Last month, the New York State Court of Appeals invalidated a state Department of Health (DOH) regulation that restricted certain health care providers contracting with the state from paying executives more than $199,000 annually, regardless of whether the funds came from the state or not. However, the Court upheld two other DOH regulations; one that limits providers from using public tax-payer money directly to pay executives in excess of $199,000 annually, and another that limits the amount of public funds used for administrative costs.

In January 2012, Governor Andrew Cuomo issued Executive Order 38 in response to media reports calling out high executive compensation rates among nonprofit health care organizations receiving funds from Medicaid. Executive Order 38 directed the DOH to regulate the use of state funds for executive compensation and administrative costs. Consistent with this executive order, the DOH implemented three regulations that imposed: (1) a “hard cap” prohibiting covered providers from using public funds directly to pay executives more than $199,000 (2) another “hard cap” limiting the percentage of public funds used for administrative costs to fifteen percent annually by 2015; and (3) a “soft cap” subjecting covered providers to penalties should they pay executives, with certain exceptions, more than $199,000, regardless of whether the money used to pay them came from public or private sources.

Shortly after the regulations were announced, a group of nursing homes, assisted-living programs, home-care agencies, and trade associations brought lawsuits challenging the DOH’s authority to issue the regulations. These lawsuits, arguing that the DOH exceeded its regulatory authority in promulgating the regulations, eventually made their way all the way up to the courts to the Court of Appeals.

The Court’s majority opinion in LeadingAge New York, Inc. v. Shah, authored by Chief Judge DiFiore, held that the hard cap regulations fell within the DOH’s regulatory authority and were valid agency actions. With regard to the soft cap, however, the majority concluded that the DOH did in fact exceed its authority, usurped the Legislature’s role, and violated the separation of powers doctrine. Accordingly, the soft cap regulation subjecting covered providers to penalties if they paid executives above the $199,000 threshold, regardless of the source of funds, was struck down by the Court.

In accordance with this decision, covered health care providers who contract with the state will no longer need to comply with the “soft cap” regulation or fear penalties for failure to do so. However, health care providers covered by the “hard cap” regulations will still need to comply with the limitations set under those regulations, absent an applicable exception.

On June 5, 2017, in Advocate Health Care Network et al. v. Stapleton et. al, the Supreme Court unanimously held that employee benefit plans maintained by church-affiliated hospitals were exempt from the Employee Retirement Income Security Act (the “ERISA”), regardless of whether the plan was actually established by a church. The plaintiffs consisted of current and former employees of three church-affiliated non-profits who ran hospitals and healthcare facilities that offered their employees defined benefit pension plans established by the hospitals and managed by internal hospital employee benefits committees.  The plaintiffs filed class actions in three different federal districts alleging that the hospital defined benefit pension plans were not entitled to an exemption under ERISA because they were not established by a church and therefore should be required, among other things, to meet the minimum-funding obligations of ERISA. The pension plans at issue were severely underfunded and ERISA would have required the hospitals to potentially contribute billions of dollars to satisfy the ERISA minimum-funding standards.

Under ERISA, private employers that offer pension plans must abide by a set of rules created to protect plan participants and ensure plan solvency. Section 4(b)(2) of ERISA, however, specifically exempts the employee benefits plans of churches. Section 3(33) of ERISA originally defined a church plan to mean a plan “established and maintained” for its employees by a church or by a convention or association of churches. In 1980, Congress expanded the church-plan definition to state that an “employee of a church” would include an employee of a church-affiliated organization and to add that a church plan includes a plan “maintained” by a “principal-purpose” organization. A “principal-purpose” organization is an organization controlled by or associated with a church or a convention or association of churches the principal purpose or function of which is the administration or funding of a plan or program providing retirement or welfare benefits to employees of such organizations. The Supreme Court found that, under the best reading of the statute, Congress intended that the church plan exemption under ERISA include plans adopted by principal-purpose organizations, even if not established by the church to which the principal-purpose organization is affiliated. In a concurring opinion, Justice Sotomayor agreed with the interpretation of ERISA but cautioned that Congress, when enacting the 1980 amendment, probably did not envision that this exemption would apply to large organizations that employ thousands of employees, operate for-profit subsidies, earn billions of dollars in revenue, and compete in the secular market with companies that must bear the cost of compliance under ERISA. Although she agreed with the majority’s conclusion, she wondered whether the current reality may prompt Congress to make changes.

Takeaway

The Supreme Court’s decision provides assurances to church-affiliated organizations that have treated their employee benefit plans as exempt church plans under ERISA. The organizations should be mindful, however, that as the Court specifically noted, the issue of whether  the hospitals qualified as “principal-purpose” organizations was not brought before it.  Therefore, it remains to be seen how the lower courts address the level and quality of a relationship that must be maintained between a church and a health care provider to qualify it as a “principal-purpose” organization.