Can Maine pass a law capping how much hospital executives are paid, and how would the state actually enforce that?

Subject

Whether the Maine Legislature can cap hospital executive pay, and what enforcement mechanisms would work if it did. Issued by AG Aaron M. Frey on January 30, 2024 in response to a request from the Health and Human Services Committee chairs. The committee was looking back at L.D. 1321 (which would have limited hospital executive pay to no more than five times the median pay of the hospital's full-time RNs) and considering similar legislation for the next session.

Plain-English summary

Two Maine legislators asked the AG whether a state law capping hospital executive pay would be legal, and if so, how the state could enforce it. The AG said such legislation would be legally defensible but stressed that no relevant precedent allowed a certain assessment. He outlined three possible enforcement options.

On legality, the AG looked at the only really comparable example: New York. In 2012, then-Governor Cuomo issued an executive order capping pay for executives at health care providers receiving state funds at $199,000. The Department of Health wrote regulations to back it up. Hospitals sued. The case went up through the New York courts and ended with a split result. The cap was upheld where it limited the use of state funds for executive pay. It was struck down where it tried to limit non-state funds, because at that point the agency was acting beyond what the legislature had authorized. The due process challenge fell out of the case early; hospitals could not show a vested property interest in Medicaid reimbursements. The AG noted that LeadingAge is not a perfect precedent for Maine because the New York fight was about agency authority, not legislative authority. In Maine, a cap would come straight from the Legislature, so the agency-authority question would not arise.

The AG also flagged a Los Angeles ballot initiative that tried to cap hospital executive pay at the President's salary. A trial court rejected a challenge to placing it on the ballot. He noted California's Senate Bill No. 525, which prohibited local pay-cap ordinances at covered healthcare facilities through 2029.

The AG's bottom line on legality: no precedent clearly foreclosed a hospital pay cap, and legislation would be legally defensible. He expressly assumed a prospective law. Applying a cap to existing employment agreements could raise due process issues.

On enforcement, the AG offered three options:

1. Hospital licensure. All Maine hospitals must be licensed by DHHS under 22 M.R.S. §§ 1811-1833. The Legislature can make compliance with a pay cap a condition of licensure, and hospitals would have to disclose executive compensation in initial and renewal applications.

2. MaineCare participation. The Legislature could make pay-cap compliance a condition of participating in MaineCare. The AG said DHHS would likely need to update its State Plan and obtain federal approval. A hospital could potentially end its MaineCare participation to avoid the cap; to the AG's knowledge, all Maine hospitals participated at the time.

3. Direct cause of action. The Legislature can simply create a statutory cause of action and let the AG enforce it in court, with statutory penalties on the books for violations.

The AG was careful to add: he was not recommending that the Legislature impose a cap. He was answering the legal questions the committee asked.

What this means for you

If you are a Maine legislator considering a hospital pay-cap bill

The AG viewed prospective legislation as legally defensible but acknowledged uncertainty. He discussed possible enforcement through licensure, MaineCare participation, or an AG court action with statutory penalties. He noted that the New York plaintiffs apparently did not appeal dismissal of their due process claim and said this might indicate they saw insufficient merit in a constitutional claim.

If you are a hospital executive or sit on a hospital board

The AG viewed prospective legislation as legally defensible while acknowledging uncertainty. He said applying a cap to existing employment agreements could raise due process issues.

If you advise hospitals or healthcare organizations

The AG called prospective legislation legally defensible while saying its legality could not be assessed with certainty without relevant precedent. He noted that the New York plaintiffs' due process claim was dismissed at trial and apparently was not pursued on appeal.

If you cover Maine healthcare policy

The opinion sets out the AG's view that a prospective hospital pay-cap bill would be defensible, and discusses the licensure-versus-MaineCare enforcement options and the relevance of the LeadingAge litigation history.

Background and statutory framework

The committee's request grew out of L.D. 1321 from the prior session, which would have limited a hospital executive's pay to no more than five times the median compensation of the hospital's full-time registered professional nurses. That bill received an "ought not to pass" report. The committee chairs asked AG Frey to weigh in on legality and enforcement before the next session.

The AG noted that Maine hospitals must be licensed by the Department of Health and Human Services under 22 M.R.S. §§ 1811-1833 and that, to his knowledge, all Maine hospitals then participated in MaineCare. He discussed compliance conditions in those two programs as possible enforcement methods.

The most directly comparable legal development is the LeadingAge litigation in New York. The trial court upheld regulations limiting the use of state funds for executive compensation but invalidated regulations restricting both state and non-state funds because the Department of Health exceeded its statutory authority; the appellate courts affirmed. The trial court dismissed the plaintiffs' due process claim because they could not establish a vested property interest in Medicaid reimbursements. The appellate courts did not address that claim, and the AG said the plaintiffs may not have appealed its dismissal.

The Los Angeles ballot initiative the AG mentioned would have capped covered hospital executive pay at the President's salary (then $450,000 per Title 3 U.S.C. § 102). The California Hospital Association sued to keep it off the ballot and lost on that challenge. The AG wrote that California's Senate Bill No. 525 might prevent the initiative's enforcement even if it passed.

Common questions

Can Maine actually cap hospital executive pay?

The AG said the Legislature arguably has authority to enact a prospective cap and that such legislation would be legally defensible. He could not assess its legality with certainty without relevant precedent. The New York litigation addressed whether an agency had legislative authority to impose a cap.

Why does the AG keep saying "prospective only"?

Footnote 3 says the AG's analysis assumes a cap would not apply to existing employment agreements. Applying one to those agreements could raise due process issues.

What enforcement options would actually work?

Three are laid out in the opinion. The state could require compliance as a condition of licensure (every Maine hospital needs DHHS licensure under 22 M.R.S. §§ 1811-1833). It could make compliance a condition of MaineCare participation, for which DHHS would likely need a federally approved State Plan amendment. Or the Legislature could create a statutory cause of action and authorize AG enforcement in court with monetary penalties.

Could a hospital just opt out of MaineCare to dodge the cap?

Potentially. The AG said a hospital could choose to end MaineCare participation to avoid a cap imposed through that program. To his knowledge, all Maine hospitals participated when he wrote the opinion.

Did the AG recommend that Maine cap hospital executive pay?

No. The opinion is explicit on this. AG Frey said he was "simply expressing my opinion that the Legislature arguably has the authority to do so and outlining various enforcement options." The decision whether to legislate is the Legislature's.

What about the LeadingAge case in New York? Did it really say states can do this?

Sort of. LeadingAge let New York cap how state funds could be used (so a provider can't use Medicaid dollars to pay an executive over the cap), but blocked the agency from capping how non-state funds were used because the legislature hadn't authorized that. The fight was over agency authority, not constitutional limits on legislatures. A Maine law passed directly by the Legislature would not face the same agency-authority issue.

Could a hospital sue to block a Maine pay cap on constitutional grounds?

The opinion does not foreclose a constitutional challenge. The AG noted that the New York plaintiffs apparently did not appeal the dismissal of their due process claim and said it was impossible to assess a Maine cap's legality with certainty. He specifically warned that applying a cap to existing employment agreements could raise due process issues.

What was L.D. 1321?

A prior-session Maine bill that would have limited hospital executive pay to no more than five times the median compensation of the hospital's full-time registered professional nurses. The HHS Committee voted "ought not to pass" on it. This opinion was written because the same committee was thinking about a different version of the bill for a future session.

Citations

The opinion's central authorities, drawn directly from its text:

• Federal precedent referenced: Title 3 of the United States Code § 102 (Presidential salary, referenced in the LA ballot initiative).
• New York regulations: 10 NYCRR § 1002.3 (2013); 10 NYCRR § 1002.3(b).
• Maine licensure statute: 22 M.R.S. §§ 1811-1833 (hospital licensure as a possible enforcement vector).
• New York LeadingAge litigation chain: In re LeadingAge N.Y., Inc. v. Shah, No. 5352-13, 2014 WL 4207061 (N.Y. Sup. Ct. Aug. 13, 2014); LeadingAge New York, Inc. v. Shah, 56 Misc. 3d 594, 53 N.Y.S.3d 804 (N.Y. Sup. Ct. 2015); 153 A.D.3d 10, 58 N.Y.S.3d 651; 32 N.Y.3d 249, 114 N.E.3d 1032 (2018).
• Los Angeles ballot litigation: California Hospital Assoc. v. Wolcott, No. 23STCP00760 (Apr. 4, 2023, Cal. Sup. Ct., L.A. Cty.).

The opinion also references California Senate Bill No. 525 (2023) and Maine L.D. 1321 (prior session) as background.

Source

• Landing page: https://www.maine.gov/legis/lawlib/lldl/agops/agops.htm
• Original PDF: https://lldc.mainelegislature.org/Open/AG/Opinions/2024/ag_20240130.pdf

Original opinion text

MAINE STATE LEGISLATURE

The following document is provided by the LAW AND LEGISLATIVE DIGITAL LIBRARY at the Maine State Law and Legislative Reference Library http://legislature.maine.gov/lawlib

Reproduced from scanned originals with text recognition applied (searchable text may contain some errors and/or omissions) 2024-01
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January 30, 2024

The Honorable Joseph M. Baldacci
The Honorable Michele Meyer
Committee on Health and Human Services
100 State House Station
Augusta, ME 04333-0100

Dear Senator Baldacci and Representative Meyer:

I am writing in response to your letter requesting my thoughts regarding the legality of capping executive pay at hospitals and the means by which such a cap could be enforced. As you note, last session the Committee on Health and Human Services considered L.D. 1321, "An Act to Address Income Disparity in Health Care by Limiting the Compensation of Hospital Executives." This bill would have limited hospital executive pay to no more than five times the median compensation of the hospital's full-time registered professional nurses. While the Committee voted "ought not to pass" on the bill, you indicate that the Committee may consider other legislation limiting hospital executive pay in the upcoming session. You ask for my opinion regarding the legality of capping executive pay at hospitals and how such a cap could be implemented and enforced.

With respect to the legality of capping executive pay at hospitals, the only reported decisions I am aware of relate to an executive order issued by New York's governor in 2012 directing the Department of Health ("DOH") and other state agencies to promulgate regulations requiring that at least 75 percent of state funds be used for direct care and prohibiting using state funds for executive compensation in excess of $199,000 per year. The DOH adopted regulations imposing these limits on health care providers. 10 NYCRR § 1002.3 (2013). The DOH regulations went beyond the executive order by capping executive compensation at $199,000 regardless of the funding source. Id. at § 1002.3(b). This cap could be exceeded, though, if 1) the compensation did not exceed the 75 th percentile of the compensation provided to comparable executives in comparable facilities in the same geographic area, or 2) the compensation was reviewed and approved by the provider's governing body following an assessment of "appropriate comparability data." Id.

Various providers challenged the regulations in state court, alleging, among other things, that the DOH regulations violated the separation of powers principle and their due process rights.
The Honorable Joseph M. Baldacci
The Honorable Michele Meyer
January 30, 2024
Page 2

The trial court dismissed the plaintiffs' due process claim because they were "unable to establish a 'vested property interest' in Medicaid reimbursements." In re LeadingAge N. Y., Inc. v. Shah, No. 5352-13, 2014 WL 4207061, at *6 (N.Y. Sup. Ct. Aug. 13, 2014). Subsequently, the trial court held that the DOH regulations limiting the use of state funds for executive compensation were valid but that the regulations limiting the use of both state and non-state funds for executive compensation were invalid because they were promulgated in excess of the DOH's statutory authority. LeadingAge New York, Inc. v. Shah, 56 Misc. 3d 594, 610, 53 N.Y.S.3d 804, 817 (N.Y. Sup. Ct. 2015). Subsequently, both the Appellate Division and the Court of Appeals affirmed. 153 A.D.3d 10, 58 N.Y.S.3d 651; 32 N.Y.3d 249, 114 N.E.3d 1032 (2018). Neither of the appellate courts addressed the due process claim, and it may be that the plaintiffs did not appeal the dismissal of that claim.

The LeadingAge case is not particularly instructive because the primary issue litigated was whether a state agency had sufficient legislative authority to impose compensation caps. Here, on the other hand, any cap would be imposed directly by the Legislature and issues of agency authority would not be relevant.

Because you mention it in your letter, I also want to briefly discuss a citizen initiative in Los Angeles to cap hospital executive compensation. Essentially, under this initiative, the compensation of executives at hospitals and certain other healthcare facilities "shall not exceed the total compensation for the President of the United States, currently $450,000, as set forth in section 102 of Title 3 of the United States Code." The California Hospital Association filed a lawsuit to stop the initiative from being placed on the ballot, arguing that the initiative made a false statement regarding the amount of the President's compensation. The court rejected this argument. California Hospital Assoc. v. Wolcott, No. 23STCP00760 (Apr. 4, 2023, Cal. Sup. Ct., L.A. Cty.). It appears that the initiative will be placed on the March 5, 2024 ballot.

Without any relevant legal precedent, it is impossible to assess with certainty the legality of legislation capping hospital executive pay. Although the providers in LeadingAge initially made a due process challenge to compensation limits, they apparently abandoned it after it was dismissed by the trial court. This may indicate that the providers did not see sufficient merit in bringing due process or other constitutionally-based claims. In any event, in the absence of any precedent clearly foreclosing legislation capping hospital executive compensation, it is my view that such legislation would be legally defensible.

(Footnote 1: On October 8, 2021, New York's current governor issued an order discontinuing a number of prior executive orders, including the 2012 order limiting executive compensation.)

(Footnote 2: On October 13, 2023, California's governor signed into law Senate Bill No. 525, establishing a statewide minimum wage for covered healthcare workers and prohibiting local governments from enacting or enforcing ordinances limiting compensation at covered healthcare facilities through the end of 2029. So even if the Los Angeles initiative passes, state law may prevent its enforcement.)

(Footnote 3: This assumes that any such legislation would be prospective only and would not apply to existing employment agreements. Applying legislation limiting executive compensation to existing employment agreements could raise due process issues.)

The Honorable Joseph M. Baldacci
The Honorable Michele Meyer
January 30, 2024
Page 3

As to enforcement, there are at least three options. First, all hospitals in the state must be licensed by the Maine Department of Health and Human Services ("DHHS"). See 22 M.R.S. §§ 1811-1833. Compliance with compensations caps could be made a condition of licensure. This could be implemented by requiring hospitals to provide information about their executive compensation as part of initial licensure and all license renewal proceedings.

Second, hospitals could be required to comply with executive compensation caps as a condition of participating in the MaineCare program. To implement such a requirement, though, DHHS would likely need to update its "State Plan," and have the amendment approved by the federal Centers for Medicare & Medicaid Services. Further, while to my knowledge all hospitals in Maine currently participate in the MaineCare program, a hospital could potentially choose to end its participation to avoid imposition of compensation caps.

Third, the law could create a cause of action for violations of the compensation limits and authorize the Attorney General to bring enforcement actions in state court. The law could direct the court, if it finds a violation, to assess specific monetary penalties.

To be clear, I am not recommending that the Legislature impose caps on hospital executive compensation. In responding to your questions, I am simply expressing my opinion that the Legislature arguably has the authority to do so and outlining various enforcement options should the Legislature decide to limit hospital executive compensation.

I trust this information is helpful. Please let me know if I can be of further assistance on this issue.

Very truly yours,

Aaron M. Frey
Attorney General