Insights & Resources

June 4, 2024 | Alerts

NY Upholds Elimination of Nursing Home Residual Equity Reimbursement

NY Upholds Elimination of Nursing Home Residual Equity Reimbursement

The Court of Appeals recently upheld New York State’s elimination of residual equity, a capital cost component of Medicaid rates afforded to for-profit nursing homes with older facilities (the “Elimination”). The Elimination has been in effect since April 2020; however, over 150 for-profit nursing home plaintiffs in the lawsuit received an injunction preventing the State from eliminating their residual equity reimbursement during the pendency of the litigation and will now have to pay back the residual equity reimbursements they received.

Historically, once a for-profit nursing home facility’s reached the end of its useful life[1], the nursing home’s capital cost component of their Medicaid reimbursement rate no longer included a return on equity, but the State Health Commissioner was permitted to “approve a payment factor for any facility for which he determines that continued capital cost reimbursement is appropriate” (known as “residual equity”). However, as part of the 2020-21 New York State Enacted Budget, residual equity reimbursement was eliminated as a mechanism to save the State money in the midst of the COVID-19 pandemic.

The lawsuit, filed on behalf of several nursing homes, challenged the Elimination on three grounds:

  1. the elimination of the residual equity rate component has an impermissible retroactive effect;
  2. the Medicaid rates, without the residual equity component, are “not reasonable and adequate to meet costs” as required by State Public Health Law; and
  3. the Medicaid rates violate the Plaintiffs’ equal protection rights.

The Court concluded that the Elimination was not impermissibly retroactive, reasoning that the Elimination affected rates for services provided on and after the enactment of the Elimination, so the nursing homes had not yet provided services for which they would seek reimbursement. As for whether Medicaid reimbursement rates are adequate without residual equity, the Court said that they are, noting “even without this factor, rates could be adequate to cover necessary costs and still reap budget savings for the State[.]” Interestingly, the Court factored into their analysis the ability of nursing homes to file a rate appeal. However, the Court failed to recognize that a rate appeal is only available for challenges to rates on the basis that there were errors in the cost and/or statistical data, not on the basis that it is inadequate or unreasonable.

Noting that not-for-profit nursing homes will continue receiving capital reimbursement on older facilities and will be unaffected by the Elimination, the lawsuit raised equal protection claims. The Court simply stated that for-profit and not-for-profit nursing homes have “fundamentally different ‘underlying economic purposes and incentives’” and thus are not similarly situated for purposes of an equal protection claim.

The financial impact of the Elimination and the Court’s upholding of the Elimination has a profound impact on the nursing home industry. The many nursing homes operating out of older facilities may be discouraged from making facility improvements and often unable to make such improvements without the residual equity component. Additionally, the upholding of the Elimination could discourage ownership changes.

If you have any questions about how the Elimination may impact you, please contact the authors, the Garfunkel Wild attorney with whom you regularly work, or contact us at [email protected].


[1] Useful facility life is defined by New York regulation as “a period of 40 years measured from the calendar year in which a facility commenced operations.”