Nearly 15 years ago, in State Farm Mutual Automobile Ins. Co. v. Mallela, 4 N.Y.3d 313 (2005), the New York Court of Appeals ruled that an insurer may withhold payment under New York's no-fault law for medical services provided by a professional medical corporation based on its “willful and material failure to abide by” the state's licensing and incorporation statutes without needing to show specific instances of billing fraud. Over the years, insurers have relied on that decision to avoid paying claims submitted by medical providers that were secretly owned by non-physicians in violation of New York's prohibition of the corporate practice of medicine.

The court has just issued a new decision, Andrew Carothers, M.D., P.C. v. Progressive Ins. Co., 2019 N.Y. Slip Op. 04643 (N.Y. June 11, 2019), confirming that it meant what it said in Mallela: No evidence of fraud, fraudulent intent, billing fraud, or fraud of any sort is needed to demonstrate that a health care provider is ineligible for no-fault reimbursement when it is in violation of applicable licensing rules.

Background

Under New York's Business Corporation Law, only licensed professionals may own and control a professional service corporation. Moreover, licensed professionals may incorporate only if they are the sole organizers, owners, and operators of the professional corporation. To incorporate, a licensed individual must obtain a certificate issued by the New York State Department of Education certifying that each of the proposed shareholders, directors, and officers is authorized by law to practice the profession that the corporation is being organized to practice. New York also limits shareholders' actions after a professional corporation is formed, by prohibiting them from transferring their voting power to any person who is not a licensed professional in the field.

These restrictions are not new. New York has long prohibited unlicensed individuals from organizing a professional service corporation for profit or exercising control over such an entity. In the medical context, the underlying policy concern is that the “corporate practice of medicine” could create ethical conflicts and undermine the quality of care afforded to patients—with higher costs, less effective medical treatment, and mistrust of the insurance system.

In 2001, the New York State Insurance Department, which now is known as the New York State Department of Financial Services (DFS), promulgated an anti-fraud regulation interpreting these statutory requirements. Codified at 11 N.Y.C.R.R. §65-3.16(a)(12), the regulation states that a health care provider, as a condition of eligibility for no-fault reimbursement, must comply with all applicable licensing requirements. Ever since 2001, the department has consistently maintained that a medical professional corporation is ineligible for no-fault insurance reimbursement if it fails to meet any condition of licensure, including the requirement of physician control. See Evan H. Krinick, “DFS Continues Long History of Strongly Supporting Anti-Fraud Reg,” N.Y.L.J. (May 2, 2019).

'Mallela'

In 2005, the court decided Mallela (a case in which my firm and I were co-counsel for State Farm).

The case began when State Farm filed a complaint in the U.S. District Court for the Eastern District of New York seeking a judgment declaring that it did not have to reimburse allegedly unlawfully incorporated medical professional corporations for no-fault claims that had been assigned to them by their patients. State Farm alleged, in essence, that to obtain payments under the requirements of no-fault insurance, the defendants had evaded New York law prohibiting non-physicians from sharing ownership in, and controlling, medical professional corporations.

According to the complaint, the unlicensed defendants paid physicians to use their names on paperwork filed with New York state to establish medical professional corporations. The insurer alleged that once the medical professional corporations were established under the facially valid cover of the nominal physician-owners, the non-physicians actually operated and controlled the companies.

When the case reached the court, it held that an insurer may withhold payment for medical services provided by a professional corporation based on its “willful and material failure to abide by” New York's licensing and incorporation statutes.

In its unanimous decision, the court pointed out that the no-fault law requires insurance carriers to reimburse patients (or their medical provider assignees) for “basic economic loss.” It observed that 11 N.Y.C.R.R §65-3.16(a)(12) excluded from the meaning of “basic economic loss” payments made to unlicensed or fraudulently licensed providers, thus rendering them ineligible for reimbursement.

The court rejected the defendants' contentions that they were entitled to reimbursement even if fraudulently licensed and that the regulation conflicted with the prompt payment goals of the no-fault law. The court said the regulation was valid.

'Carothers'

Now, the court has decided Carothers—a perfect complement to Mallela and a ringing endorsement of the plain meaning, and the insurance department's interpretation, of 11 N.Y.C.R.R §65-3.16(a)(12).

Carothers (a case in which my firm is among several counsel for the insurers), had its genesis in 2004, when Andrew Carothers, M.D., P.C., a professional service corporation, was formed by Andrew Carothers, M.D., a radiologist. The PC provided magnetic resonance imaging (MRI) services and was incorporated after Carothers met Hillel Sher, a non-physician who owned and controlled two companies that together held long-term leases for three fully equipped, operational MRI facilities in New York City.

Carothers hired Irina Vayman, another non-physician, as the PC's executive secretary.

Most of the scans performed at the PC's facilities were of patients allegedly injured in motor vehicle accidents. The patients assigned their rights to receive first-party no-fault insurance benefits to the PC, which billed insurance companies to recover payment on the assigned claims.

Insurance companies stopped paying the PC's no-fault claims in 2006. The PC filed multiple collection actions against insurance carriers in New York City Civil Court seeking to recover unpaid claims of assigned first-party no-fault insurance benefits.

In response, the insurers asserted that, under Mallela and 11 N.Y.C.R.R §65-3.16(a)(12), the PC was not eligible to seek reimbursement of the insurance benefits because it was controlled by unlicensed non-physicians. The insurance companies contended, among other things, that Carothers was merely a nominal owner of the PC and that it actually was owned and controlled by Sher and Vayman, who were not physicians.

In response, the PC argued that Mallela allowed insurers to withhold payments under 11 NYCRR 65-3.16(a)(12) only where the professional corporation's ostensible or real managers had engaged in conduct “tantamount to fraud,” which had not occurred here.

The cases were consolidated for trial, where the insurers introduced evidence indicating, among other things, that:

• At the MRI facilities, Carothers' oversight of the provision of medical services was practically nonexistent;

• Vayman, not Carothers, had contact with the physicians who generated patient traffic;

• Patient care protocols had been set up by Carothers' predecessor;

• Carothers was not involved in evaluating or disciplining employees; and

• Carothers himself reviewed at most 79 reports out of a total of about 38,000.

An expert on radiology practice testified that “there was absolutely no quality control; there was no supervision; … the reports did not reflect [the] reality [of] what the films showed,” and “the quality of what was being produced … was abysmal.” The expert opined that “what was being done here was not being done with an eye towards producing any kind of a quality product. This was … being done to sort of get an image on the film. And those images are not the images that would lend themselves towards being highly diagnostic types of examinations. … [A] lot of the images are replete with a tremendous amount of artifacts that reflect … inadequate equipment performance.”

The jury found that the insurers had proved that the PC was “fraudulently incorporated” and, accordingly, not entitled to recover the payment it sought from the insurers.

The case reached the Court of Appeals, which affirmed the ruling in favor of the insurance companies.

The Court's Decision

In its decision in Carothers, the court ruled that Mallela does not require a finding of fraud for an insurer to withhold payments to a medical service corporation improperly controlled by non-physicians. Accordingly, the court decided, the jury charge did not need to include a requirement that the jury find fraudulent intent or conduct “tantamount to fraud” to reach a verdict in favor of the insurers.

The court ruled that, under Mallela and 11 NYCRR 65-3.16(a)(12), an insurance carrier need not demonstrate that a professional service corporation or its managers engaged in common law fraud in order to deny payment of no-fault benefits. Rather, the court stated, a corporate practice that shows “willful and material failure to abide by” licensing and incorporation statutes may support a finding that the provider is not an eligible recipient of reimbursement under the no-fault rules.

Moreover, the court declared that a jury is not required to evaluate the extent to which corporate misconduct approximates fraud. The court was clear that the no-fault insurance regulations make providers ineligible for reimbursement when their statutory violations are more than “merely technical” and “rise to the level of” a grave violation.

The court concluded that the jury's finding in Carothers that the PC was in material breach of the “foundational rule” for professional corporation licensure—that it violated the principle of control by licensed professionals—was enough to render the PC ineligible for reimbursement.

Conclusion

The court's decision in Carothers puts to rest any question about the standard that must be met for insurers to be able to refuse payments to health care providers assigned the right to their patients' no-fault benefits. Simply stated, a provider owned or controlled by a non-physician is not entitled to receive no-fault payments. Period. 

Evan H. Krinick, managing partner of Rivkin Radler, can be reached at [email protected].