In a
recent decision by the New York Court of Appeals, which is New York’s highest
court, the Court held that payors can withhold amounts paid to a provider if
the provider violates the corporate practice of medicine by ceding too much
control to a management service organization (“MSO”). Andrew
Carothers, M.D., P.C. v. Progressive Insurance Company, Docket No.
APL-2017-00225 (2019).
In this
matter, Dr. Carothers established a professional corporation (“PC”) to provide
MRI services. The PC then agreed to lease MRI facilities and equipment from
companies owned and controlled by non-physicians, which acted as an MSO to the
PC. The PC provided MRI services to car accident patients, who assigned
“no fault” insurance benefits to the PC, which then billed the insurance
companies. The insurance companies began to withhold payments and the PC
eventually filed suit to recover these payments. On appeal, the PC claimed the
insurance companies needed to demonstrate fraud to deny payment, but the Court
disagreed. The Court held that it is well settled 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.” The Court continued, however, and held that “fraudulently
incorporated” may be misleading and does not actually require proof of fraud.
As in many
jurisdictions, in New York, the corporate practice of medicine prevents
unlicensed persons from exercising control of professional corporations because
it would create an ethical conflict. In other words, it prevents medical
services from being provided by unlicensed third parties with only monetary
interests. Here, the jury found that the PC breached this rule by ceding too
much control to non-physicians and, therefore, was “fraudulently incorporated.”
The Court agreed because: (i) the equipment leases were far above the fair
market value and, in one year, the Court found that the difference between fair
market value and what was charged was $4,680,000; (ii) the MSO had the right to
terminate each lease without cause, regardless of payment, but the PC could not
terminate the leases at all; (iii) Dr. Carothers barely provided oversight of
the provision of medical services since he reviewed 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
and, instead, delegated 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 PC’s
bank account.
Considering
that MSOs have been extremely popular, especially in venture capital deals, it
is important to make sure that your corporate structure with the MSO is based
on, among other things, fair market value and that physicians retain control
over medical decisions.
We send these Alerts to our clients and friends to share our insights on new developments in the law. Nothing in this Update should be relied upon as legal advice in any particular matter. © 2019 Riker Danzig Scherer Hyland & Perretti LLP.
