HLT-22-12-00012-RP Limits on Executive Compensation and Administrative Expenses in Agency Procurements

3/13/13 N.Y. St. Reg. HLT-22-12-00012-RP

NEW YORK STATE REGISTER

VOLUME XXXV, ISSUE 11

March 13, 2013

RULE MAKING ACTIVITIES

DEPARTMENT OF HEALTH

REVISED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. HLT-22-12-00012-RP

Limits on Executive Compensation and Administrative Expenses in Agency Procurements

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following revised rule:

Proposed Action:

Addition of Part 1002 to Title 10 NYCRR.

Statutory authority:

Social Services Law, section 363-a(2); Public Health Law, sections 201(1)(o), (p), 206(3) and (6); and Not-For-Profit Corporation Law, section 508

Subject:

Limits on Executive Compensation and Administrative Expenses in Agency Procurements.

Purpose:

Ensure state funds and state authorized payments are expended in the most efficient manner and appropriate use of funds.

Substance of revised rule:

The revised rule would add a new Part 1002 to 10 NYCRR titled Limits on Administrative Expenses and Executive Compensation.

Section 1002.1 Contains definitions for purposes of this Part, including definitions for administrative expenses, covered operating expenses, covered executive, covered provider, executive compensation, program services, program services expenses, related organization, reporting period, State-authorized payments, and State funds.

Section 1002.2 Limits on Administrative Expenses. Contains limits on the use of State funds or State-authorized payments for administrative expenses.

The restriction will apply to subcontractors and agents of covered providers which meet the specified criteria.

The restriction will apply to covered providers receiving State funds or State-authorized payments from county or local governments, rather than directly from a State agency, pursuant to specified criteria.

The revised regulation addresses how the restriction will apply in the event that a covered provider has multiple sources of State funds or State-authorized payments.

Section 1002.3 Limits on Executive Compensation. Contains restrictions on executive compensation provided to covered executives.

The restriction will apply to subcontractors and agents of covered providers which meet the specified criteria.

The restriction will apply to covered providers receiving State funds or State-authorized payments from county or local governments, rather than directly from a State agency, pursuant to specified criteria.

The revised rule addresses the application of this limit if the covered provider has multiple sources of State funds or State-authorized payments.

Section 1002.4 Waivers. Processes are established for covered providers to seek waivers of the limit on administrative expenses and the limits on executive compensation.

Section 1002.5 Reporting by Covered Providers. Covered providers are required to report information on an annual basis for each covered reporting period.

Section 1002.6 Penalties. A process is established for the imposition of penalties in the event of non-compliance with the limit on administrative expenses or the limits on executive compensation.

A copy of the full text of the regulatory proposal is available on the Department of Health website (www.health.ny.gov).

Revised rule making(s) were previously published in the State Register on

October 31, 2012.

Revised rule compared with proposed rule:

Substantial revisions were made in sections 1002.1, 1002.2, 1002.3, 1002.4, 1002.5 and 1002.6.

Text of revised proposed rule and any required statements and analyses may be obtained from:

Katherine Ceroalo, DOH, Bureau of House Counsel, Reg. Affairs Unit, Room 2438, ESP Tower Building, Albany, NY 12237, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

30 days after publication of this notice.

Revised Regulatory Impact Statement

Statutory Authority:

The authority for the promulgation of these regulations is contained section 363-a(2) of the Social Services Law and in sections 201(1)(o), 201(1)(p), 206(3) and 206(6) of the Public Health Law.

Additional support for the rationale underlying these regulations is section 508 of the Not-for-Profit Corporation Law. (Income from corporate activities), which provides:

A corporation whose lawful activities involve among other things the charging of fees or prices for its services or products shall have the right to receive such income and, in so doing, may make an incidental profit. All such incidental profits shall be applied to the maintenance, expansion or operation of the lawful activities of the corporation, and in no case shall be divided or distributed in any manner whatsoever among the members, directors, or officers of the corporation.

Legislative Objectives:

This rule furthers the proper use of funds in furtherance of the Department's oversight of the various programs and procurements for which it pays, or authorizes payment.

Needs and Benefits:

The New York State Department of Health is proposing to adopt the following regulation because the State of New York directly or indirectly funds with taxpayer dollars a large number of tax exempt organizations and for-profit entities that provide critical services to New Yorkers in need and the goal is to ensure that taxpayers' dollars are used properly, efficiently, and effectively to improve the lives of New Yorkers. In certain instances, providers of services that receive State funds or State-authorized payments have used such funds to pay for excessive administrative costs or inflated compensation for their senior executives, rather than devoting a greater proportion of such funds to providing direct care or services to their clients. Such abuses involving public funds harm both the people of New York who are paying for such services, and those persons who must depend upon such services to be available and well-funded. These regulations, which are required by Executive Order No. 38, will ensure that State funds or State-authorized payments paid by this agency to providers are not used to support excessive compensation or unnecessary administrative costs.

Costs:

The costs of implementing this rule to affected providers is anticipated to be minimal as most, if not all, of the information that must be reported by such providers is already gathered or reported for other purposes. The costs to the agency of such implementation is expected to be very limited as well, and efforts to ensure efficient centralization of certain aspects of such implementation are underway.

Paperwork/Reporting Requirements:

The proposed regulatory amendments will require limited additional information to be reported to the agency by providers receiving State funds or State-authorized payments. To the extent feasible, such reporting shall be made electronically to avoid unnecessary paperwork costs.

Local Government Mandates:

The proposed regulatory amendments do not anticipate any additional mandates.

Duplication:

This proposed rule does not duplicate, overlap, or conflict with any State or federal statute or rule. However, the proposed rule seeks to minimize the reporting requirements faced by providers by building upon those requirements in the federal internal revenue code that require certain tax-exempt organizations to report information concerning their executive compensation and administrative costs.

Alternatives:

Executive Order #38 requires the adoption of this proposed regulation.

Federal Standards:

These amendments do not conflict with federal standards.

Compliance Schedule:

This rule will become effective upon adoption; the implementation date establishing the limits on administrative expenses and executive compensation will be July 1, 2013.

Revised Regulatory Flexibility Analysis, Rural Area Flexibility Analysis and Job Impact Statement

Changes made to the last published rule do not necessitate revision to the previously published Regulatory Flexibility Analysis, Rural Area Flexibility Analysis and Job Impact Statement.

Summary of Assessment of Public Comment

A Notice of Revised Rule Making was published in the State Register on October 31, 2012.

A number of comments objected generally to the underlying concept of the regulations, stating that the proposed regulation is overly broad in its authority and burdensome in its requirements. The Department believes that the proposed limitations in the regulation further the legitimate goal of ensuring that public funds are properly expended and the use of such funds is properly monitored.

Clarification was requested concerning certain defined terms in the proposed regulation, in particular with respect to their intended scope. Comments were provided with regard to the definitions of the following terms: “administrative expenses,” “covered provider,” “covered executive,” “executive compensation,” “program services expenses,” “related entity,” “State-authorized payments” and “State funds.” Various clarifications and modifications were made to the definitions of “administrative expense,” “covered executive,” “covered provider,” “executive compensation,” “program services,” “reporting period,” “state authorized payments,” and “state funds.” A definition was added for “covered reporting period,” The regulatory definitions were not further revised because the Department believes the definitions are otherwise sufficiently clear, descriptive, and supportive of the underlying policy goals of the regulations.

Some commenters stated that the proposed definition of and limits on “administrative expenses” were burdensome and unnecessary, because they would interfere with existing contracts, because they were possibly duplicative of existing state and federal rules, or they will not enhance the protections already provided by restrictions from State reimbursement rates. Further clarification was requested as to what will constitute “administrative expenses” and “program expenses.” The definitions of “administrative expenses” and “program expenses” were clarified, as noted above. The Department made various technical changes and clarifications to section 1002.2 to delay the effective date of the limits to the first day of the covered provider's reporting period after July 1, 2013, to require reporting of subcontractors and agents upon request, rather than in all cases, to emphasize that the definition and interpretation of the regulations control over any definitions or interpretations in other regulations or agreements, and to clarify that the covered provider will not be held responsible for a subcontractor's or agent's failure to abide by the regulations. The Department made no further changes to the regulations because it believes they strike a proper balance between supporting the underlying policy of the regulation while minimizing the impact on affected entities and providing sufficient guidance.

There were a wide range of comments and suggestions on the definition of, and proposed limits on, “executive compensation.” They covered such topics as: (a) general concerns about application of the definition, (b) exclusions, (c) limitations and application of the definition, and (d) suggestions about surveys and their use. A summary of the comments and suggestions follows:

(a) General concerns regarding the regulation include that it: is too broad since it regulates use of funding sources not emanating from the state; is unrealistic, problematic and intrusive to operations; will adversely affect candidate pools, incumbents, service delivery and the ability of providers to meet the challenges and changes in the health care system; is intrusive to the for-profit sector where executive compensation is a private matter; and is duplicative as executive compensation is already controlled at the State and federal levels through rate setting, IRS rules and reporting, and the Not-For-Profit Corporation Law. Other comments stated that the regulation would encroach on the State Attorney General’s regulation and enforcement; is arbitrary in its establishment of the thresholds of $500,000 and 30%; was exclusive of larger corporations; and inappropriately used a percentile standard that will gradually diminish compensation levels and lead to the existence of two levels of compensation.

(b) Other comments sought elimination of the 75th percentile threshold.

(c) Still other comments related to limitations and application of the definition of “executive compensation.” They suggested that executive compensation rules should only be applied to non-state funds or to state and state-authorized funds. The applicability of the rules with regard to contributions of other non-covered entities should be clarified. Also, letters received argued that the period covered by the limits on executive compensation should begin later than proposed in the regulations.

(d) Commenters recommended several approaches to determining reasonable compensation, such as the use of recognized surveys or independent commissioned surveys or identification and recognition of specific compensation surveys to establish comparisons. It was suggested that surveys should allow for regional and geographic variations. Further, commenters suggested that the regulation also should address instances where a board or governing body does not exist.

Section 1002.3 was revised to delete related organizations from its coverage, to extend the effective date of restrictions to the first day of the covered provider's reporting period after July 1, 2013, to clarify that the covered provider will not be held responsible for a subcontractor's or agent's failure to abide by the regulations, to require reporting of subcontractors and agents upon request, rather than in all cases, to emphasize that the definition and interpretation of the regulations control over any definitions or interpretations in other regulations or agreements, to apply the limits to the covered provider's contracts or other agreements with covered executives from July 1, rather than April 1, 2012, and to make other technical amendments and corrections. No further revisions were made with regard to the “executive compensation” provisions. The Department believes that the scope of the term adequately addresses the issue and ensures that public spending on health care services is efficient and appropriate. The regulation was not further revised to limit the rule to non-state funds, to exclude for-profits from being covered by the regulations, or to alter the 75th percentile threshold because these revisions would compromise the goal of the regulation. Eliminating the “executive compensation” requirements would eviscerate one of the key objectives of the executive order: limiting the extent of such compensation paid by covered providers that rely to a significant degree upon public funds for their program and administrative services funding. The Department is proposing to adopt this regulation because the State of New York directly or indirectly funds with taxpayer dollars a large number of tax exempt organizations and for-profit entities that provide critical services to New Yorkers in need, and the goal is to ensure that taxpayer dollars are used properly, efficiently and effectively to improve the lives of New Yorkers. In certain instances, service providers that receive state funds or state-authorized payments have used such funds to pay for excessive administrative costs or inflated compensation for their senior executives, rather than devoting a greater proportion of such funds to providing direct care or services to their clients. Such abuses involving public funds harm both the people of New York who are paying for such services and those persons who must depend upon such services to be available and well-funded. These regulations provide a benchmark to ensure that state funds or state-authorized payments paid by this agency to providers are not used to support excessive compensation or unnecessary administrative costs.

Some comments stated that the proposed waiver process is overly complex and lacking objective criteria. The Department made various technical corrections to section 1002.4, amended the section to provide for waivers associated with one or more positions, rather than simply one or more covered executives, to acknowledge that not all entities have a board of directors or other governing body, to clarify when waiver requests must be filed, and to clarify the applicability of the Freedom of Information Law. Having considered the comments, the Department has determined that further revision to the regulation is unnecessary.

Comments received also criticized the proposed reporting requirements suggesting that they require providing information related to “administrative expenses” and “program expenses” in a manner inconsistent with other current reporting obligations. The Department has considered those comments. The reporting provisions were revised to clarify when reports must be filed. The Department believes the reporting required is necessary and as narrowly focused as possible to achieve the goals of the regulation.

Other submissions asked when penalties for excess compensation would be assessed, what the type of penalties would be imposed, and about the level of severity. The Department has considered those comments and intends to follow the routine enforcement process.

The full Assessment of Comments is available on the Department website at www.health.ny.gov.