New York High Court Upholds Law Requiring Approval for the Withdrawal of Nursing Home Equity or Assets

The New York Court of Appeals issued a decision on October 15, 2013 upholding the constitutionality of Public Health Law (PHL) § 2808(5)(c), a provision that requires the prior approval of the State Commissioner of Health for the withdrawal or transfer of nursing home equity or assets in an aggregate amount exceeding 3 percent of the facility’s most recently reported annual revenue from patient care services. The Court ruled that lower courts erred in concluding that the law was facially unconstitutional.

The statute at issue, PHL § 2808(5)(c), added a preapproval requirement to an already existing notice requirement. PHL § 2808(5)(a), enacted in 1977, requires a nursing home operator to obtain permission for the withdrawal of facility assets or equity when the facility is in a negative net worth position or when the withdrawal would give rise to a negative net worth position. PHL § 2808(5)(b), which was enacted in 2008, extended the State Commissioner of Health’s oversight of facility asset or equity withdrawals to facilities in positive equity positions, by requiring prior written notification of any withdrawal or transfer of facility equity or assets exceeding in the aggregate 3 percent of the facility’s most recently reported annual revenue from patient care services. The challenged provision, subdivision (5)(c), is a further extension of the same regulatory agenda, requiring preapproval for the withdrawal for which notice is required under subdivision (5)(b).

Specifically, subdivision (5)(c) provides: 

The commissioner shall make a determination to approve or disapprove a request for withdrawal of equity or assets under this subdivision within sixty days of the date of the receipt of a written request from the facility … In reviewing such requests the commissioner shall consider the facility’s overall financial condition, any indications of financial distress, whether the facility is delinquent in any payment owed to the department, whether the facility has been cited for immediate jeopardy or substandard quality of care, and such other factors as the commissioner deems appropriate.
The New York Court of Appeals’ opinion, written by Chief Judge Lippman, reasoned that the plaintiffs had not met their high burden of providing beyond a reasonable doubt that the statute was facially unconstitutional. The Court stated that the subdivision’s “freeze” on the availability of facility equity for private, non-facility purposes is “justified by the Legislature’s reasonable election to avoid financially improvident withdrawals and their potentially irremediable consequences altogether.” The Court went on to state that “facility funds once alienated may be very difficult to recapture and facility operations once compromised for lack of adequate funding may occasion irreparable harm within an especially fragile and dependent resident population.”

Plaintiffs in the case had argued that the enactment does not reasonably advance the Legislature’s purposes because it targets facilities that are not financially distressed and imposes an across-the-board freeze on assets, using as a touchstone an arbitrary percentage of annual revenue. Plaintiffs also contended that annual revenue is not a reliable indicator of a facility’s financial well-being. Defendants responded that facilities with positive net worth can still experience instability resulting from the withdrawal of facility assets. Defendants also argued that while annual revenue is not a perfect indicator of a facility’s financial health, it is rationally indicative of a facility’s ability to sustain services to its residents at mandated levels and thus can be reasonably used as a basis for determining how much may be withdrawn from a facility without the prior approval of the State Commissioner of Health.

Please click the link below to download the entire alert.

Service Specialties