So what happened in Carothers?June 21, 2019

Andrew Carothers, M.D., P.C. v Progressive Ins. Co., 2019 NY Slip Op 04643 (2019)

The facts are as egregious as they come. Carothers made nothing and lay people Sher and Vayman pocketed the money. Medtrex appeared to be the factor. If this were Florida, we would not have this conversation since they allow lay person ownership with a medical director. New York and New Jersey require physician ownership.

We all know how the story played out and the facts are not what should interest anyone. It is the law, or its shift that should interest you.

First, Court of appeals punted on the issue Judge Soloman raised in the initial dissent: negative inference due to Sher and Vayman pleading the fifth amendment. They appeared to want to resolve it in favor of the insurance carriers, but backed away.

Second, “A [*4]corporate practice that shows “willful and material failure to abide by” licensing and incorporation statutes (Mallela, 4 NY3d at 321) 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.”

Comment: I never thought the carrier had to prove common-law fraud.

Third, “Insurance carriers do not have good cause to delay or deny payments of reimbursement claims on the basis of a provider’s slight divergence from licensing requirements. Here, the jury’s finding that plaintiff was in material breach of the foundational rule for professional corporation licensure — namely that it be controlled by licensed professionals — was enough to render plaintiff ineligible for reimbursement under 11 NYCRR 65-3.16 (a)(2). The trial court committed no error in refusing to issue a charge requiring a “tantamount to fraud” finding by the jury”

Comment: “material breach of the foundational rule for professional corporation licensure”. Interesting.

Fourth, “plaintiff is incorrect to characterize the improper control of plaintiff by unlicensed persons as simply an instance of improper fee splitting of the professional corporation’s profits with a nonphysician in violation of 8 NYCRR 29.1 (b) (4). Although the Appellate Division held in Matter of Allstate Prop. & Cas. Ins. Co. v New Way Massage Therapy P.C. (134 AD3d 495, 495 [1st Dept 2015], lv denied 28 NY3d 909 [2016]) that a “fee-sharing arrangement . . . does not constitute a defense to a no-fault action,” the jury in this case determined that plaintiff was controlled by unlicensed persons, rather than merely splitting fees with them. Control of a professional corporation by nonprofessionals violates foundational New York licensing requirements and rendered plaintiff ineligible for insurer reimbursement, for exactly the same reason the medical service corporation in Mallela was ineligible for reimbursement.”

Comment: Mere violations of the Public Health Law and regulations promulgated thereto will not sufficie as a basis to withhold no-fault benefits.

Of course, this makes me wonder about the viability of the Raia case – where the owner of the clinic is a physician in good standing, cannot read films and the Second Department (Liberty Mut. Ins. Co. v Raia Med. Health, P.C., 140 A.D.3d 1029, 1031 [2d Dept. 2016]) held that sufficient violations of the the education law to withhold compensation. Where does that fit on the radar ? Or, is 65-3.16(a) clearly pure Mallela? I need more guidance.

2 Responses

  1. Anonymous says:

    I disagree that with your statement that “the facts are not what should interest anyone.”. The facts are what drive this case. Even the court of appeals opened the opinion by stating “The factual background is essential in understanding our legal conclusion.”. This case does not move the needle much, but to the extent that it does, it is more helpful than hurtful to health providers.. the informed counsel could have a field day with this decision.

    • jtlawadmin says:

      The facts of this case are the definition of layperson ownership. Under any test, Carothers loses. My thought is based upon the statements of law that the court presented. It is my sense, and I would have to reread what I wrote, that absent a Mallela situation, the Court of Appeals will not allow the Allstate v. New Way Massage collateral attacks on clinic owners. This includes stand alone allegations of fee-splitting and self referrals. Again, these may be predicates under a mail fraud or wire fraud scenario under a civil RICO. Yet, if the Court of Appeals just held these cannot be a stand alone basis to bring an action (or defend an action) against a clinic, it would be strange to allow a RICO action to exist that is predicated upon these offenses. I agree this is helpful to the clinic owner that acts between a true sanitized medical practice and a Carothers type practice.

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