waivers

Waivers are provided under the regulations on executive compensation to the relative department and the New York State Division of Budget subject to the following:

·         Where a provider has a contract with the department, prior to the date of the contract, renewal or extension.

·         Factors considered for a waiver include:

a)      subject of the waiver is comparable to a waiver given other providers of similar size,

b)      extent provider unable to deliver program services because of complexity of operations, services, etc.

c)      qualifications of the experience possessed by the executive

d)     providers efforts to secure executives with the same levels of experience, expertise and skills for the positions of covered executives at lower levels of compensation;

·         Waivers will only be granted with good cause; and

·         Waivers shall be exempt for the Freedom of Information Law (FOIL).

 

Administrative Expense Waivers

Waivers are provided under the regulations on administrative expenses to the relative department and the New York State Division of Budget subject to the following:

  • The extent to which the administrative expenses that are the subject of the waiver are necessary or avoidable;
  • 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;
  • The nature, size, and complexity of the covered provider’s operations and the program services provided;
  • The provider’s efforts to monitor and control administrative expenses and to limit requests for reimbursement for such costs;
  • 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;
  • Waivers will only be granted with good cause; and
  • Waivers shall be exempt for the Freedom of Information Law (FOIL).

 

Link to Full Text of NYSDOH Regulation: http://www.health.ny.gov/regulations/recently_adopted/docs/2013-07-01_limits_on_executive_compensation.pdf

 

Link to State Register to Access all applicable Agency Regulations: http://docs.dos.ny.gov/info/register/2013/may29/toc.html

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