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Nursing Homes Challenge New York’s Profit Cap as Unconstitutional

Written by: Jeffrey T. Wolber, Esq.

Edited by: Nicole A. Callahan, Esq.

A group of over 200 nursing homes are challenging a New York law that sets a cap on their profits. The lawsuit was filed on December 29, 2021 in the U.S. District Court for the Northern District of New York (Case No. 1:21-cv-01384).

The law, codified at Public Health Law § 2828, imposes an annual profit cap for residential health care facilities equal to 5% of their expenses. It also provides that such facilities must spend at least 70% of revenue on “direct resident care,” including 40% on “resident-facing staffing.” Further, a facility must pay excess profits to the state, and if it fails to spend the minimum for resident care and staffing, it must pay the difference to the state. The Commissioner of Health is authorized to audit facilities’ reports for compliance and to make case-by-case exceptions for “unexpected or exceptional circumstances” preventing compliance.

This law was passed on April 19, 2021, as part of the New York State health and mental hygiene budget for the 2021-22 fiscal year (S.2507-C, part GG). It was set take effect on January 1, 2022. However, on December 31, 2021 Governor Hochul signed Executive Order 4.4, which postponed the law from taking effect until January 30, 2022 “in light of the staffing shortage caused by the Covid-19 public health emergency.”

The nursing homes now seek a declaration that the law is unconstitutional. The complaint argues that the law would violate the Supremacy Clause by effectively permitting a state to capture federal Medicare funds paid to nursing homes, contrary to federal law. It also argues that the law violates due process by imposing a financial penalty based solely on profitability and without regard to quality of care or whether losses were sustained in prior years. It further argues that the law violates the National Labor Relations Act to the extent that it would require a nursing home to deviate from the terms of an existing collective bargaining agreement.  It is unclear how the New York State Health Commissioner, who would be in charge of enforcing the profit cap, will respond.