In the Matter of Coalition of New York State Public Health Plans et al., Appellants-Respondents, v  New York State Department of Health et al., Respondents-Appellants. (Proceeding No. 2.)

Argued September 5, 2018; decided October 18, 2018

Matter of LeadingAge N.Y., Inc. v Shah, 153 AD3d 10, affirmed.

This appeal involves a challenge, on separation of powers grounds, to regulations promulgated by the Department of Health (DOH) limiting executive compensation and administrative expenditures by certain health care providers receiving state funds. Because we agree that two of the challenged regulations fall within the agency's regulatory authority but that a third was promulgated in excess of its delegated powers, we affirm the order of the Appellate Division.

After media reports emerged of high executive compensation within nonprofit health care organizations funded in part by Medicaid, Governor Cuomo created a task force to investigate the issue. In January 2012, the Governor issued Executive Order (Cuomo) No. 38 (EO38) to certain executive agency heads, including respondent Commissioner [*2]of Health, directing agencies providing state funding to service providers to regulate provider use of state funds for executive compensation and administrative costs, specifying that the agencies should (i) limit providers' allocation of state funds toward administrative costs to 15% by 2015 and (ii) "[t]o the extent practicable," limit reimbursement of the amount of state funds used for executive compensation by a provider to $199,000 (9 NYCRR 8.38). The executive order was aimed at "curb[ing] . . . abuses in executive compensation and administrative costs" within service providers receiving state funds in order to "ensure that taxpayer dollars are used first and foremost to help New Yorkers in need" (id.). DOH published proposed regulations that were consistent with EO38 and, after a public comment period and substantial revision, promulgated the regulations at issue in 2013 (see 10 NYCRR part 1002).

Consistent with EO38, the regulations impose restrictions on state-funded providers' expenditures related to administrative expenses and executive compensation. The restrictions apply to "covered providers," which the regulations define as those (i) receiving, pursuant to a contract with DOH (or another{**32 NY3d at 255} governmental entity or entity on its behalf) for program services, "State funds or State-authorized payments during the covered reporting period and the year prior . . . in an average annual amount greater than $500,000"; and (ii) "at least 30 percent of whose total annual in-state revenues for the covered reporting period and for the year prior . . . were from State funds or State-authorized payments" (10 NYCRR 1002.1 [d] [1], [2]). The regulations exempt certain entities and individuals from the definition of "covered provider," including state, county, and local governments and those "providing primarily or exclusively products, rather than services" in exchange for state funds (id. § 1002.1 [d] [6] [i], [iv]).

Two of the regulations have been labeled a "hard cap" (id. §§ 1002.2 [a]; 1002.3 [a]) and the third a "soft cap" (id. § 1002.3 [b]). The so-called hard cap has two components, one relating to administrative expenses and the other executive compensation. The administrative expenses hard cap mandates that "[n]o less than 75 percent [increasing to 85 percent by 2015] of the covered operating expenses of a covered provider paid for with State funds or State-authorized payments shall be program services expenses rather than administrative expenses," thus limiting the percentage that the provider may allocate to administrative expenses to 15% beginning in 2015 (id. § 1002.2 [a]). The executive compensation hard cap directs that, absent a waiver, a covered provider may "not use State funds . . . for executive compensation . . . in an amount greater than $199,000" (id. § 1002.3 [a]).

The "soft cap" regulation also relates to executive compensation. Under the soft cap, a covered provider is subject to penalties if executive compensation exceeds $199,000 per year from any source of funding (state or non-state), with two significant exceptions (id. § 1002.3 [b]). The soft cap is applicable only if the executive compensation either (i) is "greater than the 75th percentile of that compensation provided to comparable executives in other providers of the same size and within the same program service sector and the same or comparable geographic area as established by a compensation survey identified, provided, or recognized by the [DOH] and the Director of the Division of the Budget"; or (ii) "was not reviewed and approved by the covered provider's board of directors or equivalent governing body (if such a board or body exists) including at{**32 NY3d at 256} least two independent directors or voting members" (id. § 1002.3 [b] [1], [2]).^[FN1]

Both executive compensation caps apply to compensation paid to a "covered executive," defined in the regulations as "a compensated director, trustee, managing partner, or officer," or "key employee" whose compensation exceeded $199,000 during the reporting period, "whose salary and/or benefits, in whole or in part, are administrative expenses" (id. § 1002.1 [b]).^[FN2] The definition of "covered executive" expressly excludes "[c]linical and [*3]program personnel in a hospital or other entity providing program services, including . . . types of personnel fulfilling administrative functions that are nevertheless directly attributable to and comprise program services," like "chairs of departments" and "directors of nursing" (id.). "Program services" are those "rendered by a covered provider or its agent directly to and for the benefit of members of the public . . . that are paid for in whole or in part by State funds or State-authorized funds," with certain exceptions (id. § 1002.1 [h]).^[FN3]

A covered provider may receive a waiver excusing compliance with the caps upon a showing of "good cause" (id. § 1002.4). With respect to the executive compensation caps, DOH outlined six factors for determining "good cause," including "the extent to which the covered provider would be unable{**32 NY3d at 257} to provide the program services reimbursed with State funds . . . at the same levels of quality and availability without obtaining reimbursement for executive compensation" in excess of the $199,000 limit (id. § 1002.4 [a] [2] [ii]).^[FN4] DOH also identified five factors [*4]supporting a waiver from the administrative expenses hard cap, including "[e]vidence 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" (id. § 1002.4 [b] [2] [ii]).^[FN5]

These two hybrid CPLR article 78 proceedings and declaratory judgment actions were commenced by two sets of petitioners soon after the regulations were promulgated. The petitioners in Matter of LeadingAge N.Y., Inc. v Shah (the LeadingAge petitioners) are nursing homes, assisted-living programs, home-care agencies, and trade associations representing those types of providers. The petitioners in Matter of Coalition of N.Y. State Pub. Health Plans v New York State Dept. of Health—Coalition of New York State Public Health Plans, New York State Coalition of Managed Long Term Care/PACE Plans, and New York Health Plan Association, Inc. (the Coalition petitioners)—are trade associations representing health care plans, health maintenance organizations, and long-term care plans. Both groups have members who contract with DOH to provide health care services and receive significant state funds—primarily via Medicaid. Petitioners sought invalidation of the regulations, contending that in promulgating the regulations, DOH exceeded its regulatory authority and violated the separation of powers doctrine. Petitioners further asserted that the regulations are arbitrary and capricious. The LeadingAge petitioners also brought substantive due process and federal preemption claims.{**32 NY3d at 258}

After the actions were consolidated and the substantive due process and federal preemption claims dismissed, Supreme Court partially denied relief, declaring that the hard cap regulations do not violate the separation of powers doctrine and are not arbitrary and capricious but declaring the soft cap regulation to be invalid (56 Misc 3d 594 [Sup Ct, Albany County 2015]). Supreme Court reasoned that promulgation of the executive compensation and administrative expenses hard cap regulations did not usurp the legislature's role because they are grounded in the statutory mandate of "administer[ing] taxpayer fund[ed] programs efficiently to get the biggest bang for the buck in the delivery of health care and services" (56 Misc 3d at 604). Supreme Court also held that the hard cap regulations were not arbitrary and capricious, noting that the regulations were promulgated based on task force research and after public comment, and that the definitional thresholds, exclusions, and the decision to apply the regulations only to providers receiving state funding were not irrational (id. at 608-610). The court observed, however, that it would be possible to address certain arguments only in the context of a challenge from a particular provider to which DOH has applied the regulations (id. at 610). With regard to the soft cap provision, however, Supreme Court granted the petitions, declaring that the soft cap was promulgated in excess of DOH's authority and therefore violated the separation of powers doctrine because it "reaches beyond state funds and state-authorized funds expended for executive compensation," and thus "flags concerns that the agency was improperly engaged in acting on its own ideas of good public policy" (id. at 605-606).

On the parties' appeals and cross appeals, the Appellate Division affirmed, with one Justice dissenting in part (153 AD3d 10 [3d Dept 2017]). The Appellate Division largely agreed with Supreme Court's reasoning, holding that because "DOH has the statutory obligation to ensure that scarce taxpayer dollars are used efficiently and for the benefit of those who are the recipients of the services, and routinely promulgates regulations setting reimbursement rates for the government-funded care and services," promulgation of the hard cap regulations did not reflect an inherently legislative attempt to balance policy concerns beyond DOH's purview (id. at 20). The Appellate Division further concluded that petitioners' claim that the hard cap regulations were arbitrary and capricious was "utterly devoid of merit" because "[b]oth empirical evidence and {**32 NY3d at 259}sound agency judgment support the promulgation of [the regulations]" (id. at 25-26). With respect to the soft cap, the Appellate Division agreed that DOH exceeded its authority by "attempting to regulate executive compensation from all sources" (id. at 25). The partially dissenting Justice would have invalidated both the hard and soft cap regulations, reasoning that the enabling legislation does not [*5]authorize DOH to "control how providers spend earned revenues for past services," that DOH impermissibly sought to balance the legislative goal "against the interests of private businesses in administering their internal fiscal affairs" (id. at 29 [Mulvey, J., concurring in part and dissenting in part]), and that the regulations are arbitrary and capricious (id. at 31).

In this Court, both sets of petitioners argue that the hard and soft cap regulations related to executive compensation constitute an improper attempt to regulate matters beyond the scope of DOH's authority, as the statutes directed to DOH do not expressly address executive compensation, and that the doctrine of separation of powers has been violated because the agency engaged in legislative activity that exceeds its regulatory powers. Petitioners further challenge the regulations as arbitrary and capricious, asserting that they are insufficiently linked to the concerns they attempt to mitigate and incorporate arbitrary standards. The LeadingAge petitioners extend their challenge to the administrative expenses hard cap, contending that the regulations conflict with existing legislation. Petitioners also maintain that even if the legislature intended to empower DOH to regulate in this arena, such a delegation would be ultra vires and unenforceable because the legislation on which the agency relies fails to provide sufficient guidance to the agency.

"The concept of the separation of powers is the bedrock of the system of government adopted by this State in establishing three coordinate and coequal branches of government, each charged with performing particular functions" (Matter of NYC C.L.A.S.H., Inc. v New York State Off. of Parks, Recreation & Historic Preserv., 27 NY3d 174, 178 [2016] [internal quotation marks and citation omitted]). The principle "requires that the Legislature make the critical policy decisions, while the executive branch's responsibility is to implement those policies" (Bourquin v Cuomo, 85 NY2d 781, 784 [1995] [citation omitted];{**32 NY3d at 260} see NY Const, art III, § 1; art IV, § 1). "Agencies, as creatures of the Legislature, act pursuant to specific grants of authority conferred by their creator" (Matter of Campagna v Shaffer, 73 NY2d 237, 242 [1989]). Thus, a legislature may enact a general statute that reflects its policy choice and grants authority to an executive agency to adopt and enforce regulations that expand upon the statutory text by filling in details consistent with that enabling legislation (Matter of General Elec. Capital Corp. v New York State Div. of Tax Appeals, Tax Appeals Trib., 2 NY3d 249, 254 [2004]). If an agency promulgates a rule beyond the power it was granted by the legislature, it usurps the legislative role and violates the doctrine of separation of powers (Matter of NYC C.L.A.S.H., 27 NY3d at 178; Greater N.Y. Taxi Assn. v New York City Taxi & Limousine Commn., 25 NY3d 600, 608 [2015]).

The separation of powers doctrine commands that the legislature make the primary policy decisions but does not require that the agency be given rigid marching orders (see Greater N.Y. Taxi Assn., 25 NY3d at 609). Administrative entities possess technical expertise and may be vested with considerable discretion to flesh out a policy broadly outlined by legislators. Thus, in promulgating regulations, an agency may rely on a general but comprehensive grant of regulatory authority. To be sure, a broad grant of authority is not a license to resolve—under the guise of regulation—matters of social or public policy reserved to legislative bodies (Boreali v Axelrod, 71 NY2d 1, 9 [1987]). But among the powers possessed by necessary implication, administrative agencies have flexibility in determining the best methods for pursuing objectives articulated by the legislature (Bourquin, 85 NY2d at 790-791). And because it is not always possible to draw a clear line between the functions of the legislative and executive branches, common sense must prevail when determining whether an agency acted within its grant of authority (Greater N.Y. Taxi Assn., 25 NY3d at 609).

In Boreali, we offered guidance for finding "the difficult-to-define line between administrative rule-making and legislative policy-making" (71 NY2d at 11). The following "coalescing circumstances" may inform the inquiry:

"whether (1) the agency did more than balanc[e] costs and benefits according to preexisting guidelines, but instead made value judgments entail[ing]{**32 NY3d at 261} difficult and complex choices between broad policy goals to resolve social problems; (2) the agency merely filled in details of a broad policy or if it wrote on a clean slate, creating its own comprehensive set of rules without benefit of legislative guidance; (3) the legislature has unsuccessfully tried to reach agreement on the issue, which would indicate that the [*6]matter is a policy consideration for the elected body to resolve; and (4) the agency used special expertise or competence in the field to develop the challenged regulation[ ]" (Matter of NYC C.L.A.S.H., 27 NY3d at 179-180 [internal quotation marks and citations omitted]; Boreali, 71 NY2d at 12-14).^[FN6]

We have explained that these are not "criteria that should be rigidly applied in every case" but rather "overlapping, closely related factors" that, viewed together, may signal that an agency has exceeded its authority (Matter of New York Statewide Coalition of Hispanic Chambers of Commerce v New York City Dept. of Health & Mental Hygiene, 23 NY3d 681, 696 [2014]; see Greater N.Y. Taxi Assn., 25 NY3d at 612). If we find that the agency has been empowered to regulate the matter in question and has not usurped the legislative prerogative, the separation of powers inquiry is at an end (see Garcia v New York City Dept. of Health & Mental Hygiene, 31 NY3d 601 [2018]). Our role in this regard is not to question the efficacy or wisdom of the means chosen by the agency to accomplish the ends identified by the legislature. Rather, we determine only whether the agency acted within the scope of its authority.

In this case, our analysis must begin with a review of the function of the agency whose actions are challenged. DOH is the state agency primarily responsible for public health. It{**32 NY3d at 262} administers state health care programs that provide public medical services to New Yorkers and manages state funds earmarked for public health, including Medicaid funds. In this regard, the Public Health Law authorizes DOH to "regulate the financial assistance granted by the state in connection with all public health activities" (§ 201 [1] [o]) and to "receive and expend funds made available for public health purposes pursuant to law" (§ 201 [1] [p]), in addition to numerous other public-health-related tasks.

Of critical relevance here, DOH has been granted broad authority to maintain New York's Medicaid program, which provides a significant portion of the public funds under DOH management, and to implement related regulations (Social Services Law § 363-a).

"We have recognized that the public must be assured that the funds which have been set aside (for providing medical services to the needy) will not be fraudulently diverted into the hands of an untrustworthy provider of services. To that end, the agency charged with the responsibility of administering the medicaid program has inherent authority to protect the quality and value of services rendered by providers in that program" (Matter of Medicon Diagnostic Labs. v Perales, 74 NY2d 539, 545 [1989] [internal quotation marks and citations omitted]; see Matter of Koch v Sheehan, 21 NY3d 697, 700 [2013]).

Moreover, the legislature has authorized DOH to contract with private companies for the provision of state-funded health care services to the public (Public Health Law § 206 [3]). Reading these enabling statutes together, it is evident that the legislature has delegated to DOH the authority to receive, manage, and expend state funds; oversee the Medicaid program and the funding it provides; and contract with private entities that receive state money—all with the goal of ensuring that the limited public funding available be directed as efficiently as possible toward high-quality services for New Yorkers in need (see Public Health Law §§ 201 [1] [o], [p]; 206 [3]; Social Services Law § 363-a).

[1] Here, with respect to the hard cap regulations—which regulate only the manner in which state health care funding is expended—we conclude that DOH did not exceed its authority. Applying the first Boreali factor, [*7]promulgation of the hard caps{**32 NY3d at 263} reflects a "balanc[ing] [of] costs and benefits according to preexisting guidelines" set by the legislature—not a new "value judgment" directed at resolution of a "social problem." The enabling statutes reflect the legislature's policy directive that DOH oversee the efficient expenditure of state health care funds to ensure high-quality services and provide guidance to DOH in implementing regulations consistent with that directive.^[FN7] The hard cap regulations are thus directly tied to a specific goal dictated by the legislature—to efficiently direct state funds toward quality medical care for the public (see Garcia, 31 NY3d 601). The hard caps accomplish that goal by limiting the extent to which state funds may be used for non-service-related salaries or disproportionately large administrative budgets, thereby channeling state funds toward the direct provision of services. DOH rationally concluded that requiring that a high proportion of state funding be used directly for medical services will further the legislative goal of maximizing state resources for the purchase of high-quality care.

Petitioners assert that in electing to limit the use of state funds for executive compensation and administrative expenses, DOH made decisions not envisioned by the legislature regarding the best use of state funding earned by health care providers. As petitioners point out, there are no statutes specifically restricting the use of state funding for executive compensation or administrative expenses. However, as we recognized in Greater N.Y. Taxi, enabling legislation need not detail an agency's role. Indeed, it is commonly the function of the administrative agency to fill in the details and interstices in a policy that may have been broadly articulated by the legislative branch. For example, in Greater N.Y. Taxi, where the New York City Council granted the New York City Taxi & Limousine Commission broad authority to regulate the taxi industry, we held that this included by implication the authority to require the use of a particular vehicle as part of the agency's "Taxi of Tomorrow" initiative (25 NY3d at 609-610). We reached this conclusion even though there was no specific legislative{**32 NY3d at 264} authority for the agency's decision to partner with a specific motor vehicle manufacturer rather than adhere to its prior practice of adopting general conforming vehicle specifications. This is a corollary of the maxim that an agency may promulgate regulations not specifically directed by its enabling legislation as long as they are consistent with and intended to advance the legislature's broad policy choice (id. at 611). Here, as in Greater N.Y. Taxi, DOH has been granted general but comprehensive authority to regulate how state funds are expended in furtherance of the goals of maximizing efficiency and quality in the provision of health care services. This grant of authority is sufficient even though the enabling statutes do not specifically instruct DOH to focus on executive compensation or administrative expenses as the particular means to achieve that goal.^[FN8]

Although petitioners argue otherwise, in allowing waivers and exemptions to the hard caps, DOH did not make impermissibly complex policy decisions beyond its health care mandate. Rather, it used its expertise and understanding of the practical realities of New York's health care industry to develop a multi-factored analysis to account for specific scenarios in which the regulation would undermine the legislative objectives. In determining whether to grant a waiver, DOH may consider a provider's inability under the executive compensation hard cap to provide services "at the same levels of quality and availability" (10 NYCRR 1002.4 [a] [2] [ii]) or whether application of the administrative expenses hard cap "would negatively affect the availability or quality of program services in the [*8]covered provider's geographic area" (id. § 1002.4 [b] [2] [ii]). Thus, DOH crafted waiver provisions that excuse application of the regulations in situations where an important aspect of the legislative goal—the provision of high-quality care—would be obstructed.

The waiver provisions here can be contrasted with the exception in Statewide Coalition, where we determined that a portion cap rule on sugary drinks developed by the New York City Board of Health was adopted in excess of administrative authority. The portion cap rule banned the sale of a sugary drink in a cup that could contain more than 16 fluid ounces, "making it inconvenient, but not impossible, to purchase more{**32 NY3d at 265} than 16 fluid ounces of a sugary beverage while dining at a food service establishment" (23 NY3d at 698). By using an indirect method of regulation—buyer inconvenience—and exempting smaller-sized sugary drinks from the ban, the agency "necessarily chose between ends, including public health, the economic consequences associated with restricting profits by beverage companies and vendors, tax implications for small business owners, and personal autonomy" (id.). The rule was structured in a manner that indicated a weighing of diverse social and economic policy interests falling significantly outside the agency's public health mandate. In contrast, here, instead of improperly weighing competing special interests against the public health goal, the waiver provisions of the hard cap regulations are designed to further the legislative goal. Thus, the hard cap regulations do not evince an administrative attempt to advance an unrelated policy out of step with the enabling legislation or to mitigate the impact of the agency's rule based on social or public policy concerns unrelated to its mandate. Rather, they indicate a balancing of costs and benefits directly tied to the efficient use of state funds and quality of care goals directed by the legislature.

With respect to the second Boreali factor, in promulgating the hard cap regulations, the agency did not "write on a clean slate" but acted pursuant to a preexisting directive. Read together, the Public Health Law and Social Services Law provisions cited by DOH form a statutory framework directing DOH to use state health care funds in the most efficient and effective manner possible—to ensure, as the Supreme Court put it, "the biggest bang for the buck" (LeadingAge N.Y., Inc. v Shah, 56 Misc 3d at 604). By implementing the hard cap regulations, which attempt to steer state funds away from administrative uses and thus increase the impact of those funds on quality of care, DOH complied with this directive. Therefore, DOH "filled in details of a broad policy" articulated by the legislature (Greater N.Y. Taxi, 25 NY3d at 611, citing Boreali, 71 NY2d at 13).

The third Boreali factor—which considers the extent to which the legislature has attempted but failed to reach agreement on the issue—does not support petitioners' claim that the hard cap regulations address a topic exclusively within the legislative domain. While bills have been introduced in the legislature relating to executive compensation caps, they never made it out of committee. Moreover, many of the bills relied on by{**32 NY3d at 266} petitioners did not relate specifically to state funding of executive compensation or public health spending, and many of them were not proposed until after the issuance of EO38. As petitioners point out, the most relevant legislative proposal advanced prior to the adoption of the regulations was a January 2012 budget bill introduced by the Governor virtually contemporaneously with the issuance of EO38, which the legislature declined to pass. However, a single unsuccessful proposal is not in the same class as the repeated unsuccessful legislative efforts we have deemed indicative of the type of broad public policy issue reserved exclusively to the legislature. And,

"[w]hile it may have been more desirable for the Legislature to have passed a statute . . . , the question whether the [executive branch] had the authority to [take the challenged action] is not one of preference but of constitutionality. It is not the role of this Court to dictate how public policy should be implemented, but only to state when and how the Constitution has been offended" (Bourquin, 85 NY2d at 788).

With respect to the fourth Boreali factor, it is apparent that DOH utilized "special expertise" in crafting the hard cap regulations. Although EO38 contained specific instructions regarding limits on executive compensation and administrative expenses, DOH drew upon its understanding of the realities of the health care industry to adopt detailed definitional, waiver, and exemption provisions tailored to that sector. For example, DOH exempted from the executive compensation caps certain quasi-administrative jobs it identified as inseparable from the direct provision of program services, like hospital department chairs (10 NYCRR 1002.1 [b]). Thus, DOH ensured that state funds would be available to support appropriate compensation for experienced and skilled physicians and other health care workers, thereby providing an incentive for covered providers to offer competitive salaries to those most directly involved in patient care.

In totality, following consideration of the Boreali factors, we are unconvinced that, in adopting the hard cap regulations, DOH exceeded its regulatory authority. The legislature expressed a policy goal—that state health care funds should be expended in the most efficient and effective manner to maximize the quality and availability of [*9]public care—and the hard cap regulations, which focus exclusively on the appropriate{**32 NY3d at 267} use of state funds, are directly tied to that goal without improperly subverting it in favor of unrelated public policy interests.^[FN9] The Appellate Division correctly held that the hard cap regulations were a proper exercise of DOH's regulatory powers.

[2] Having rejected the separation of powers challenge to the hard cap regulations, we turn to petitioners' claims that the regulations are arbitrary and capricious. DOH points out that certain aspects of this claim may be premature and might better await a subsequent CPLR article 78 challenge brought by a provider disciplined for failing to comply with the regulations. To the extent petitioners mount a facial challenge to the hard cap regulations, they do not meet their "heavy burden" of establishing invalidity on this basis (see Matter of Acevedo v New York State Dept. of Motor Vehs., 29 NY3d 202, 227 [2017]). An administrative regulation stands as long as it "has a rational basis and is not unreasonable, arbitrary or capricious" (id. at 226). The task force's discovery of excessive executive compensation within the health care industry provided a rational basis for the hard caps, as did New York's rapid increase in health care spending, resulting in per capita Medicaid spending nearly twice the national average. We cannot say that it was irrational for DOH to promulgate regulations that direct public funds towards services and away from non-service-provider salaries and administrative overhead, as well as to permit waivers on a case-by-case basis when a covered provider establishes that higher executive compensation or administrative expenditures are necessary to deliver{**32 NY3d at 268} quality services to the public. Accordingly, petitioners' challenges to the hard cap regulations were properly rejected.

[3] We now turn our attention to the soft cap regulation, which precludes health care providers from paying executive salaries over $199,000 regardless of funding source, absent the applicability of an exception or the grant of a waiver. The soft cap regulation stands in stark contrast to the hard cap regulations, which do not actually restrict the total amount or percentage of funding a covered provider uses on administrative expenses or executive compensation (they merely limit the amount of state funding used for such purposes). Although we do not doubt that DOH's intentions were to advance the same interests underlying the hard cap regulations, we conclude that the calculus differs significantly with respect to the soft cap because it is not focused on the direct regulation of state health care funding. With respect to the soft cap, the first two Boreali factors are the most instructive and lead us to conclude that DOH's attempt to regulate the expenditure of private—as opposed to state—funds represents an unauthorized excursion by DOH beyond the parameters set by the legislature.

Unlike the hard cap regulations, which regulate only how providers use public funding, the soft cap imposes an overall cap on executive compensation, regardless of the funding source. The soft cap thus pursues a policy [*10]consideration—limited executive compensation—that is not clearly connected to the objectives outlined by the legislature but represents a distinct "value judgment." By attempting to control how an entity uses its private funding, DOH has ventured beyond legislative directives relating to the efficient use of state funds and into the realm of broader public policy concerns. Put another way, the soft cap imposes a restriction on management of the health care industry that is not sufficiently tethered to the enabling legislation identified by DOH, which largely concerns the expenditure of state funding for public health care. In this regard, the agency "wrote on a clean slate."

We are not suggesting that the regulation is entirely unrelated to the legislative goal of increasing efficiency and quality of health care by covered providers. If a provider pays an excessive salary, even using private funds, DOH may have a legitimate concern that the entity is misdirecting resources away{**32 NY3d at 269} from uses that directly impact services, i.e., money spent on outsized executive compensation is money not spent attracting or retaining more experienced or talented physicians by paying higher salaries to those who provide services. However, any impact on the efficiency or quality or affordability of services purchased by state funds emanating from the use of private funding sources for "excessive" executive compensation is indirect. Absent a clearer legislative delegation of authority in this regard, DOH has not demonstrated a sufficient connection between the soft cap and its general grant of authority to ensure "the biggest bang for the buck" with respect to the expenditure of state funds. Rather, the connection between the legislative aims and the regulatory means is simply too attenuated.

Indeed, the exceptions to the soft cap reflect a choice between competing public policy interests, rather than mere implementation of the legislature's chosen goal relating to the efficient use of state funds. A salary above the cap is permitted if "reviewed and approved" by the provider's board or other equivalent governing body including at least two independent directors or voting members, as long as it does not exceed "the 75th percentile" limitation (10 NYCRR 1002.3 [b]). Unlike the waiver provisions, which consider whether a provider can maintain the same high-quality services if forced to comply with the regulations, the soft cap exceptions are not clearly related to any quality of care goal. The fact that the executive compensation in a particular case was approved by a board containing two independent directors in no way necessarily promotes efficiency or quality or affordability of patient care—and it is therefore difficult to discern any connection between it and the policy adopted by the legislature in the enabling legislation. The same is true of the exception predicated on a board's review of "appropriate comparability data" (id. § 1002.3 [b] [2]) in approving executive compensation because there is no requirement that the compensation scheme ultimately adopted bear any particular relationship to that data. Like the sugary drinks portion cap rule we reviewed in Statewide Coalition, it appears that the soft cap "embodie[s] a compromise that attempted to promote [the legislative goal] without significantly affecting the . . . industry," which "necessarily implie[s] a relative valuing of . . . ends" that "involved more {**32 NY3d at 270}than simply balancing costs and benefits according to preexisting guidelines" (23 NY3d at 698).^[FN10]

DOH emphasizes that State Finance Law § 163 (2) (a) requires that services be purchased from "responsive and responsible offerers," and that state agencies should consider potential contractors' "financial ability, legal capacity, integrity, and past performance" when dispensing state funds (see State Finance Law § 163 [1] [c]). This is undoubtedly an important aspect of any contracting agency's mandate. However, the difficulty here is that DOH has not shown a connection between a provider's decision to use private funds to compensate its executive staff handsomely or even excessively and the absence of any of these essential contractor characteristics. That an entity [*11]may have sufficient surplus funds to pay what some might call an exorbitant salary is just as likely to demonstrate the presence of "financial ability" as it is to signal a lack thereof. The legislature has not found that generous compensation of executive staff necessarily reflects a lack of "integrity"—and such a conclusion is far from intuitive.^[FN11] If the agency has in fact drawn that conclusion (and it is not clear that there was any such impetus for the regulation), this would only reinforce our view that the soft cap regulation embodies a "value judgment" or "public policy" determination that is beyond the agency's health care funding mandate.

Critically, no claim is made here that executive compensation was restricted because DOH has determined, on a programmatic level, that there is a relationship between high executive income and relaxation of safety standards or diminution of other quality controls leading to poor patient outcomes.{**32 NY3d at 271} Needless to say, DOH has the authority to regulate in areas having nothing to do with state health care funding and, when doing so, can undoubtedly require health care providers to take certain actions (which may well involve the expenditure of private funds) to ensure patient safety and to meet required levels of service quality. But DOH does not justify the soft cap regulation on this basis, focusing instead on its authority to regulate state health care contracting and funding.

Viewed in this light, the soft cap regulation cannot be said to here "fill in details of a broad policy." Rather than determining the best way to regulate toward the legislative goal identified in its enabling legislation (i.e., using state funds to purchase affordable, quality care) with respect to the soft cap DOH appears to have envisioned an additional goal of limiting executive compensation as a matter of public policy and regulated to that end. Thus, we agree with the conclusion of the courts below that the soft cap regulation was promulgated in excess of DOH's administrative authority.

Accordingly, the order of the Appellate Division should be affirmed, without costs.

[*12]Garcia, J. (dissenting in part).

I agree with the majority that 10 NYCRR part 1002 is constitutional to the extent it requires a portion of state funds be spent directly on program services rather than on administrative expenses. However, I believe the Department of Health (DOH) exceeded its constitutional authority and acted arbitrarily in promulgating both the soft and hard caps on executive compensation. Accordingly, I dissent in part.

Executive Order (Cuomo) No. 38 (EO38), issued by the Governor in 2012, purportedly sought to curb "abuses involving public funds" by limiting the use of state monies for "excessive administrative costs and outsized compensation for . . . senior executives" (9 NYCRR 8.38). "[T]he commissioner of each Executive State agency that provides State financial assistance or State-authorized payments to providers of services," including the Commissioner of Health, was instructed to promulgate regulations, that, at a minimum, (1) limited allocation of state funds to administrative costs to 15% by 2015; and (2) prohibited the use of state funds for executive compensation in an amount greater than $199,000 per year (id.). This latter{**32 NY3d at 272} figure was based on the highest salary paid to an executive on the federal pay scale (id. § 8.38 [2] [b]; Matter of LeadingAge N.Y., Inc. v Shah, 153 AD3d 10, 14 [3d Dept 2017]).

In response to the Governor's order, DOH promulgated 10 NYCRR part 1002, placing restrictions on "covered providers" that derive over $500,000 from state funds and earn at least 30% of total annual in-state revenue from those funds for the covered reporting period and year prior (see 10 NYCRR 1002.1 [d]). Excluded from this definition, and the regulations' restrictions, are "[s]tate, 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" (id. § 1002.1 [d] [6] [i]).

The regulations track EO38 in requiring the same ratio of program service expenses and administrative expenses (see 9 NYCRR 8.38 [2] [a]; 10 NYCRR 1002.2 [a]). They also adopt the salary figure taken from the federal pay scale in denying state funds for executive compensation in an amount greater than $199,000 (10 NYCRR 1002.3 [a]). DOH added a provision, the so-called "soft cap," which subjects a covered provider to penalties if executive compensation exceeds $199,000 per year from any source (majority op at 255-256).

Section 1002.1 defines "administrative expenses" as those expenses "incurred in connection with the covered provider's overall management and necessary overhead that cannot be attributed directly to the provision of program services," and includes the "portion of the salaries and benefits of staff performing administrative and coordination functions that cannot be attributed to particular program services" (10 NYCRR 1002.1 [a]).

As the majority notes, the relevant statutes provide DOH with the authority and the responsibility to ensure "that the limited public funding available be directed as efficiently as possible toward high-quality services for New Yorkers in need" (majority op at 262; see Matter of Medicon Diagnostic Labs. v Perales, 74 NY2d 539, 545 [1989]; Public Health Law §§ 201 [1] [o], [p]; 206 [3]). As a means to that end, DOH chose to limit the amount of administrative expenses that may be reimbursed from public funds to ensure those funds are spent directly on program services. By limiting administrative expenses only where they divert state funds away from the actual provision{**32 NY3d at 273} of health care services, the regulation advances the goals set forth in the relevant statutes. As a result, I agree with the majority that the limit on administrative expenses is constitutional.

I also agree with the majority that DOH, in attempting to restrict a covered provider's use of private funds through the soft cap on executive compensation, "ventured beyond legislative directives relating to the efficient use of state funds and into the realm of broader public policy concerns" (majority op at 268). A broad grant of authority is not a license to resolve matters of social or public policy reserved to legislative bodies (Boreali v Axelrod, 71 NY2d 1, 9 [1987]). For the same reasons, the hard cap on executive compensation should be struck down.

Although the majority combines the administrative expenses cap with the state funding limitation on executive compensation under the "hard cap" heading, each of those regulations must be considered individually. [*13]Indeed, the restrictions are found in separate regulatory provisions (10 NYCRR 1002.2 [limits on administrative expenses], 1002.3 [limits on executive compensation]). Once the administrative expenses cap passes muster, it becomes clear that the "hard cap" on salary has no effect on whether "limited public funding . . . [is] directed as efficiently as possible toward high-quality services for New Yorkers in need" (majority op at 262).

Under the administrative expenses cap, a covered provider must spend at least 85% of funding on "program services expenses," rather than "administrative expenses" (10 NYCRR 1002.2 [a]). "Administrative expenses" include, by definition, "that portion of the 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" (id. § 1002.1 [a] [1] [i] [emphasis supplied]). Executive compensation is defined to include "all forms of cash and noncash payments or benefits given directly or indirectly to a covered executive, including but not limited to salary and wages, bonuses, dividends" (id. § 1002.1 [g] [emphasis supplied]). State funds cannot be used to pay a covered executive more than $199,000 (id. § 1002.3 [a]). Accordingly, once the administrative cap controls, the executive compensation cap has no effect on money spent on program services. For example, assume a covered provider is meeting and exceeding the expense ratio at 90% of state{**32 NY3d at 274} funds going directly to program services. But that same company, perhaps as a reward for achieving such performance, is paying a covered executive $249,000. That executive spends half of his or her time on program services and half on administrative expenses. As a result of the regulation, the company cuts $50,000 from the executive's compensation. That company is free to direct all of that "saved" money to administrative expenses, assuming it remains under the 15% administrative cap—effectively diverting state funds from program services. Put another way, as the Coalition of New York State Public Health Plans petitioners point out,

"because part 1002 requires a provider to attribute 85% of the funds or payments it receives from the State to provide DOH program services, DOH will receive no more or less such services if the provider chooses to use any portion of the remaining 15% allotted for administrative expenses to pay executives in excess of $199,000."

At a minimum, there is no mandate to direct any portion of what DOH considers "extravagant" compensation to program services and therefore no tie to "profligate and disproportionate spending on executive compensation unrelated to program services." The problem, of course, is that these provisions are neither complementary nor duplicative (see majority op at 267 n 9). Quite the opposite: the effect of one by operation makes the effect of the second unlawful.

Nevertheless, DOH argues that "excessive executive compensation and administrative expenses will divert scarce state resources away from the needy New Yorkers who are the intended beneficiaries of such funding." But the hard cap on compensation does not require that any additional funds be used for program services—it is not concerned with directing money toward "needy New Yorkers" but away from "overcompensated" executives. This is precisely the type of social policymaking prohibited by this Court's prior decisions (see Matter of Campagna v Shaffer, 73 NY2d 237, 242-243 [1989]; Council for Owner Occupied Hous. v Abrams, 72 NY2d 553, 558 [1988]; Under 21, Catholic Home Bur. for Dependent Children v City of New York, 65 NY2d 344, 359 [1985]; Subcontractors Trade Assn. v Koch, 62 NY2d 422, 428 [1984]; Matter of{**32 NY3d at 275} Fullilove v Beame, 48 NY2d 376, 379 [1979]; Matter of Broidrick v Lindsay, 39 NY2d 641, 646-647 [1976]).^[FN*]

This is not a new rule. In Boreali, we concluded that the agency had "stretched [the] statute beyond its constitutionally valid reach when it used the statute as a basis for drafting a code embodying its own assessment of what public policy ought to be" (71 NY2d at 9). And we prefaced our discussion of the four "coalescing circumstances" by noting that the analysis of those factors would "persuade us that the difficult-to-define line between administrative rule-making and legislative policy-making has been transgressed" (id. at 11). Indeed, prior to Boreali, we noted that "the general power to enter into contracts which is bestowed upon the executive branch of government ordinarily cannot serve as a basis for creating a remedial plan for which the executive never received a grant of legislative power" (Subcontractors Trade Assn., 62 NY2d at 428; see also Under 21, Catholic Home Bur. for Dependent Children, 65 NY2d at 359 ["(A)n executive may not usurp the legislative function by enacting social policies not adopted by the Legislature"]). It was not conflict with the authorizing legislation that doomed the executive policymaking in those cases, but rather an unlawful assumption of power by the executive in setting that policy (see Under 21, Catholic Home Bur. for Dependent Children, 65 NY2d at 358).

Although the majority characterizes the hard cap as a permissible "balancing of costs and benefits" (majority op at 265), the decision to cap executive compensation is a policy choice made by DOH from competing views of a hotly debated topic (compare Richard A. Posner, Are American CEOs Overpaid, and, if So, What if Anything Should be Done About it?, 58 Duke LJ 1013, 1045 [2009] ["Placing a ceiling on CEO salaries and other compensation would be a mistake. Apart from the infeasibility of a government agency's determining the amount of water in an executive's pay, capping salaries by government fiat, like other regulatory price controls, would incite wasteful activities that would be more costly to society than overcompensation"], {**32 NY3d at 276}with Charles C. Pak, Toward Reasonable Executive Compensation: Outcry for Reform and Regulatory Response, 1994 Ann Surv Am L 633, 659 [1995] ["The simplest response to excessive executive compensation would be to prohibit remuneration above a predetermined level or to impose a penalty for pay in excess of a specified level"]). This debate gained momentum following the 2008 financial crisis (see e.g. William O. Fisher, To Thine Own CEO Be True: Tailoring CEO Compensation to Individual Personality and Circumstances, 2017 Colum Bus L Rev 599 [2017]; Steven A. Bank et al., Executive Pay: What Worked?, 42 J Corp L 59 [2016]; Robert E. Wagner, Mission Impossible: A Legislative Solution for Excessive Executive Compensation, 45 Conn L Rev 549 [2012]; Stuart Lazar, The Unreasonable Case for a Reasonable Compensation Standard in the Public Company Context: Why It Is Unreasonable to Insist on Reasonableness, 59 Buff L Rev 937 [2011]; Omari Scott Simmons, Taking the Blue Pill: The Imponderable Impact of Executive Compensation Reform, 62 SMU L Rev 299 [2009]).

A policy choice about reasonable executive compensation aimed at influencing corporate behavior is law-making beyond DOH's regulatory authority (see Matter of New York Statewide Coalition of Hispanic Chambers of Commerce v New York City Dept. of Health & Mental Hygiene, 23 NY3d 681, 698-699 [2014] [the regulation "evidenced a policy choice relating to the question of the extent to which government may legitimately influence citizens' decision-making . . . . By choosing between public policy ends in these ways, the Board of Health engaged in law-making beyond its regulatory authority"]). DOH's legislative authority related to fiscal oversight cannot justify these regulations. We have made clear that "[e]ven under the broadest and most open-ended of statutory mandates, an administrative agency may not use its authority as a license to correct whatever societal evils it perceives" (Boreali, 71 NY2d at 9). No agency, through regulation, can "effect its vision of societal policy choices" (Matter of New York State Health Facilities Assn. v Axelrod, 77 NY2d 340, 346 [1991]). DOH, with its caps on compensation that have no effect on money directed to program services, has done just that.

In addition to its constitutional infirmity, the hard cap is arbitrary and capricious. As noted above, DOH fails to demonstrate how the hard cap will ensure that public funds are{**32 NY3d at 277} directed to program services rather than any other form of administrative expenses. Further, the benchmark for determining "excessive" compensation is itself arbitrary and capricious. The $199,000 cap was not the result of any compensation study of the health care industry, but instead was lifted from EO38, which for unknown reasons identified the highest salary paid to federal employees at Level I of the Executive Schedule as the benchmark for "outsized" executive compensation for all "providers of services" (see 9 NYCRR 8.38). The majority posits that the "research" conducted by the Governor's task force, convened to investigate nonprofit spending, provides "a rational basis for the hard caps" (majority op at 258, 267). However, as noted [*14]in the record, the task force never produced any report supportive of a $199,000 cap (see testimony of Doug Sauer, Chief Executive Officer, New York Council of Nonprofits, Inc., Feb. 6, 2012, at 3 ["The Governor's Executive Order later established a $199,000 threshold presumably based on the recent survey. The data compiled in this survey still has not been publically released. I do not know where the $199,000 figure came from"]). The majority's statement that "[t]he task force's discovery of excessive executive compensation within the health care industry provided a rational basis for the hard caps" (majority op at 267) is likewise unsupported by any citation or authority.

In an attempt to rationalize the caps on executive compensation, DOH argued: "[i]f a provider spends extravagantly on executive compensation—even out of private funds—it may be a red flag that the provider will spend state funds irresponsibly as well" (emphasis supplied). Yet, the regulation exempts certain entities from the cap, including state health care providers (10 NYCRR 1002.1 [d] [6] [i]). As noted in the testimony before the Senate Committee on Investigations and Government Operations, state executives earn upwards of seven figure salaries (see Sauer at 3). It is unclear why salaries greater than $199,000 for executives of state-run providers would not raise any "red flags." Moreover, the "caps have not been demonstrated through 'rational, documented, empirical determination' to have any connection to reducing state health care expenditures or to the more efficient use of taxpayer funds in the delivery of services" (LeadingAge, 153 AD3d at 31 [Mulvey, J., concurring in part and dissenting in part], citing New York State Assn. of Counties v Axelrod, 78 NY2d 158, 168 [1991]).{**32 NY3d at 278}

We have never before allowed an agency, by way of the power of the purse, to direct social policy (see Campagna, 73 NY2d at 242-243; Council for Owner Occupied Hous., 72 NY2d at 558; Under 21, Catholic Home Bur. for Dependent Children, 65 NY2d at 359; Subcontractors Trade Assn., 62 NY2d at 428; Matter of Fullilove, 48 NY2d at 379; Matter of Broidrick, 39 NY2d at 646-647). Under the majority's rule, the executive is now able to do so through the contracting authority of the State. Whoever the executive, whatever the policy, regulation is permissible if implemented under the guise of oversight of public funds—or "getting the biggest bang for the buck" to use the majority's phrase—regardless of whether the regulations do in fact further fiscal responsibility.