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Insurance fraud case in New York may impact first party no-fault benefits

February 14, 2019, Albany, NY — A high-profile insurance fraud case on appeal in New York is being closely watched by fraud fighters across the country for the impact the decision will have on no-fault law.

The case, Andrew Carothers, M.D., P.C. v. Progressive Insurance Company, involves a carrier’s defense of delayed payments and nonpayment based on a medical provider’s “fraudulent incorporation” due to the operational requirements that exist for medical practices. Oral arguments before the New York Court of Appeals are being set, and the matter should be ruled on this year.

Background
As a safeguard to ensure that medical decisions are made solely by licensed professionals, New York law prohibits the corporate practice of medicine. Under the Business Corporation law, providing medical services is restricted to licensed professionals or an “organization otherwise authorized by law,” [1] namely PCs or PLLCs whose shareholders are all licensees of one profession and only practice said profession.[2] Furthermore, licensed professionals cannot share their profits or split fees with non-licensed professionals.[3] That said, violations of these provisions often arise when medical practitioners engage management companies to run their medical businesses.

Under 11 NYCRR 65-3.16(a)(12), no-fault carriers are not required to provide reimbursement for “basic economic loss” for services rendered by unlicensed or fraudulently licensed healthcare providers. This provision extends to medical providers that are in violation of New York’s Business Law.

Providers that violate New York’s prohibition on the corporate practice of medicine can face fines and penalties, as well as prosecution.
Upholding a Carrier’s Defense of Nonpayment
On April 5, 2017, New York’s Second Judicial Department upheld a judgment rendered by the Richmond County Civil Court in the matter of Andrew Carothers, M.D., P.C. v. Progressive Insurance Company,[4] affirming the insurance carrier’s defense for nonpayment by finding the practice to have violated New York law because a majority of the practice was controlled by nonphysicians, Hillel Sher and Irina Vayman.[5] In 2004, Dr. Carothers formed a professional service corporation (the “Practice”) to perform MRI scans at three separate MRI facilities that were owned and controlled by Sher.

The corporate filings list Dr. Carothers as the sole owner, shareholder, director and office of the Practice. Insurance carriers, including Progressive, denied numerous claims from the Practice for first-party no-fault benefits, arguing that the Practice was fraudulently incorporated. Evidence at trial revealed that the Practice’s profits were transferred to Sher and Vayman through grossly inflated lease payments made to a company owned and controlled by Sher and through the direct transfer of funds by Vayman, who served as the Practice’s executive secretary, into her own personal accounts.

During 2005 and 2006, Sher and Vayman received a total of $12.2 million from the Practice, while Dr. Carothers received $133,000. In addition to splitting profits with non-professionals, Dr. Carothers was found to have no significant involvement in the management of the Practice, as Vayman was in charge of hiring all personnel and signed and issued payments from the Practice’s operating account.

At issue before the Appellate Division was whether the jury was properly instructed on the elements of an insurer’s fraudulent incorporation defense. The Court had instructed the jury that the insurers had to establish that Sher and/or Vayman were de facto owners of the Practice or that they exercised substantial control over same.

For de facto ownership, the jury would need to find that the nonphysicians exercised dominion and control over the Practice and its assets, and that the nonphysicians shared risks, expenses and interests in the profits and losses of the Practice. The jury was further instructed that, to find control, the nonphysicians would have had a significant role in the guidance, management and direction of the Practice.

In addition, the court provided the jury with a list of factors that they might want to consider in making their determination, as they were instructed that a decision should be made based on the totality of the circumstances involved. The jury subsequently found that the insurers proved their defense that the Practice was fraudulently incorporated by clear and convincing evidence, and that Dr. Carothers was not engaged in the practice of medicine during the time the Practice was in business as required by New York law.[6]

In a unanimous decision by the four judges, the Appellate Division set aside the verdict as to the determination that Carothers failed to practice medicine, but upheld the verdict as to the finding of fraudulent incorporation, thereby affirming insurance carrier’s defense of nonpayment under 11 NYCRR 65-3.16(a)(12).

In October 2017, the Practice was granted leave to appeal its decision to the New York Court of Appeals. Oral arguments as to the elements necessary to establish the defense of fraudulent incorporation are expected to occur sometime in 2019.

State Farm v. Mallela: “Actual Ownership”
Carothers is not the first “fraudulent incorporation” case to head to the New York Court of Appeals. In 2005, the Court of Appeals held in State Farm Mut. Auto. Ins. Co. v. Mallela [7] that medical providers that are not solely owned and controlled by physicians, as required under New York law, are ineligible for reimbursement of no-fault claims. The court fu

Source: Insurance Journal

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