Planned Medicaid Minimum-Wage Reconciliations Upheld, But DOH Must Provide 18 NYCRR 518/519 Notice and Hearing Before Recoupment

Introduction

In Garden of Eden Home, LLC, et al. v. Bassett, 2025 N.Y. Slip Op. 1026 (3d Dep’t Feb. 20, 2025), the Appellate Division, Third Department, addressed a high-stakes dispute over New York State’s reconciliation and recoupment of Medicaid “minimum wage add-on” funds paid to Assisted Living Program (ALP) providers following the State’s phased implementation of a $15 per hour minimum wage. The petitioners—licensed adult care facilities participating in Medicaid as ALP providers—challenged the Department of Health’s (DOH) recalculation and recovery of 2017–2019 add-on payments.

The case sits at the intersection of two powerful currents in New York administrative law: (1) the State’s well-established policy interest in recouping public funds paid in excess, and (2) providers’ procedural rights to receive adequate notice and an opportunity to be heard before overpayments are recovered. The Third Department largely validated DOH’s substantive approach—treating the reconciliation as planned, not retroactive, and deferring to the agency’s rate-setting methodology—yet held that DOH must still comply with the specific regulatory notice-and-hearing requirements before recouping funds.

The ruling provides critical guidance to providers and agencies alike: planned Medicaid reconciliations tied to appropriations and State Plan Amendments (SPAs) are permissible and may be executed via provider-specific recalculations; however, even such reconciliations trigger 18 NYCRR 518.5 and 519.5 procedural protections when the State seeks to recoup overpayments.

Summary of the Opinion

Background: In 2016, New York enacted phased minimum wage increases. The Legislature appropriated funds to DOH (2016–2017 Aid to Localities Bill) to help Medicaid providers meet the new wage mandates. DOH initially distributed add-ons using regional calculations, later obtained CMS approval of a SPA that expressly contemplated annual reconciliation, and ultimately recalculated add-ons on a provider-specific basis after identifying data discrepancies, leading to recoupment demands for 2017–2019.
Holding, Part I—Planned Reconciliation: The court held the recoupment stemmed from a planned reconciliation—not a retroactive policy change. Because reconciliation was contemplated from the outset (appropriation language, DOH communications, and SPA approval), DOH did not need to justify recoupment under the narrow common-law recoupment doctrine. The shift from regional to provider-specific calculations was rational and not arbitrary or capricious.
Holding, Part II—Rate-Setting Methodology: The court upheld DOH’s provider-specific methodology, which used the baseline of the final pay period before each statutory wage increase to measure minimum wage impact. Rate-setting determinations are quasi-legislative and receive high judicial deference; petitioners failed to carry the heavy burden of showing the methodology was unreasonable or unsupported by evidence.
Holding, Part III—Notice and Hearing: Despite validating DOH’s substantive approach, the court found DOH failed to issue notices compliant with 18 NYCRR 519.5 and to provide the required opportunity to be heard under 18 NYCRR 518.5(a). General communications since 2016 did not satisfy regulatory notice requirements. The matter was remitted to DOH for further proceedings, with a reminder that hearing issues are limited by 18 NYCRR 519.18(a).
Procedural Dispositions: Petitioners abandoned any challenge to the dismissal of their declaratory judgment claim. The judgment was modified to reinstate the third cause of action (notice and hearing) and remitted; otherwise affirmed.

Analysis

1) Precedents Cited and Their Influence

Matter of Cortlandt Nursing Home v Axelrod, 66 N.Y.2d 169 (1985): The Court of Appeals recognized New York’s strong public policy favoring recovery of public funds improperly received, balanced against equitable considerations and potential prejudice. The Third Department leaned on Cortlandt to underscore the legitimacy of recouping Medicaid overpayments, situating DOH’s reconciliation within the State’s broader policy to correct overpayments.
Matter of Westledge Nursing Home v Axelrod, 68 N.Y.2d 862 (1986): Permits retroactive adjustments and recoupments where rates were based on mathematical miscalculation, computer error, or false information. Although the court ultimately characterized DOH’s action as planned reconciliation (making common-law recoupment analysis unnecessary), Westledge reinforces the State’s authority to correct rate errors post hoc in appropriate circumstances.
Matter of Daleview Nursing Home v Axelrod, 62 N.Y.2d 30 (1984): Limits the common-law right of recoupment where payments arise from quasi-legislative discretion involving expertise. The Third Department distinguished this line of authority by emphasizing that the minimum wage add-on was subject to an expressly planned reconciliation regime. Hence, DOH’s recoupment did not hinge on common-law recoupment in the first place.
Matter of Bethany Nursing Home & Health Related Facility v Axelrod, 106 A.D.2d 809 (3d Dep’t 1984): Supports the proposition that DOH does not act arbitrarily by adjusting methodology where circumstances and prior communications justify the change. This bolstered the court’s conclusion that moving from regional to provider-specific calculations was rational.
Matter of Mount Loretto Nursing Home v Perales, 169 A.D.2d 47 (3d Dep’t 1991): Invoked to avoid windfalls. The court reasoned that refusing reconciliation would produce unjust enrichment to providers who received add-ons in excess of their actual statutory wage costs.
Matter of Nazareth Home of the Franciscan Sisters v Novello, 7 N.Y.3d 538 (2006): Reaffirms that rate-setting is quasi-legislative and receives a high degree of judicial deference; only a compelling showing of unreasonableness warrants annulment. The Third Department applied this deferential standard to uphold DOH’s methodology.
Matter of Arnot Ogden Med. Ctr. v DOH, 214 A.D.3d 1195 (3d Dep’t 2023), lv denied, 41 N.Y.3d 905 (2024): Emphasizes the “heavy burden” on challengers to show a rate methodology is unreasonable and unsupported by any evidence. This directly supported the court’s rejection of petitioners’ methodological challenge.
Matter of New York Univ. Med. Ctr. v Axelrod, 188 A.D.2d 207 (3d Dep’t 1993), lv denied 81 N.Y.2d 711 (1993); Matter of Grand Manor Nursing Home Health Related Facility, Inc. v Novello, 39 A.D.3d 1062 (3d Dep’t 2007), lv denied 9 N.Y.3d 812 (2007): Both contribute to the strong line of authority granting DOH wide berth in rate-setting absent a compelling showing of unreasonableness.
Matter of Corning Natural Gas Corp. v PSC, 221 A.D.3d 1075 (3d Dep’t 2023): The court cited Corning for the legitimacy of balancing regulatory objectives with resource constraints. DOH’s policy of reimbursing only statutory, deadline-based increases was justified as a resource-conserving measure consistent with the appropriations’ purpose.
Matter of Avenue Nursing Home & Rehabilitation Ctr. v Shah, 112 A.D.3d 1178 (3d Dep’t 2013): Further support for deference to agency balancing within rate-setting frameworks.
Matter of Visiting Nurse Serv. of N.Y. Home Care v DOH, 5 N.Y.3d 499 (2005): The cornerstone for the procedural ruling. It holds that when DOH determines an overpayment and seeks recovery, the provider is entitled to notice and an opportunity to be heard under 18 NYCRR 518.5 and 519.5. The Third Department relied on VNSNY to conclude that general advance warnings of future reconciliation do not satisfy the specific regulatory notice requirements.
Matter of White Plains Nursing Home v Whalen, 53 A.D.2d 926 (3d Dep’t 1976), aff’d 42 N.Y.2d 838 (1977): Consistent with VNSNY, underscoring the right to be heard before recoupment.
Standards of Review: The court reiterated Article 78’s arbitrary and capricious standard (see, e.g., Matter of Concourse Rehabilitation & Nursing Ctr., Inc. v Zucker, 217 A.D.3d 1189 (3d Dep’t 2023); Matter of Evercare Choice, Inc. v Zucker, 218 A.D.3d 882 (3d Dep’t 2023); Matter of John E. Andrus Mem., Inc. v Commissioner of Health, 225 A.D.3d 959 (3d Dep’t 2024); Matter of Ventresca-Cohen v DiFiore, 225 A.D.3d 9 (3d Dep’t 2024)). These cases framed the deferential review applied to DOH’s decisions.

2) The Court’s Legal Reasoning

a) Planned Reconciliation vs. Retroactive Policy Change

The linchpin of the court’s analysis is the characterization of DOH’s actions as a planned reconciliation process, not a retroactive policy reversal. Several record anchors supported this conclusion:

The 2016–2017 Aid to Localities Bill contemplated advances and interchanges, signaling provisional funding subject to adjustment.
DOH’s contemporaneous 2016–2017 guidance and communications consistently flagged that funds not used appropriately would be returned and that methodologies might change.
CMS’s 2018 SPA approval expressly embedded an annual reconciliation mechanism, validating DOH’s framework for truing up payments to actual minimum wage costs.

Against that backdrop, DOH’s shift from an initially expedient regional add-on to a provider-specific calculation was rational. The regional approach, used while awaiting SPA approval and to ensure timely support for providers implementing the Minimum Wage Act, was always provisional. Treating the reconciliation as planned meant DOH’s authority to recoup did not depend on the narrower common-law recoupment doctrine (and its Daleview limitations).

b) Deference to DOH’s Provider-Specific Methodology

Petitioners argued that DOH’s methodology penalized providers who raised wages before the statutory deadlines. DOH, relying on an affidavit from its Health Care Financing Program Manager, explained that using the final pre-increase pay period as the baseline aligned with a statewide policy to conserve resources while aiding compliance—reimbursing mandated increases at the mandated times, not voluntary earlier increases.

Applying Nazareth, Arnot Ogden, and related authority, the court emphasized the “heavy burden” borne by challengers in rate-setting disputes. DOH’s choice reasonably balanced fiscal stewardship with the appropriations’ purpose: to mitigate the cost of complying with statutory minimum wage increases. The methodology was supported by record evidence (including the surveys and the policy rationale) and therefore not arbitrary, capricious, or irrational.

c) Notice and Hearing Are Mandatory Before Recoupment

The court’s most consequential procedural holding is that, once DOH determines an overpayment and seeks recovery, 18 NYCRR 518.5(a) and 519.5 apply. Those regulations require:

Clear notice of the determination and its basis,
The amount of the overpayment, the effect and effective date of the action, and
Information about the right to a hearing.

DOH argued that providers had been on notice of reconciliation since 2016, but the court held that generalized, forward-looking advisories do not substitute for the specific, regulated notices required once an overpayment is identified and recovery is sought. Citing VNSNY, the court mandated compliance and remitted the matter for further proceedings. It also reminded providers that hearing issues are limited by 18 NYCRR 519.18(a)—a signal that hearings will likely focus on calculation accuracy and specific overpayment determinations, not a wholesale relitigation of DOH’s policy choices or overarching methodology.

3) Impact and Implications

a) For ALP and Other Medicaid Providers

Substantive Validity of Reconciliations: Providers should expect courts to uphold planned reconciliations tied to appropriations and SPAs, including provider-specific recalculations that replace interim regional estimates.
Scope of Hearing Rights: Providers are entitled to 18 NYCRR-compliant notices and an opportunity to be heard before recoupment. However, the hearing will likely be confined to the correctness of the overpayment determination in the particular case (data inputs, calculations, application of the established methodology), not the wisdom of the reconciliation policy itself.
Documentation and Surveys Matter: Because reconciliations may turn on provider-submitted survey data (e.g., wage levels in the final pre-increase pay period), meticulous recordkeeping is critical. Inadequate or inconsistent submissions may drive overpayment findings.
No Reimbursement for Early, Voluntary Raises: The decision confirms that appropriated funds designed to offset statutory wage mandates will not necessarily cover voluntary early increases, reflecting a policy choice to align aid with legally required milestones.

b) For DOH and Other Agencies

Designing Reconciliation Programs: Agencies may use provisional methodologies to expedite funding, provided they clearly signal reconciliation and ultimately anchor final payments in provider-specific costs consistent with SPA terms and appropriations.
Procedural Compliance Is Non-Negotiable: Even when agency action is substantively sound and planned, recovery of overpayments requires strict adherence to 18 NYCRR 518.5 and 519.5. Agencies should deploy standardized notice templates that specify the determination, basis, amount, effective date, and hearing rights.
Limiting Hearing Scope: Agencies can and should rely on 18 NYCRR 519.18(a) to limit hearings to fact-bound overpayment issues. Courts are likely to enforce those limits where the overarching methodology has already been judicially upheld as rational.
Avoiding Windfalls and Preserving Resources: The court’s reasoning endorses reconciliation programs that prevent windfalls and protect public funds, reinforcing the State’s policy interest recognized in Cortlandt and related cases.

Complex Concepts Simplified

Planned Reconciliation vs. Retroactive Policy Change: A planned reconciliation is built into the funding program from the beginning, often referenced in appropriations, agency guidance, and SPAs. It signals that initial payments are provisional and will be trued up later. A retroactive policy change is when an agency changes the rules after the fact without prior notice or planning. The former is generally permissible; the latter triggers stricter scrutiny.
Common-Law Recoupment: A judge-made doctrine allowing recapture of funds paid by mistake (e.g., miscalculation). It does not apply to payments made under quasi-legislative discretion (Daleview). Here, DOH did not need to rely on this doctrine because the reconciliation was planned, not a simple error correction.
Rate-Setting as Quasi-Legislative: When an agency sets payment rates, it exercises broad discretion akin to lawmaking. Courts defer heavily to such decisions unless challengers show the methodology is unreasonable and unsupported by evidence.
18 NYCRR 518.5 and 519.5 Notices: These regulations require specific, formal notices before DOH can recover alleged overpayments. The notice must detail the determination, basis, amount, effective date, and hearing rights. General advisories about future reconciliations do not suffice.
Hearing Scope (18 NYCRR 519.18(a)): Hearings typically address whether an overpayment was correctly determined in a given case, not broad policy challenges. Expect a focus on data accuracy, calculation mechanics, and application of established methodology.

Conclusion

Garden of Eden Home, LLC v. Bassett crystallizes a two-part rule that will reverberate across Medicaid reimbursement disputes in New York. First, when reconciliation is planned—grounded in appropriations language, agency guidance, and SPA approval—DOH may replace interim rate estimates with provider-specific recalculations and recover overpayments, and courts will defer to the agency’s reasonable methodology. Second, even in the context of such planned reconciliations, DOH must comply with the specific procedural safeguards of 18 NYCRR 518.5 and 519.5 before recoupment—issuing formal notices that state the amount, basis, and effective date, and offering an opportunity to be heard, with the scope of that hearing limited by 18 NYCRR 519.18(a).

The decision thus fortifies the State’s ability to protect public funds through rational and pre-announced reconciliation regimes, while reaffirming that providers are entitled to meaningful, regulation-compliant process before financial recoveries are executed. Agencies designing similar programs should pair clear reconciliation mechanisms with rigorous notice-and-hearing procedures; providers should prepare to defend the accuracy of their data and calculations at hearings, recognizing that policy-level challenges to the methodology are unlikely to succeed once a court has found the agency’s approach rational.