As part of its recent budget, New York State has enacted a new law that significantly impacts nursing home operators in New York. Effective January 1, 2022, the new Section 2828 of the Public Health Law requires, among other things, that:

• • Not less than 70% of nursing home revenues shall be spent on direct resident care costs;
  • 40% of the nursing home revenues must be spent on staff who work directly with patients (so-called resident-facing staff, as that term is defined in Section 2828), which is included in amounts spent on direct resident care costs; and
  • Nursing home profits are limited to not more than 5%, and profits in excess of this threshold shall be turned over to the
  • Pursuant to the legislation, the Department of Health shall promulgate regulations in accordance with the new

Direct resident care is defined to include non-revenue support services (e.g., maintenance and patient food service), ancillary services (e.g., laboratory and pharmacy services), and program services directly serving patients. Expenses that are specifically excluded as not related to patient care include, without limitation, administrative costs (other than nurse administration), capital costs, debt service, taxes (other than sales taxes or payroll taxes), capital depreciation, rent and leases, and fiscal services. Specifically excepted from the new law are nursing homes that provide certain specialized services, including, for example, behavioral intervention and neurodegenerative services.

Failure to comply with the requirements of the new law will result in monetary penalties to noncompliant facilities. In particular, facilities that fail to turn over their excess profits to the State could face Medicaid deductions, offsets or lawsuits. Furthermore, facilities that fail to meet the minimum spending requirement would be required to turn over to the State an amount equal to the spread between the minimum spending requirement and their actual expenditures.

Nursing Home lenders should immediately determine if any of their existing borrowers are subject to this new law, and if so, lenders should review the various representations, warranties, and covenants contained in the credit documents, including, without limitation, financial covenants, such as debt service coverage ratios, reserve requirements, and permitted distributions, all of which may be impacted. Lenders should also determine whether the new law’s requirements rise to a level of a change of regulation or a change of law that could adversely impact their existing loan facilities. Specifically, lenders and borrowers alike need to evaluate whether or not performance by borrower under the operative credit documents will result in borrower violating the requirements of the new law. Restructure, default, forbearance and amendments are all concepts lenders will utilize to reconcile compliance with the new law and the borrower’s obligations under the credit documents. Going forward, lenders must be mindful of how this new legislation will impact new borrowers and should update their underwriting models and due diligence requirements to account for the changes set to take effect on January 1, 2022.