Are you an entity that receives more than $500,000 from the Medicaid program on an annual basis? Does the amount you receive from Medicaid represent more than 30% of your revenue? If you answered yes to both of these questions, your entity is most likely subject to the regulations outlined in Executive Order #38 (EO #38). In July of 2014, New York State issued final guidance surrounding EO #38. The NYS website now includes detailed tutorials for determining whether you are a Covered Provider. If determined to be a Covered Provider, the disclosure form is required. The website also provides a detailed tutorial and step–by–step instruction guide for electronically submitting the disclosure form. NYS has also scheduled hour long training webinars throughout the month of July to help minimize the confusion. What is the purpose of EO #38? EO #38 regulations are designed to place limits on Administrative Expenses and Executive Compensation for nonprofit and for-profit entities that receive State Funds or State–Authorized Payments (SF/SAP). How do you determine whether you are a Covered Provider? New York State has provided tools and worksheets, namely, the Covered Provider Determination Worksheet to walk you through determining whether you are a Covered Provider and the required steps thereafter. Once established as a Covered Provider, the Covered Reporting Period will drive the limitation calculations and EO #38 Disclosure Form Submission (or waiver) deadline. The calculation to determine a Covered Provider is a two part test: (1) SF/SAP received during the Covered Reporting period and the one–year period immediately prior average over $500,000 annually, and (2) At least 30% of revenues are populated from state funds. Once determined to be a covered provider, the disclosure form is mandatory. What Executive Compensation limits are in store under EO #38? Executive Order #38 limits use of SF/SAP to pay executive compensation greater than $199,000. A Covered Executive typically consists of a compensated director, trustee, owner, or key officer who’s overall compensation exceeds $199,000 during the Covered Reporting Period. This compensation limit excludes those who provide program services (i.e. medical physicians in a nursing home). Be aware, the Executive Compensation limit applies to individuals employed by related organizations. In the event that a Covered Provider pays a related organization to perform administrative services, the covered executives of the related organization shall also be considered “Covered Executives” of the Covered Provider if more than 30% of such a covered executive’s compensation is derived from State Funds received from the Covered Provider. Included as sources of compensation are salary, compensatory distributions to a partner/shareholder, bonuses, dividends, perks (such as cars, housing, personal travel), and special executive deferred compensation plans not offered to all employees. The main exclusions from this calculation are health insurance, life insurance, and other benefits offered to other employees. The final regulations define executive compensation broadly, to include both cash and noncash benefits. It is recommended to seek guidance for this calculation. Organizations that may be affected should review their compensation arrangements to determine whether modifications are necessary to comply with the new limits or attempt to seek a waiver. Can Executive Compensation exceed $199,000 without filing a waiver? Yes it can, under the following conditions. If the calculated compensation is less than or equal to the 75th percentile of an approved compensation survey; the compensation is reviewed and approved by the provider’s board of directors or equivalent independent governing body relying on comparability data, and this information is sufficiently documented. Such information will not only be necessary for a Covered Provider to provide to state agencies to examine upon their request, but will likely also be necessary for justification should a Covered Provider seek a waiver to the limits on Executive Compensation. Just how much of a restriction is being imposed on Administrative Expenses? Administrative Expenses must not exceed 25% for a covered Reporting Period beginning between July 1, 2013 and June 30, 2014. This percentage drops to 20% for 2014 and to 15% in 2015. Early education is important due to the fact the definition of what constitutes administrative expenses under EO #38 is different from tax and cost report definitions. Timelines and planning ahead: For most nursing homes EO #38 will be effective for calendar year 2014. Therefore, it is probably a wise move to consider a midyear review to evaluate the impact on your entity. Covered Providers must submit an EO #38 Disclosure Form no later than 180 days after the close of their Covered Reporting Period or the cost report filing deadline. If you expect to exceed the Administrative Expenses and Executive Compensation limitations, you may submit a waiver application no later than the submission date of your EO#38 Disclosure Form. See New York State’s website for the Preliminary Guidance on EO #38 at http://executiveorder38.ny.gov. This document is accompanied by 4 worksheets designed to assist for profit and nonprofit entities: • Executive Summary • State Funds/State-Authorized Payments Calculation Worksheet • Administrative Expenses and Program Services Expenses Calculation Worksheet • Executive Compensation Calculation Worksheet If you have any questions, please feel free to email or call us at: William T. McDonald, CPA, MBA Partner EFPR Group T (585) 295–0557 F (585) 295–0657 | What’s Next Not to be confused with EO #38, Rotenberg Healthcare Consulting will feature an article on what you need to know about the 3% Medicaid withdrawal requirements in next month’s newsletter. William T. McDonald, CPA, MBA: Bill has been with firm since 1999. He manages a wide variety of audit engagements for the firm, and provides supervision and training for staff on audit procedures, audit standards and other technical issues. Bill has acquired experience in numerous industries including health care (specifically hospitals and nursing facilities), not–for–profit, governmental accounting, manufacturing, and ERISA engagements which include defined benefit, defined contribution, and health and welfare plans.