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Nursing homes file lawsuit over New York’s profit cap, say taking back excess revenue is unconstitutional

Ellicott Center for Rehabilitation and Nursing in Buffalo, as seen in May of 2020. The nursing home is one of 250 across the state to file a lawsuit against New York's profit cap mandate.
Tom Dinki
Ellicott Center for Rehabilitation and Nursing in Buffalo, as seen in May of 2020. The nursing home is one of 250 across the state to file a lawsuit against New York's profit cap mandate.

Nursing homes are suing to stop New York from limiting their profits, one of the state’s cornerstone measures to crack down on the long-term care industry in the wake of the COVID-19 pandemic.

The lawsuit, filed Wednesday in U.S. District Court and signed by over 250 nursing homes across the state, asks a federal judge to declare the state’s nursing home profit cap law unconstitutional.

“This law was done behind closed doors, without the involvement of providers, and is detrimental, actually, to the men and women who work in nursing homes,” said Stephen Hanse, president and CEO of the New York State Health Facilities Association, one of several nursing home lobbying groups involved in the suit. “It has the potential to close nursing homes the way it negatively impacts nursing homes that are high quality but struggling financially,”

WBFO file photo
Stephen Hanse, president and CEO of the New York State Health Facilities Association

The profit cap was included in the 2021 state budget passed by lawmakers in April and is set to take effect on New Year’s Day. It mandates nursing homes put at least 70% of revenue toward direct care of residents, including at least 40% toward paying direct care staff. It also limits nursing home profits to no more than 5%.

Proposed by then-Gov. Andrew Cuomo, it was one of the state’s major legislative responses to the deaths of over 15,000 nursing home residents to COVID-19. A report by state Attorney General Letitia James found some for-profit nursing homes diverted money to related parties rather than investing in staff and personal protective equipment during the pandemic.

Nursing homes lobbying groups have threatened litigation over the profit cap for months. Michael Balboni, executive director of the Greater New York Health Care Facilities Association, told WBFO last month he expected a filing to happen in December.

The lawsuit filed Wednesday names New York State Health Commissioner Dr. Mary Bassett as the defendant. Bassett, who took office earlier this month, would be in charge of enforcing the profit cap.

A spokesperson for the state Department of Health says it does not comment on pending litigation.

The lawsuit makes several arguments as to why the profit cap allegedly violates the U.S. Constitution or is otherwise invalid.

New York doesn't have right to take back federal funds: The profit cap allows the state to confiscate a nursing home’s excess revenue. The money would then be placed into a pooled fund for nursing homes across the state.

Nursing homes would have had to pay back to the state approximately $824 million had the cap been in effect in 2019, according to the lawsuit.

However, a large portion of nursing home revenue comes from Medicaid, the government-funded program that reimburses them for caring for residents who otherwise couldn’t pay. Federal, state and local governments split the cost of Medicaid.

Federal regulations prohibit states from using federal Medicare funds to subsidize their own Medicaid programs, according to the lawsuit. Therefore, the lawsuit alleges the profit cap violates the Supremacy Clause, which says federal laws supersede state laws, as well as the portions of the Fifth and Fourteenth Amendments related to the seizure of private property.

“The state doesn't have the right to take federal dollars and loop it back in,” Hanse said.

New York hasn’t gotten permission from the federal government: The lawsuit claims New York must get a Medicaid State Plan Amendment approved by the U.S. Centers for Medicare and Medicaid Services (CMS), which regulates nursing homes at the federal level, in order to implement the profit cap. However, according to the lawsuit, New York has yet to even ask CMS for approval.

No relationship between profitability and quality: Of the approximately $824 million nursing homes would have to pay back to the state, $338 million would come from nursing homes considered “quality providers” by the New York State Department of Health, according to the lawsuit.

“It penalizes facilities based solely on their profitability, without regard to the quality of care they provide,” Hanse said.

Nursing homes have long argued there’s no correlation between profitability and quality, saying many facilities rated five stars by the federal government do not meet the profit cap’s spending mandates.

Therefore, taking away profits violates the equal protection clauses of the Fourteenth Amendment, according to the lawsuit.

However, New York’s for-profit nursing homes have worse average federal inspection scores than nonprofit and government-run nursing homes, according to a 2019 report by the Long Term Care Community Coalition, a New York City-based advocacy group for nursing home residents.

Fines are excessive: Because there is allegedly no correlation between profitability and quality, the lawsuit argues that any penalties from the state are excessive and in violation of the Eighth and Fourteenth Amendment’s protections against excessive fines

Violates federal labor law: The lawsuit alleges the profit cap interferes with the National Labor Relations Act, which lays out the process for collective bargaining, because it would force some nursing homes to hire more staff or pay staff more than is required by their contracts with unionized workers, the lawsuit alleges.

Workers of Buffalo Community Healthcare Center speak with the media Nov. 17, 2021 about their new three-year contract. The event outside the nursing home was supposed to be a picket demanding higher wages, but instead turned into an announcement and celebration of a new contract.
Tom Dinki
Workers of Buffalo Community Healthcare Center, represented by 1199 SEIU, speak with the media Nov. 17, 2021 about their new three-year contract.

The lawsuit was criticized by the largest nursing home workers union in the state, 1199 SEIU. In a statement, Yvonne Armstrong, senior executive vice president of 1199 SEIU’s long term care division, said it was “disappointing” nursing homes were focusing their energy on fighting on the profit cap, rather than “working with all stakeholders to address common challenges and improve quality of care.”

Prior to the filing, WBFO asked 1199 SEIU policy analyst Dennis Short about the possibility of a lawsuit. Short said the union believed nursing homes could meet the profit cap’s standards by raising wages to attract and hire more staff.

“I think that there's an opportunity here to really learn from what happened over this past almost two years now, and figure out together how we improve care in these facilities,” he said. “That's the opportunity that's before us and our hope is that employers will take that opportunity.”

Hanse said the nursing home industry does want to work with the state and the union, but that long-term care must stop being treated “as an expense, and rather as an investment.”

He argued the state needs to increase its Medicaid reimbursement rates and use that increase to help nursing homes increase wages amid a national staffing shortage, which has seen nursing homes lose 12% of their workforce since the pandemic began.

Nursing home lobbying groups are asking the state Legislature this upcoming session for an “emergency investment” of $259 million, which they say would restore $168 million in Medicaid cuts last year and provide a 3.4% Medicaid rate increase for this year.

“We can't compete against Macy's, we can't compete against Target now, based on the nation-leading low Medicaid reimbursement nursing homes receive,” Hanse said. “Organized labor knows that, so we need to work in partnership. We need to increase New York's Medicaid rate and dedicate 100% of that increase to our workforce.”

As for now, the profit cap is set to go into effect on Saturday. A federal judge would have to put an injunction on the law in order to prevent that.

Tom Dinki joined WBFO in August 2019 to cover issues affecting older adults.
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