N.Y. Court Upholds No-Fault Regulation Letting Insurers Deny Payments to Fraudulent Medical Firms

The New York Court of Appeals has upheld the right of an insurance company to refuse to reimburse fraudulently incorporated medical providers for no-fault auto insurance claims even when the medical care provided is appropriate.

The defendant medical providers argued they were entitled to reimbursement even if they were fraudulently licensed because the actual care that patients received was within the scope of the licenses of those who treated the patients. But the court disagreed, upholding a state anti-fraud regulation that lets insurers deny payments to fraudulent medical corporations.

New York law prohibits ownership of medical corporations by people who are not licensed as medical professionals. This case began when State Farm filed a complaint in the U.S. District Court for the Eastern District of New York seeking a judgment declaring that it need not reimburse defendant fraudulently incorporated medical corporations for assigned claims submitted under no-fault.

The corporations had paid physicians for the use of their names on incorporation documents while non-physicians actually ran the corporations. To maintain the appearance that the physicians owned the entities, the non-physicians hired their own management companies, which billed the medical corporations inflated rates for routine services. The actual profits were channeled to the non-physicians who owned the management companies, not to the physicians who treated patients.

State Farm alleged defendants willfully evaded New York law prohibiting non-physicians from sharing ownership in medical service corporations in order to collect payments under no-fault.

State Farm never alleged that the actual care received by patients was unnecessary or improper.

The Federal District Court dismissed State Farm’s complaint, holding that defendants’ non-compliance 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.

In this decision on appeal, the New York Court of Appeals disagreed, ruling that such corporations are not entitled to reimbursement.

The defendants argued they were entitled to reimbursement even if they are fraudulently licensed because the actual care that patients received was within the scope of the licenses of those who treated the patients. Defendants also argue that the state regulation conflicts with the prompt payment goals of the no-fault statutes.

But the state’s high court ruled that the regulation is valid and that it governed this case. “We hold that on the strength of this regulation, carriers may look beyond the face of licensing documents to identify willful and material failure to abide by state and local law,” the court said.

The defendants included Valley Physical Medicine and Rehabilitation, P.C., Yonkers Medical Services, P.C., and Astoria Physical Medicine and Rehabilitation, P.C.

The decision added that insurers may not delay or refuse payment for mere technical violations, such as failure to hold an annual meeting, pay corporate filing fees or submit otherwise acceptable paperwork on time. Those infractions “will not rise to the level of fraud,” the court noted.

The case is State Farm Mutual Automobile Insurance Co. v. Robert Mallela, et al.