The highest New York state court has ruled unanimously that a health insurance company may withhold payment of claims under the state's no-fault auto insurance law if the medical corporation that has received assignment from patients for payment is not legally constituted under state law.
The case of State Farm Mutual Automobile Insurance Co. v. Robert Mallela (M.D.) et al. was submitted to the New York Court of Appeals by the 2nd U.S. Circuit Court of Appeals.
According to facts in the case outlined in the eight-page decision Tuesday by the state appeals court, patients covered under New York's no-fault law frequently assign their claims to their providers rather than seek reimbursement directly from an insurance company. Also, New York law requires all owners of a professional corporation to be members of that profession and authorized to practice in the state, the court said.
State Farm originally filed a complaint in U.S. District Court for the Eastern District of New York asking the court to rule that it need not reimburse the defendants because they were fraudulently incorporated, according to court documents. State Farm alleged the unlicensed defendants paid physicians to use their names on paperwork filed with the state to establish medical service corporations, the state court opinion said.
The federal trial court dismissed State Farm's complaint, "holding that defendants' noncompliance with the licensing and incorporation statutes did not extinguish State Farm's duty to pay, so long as the actual providers acted within the scope of their licenses in rendering care."
State Farm persisted in its challenge and the federal appeals court asked the New York state appeals court to rule in a procedure called certification of a question, which was whether a fraudulently incorporated corporation is entitled to reimbursement under New York insurance law and its implementing regulations.
The state court ruled that it wasn't. The New York high court noted a regulation promulgated by the state insurance superintendent that allows insurers to withhold reimbursement from fraudulently licensed medical corporations, that the rule was crafted within the scope of the superintendent's authority and "has the force of law and represents the policy choice of the state."
The New York State Board for Professional Medical Conduct accepted the surrender of Mallela's medical license on Jan. 8. Mallela was facing 19 charges of professional misconduct, including fraudulent billing; working with nonphysicians to establish and run a professional medical corporation; and negligent and incompetent care of patients.
The suit, originally filed in 2000, names more than 50 business entities and 25 individuals.
According to Evan Krinick, attorney for State Farm, a partner in the Uniondale, N.Y., law firm of Rivkin Radler, the money at stake in the suit is "I believe, in excess of $6 million, but the total amount this issue touches is many multiples of that."
"No-fault fraud is epidemic in New York and the medical clinics are at the epicenter of that fraud," Krinick said. "In New York, every person is entitled to $50,000 in no-fault medical benefits. Multiply that by the number of accidents that could occur or you might stage and it's a multi-million industry."
Some of the accidents involved in fraud cases are real and some of the patients are truly injured and are referred to a network of fraudulent clinics by their attorneys, Krinick said. But many accidents are staged, he said, and many of the patients fake injuries in schemes that involve businessmen operating the clinics, lawyers, doctors, even chop-shop operators in what Krinick said was "the makings of a good Hollywood movie."
The case moves back to the federal appeals court, which likely will send return it to the federal trial court for a hearing on its merits, Krinick said. The insurer not only seeks to void the claims, but also is asking for damages against the defendants for unjust enrichment and fraud.
According to Francis Serbaroli, a lawyer with the New York law firm of Cadwalader, Wickersham & Taft, which represents seven other insurance companies that filed friend-of-the-court briefs in the case, the decision is a victory for the insurance industry attempting to combat fraud.
"The insurance department in New York estimates that fraud in the no-fault insurance activities is around $1 billion a year. The insurance commissioner recognized this problem and that's why he came out with this regulation in 2002. The court upheld the rule not only as constitutional, but it is a sufficient basis for an insurance company to deny payments."
Serbaroli said doctors participating in such schemes are typically not unwitting victims, but "bottom-of-the-barrel physicians" who may already have lost their ability to bill Medicare or Medicaid because of billing problems.
"When they have nothing left but their license, they'll sell it to the highest bidder and be the nominal owners of 20 or 30 corporations that they wouldn't have any role in overseeing," he said.