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The state Department of Health overstepped its bounds when it imposed conflict of interest regulations and cost caps on childhood early intervention providers that had been rejected by the Legislature, a Nassau judge has determined.

Ruling in a lawsuit brought by an association of providers serving more than 25,000 children statewide, Supreme Court Justice Thomas Feinman (See Profile) said the Department of Health acted “clearly outside” its function when promulgating conflict of interest regulations.

As far as the challenged compensation caps were concerned, the judge said in Agencies for Children’s Therapy Services v. New York State Department of Health, 15763/12 that the health department “did not merely fill in the details of broad legislation, but rather, wrote on a clean slate, created its own comprehensive rules without the benefit of legislative guidance.”

In the Early Intervention program, the state, municipalities and third-party insurers reimburse private, for-profit providers for their services. Various sections of the Public Health Law lay out the process, which includes screening, evaluation and service coordination.

One provision, §2544(5), notes that evaluations cannot include referrals to specific providers if a child is deemed eligible for help.

In an analysis ordered by the Legislature in 2003, the Health Department concluded that more than 90 percent of New York City evaluators and more than 44 percent of evaluators in the rest of the state offered services to the same children they once examined.

That same disproportionality still existed, the state said in its defense in the current action.

Governor Andrew Cuomo’s January 2012 budget bill included legislation to prevent conflict of interest among evaluators, service coordinators and providers.

The Legislature passed the budget without the measure, but the health department amended an existing provision to promulgate conflict of interest rules that, among other things, would have prohibited a professional who evaluates a child’s eligibility from then providing services to the same child.

The Legislature also rejected a proposal by Cuomo specifying how much state reimbursement could go towards administrative expenses and compensation.

The governor responded by issuing an executive order that directed state entities to put forward regulations to address the extent and nature of executive compensation and administrative costs.

The health department enacted the so-called “anti-excess” or “use-of-funds” rule under 10 NYCRR §§ 1002.2(a) and 1002.3(a), which declared that 75 percent of state funds had to be directed to patient care. Also, state funded compensation for executives was to be capped at $199,000.

Agencies for Children’s Therapy Services—a non-profit industry association representing more than 25 providers—sued the health department and Cuomo in 2013.

The association argued in court papers that the health department had exceeded its authority by enacting rules that had nothing to do with health matters.

In an affidavit, Steven Sanders, executive director of Agencies for Children’s Therapy Services, said the rules would cause major disruptions, harming member organizations and affecting parents’ rights to choose evaluators.

The department countered the provisions were entirely lawful.

With regard to the conflict of interest rule, it pointed to Public Health Law provisions like §201(1)(o), which said the agency was empowered to “regulate the financial assistance granted by the state in connection with all public health agencies.”

The agency also submitted an affidavit from the director of its Center for Community Health, who oversees the Bureau of Early Intervention.

The director, Bradley Hutton, said the conflict of interest rules were consistent with the agency’s powers because they were meant to ensure providers were picked in the child’s best interests “and not on the best financial interests of the evaluator or the evaluator’s agency.”

The agency said the anti-excess rule was permissible oversight of state funds that aimed to channel more state money to patient care.

Feinman granted a preliminary injunction on enforcement of the conflict of interest rule in February 2013, but the anti-excess rule came into effect.

Crossing the Line

Feinman looked to the Court of Appeals’ 1987 ruling in Boreali v. Axelrod, 71 N.Y.2d 1, to examine if the health department “cross[ed] the line from administrative rule making into legislative policy making.”

The Boreali court laid out four factors to evaluate whether agency action had gone too far including a question of whether an agency “did not merely fill the details of broad legislation” but made a “comprehensive set of rules” without legislative guidance.

Here, Feinman said the health department’s rules filled no “statutory gap.”

Referring to Public Health Law provisions including §2544(5), Feinman said lawmakers have “made clear how service providers are chosen and how conflicts of interest are best avoided, leaving no provision for the [health department] to have any regulatory role in this area.”

Likewise, with the anti-excess rule, the health department “created its own comprehensive rules,” after rejection by the Legislature he said.

Another Boreali factor pertained to whether an agency “acted in an area in which the legislature had repeatedly tried—and failed—to reach agreement.”

In regard to the conflict of interest rule, Feinman said “refusal by the Legislature, the arm of the government charged with the task of enacting laws, to adopt the Governor’s proposed rule is enough evidence that this choice, in fact, belongs to the legislature, not to an executive agency.”

The plaintiffs also showed that the anti-excess regulation was “nearly a verbatim copy of the proposal that the Legislature rejected, not just once but several times.”

Another Boreali factor questions if the agency had any “special expertise or technical competence” when promulgating the rule.

Feinman said there was “no evidence” to indicate it applied any special expertise to the rules.

Furthermore, the department’s reasoning behind the regulations did not take into consideration “how the prohibitions will impact” the Early Intervention Program, he said.

Todd Geremia, a partner at Jones Day and Allison Waks, an associate, represented Agencies for Children’s Therapy Services. David Cooper, now of counsel to Quinn Emanuel Urquhart & Sullivan, also appeared on the brief.

In an interview, Geremia said Feinman’s ruling was a “proper application in the separation of powers doctrine” and was a “faithful application of the framework from the Boreali decision and its progeny.”

He said the invalidated conflict of interest rule would have “twist[ed] the whole program” by dis-incentivizing providers to make evaluations so as to avoid being conflicted out of offering service.

Meanwhile, the compensation cap “essentially punished providers for providing efficient services.”

Assistant Attorney General Ralph Pernick appeared for the Attorney General’s office. An office spokeswoman declined to comment.