In order to "prevent public funds from being diverted to excessive compensation and unnecessary administrative costs," New York Governor Andrew M. Cuomo executed an executive order on January 18, 2012 ("Executive Order"), capping both executive compensation and administrative costs that New York State ("NYS" or "State") will pay to for-profit and not-for-profit service providers.[1] The Executive Order appears to be part of a larger ongoing trend of increasing scrutiny of, and attempts to limit, the executive compensation practices of health care, social service, and not-for-profit organizations in NYS and across the country.

This client alert discusses: the Executive Order, key considerations/questions about the Executive Order, and related recent developments to put the Executive Order in context.

The Executive Order

The new limitations imposed in NYS by the Executive Order have the potential to adversely impact health care providers and payers that receive Medicaid funding and other service providers that directly or indirectly receive State funds.

Within 90 days following the issuance of the Executive Order (mid-April), each covered State agency that provides "financial assistance or State-authorized payments" to providers of services must promulgate regulations to impose a $199,000 annual cap on executive compensation and to require that no less than 75 percent (increased by 5 percent each year until it reaches no less than 85 percent by April 1, 2015) of State funding be used for direct care or services rather than administrative expenses. Further, these State agencies must also take any other action (including amending agreements with providers) "to address the extent and nature" of a provider's administrative costs and executive compensation eligible for reimbursement by the State.