MD/DC Clinics and “Fraudulent Incorporation”

MD/DC Clinics and “Fraudulent Incorporation”

It’s been some time since I’ve lasted written about MD/DC clinics and how they can turn into fraudulent operations. Here are two of my last couple of articles from Dynamic Chiropractic.

In the last few years, there has been an uptick in federal criminal prosecutions and insurance company lawsuits against medical clinics alleged to be controlled by someone other than the MD clinic owner. So it seems like time for an update by me. Having been involved in this field for almost thirty years, my take is that while some things have changed, the important things, in terms of the method of operation and the government and insurance companies’ response really haven’t changed in any legally significant sense.

For instance, in the old days, some chiro consultants found the MD to act as the MD professional corporation owner. In one well-known and egregious case, an MD was the paper owner of several dozen different clinics in several states. The carrier sued one of those clinics, the MD, the chiro consultant, and (gulp) the lawyer who taught the model and set it up. The case lasted almost twenty years, (ending just last year), and resulted in a large judgement against the consultant and attorney. I may give my take on that case in another post but here is the case:

I think the days of one MD being the paper owner of so many clinics may be over. In the current illegal MD/DC iteration, the MD rubber stamp might only be involved in one medical practice. But, a rubber stamp, or a rose by any other name . . . .

In the old days, there was a lot of classic insurance fraud at some of these clinics, like unnecessary services, up coding, unbundling, and improper “incident to” billing. Maybe and hopefully that’s been cleaned-up, in some cases at least. However, the carriers still scrutinize MD/DC clinics and other alleged nominal physician controlled clinics because they have this crazy idea that the chiropractors or non-physicians are actually running them. The carriers have gone after some of these clinics based on a “fraudulent incorporation” theory, even if all the care provided is medically necessary and there is no specific fraudulent billing. (That’s a big Gulp!)

This fraudulent incorporation theory goes to the heart of the MD/DC model, the model being that through corporate interrelationships, management and other business service agreements, the money generated by the medical clinic finds its way to the chiropractor in the MD/DC venture (or to the non-MD business people who control the clinics).

In these clinics, the money needs to go first to the medical clinic (i.e., care is billed through the medical corporation) because of carrier imposed restrictive limitations on chiropractic, or because there are now entire areas of insurance reimbursed care which have to be provided by a physician-owned entity, like New York no-fault accident law medical care.

But that aside, the ultimately reality is that there’s a lot of money in medicine, and chiropractors (and regular business folk) try to get in on the action. The MD/DC clinic was largely originialy developed (in my opinion) to do just that, and business people created similar corporate structures to achieve that goal also. I’m not saying they all are illegal, but what I will say is that it is viewed as a problematic business model which sends up red flags to prosecutors and insurance companies.

It’s interesting to see how this fraudulent incorporation legal theory evolved and metastasized from the state civil insurance law to federal criminal law.

Follow me here:

In the early 2000’s, State Farm filed a federal civil action in New York seeking a ruling that it didn’t have to pay no-fault accident claims from a few related medical clinics because supposedly the medical clinics were fraudulently incorporated. The allegation was that two businessmen hired physicians to act as the nominal owner of the clinics, and that these two non-physicians actually ran the clinics. Of course similar allegations had been made against MD/DC clinics in criminal cases in which there had been classic insurance fraud as evidence of the overall fraudulent scheme.

Significantly and chillingly, State Farm didn’t claim that the care rendered was medically unnecessary or improper, and it didn’t even claim that the care was rendered by someone not authorized to provide the treatment. In short, there was no allegation that there was anything wrong with the care. Rather, the claim was that the medical corporation was a sham because the corporation’s medical business wasn’t run by the physician owner, but by the businessmen. Because of that, State Farm argued that it didn’t have to pay for any of the care. (It’s a very creative argument. You have to love these insurance companies. I know I do.)

The federal district court dismissed the case, holding that State Farm had to pay the claims so long as the providers who rendered the case acted within the scope of their licenses. Well that seems like a logical and pretty reasonable approach to me. However, State Farm appealed to the federal Second Circuit Court of Appeals.

The clinics argued that the formalities of the clinic ownership was all that mattered. The law requires that a physician-owned clinic had to provide the care, in fact a physician owned the corporation and the corporation provided the care, so that’s it, end-of-story.

State Farm argued that the business men’s actually running the medical practice violated the corporate practice of medicine doctrine (“CPM,” which prohibits anyone other than physicians from practicing medicine). According to State Farm , the CPM violation meant that all the claims were fraudulent and it didn’t’ have to pay anything. Because it was an unsettled issue of state law, the federal appellate court asked the highest state court in New York to decide (confusingly called the Court of Appeals, and just to make it more confusing, the trial courts in New York are called the “Supreme Court.”)

The question asked was whether an allegedly fraudulently incorporated medical corporation is entitled to be reimbursed by insurers. The Court of Appeals answered no. The Court of Appeals then ruled that the CPM doctrine prohibits a non-physician from owning or controlling a medical corporation, that technical ownership was not sufficient, and that the realities, not the formalities determine whether there has been a CPM violation, and if there was a violaiton, then the clinic is not entitled to be paid anything by the carrier.
That’s a tough decision, given that there was no allegation of improper billing or improper medical care.

Although the actual owners of the clinics were not chiropractors, the case still impacts them, because the operative legal point is that under a fraudulent incorporation theory, it doesn’t matter if the actual owner is a layman or a health care practitioner other than a medical doctor.

The problem is that the owner isn’t a medical doctor, and that care is billed under the medical corporation’s name which in reality is controlled by a non-physician. That is (or could be) illegal in states which have a CPM doctrine and limit certain kinds of care to physicians, And while the case only deals with New York no fault law, I think it would apply, at least to any case where care has to be or purports to be delivered by a medical practitioner, or so the government will argue.

So at least from the time of this case (State Farm v. Mallela, 794 N.Y.S. 2 700 (2005)), insurance companies have had this weapon against MD/DC clinics in New York, even if all the care was medically necessary and successful. And, for better or worse, this case has garnered respected and precedential status throughout the country, even though it only technically interprets and applies to New York law no- fault insurance law.

Therefore, in any state which has a CPM doctrine and limits or excludes chiropractors from some form of reimbursed care like no-fault, or limits chiropractic care, or reimburses at a lower level than physician reimbursement, this case is a possible weapon against an MD/DC clinic which provides care to classes of patients or injuries which have to be provided by a medical corporation. After this case, a number of other civil cases in New York were filed against similar run operations, many of which clinics specialized in no-fault.

The next big thing is what happened to a medical doctor who rented out her license to a couple of business folk for 1500 bucks a week. Two businessmen had set up a number of medical clinics to provide medical care to accident victims under New York no fault. They hired physicians for $1500 per week to be the nominal owners of the medical corporation providing the services. Eventually Allstate’s SIU (special investigative unit) zeroed in on these entities and had the medical doctor owner submit to an examination under oath about her role at the clinics. She falsely testified about her role, and claimed to have seen patients which Allstate knew she hadn’t.

The SIU turned the case over to the US Attorney’s office and several dozen people were indicted, including the physician. The doctor wanted the jury instructed that “ownership” is limited to who is the technical owner of the medical corporation’s stock. The district court rejected the request and gave the economic realities view in State Farm v Mallela. The physician (and all the others) were convicted of health care fraud and conspiracy to commit heath care fraud. The physician appealed, and her main argument was that her formality of ownership jury instruction was not given, and it was error for the judge to give the broader, economic realities instruction. Needless to say the Second Circuit rejected her argument and affirmed her conviction. The case is U.S. v. Gabinskaya, 829 F.3d 127 (2nd Cir. 2016).

Here is a pdf of the decision: United States v. Gabinskaya, 829 F.3d 127 (2nd Cir., 2016) (1)

Again, even though the case doesn’t involve chiropractors, and is limited to New York no-fault, it, and the cases it cites and cases cited by it will be used as guidance and precedent by federal prosecutors as they view MD/DC clinics, at least as a legal basis for rejecting the notion that corporate formalities offer some immunity or insulation against fraud prosecution against MD/DC clinics.

The basic lesson of these cases is that economic and business realities determine whether these type of operations are (or can ever be) legal. Some of the cases set forth 13 factors which establish substantial control over the medical corporation (which places the operation into federal felony land), but ultimately it’s going to come down to the facts and circumstance of each operation. My hunch is that not a lot of these operations will be on the good side of the law, but I’ll give my analysis of these factors another time.

Rick Jaffe, Esq.

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