Requirements for Non-Member Managers (“Outside Managers”) of LLCs Operating Article 28 Facilities

Members of a limited liability company (LLC) designate a person or persons to manage the LLC, as provided in the LLC's operating agreement. The members may choose to manage the company themselves or may choose to have an outside manager manage the company. These "outside managers" are not members of the LLC but will have certain management powers and responsibilities under the LLC's operating agreement. Because outside managers control and direct the LLC, when an LLC that will be managed by an outside manager seeks to become the established operator of a facility licensed under Article 28 of the Public Health Law (an Article 28 LLC), the members of the LLC must have a written management agreement, approved by the Commissioner of Health, with the outside manager that reserves to them specific powers and obligations. These required provisions are set forth below.

  1. Article 28 LLCs which are to be managed by outside managers must have a written management agreement, approved by the Commissioner of Health and including the following provisions:
    1. A description of the proposed roles of the members of the Article 28 LLC during the period of the proposed management contract, which must clearly reflect retention by the members of ongoing responsibility for statutory and regulatory compliance;
    2. A provision that clearly recognizes that the responsibilities of the members of the Article 28 LLC are in no way obviated by entering into a management agreement and that any powers not specifically delegated to the manager through the provisions of the management agreement remain with the members. The following language must be included:
    3. "Notwithstanding any other provision in this contract, the facility remains responsible for ensuring that any service provided pursuant to this contract complies with all pertinent provisions of Federal, State and local statutes, rules and regulations.";
    4. A plan for assuring maintenance of the fiscal stability, the level of services provided and the quality of care rendered by the facility during the term of the management agreement; and
    5. Retention of authority by the members of the Article 28 LLC to discharge the manager and its employees from their positions at the facility with or without cause on not more than 90 days' notice. In such event, the facility shall notify the department in writing at the time the manager is notified. The members of the Article 28 LLC must provide a plan for the operation of the facility subsequent to the discharge of the manager and such plan must be submitted with the notification to the department.
  2. The members of the Article 28 LLC must retain sufficient authority and control to discharge its statutory and regulatory responsibility. The following powers must be specifically reserved to the Article 28 LLC members, both in the Article 28 LLC's Operating Agreement and in the management agreement:
    1. Direct independent authority over the appointment or dismissal of the facility's management-level employees and medical staff;
    2. Approval of the facility's operating and capital budgets and independent control of the books and records;
    3. Adoption or approval of the facility's operating policies and procedures and independent adoption of policies affecting the delivery of health care services;
    4. Authority over the disposition of assets and authority to incur liabilities not normally associated with day-to-day operations;
    5. Approval of certificate of need applications filed by or on behalf of the facility;
    6. Approval of debt necessary to finance the cost of compliance with operational or physical plant standards required by law;
    7. Approval of the facility's contracts for management or for clinical services; and
    8. Approval of settlements of administrative proceedings or litigation to which the facility is a party.
  3. An Article 28 LLC desiring to be managed by managers who are not members must submit a proposed written management agreement to the department at least 60 days prior to the intended effective date, unless a shorter period is approved in writing by the Commissioner, due to extraordinary circumstances. In addition, the Article 28 LLC shall also submit, within the same time frame, the following:
    1. Documentation demonstrating that the proposed manager holds all necessary approvals to do business within New York;
    2. Documentation of the goals and objectives of the management arrangement, including a mechanism for periodic evaluation by the members of the Article 28 LLC of the effectiveness of the arrangement in meeting those goals and objectives;
    3. Evidence of the manager's financial stability;
    4. Information necessary to determine that the character and competence of the proposed manager, and its principals, officers and directors, is satisfactory, including evidence that all facilities it has managed within New York have provided a substantially consistent high level of care in accordance with applicable statutes and regulations, during the term of any management agreement contract or their operating certificate; and
    5. Evidence that it is financially feasible for the facility to enter into the proposed management agreement for the term of the agreement and for a period of one year following expiration, recognizing that the costs of the agreement are subject to all applicable provisions of Part 86 of 10 NYCRR.
  4. To demonstrate evidence of financial feasibility, the facility shall submit projected operating and capital budgets for the required periods. Such budgets shall be consistent with previous certified financial statements and be subject to future audits.
  5. During the period between a facility's submission of a request for initial approval of a management contract and disposition of that request, a facility may not enter into any arrangement for management contract services other than a written interim consultative agreement with the proposed manager. Any interim agreement shall be consistent with these provisions and shall be submitted to the department no later than five days after its effective date.
  6. The term of a management contract shall be limited to three years and may be renewed for additional periods not to exceed three years only when authorized by the commissioner. The commissioner shall approve an application for renewal provided that compliance with this section and the following provisions can be demonstrated:
    1. That the goals and objectives of the arrangement have been met within specified time frames;
    2. That the quality of care provided by the facility during the term of the arrangement has been maintained or has improved; and
    3. That the level of service to meet community needs and patient access to care and services has been maintained or improved.

    An agreement for which an application for renewal has been submitted on a timely basis to the commissioner may be extended on an interim basis until the commissioner approves or disapproves the application for renewal.