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New York Court of Appeals Holds that PCs that Cede Excessive Control to MSOs Violate the Corporate Practice of Medicine Doctrine

On June 11, 2019, the New York Court of Appeals issued an opinion in Andrew Carothers, M.D., P.C. v. Progressive Insurance Company, 2019 NY Slip Op 04643, holding that an insurer could withhold payments for medical services provided by professional corporations “when there is willful and material failure to abide by licensing and incorporation statutes” without a direct finding of fraud.  The court found that medical professional corporations (“PCs”) ceding too much control of management activities, including finances and operations, to a non-physician violates the Business Corporation law and the corporate practice of medicine doctrine making the entity improperly incorporated, thus allowing an insurance company to withhold payment. While the scope of the Carothers case was limited to “no-fault” insurance reimbursement, this opinion is instructive on how New York courts may in the future examine the arrangements between PCs and management service organizations (“MSOs”).

In Carothers, Dr. Carothers established a PC (the “Carothers PC”) to provide MRI services. The Carothers PC agreed to lease MRI facilities and equipment from companies owned and controlled by non-physicians, which acted as an MSO to the Carothers PC. The court examined the arrangement and found that the terms between the MSO and Carothers PC were suspect because: (i) the equipment leases were far above the fair market value – the difference between fair market value and what was charged in one year was $4,680,000; (ii) the MSO had the right to terminate each lease without cause, regardless of payment, however no similar provision allowed the Carothers PC to terminate the leases without cause. In fact, the Carothers PC had no exit unless terminated by the MSO; (iii) Dr. Carothers’ oversight of the provision of medical services was practically nonexistent, as he did not perform services himself reviewing at most 79 reports out of a total of some 38,000, and he was not involved in evaluating or disciplining employees; and (iv) Dr. Carothers was not involved with the business operations, instead delegating the duties to a non-physician, who ran the business of the P.C., and who funneled millions of dollars to herself and the MSO from the Carothers PC’s bank account.

The Carothers PC provided MRI services to car accident patients, who assigned “no fault” insurance benefits to the Carothers PC, which then billed the insurance companies. Eventually the insurance companies began to withhold payments and the Carothers PC filed suit to recover these payments, giving rise to the underlying case. On appeal the Carothers PC claimed the insurance companies need to demonstrate fraud to deny payment. However, the Court of Appeals held to the contrary.

The Court reasoned that it is established law in New York that an insurance company can “withhold reimbursement for no-fault claims that are provided by fraudulently incorporated enterprises to which patients have assigned their claims.” However, the Court of Appeals here clarified that “fraudulently incorporated” may be misleading and does not actually require proof of fraud. The Court of Appeals held, “[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 11 NYCRR 65-3.16 (a) (12) without meeting the traditional elements of common-law fraud.” In New York, the Business Corporation law prevents unlicensed persons from exercising control of professional corporations. To incorporate, the licensed individual(s) must get a certificate stating that all shareholders, officers, and directors are licensed in the profession the entity is being incorporated to practice. The Court reasoned, in the medical context, this originates from the corporate practice of medicine doctrine preventing corporations from practicing medicine because it would create an ethical conflict. This is designed to protect medical services from being provided by unlicensed third parties with only monetary interests. Thus, here, the jury’s finding that the Carothers PC breached this rule by ceding too much control to non-physicians demonstrated a willful failure to abide by the incorporation statutes. This failure was sufficient to show that the Carothers PC was “fraudulently incorporated” within the confines of the statute. Accordingly, a PC in New York may have “no-fault” claims withheld if they cede too much control to unlicensed individuals for management services, and be determined to be “fraudulently incorporated.”

The Carothers opinion is useful to New York professional entities and investors looking to enter the New York health industry by clarifying the relationship between the New York Business Corporation law and New York’s corporate practice of medicine doctrine. This case serves as a reminder to PCs and MSOs to closely examine the contracted services and the nature of their relationship to ensure that the PC does not cede excessive control or oversight of its operations, especially those that may impair professional judgements.

This post was co-authored by Michael Lisitano, legal intern at Robinson+Cole. Michael is not yet admitted to practice law.

Copyright © 2019 Robinson & Cole LLP. All rights reserved.

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Leslie Levinson Health Business Attorney
Partner

Leslie Levinson is co-chair of the firm's Transactional Health Law Group and a member of both the Health Law and Business Transaction Groups. He has represented private and public businesses throughout his more than 30-year career. Although Les maintains an active business law practice, he concentrates on the transactional, regulatory, and compliance representation of health care and life science clients, including home care and hospice companies, physician practices, hospitals, information technology and medical device companies, health care equipment providers, and health care investors...

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David R. Gilboa Robinson Cole Health Law Associate
Associate

David Gilboa represents hospitals, health systems, physician groups, home care agencies, skilled nursing facilities, and other health care entities (both for profit and not-for profit) on a variety of health law and business issues, including transactional, corporate, regulatory, and compliance matters. He has extensive experience representing healthcare providers in all legal and regulatory matters. David is a member of the firm’s Health Law Group. 
 
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David represents medical practices, healthcare agencies, skilled nursing facilities and hospitals on corporate transactions, and mergers and acquisitions from initial negotiations to closings. His work in this area includes drafting and negotiating letters of intent, term sheets, asset and stock purchase agreements, and all ancillary agreements and conducting due diligence.
 
Regulatory
David advises health care providers on federal and state fraud and abuse laws, including the False Claims Act, Anti-Kickback law and the Stark law. He counsels clients on the Health Insurance Portability and Accountability Act (HIPAA), the Health Information Technology for Economic and Clinical Health (HITECH) Act and similar state privacy laws, licensure and certificates of need, scope of practice issues, and other regulatory issues facing health care providers. He also works on clinical trial agreements and advises clients on compliance with federal and state research regulations and Institutional Review Board requirements. He also assists providers with managed care contracting, health care delivery networks, accountable care organizations, clinical integration, and physician arrangements.
 
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David counsels health care providers on information technology issues and assists clients with software and hardware acquisitions and license arrangements, cloud services agreements, data use/transfer agreements and other information technology agreements.
 
General Corporate Matters
David also assists his clients on general corporate and business matters, which include drafting, reviewing and negotiating various contracts, such as sales agreements, license agreements, employment agreements, managed care contracts, business associate agreements, professional service agreements, and management and consulting services agreements.
 
Prior to joining the firm, David worked as an associate at two law firms in New York state, where he specialized in health care matters.
 

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