On June 11, the New York Court of Appeals, in Andrew Carothers, M.D., P.C. v. Progressive Insurance Company, 2019 NY Slip Op 04643, decided that an insurer may withhold payment for services provided by a medical services corporation improperly controlled by non-physicians whether or not the medical services corporation acted fraudulently or with fraudulent intent.

The Court of Appeals began its decision with a clear and broad statement that the practice of medicine by corporations controlled by non-physicians is prohibited:

“Only licensed physicians may practice medicine in New York.  The unlicensed are not bound by the ethical rules that govern the quality of care delivered by a physician to a patient.  By statute, regulation, and the common law, the corporate form cannot be used as a device to allow nonphysicians to control the practice of medicine.”

A jury in the lower court found that the plaintiff, Andrew Carothers, M.D., P.C. (“Carothers PC”), which provided MRI services, was controlled and operated by Hillel Sher, a non-physician.  Sher owned and controlled companies that held long-term leases for three MRI centers and equipment.  The evidence at trial showed that Sher’s companies:

  • Leased the MRI equipment, which was 10 to 11 years old, to Carothers PC for $547,000 per month, an “exorbitant” amount. One piece of equipment subleased to Carothers PC for $75,000 per month was leased by Sher’s companies for $5,950.  Carothers PC could have purchased another piece of MRI equipment that it subleased for two months’ subrent.  It could have purchased used MRI equipment to replace all of the subleased equipment for less than $600,000.
  • Carothers PC paid $60,000 per year to rent 9 fax machines, although it  could have purchased “scores of new [fax] machines every year for that price.”
  • The leases for the MRI centers gave Sher the right to terminate them for any reason, even if rent was paid and current, on 30 days’ notice. Carothers PC had no right to terminate the leases without cause.
  • The bank account that Carothers PC opened was controlled by an associate of Sher, who Carothers PC hired as its executive secretary. The executive secretary wrote the checks.  Carothers never issued a check from the account.
  • Carothers provided practically no oversight or supervision of the physicians, and did not evaluate or discipline them. He reviewed, at most, 0.2% of the MRI scans performed for Carothers PC’s patients.
  • The salary of Caruther PC’s executive secretary was higher than Dr. Carothers’ salary.
  • Large sums were transferred from the bank account of Carothers PC to the executive secretary’s personal account to pay her personal expenses and Sher’s.  Larger sums were transferred to Sher.  More than $12 million was funneled through Carothers PC to Sher and the executive secretary.

The New York Court of Appeals found that the facts presented in the Carothers PC case were very similar to those in State Farm Mut. Auto. Ins. Co. v Mallela, 372 F3d 500, 503 (2d Cir. 2004):  Non-physicians paid physicians to use their names to established medical service corporations, the non-physicians operated them and billed the physicians nominally in charge at inflated rates so that the profits from the medical practice were channeled to the non-physicians.  In Mallela, the Second Circuit asked the New York Court of Appeals to answer a certified question:  whether a medical service corporation “fraudulently incorporated” under New York law by non-physicians and operated by the non-physicians was entitled to reimbursement for medical services provided by its physicians.  The New York Court of Appeals answered the question no, ruling that a medical provider not solely owned and controlled by physicians was not entitled to insurance reimbursement.

The New York Court of Appeals, in the Carothers case, clarified that the “fraudulently incorporated” language of the Mallela decision, which was part of the Second Circuit’s certified question, did not mean that common-law fraudulent conduct of the medical services corporation’s business or common-law fraudulent intent was required for an insurance company to deny payment.  In Carothers, the finding by the jury “that [Carothers PC] was in material breach of the foundational rule for professional corporation licensure – namely that it be controlled by licensed professionals – was enough to render [Carothers PC] ineligible for reimbursement. . . .”  The insurer could deny payment if the medical services corporation was improperly established and operated by non-physicians, or was properly established but subsequently operated and controlled by non-physicians.  Although Carothers PC attempted to avoid this result by arguing that the improper control by Sher was merely an instance of improper fee splitting of a professional corporation’s profits with a non-physician and should not result in the denial of reimbursement, the jury determined that Carothers POC was controlled by non-physicians and did not merely split fees with it.