CASENOTE:
PRACTICE MANAGEMENT CONTRACTS:
STATE OF THE LAW
The use of management contracts to create a business relationship between a professional practice, usually a medical practice, and a practice management entity is a longstanding and widespread practice. Businessmen often want to “partner” with, or at least profit from, medical practices. Medical professionals, on the other hand, find themselves consumed with compliance requirements which constantly cascade upon them from regulatory bodies at all levels. These include new billing forms and documentation requirements, patient confidentiality requirements and the increasing need to compete in a managed care environment where fees are compressed by payors but paperwork increases. At the same time, “miracles of modern medicine” are constantly being produced. From the latest drug to the latest medical instrument, device or procedure, doctors are expected to know it all and to be up to the minute. Patients demand it and if it is not provided, these patients can become plaintiffs in malpractice actions.
It is not surprising, therefore, that practice management companies with their promise of relieving doctors from all but the clinical responsibilities of the medical practice have proliferated. There are a number of large, publicly traded practice management companies such as Phycor and Medpartners, but there are many, many small management companies that provide services to as few as one medical practice. All have one thing in common: a contractual relationship between the medical practice and the management company which describes and delineates the business and legal relationship.
Management companies and their associated contracts are only needed in those states where the prohibition on the corporate practice of a profession does not allow a medical practice to be directly owned by anyone other than medical doctors. Almost half of the states allow a professional practice to be owned by an ordinary business corporation which, in turn, may be owned by laypersons.[1] A few additional states allow limited liability corporations also to be owned by laymen and to practice medicine. New York and New Jersey both clearly uphold and enforce the prohibition against corporate practice of medicine.[2] This article will survey recent decisions in both states that have thrown some light in this area but also have created a clearly conflicting position.
Lawyers, in crafting the contractual relationship between businesses and medical practices in these two states, seek to afford maximum protection to the practice management company, if that is their client, to ensure that the company will not lose the benefit of its time, expertise and investment expended on behalf of the medical practice. On the other hand, such a contractual relationship cannot exert excessive control over the professional practice or the relationship will trespass into the forbidden area of corporate practice of medicine. There has been paucity of case law in this area up until now and very little in the way of other legal guidelines. In the last couple of years, however, there have been a half dozen decisions and, as well, there have been some regulatory rulings in this area of business.
THE RULING LETTERS
While ruling letters are useful since they are expressions of opinion on the state of the law from government agencies that may be charged with enforcement of those laws, they often are limited, by their terms, to the specific state of facts presented or even to the specific person presenting the facts. Nonetheless, in an area with few legal beacons, even faint gleams are welcome.
On April 15, 1998, the Office of Inspector General of the United States Department of Health and Human Services issued one of its opinions[3] pursuant to a request for a ruling which procedure was set up as part of the so-called Stark II amendments[4]. The Ruling stated that if a management company provides services to a medical practice and the compensation of the management company was determined as a percentage of the gross or net revenues of the medical practice then this type of contract would not be “safe harbored” under the federal laws.[5] The rationale for this was that if the management company’s responsibilities included, in any way, production of patients through, for example, advertising, public relations or even negotiation of managed care contracts, then the management company would have an incentive to increase the number of patients in order to increase its compensation. This would be the case because if the management company received a percentage of the revenue of the practice and, of course, the practice revenue came from patients and increased with the number of patients then the practice management company would have an incentive to increase the number of patients to increase its revenue. This is similar reasoning and a similar relationship to the basic premise of the Stark self-referral prohibition[6]. This prohibition bars referral of patients by physician to a business in which the physician has an ownership interest because, since the physician will derive income from his ownership interest as the referred to business profits, the physician will have an incentive to refer patients to the business to increase his ownership profits.
This Ruling applies only to practices that see patients whose care is paid for by Medicaid, Medicare or CHAMPUS, and interprets federal laws and regulations, however. It provides no guidance in the area of corporate practice.
The Office of Counsel of the New York State Department of Health has also issued a series of ruling letters some of which have expressed opinions as to the permissible parameters of management contracts. In an April 17, 1997 ruling letter by General Counsel Henry M. Greenberg.[7] The question is posed about the propriety of a management company relationship to a medical practice that would charge a fixed fee per patient visit. The management company would be paid a fee at the end of each month determined by multiplying the fixed fee times the number of patient visits in that month. The management company also was to be responsible for assisting in securing patients by marketing, advertising, etc.
The Office of Counsel disapproved of this method of compensations for similar reasons stated above in the above discussed federal ruling letter; if the management company is providing the patients, the management company cannot be paid on a per patient basis.[8]
Another New York State opinion dated May 2, 1995 from Jerry Jasinski, Acting General Counsel, disapproved of a management contract relationship where the management company proposed to provide a broad spectrum of services including office space, all necessary equipment and all non-clinical services. Referring to an earlier June 13, 1994 opinion, the proposed arrangement was viewed as a “establishment of a de facto diagnostic and treatment center. Control of the facility apparently rests primarily with the business corporation rather than with the professional corporation.” The corporate practice prohibition was not mentioned or discussed, however, a basis for disapproval was operation of an unlicensed diagnostic and treatment center. A business corporation may be licensed under Article 28 of the New York Public Health Law to operate a diagnostic treatment center which may employ medical personnel and practice medicine and is, therefore, an exception to the prohibition against corporate practice. In this May 2, 1995 opinion letter, the New York State Department of Health could, therefore, be viewed as taking the position that provision of the above-described broad spectrum of responsibilities by a management company, leaving a practice with solely clinical responsibilities, raises significant corporate practice issues. (Note that this same opinion disapproves of a per use compensation arrangement but does so because the management company was also responsible for producing patients.)
While letter rulings on both the state and federal level, as mentioned, can be useful guides, they are simply opinions of lawyers, albeit lawyers charged with enforcing the laws about which they are issuing opinions. The more definitive and positive pronouncement of the law is, of course, the common law interpretations of decided cases.
THE CLASSIC CASES
Until the recent flurry of activity in this area, there had been only two cases which actually arose out of management contracts for medical services for a medical practice. The first was the Flynn Brothers case in Texas in 1986 and the second was the New Jersey case of Women’s Medical Center v. Finley in 1983.
THE FLYNN BROTHERS CASE
The case of Flynn Brothers, Inc. v. First Medical Associates, et al.[9] was a proceeding brought by the management company owned by the Flynn brothers against medical practice to collect monies claimed due for management services provided. The medical practice defended against the claim on the grounds that the management contract was unenforceable because legally defective. The legal defect was alleged to be a percentage compensation provision in the contract which provided that the Flynn brothers would be paid as their compensation for providing medical services two-thirds of the gross revenues of the medical practice.
The Texas court agreed that the percentage compensation provision was a fatal defect because it violated the Texas law against fee splitting between a professional and a non-professional. Since the contract contained this fatal defect, the Flynn brothers were unable to collect their amounts claimed owing for services. The Appellate Court held that the fee splitting provisions and other broad contractual rights granted by the professional corporation to the management company “indirectly allowed [the Flynn brothers] to provide medicine without a license.” [10]
WOMEN’S MEDICAL CENTER V. FINLEY
This New Jersey action, Women’s Medical Center v. Finley,[11] was an appeal from a decision by the New Jersey Commissioner of Health which reversed the finding of an administrative law judge. The administrative law judge had found that the appellants, three gynecological practices specializing in first trimester abortion services, were not required to be licensed and regulated under the New Jersey Health Care Facilities Planning Act, N.J.S.A. 26:2H-1, et. seq., but were, rather, private practices as defined under N.J.S.A. 26:2H-2(b). The Health Commissioner argued that the appellants were not private practices but, rather, “health care facilities” within the meaning of the New Jersey Health Care Facilities Planning Act because they had each contracted with a management company for the provision of a “full range of non-professional office management services”. [12]
The Appellate Division carefully and extensively analyzed the language in the management contract quoting it extensively and noting that the language specifically preserved to the medical practice the right to exclusive control over all clinical aspects and patient relationships while carefully limiting the management company to business and financial aspects only. The court then ruled that the contract properly preserved the respective rights and duties of the parties limiting the medical practice to the medical area and the management company to the business area.
It is noteworthy that the Court approved of the structure and the content of the management contracts although it noted that “patient fees are paid to [the management company] and deposited to its account. Only it has the authority to draw on that account. It pay all expenses and it issues weekly checks to the physicians, providing them with year end 1099 forms.” [13]It was further noted that all the office equipment is owned by the management companies which also leased the premises to the physicians who, it was noted, had made no capital investment in the office.
Supportive of the concept of management contracts generally, the Court disagreed with the Commissioner’s argument that a management company might exercise excessive pressure on a managed medical practice “by encouraging the physicians to provide medical care which is unnecessary or too speedily delivered”[14]. The Court countered that argument stating “those physicians who need to recoup their office capitalization costs and who may be operating their offices on a less economically efficient basis because of their direct and time consuming involvement in non-professional office management details might have an even greater incentive to insure the gross profitability of their practices”. [15]
Although this seminal management contract case appears to provide clear cut guidelines for management company relationships with physician practices, there are two major considerations which militate against its utility. The first is that the Court is not considering the legal question of whether the nature of the relationship was consistent with corporate practice prohibition principles but, rather, whether the professional practice was required to be regulated as a health care facility under the State Certificate of Need laws by virtue of its relationship with a management company.
The second major distorting factor is brought out by one of the concluding observations of the Appellate Term that the Commissioner’s attempt to exert regulatory control over the practices may have been caused by “the nature of the medical services rendered by these practices”. [16]The Court went on to observe in the footnote that the Commissioner had in the past expressed special administrative concern for trimester abortions and had attempted to impose extensive regulations which were later deemed unconstitutional over such procedures.
For many years, these cases were the only guidelines for lawyers seeking to draft contracts describing the relationship between a practice management company and a medical practice. There are now a number of cases providing a great deal more guidance, unfortunately, the cases are conflicting.
THE CURRENT CASES
Few of the cases to be discussed and described here actually discuss permissible (or impermissible) phrases or wording in management contracts as was actually the case in the Women’s Medical Center v. Finley case. The cases do, however, discuss other permissible parameters of the relationship between a business entity and a medical entity including other corporate mechanisms are used to protect the investment and business relationship of the management company with the medical practice.
THE NEW JERSEY CASES
The New Jersey cases happen to have been decided first in the time and, although they deal with similar subject matter, have not been cited as precedent by the New York cases. Indeed, they were distinguished by the latest New York case. Both cases were decided by Judge Villaneuva who is retired but temporarily assigned on recall.
The first case is Allstate Insurance Co. v. Shick, et al.[17]. This was an action brought against numerous defendants including both businessmen and the management companies they own, medical professional corporations and the medical doctors who owned them as well as chiropractors who worked for the medical PCs and some of whom also owned the management companies. The plaintiff insurance company sought to enjoin all arbitrations, pending and in the future, brought by the defendant professional corporations and the disgorgement of some ,200,000 already paid to the defendants plus treble damages under the New Jersey Fraud Prevention Act[18].
]]>
Plaintiff charged that defendants created a series of sham professional corporations that appeared to be owned by New Jersey licensed physicians but were actually controlled by defendant management companies through management contracts and other corporate devices. The corporate control devices alleged and attacked by plaintiffs included the facts that the medical doctor owners of the professional corporations did not work in the professional corporations and resided outside the state (although licensed in New Jersey). Further, these doctors signed “undated resignation letters, undated stock assignment agreements”[19]. These devices, along with the management contract, allowed defendant management companies to exercise unacceptable amounts of control over defendant corporations, it was found.
Defendants argued that if services were reasonable, necessary and performed by a plenary licensed physician, then the insurance company plaintiffs should, nonetheless, be required to make payment under the New Jersey No-Fault Law despite any finding that the corporate structure was defective.
Judge Villaneuva held, however, that in order to be eligible for payment, a provider must comply with other elements of the state law. Citing Allstate Insurance Co. v. Orthopedic Evaluations, Inc.,[20] Thermographic Diagnostics, Inc. v. Allstate Insurance Company,[21] as well as Prudential Property & Casualty Insurance Co. v. Midlantic Motion X-Ray, Inc.[22]. The court said that in order for a provider to be eligible for payment, medical services rendered, in addition to being reasonable and necessary, “must conform with pertinent norms as a precondition for eligibility under the Act” and that an insurer may deny benefits “based upon a health care provider’s failure to comply with the administrative regulations governing the practice of healthcare in the state”.[23]
The court found that the claimant providers failed to comply with the requirements for a “medical screening or a medical diagnostic facility” under N.J.A.C. 13:35-2.5(b) in that they were not “owned and under the responsibility of one or more physicians each of whom holds a plenary license from the State Board of Medical Examiners” due to the excessive control by the management companies through the above-referenced devices.[24]
As a lens on the law of management contracts and their permissible limitations in New Jersey, this case is clouded by the many other claims by plaintiff of defendants’ improper activity. For example, the judge noted that two weeks before the filing of the action, agents from the New Jersey Office of Insurance Fraud prosecutor raided the facilities of six of the defendant chiropractic and rehabilitation facilities and, as well, several of the individuals named as defendants had been arrested and charged with fraud stemming from actions including staged accidents.[25] Clearly, however, the case stands for the principle that, on a finding of excessive control by a non-licensed entity over a licensed entity, an insurer is excused from any legal responsibility to pay claims to licensed entity.
The second New Jersey case, Allstate v. Northfield Medical Center, filed on October 18, 1999, also alleging excessive control by a management company over a medical practice and is also pending before Judge Villaneuva. There have been two motions for summary judgment made in the Northfield case, both of which have been denied. Findings of fact and conclusions of law in both decisions were similar to those described above, however, there were numerous other issues in the case which bore only indirectly on the issue of the proper construct of the management company – medical practice relationship.
In the opinion on the motion to dismiss made by one of the defendants in the Northfield Medical Center case, there was a more detailed description and discussion of the wording in the contractual relationship between the management company and the medical practice that the Court found defective under New Jersey law.
The Court said that the lease between the management company and the medical practice which did not allow termination by the medical practice and which provided automatic renewal each year unless the management company decided not to renew was evidence of “sham ownership” of the medical P.C.[26]. Further, the Court stated that the management services contract was defective because the compensation was calculated entirely by the management company and, again, the services agreement could not be terminated by the medical practice.
Judge Villaneuva further noted that the fact that the owner of the medical practice had no signature authority over the bank account of the medical practice was alone sufficient to defeat the motion of the management company to dismiss the action.[27] Further indicative of “sham ownership” was the fact that the owners of the professional corporation which owned the medical practice did not invest any money or make any capital contribution.[28] Comparisons and contrasts with the Women’s Medical Center v. Finley case are tempting but passage of time and changed political and social contexts are more significant. More striking is the contrast with the most recent New York decision discussed below. Before reviewing that case, however, some background in the relevant New York case law will be useful.
THE NEW YORK CASES
Although management contracts for medical practices have been used in New York State for many, many years, their appearance in litigation is relatively recent. The oldest case that could be found is Necula v. Glass [get cite].[29] This was an appeal by a doctor who had been excluded from the Medicaid program after a hearing before the Department of Social Services. The hearing officer determined that the doctor had engaged in illegal fee splitting because the contracts the doctor had entered into with management companies which were to provide “facilities, supplies, equipment and non-physician medical staff necessary to operate his radiology practice” required payment of a fixed percentage of receipts. The Court noted that the doctor also paid the management companies a fixed fee for each procedure performed. The Appellate Division upheld the exclusion on the grounds the doctor had engaged in illegal fee splitting. As part of the record on appeal, opinion letters from New York State Department of Health, Office of Counsel were referred to which included those described above. The letters expressed disapproval of the percentage compensation arrangement for a management contract but did not express disapproval of the per use fee approach.
The next case in time was a Supreme Court decision in Nassau County. This is an unreported decision.[30] The decision, dated May 10, 1999, in the case of State Farm Insurance Company v. Medical Health Office of Stony Brook, P.C., denied an application by the insurance company petitioner to stay arbitration of certain bills submitted by respondent on the grounds that the P.C. was illegally controlled by a management company. The defects alleged by the petitioner insurance company included the fact that a chiropractor, who was a shareholder of the management company, was the secretary of the respondent professional corporation. This allegation was dismissed by the court with reference to section 1501(e) of the New York Business Corporation Law which specifically permits this. The court further found that the fact that the management company “has utilized the address of [the professional corporation] and it possesses a security interest in the [professional corporation's] accounts receivable does not reflect ownership or transfer of ownership. Rather, it reflects, as [the professional corporation] urges and supports by evidence that [the management company] provides management services for [the professional corporation] with respect to matters other than medical care, such as hiring non-medical personnel and maintaining and providing equipment.”
The next case decided later that year is Martone v. HealthSouth Holdings, Inc.Martone v. HealthSouth Holdings, Inc.[31] This was a complicated case but, basically, it involved a management company owned by HealthSouth, a national publicly traded company that managed a professional corporation which was owned by a physical therapist. The court believed that the actions of the management company with respect to the professional corporation warranted sending a copy of the decision to New York State Department of Education which regulates the profession of physical therapy because the court believed that “HealthSouth may have falsely represented to the public that it operated a number of physical therapy offices in the state” even though HealthSouth knew that it “could not lawfully provide physical therapy services in the state [and] may have engaged in a deliberate scheme to avoid that prohibition.”
The management company created and owned by HealthSouth had contracted to provide a broad range of management services to plaintiff Martone, a licensed physical therapist. This was after HealthSouth itself had contracted to purchase Martone’s practice and to employ her as a physical therapist. Upon finding that this was not possible in New York, HealthSouth changed its arrangement to a management contract relationship but continued to exercise excessive control and, as noted by the court, represented to the public that it was practicing physical therapy in New York. These actions and the misapprehension of New York law is understandable, since HealthSouth operates in all or virtually all of the states in the country and, in all or virtually all of those states, physical therapy, unlike medicine, is not regulated as one of the “learned professions” and physical therapists may be employed by ordinary business corporations such as HealthSouth.
The next case in New York considering management contracts was Mainline Medical Services, Inc., et al. v. Thomas Tyebo, et al.[32] decided November 20, 2000. This was a case where a management company sued a medical P.C. that it managed for money owed for services rendered. One of the defendants, a doctor shareholder who owned the managed professional corporation, claimed that the plaintiff management company exercised excessive control over the P.C. and, accordingly, its contracts were void, unenforceable and its claims for compensation should be denied. The defendant claimed that the management company “controlled all primary indicators of ownership; including management of money, billing, collection receivables and had absolute discretion with respect to paying the bills”.[33] Despite the management company’s argument that “arrangements for lay people to provide financial services to a medical P.C. are both proper and lawful”, the court denied the management company’s motion for summary judgment because it believed an issue of fact was raised as to whether the medical doctor “actually owned or controlled” the professional corporation that had contracted with the management company or whether the management contracts “were a scheme by the [management company] to and intended to create an appearance of compliance with the statute”.[34] This case was decided by Judge Ira Gammerman who also decided the Progressive discussed below which is a much larger case with significant factual differences but with a similar legal issue presented.
Fordham Medical and Pain Treatment, P.C. v. State Farm Mutual Insurance Company[35] is a decision denying a motion for summary judgment by plaintiffs. This action was commenced against State Farm Insurance Company for payment for medical services rendered by a medical P.C. that was managed by a management company. Payment had been denied because State Farm charged that the P.C. was formed and operated in violation of Article 15 of the New York Business Corporation Law which governs professional corporations.
This argument was also raised by State Farm in opposition to plaintiff’s motion for summary judgment. The court did not mention or discuss the management contract arrangement which existed in this case but, rather, discussed the corporate organization and operation of the claimant professional corporation. The court noted a number of defects in the organization and operation of the claimant corporation crediting certain newspaper quotes from an attorney for the doctor owner of the claimant as saying that the doctor had no authority to write checks for the P.C. and was “basically an employee” of the P.C. The court also noted that the same doctor had been involved in insurance fraud with another P.C. and denied plaintiff P.C.’s motion for judgment noting “[o]bviously plaintiff cannot be allowed to benefit from the fraudulent activity described….”.[36]
The case of Progressive Insurance Company, et al. v. Advanced Diagnostic and Treatment Medical, P.C., et al.[37] was a massive lawsuit filed in March, 2000 against 109 provider defendants charging that a group of physicians had, basically, sold the use of their names and licenses to set up sham medical professional corporations which were then used by certain of the defendants to defraud plaintiff insurers. There were claims brought under the State Consumer Protection Law as well as RICO claims[38]. The action seeks ,000,000 in damages (after trebling under the RICO statute).
Although Judge Gammerman dismissed certain claims, such as the State Consumer Protection Act claim, in response to a motion by a number of the defendants for summary judgment, he refused to dismiss the plaintiff’s claims of improper formation of defendant professional corporations, finding that nothing in the Business Corporation Law “prevents a plaintiff from challenging the legitimacy of a corporation”.[39]
Judge Gammerman refused to grant summary judgment to the defendants in the Progressive case just as he also refused to grant summary judgment to the plaintiff in the Mainline Medical Services, Inc. v. Teyibo case because he had problems with the control by the management company over medical practices. In the Progressive case, he appeared to believe that that could be sufficient reason to permit an insurance company not to pay or even to recover payments already made. In the Mainline case, in almost the reverse factual situation, he appeared to believe that such excessive control would allow a medical P.C. to avoid having to pay a management company for services the management company had rendered.
The holding of the most recent case in this area in the Federal Court in the Eastern District of New York decided on September 20, 2001 is significantly variant from most of the cases discussed heretofore.
This case is State Farm Mutual Automobile Insurance Company v. Robert Mallela, et al.[40] This case was brought by State Farm against some thirty-six medical practices as well as owners of the medical practices and business persons. Claim was made for the return of some ,000,000 in payments made to the practices based on alleged illegal structure of the practices. The thrust of the motion for summary judgment by defendants was that the manner in which the defendants “are structured does not relieve plaintiff of its obligation to pay for reasonable and necessary medical treatments provided by licensed professionals and that no private right of action exists to enforce New York’s corporate form requirements.”[41] The Court agreed with this argument noting that “the prohibition on corporate practice of medicine is designed to protect consumers of health services not insurers who pay for these services.”[42] Citing Adam Freiman, Note, The Abandonment of the Antiquated Corporate Practice of Medicine Doctrine: injecting a dose of efficiency into the modern healthcare environment, 47 Emery L.J. 697 (1998). The Court went on to observe that “plaintiff has cited, and the Court has discovered, nothing in the legislative history of the relevant Business Corporation Law provisions that indicates that the legislature intended to create a private right of action to enforce these provisions[43] and concluded, therefore, that “plaintiff has no private right of action to enforce New York’s Corporate Law requirements”. [44]
The Court also observed that “plaintiff was not damaged by its payment of claims that it was required to pay and which, in any event, were for reasonable and necessary medical expenses performed by licensed health professionals for covered persons and arising out of covered accidents”.[45] The Court also noted that New York courts were reluctant to require a party to return money paid for lack of a “statutorily required license” citing IHS Acquisition XV, Inc. v. Kings Harbor Healthcare Center[46].
In IHS Acquisition XV, Inc., a plaintiff sued for fees for services rendered to defendant nursing home by licensed physical therapists who were employed by IHS, a business corporation. In that case, the Southern District noted that “one area in particular where courts have been reluctant to give effect to the public policy defense is where a contracting party is not licensed, but where the individuals performing the work, and the individual supervising the work are, in fact, licensed.”[47]
The Court in the State Farm v. Mallela case also noted that “[t]he violation at issue here is not evil in itself and plaintiff plainly seeks to use the P.C. defendants’ violations as a sword for personal gain in order to recoup payments that it would, but for the alleged violations of the Business Corporations Law, indisputably have been required to pay. Regulatory sanctions that are available to the State ‘quite complimentarily and proportionately protect the underlying public policy’ especially since licensed healthcare professionals performed all services. Lloyd Capital 80 N.Y. 2d at 129.”[48]
In his forty-three page decision, Judge Sifton analyzed and distinguished Judge Gammerman’s decision in Progressive Northeastern Insurance Company v. Advanced Diagnostic and Treatment Medical, P.C. finding that that decision, only two months’ previous in time, actually supported his holding. Judge Sifton quoted from the Progressive Northeastern decision stating that there the insuror plaintiffs “‘are not seeking to deny claims as a result of the corporate structure of the [service providers], rather, plaintiffs seek to recover for fraudulent claims which plaintiffs allege were facilitated by the illegal corporate structure’. Index No. 6CO1112/00, at 20 (N.Y. Sup. Ct., July 25, 2001) (emphasis added). The facts in Progressive Northeastern that, if proved, would render their claims fraudulent were that the service providers submitted false claims for equipment that was not used and for services that were not provided.”[49]
Judge Sifton also distinguished the case of Fordham Medical Pain and Treatment, P.C. v. State Farm Mutual Insurance Company, discussed above, noting that “the court, stating only that ‘[o]bviously [the professional corporation] cannot be allowed to benefit from the fraudulent activity described’ by the insurer, held that the insurer could deny a claim on the basis of the healthcare provider’s improper ownership and control. The fraudulent activity described by the insurer including, however, billing for unnecessary services”.[50]
The two New Jersey cases which were also discussed above, Allstate Insurance Company v. Schick and Allstate Insurance Company v. Northfield Medical Center were both also distinguished “because those decisions do not consider New York’s statutory and regulatory ‘maze’ of a No-Fault scheme”.[51]
There have been a number of other cases filed by insurance companies against healthcare providers claiming recoupment of payments made and denial of payments pending, based on defects in corporate structure. One of these is Allstate Insurance Company, et al. v. Dipak Nandi, et al.[52] While this case makes claims of staged accidents, payment for referral of patients and other egregious and improper activity, there were also claims of illegal and improper control over the defendant medical providers “in violation of Article 15 of the Business Corporation Law (“BCL”), which governs the corporate practice of medicine in New York State and requires any corporation that provides physician medical services to do so as a professional corporation (“P.C.”) owned and controlled exclusively by physicians.[53]
Also, there is a pending indictment against a management company and several chiropractors and medical doctors, United States v. Andrew Orlander.[54] Although the thrust of the indictment is fraudulent billing, in paragraph 29(a), it is alleged that the chiropractor converted his practice into a medical practice and through a management company, he “maintained control over the finances, assets, management, professional and lay personnel, hiring, firing and the policies governing treatment of patients of the professional corporation. Through a series of contractual arrangements between the newly formed professional corporation and management company [the defendants] received all profits from the operation of [the medical practices].” It is further alleged in the indictment that the defendant chiropractor maintained control of the medical practices through a series of contractual agreements, “these included for each facility, a management agreement, which gave to the management company the responsibility of the professional corporation’s day-to-day operation which funneled all the proceeds of the P.C., with the exception of payment of the salary of the physicians and certain limited incidental costs such as malpractice insurance, to the management companies.”[55]
CONCLUSION
The form of business operation treated in these cases, as mentioned, is prevalent throughout the country. It is a response to the increasing complexity of the health care delivery system and, specifically, to several trends. Medical doctors for some time have had to be increasingly concerned with the rapid advance of science and technology in their particular fields. While it is a full-time job to provide patients’ treatment, it is also very time-consuming to read the medical literature, attend conferences and lectures and simply keep up with ongoing developments in any specialty. Increasingly, doctors are looking for ways to disburden themselves of the business aspects of medicine so that they may not only remain doctors, but remain currently competent doctors.
Unfortunately, concurrent with the above pressing need is the increasing complexity of the business of medicine. Managed care, third party reimbursement, utilization review and concern about increasing regulation, generally has taken a toll on the practice of medicine, removing it increasingly to an institutional setting at hospital out-patient departments, HMO clinics, etc.
The medical practice management company is part of the widespread trend of doctors, medical groups and other medical entities to engage competent business assistance for dealing with aggressive managed care and insurance companies and the business aspects of medicine generally. Moreover, management companies can allow small practices and even individual practitioners to continue to exist, offering a more cost-effective and economic option to the health care consumer, not to mention the ability of the practice to operate in areas that would otherwise not be medically served. As individual practices are acquired by hospitals and drawn into the orbit of the major medical empires in the metropolitan area, the consumer has less choice and the choice is far more expensive. Care in a hospital clinic, for example, is not just incrementally expensive, but a multiple of what care in a private practice setting costs. As one state Board of Medical Examiners noted in 1992:
Medicine has historically been practiced by physicians individually or in partnerships or professional corporations wholly-owned by physicians. In the recent past, however, and particularly in the last 25 years, alternatives to the traditional model have been created or proposed in response to a number of socio-economic developments in our nation’s healthcare delivery system. Affiliations between physicians and other components of the health care system – other health care providers (institutional and individual), payors, and other organizations – have been promoted by some as a means of enhancing the quality and accessibility of care, reallocating the economic and financial risks of providing services and decreasing the cost of health care.
(Louisiana Board of Medical Examiners, Statement of Position: Corporate Practice of Medicine; Applicability of Louisiana Medical Practice Act to Employment of Physician by Corporation other than a Professional Medical Corporation.)
Crafting correctly the relationships between the professionals and the businessmen is difficult without some kind of legal guidelines. The cases discussed above give conflicting signals that, hopefully, will be by harmonized appellate courts in the near future.
Robert P. Borsody
[1] See, e.g., Mars, The Corporate Practice of Medicine: A Call for Action, 7 Health Matrix 241 (1997); Parker, Corporate Practice of Medicine: Last Stand or Final Downfall; 3 Journal of Hospital and Health Law; Jacobson, Prohibition Against Corporate Practice of Medicine: Dinosaur or Dynamic Doctrine, 1993 Health law Handbook 67 (1993 ed.); Rosoff, The Business of Medicine; Problems with the Corporate Practice Doctrine, 17 Cumb. L. Rev. 485 (1987); Wilcox, Hospitals and the Corporate Practice of Medicine, 45 Cornell L.Q. 432 (1960); Note, The Corporate Practice of Medicine Doctrine: An Anachronism in the Modern Health Care Industry, 40 Vanderbilt L. Rev 445 (1987); Wiorek, The Corporate Practice of Medicine; an Outmoded Theory in Need of Modification, 8 J. Legal Medicine 465 (1987).
[2] Serbaroli, Francis, Corporate Practice of Medicine: A Clear and Present Danger, N.Y.L.J. 9/23/93, p.1 col. 1.
[3] Advisory Opinion No. 98-4
[4] 677 Fed. Reg. 7350 (2-19-97)
[5] See 42C.F.R.§1001.952
[6] 42 U.S.C.A. §1128(b)
[7] The opinion letters of the Office of Counsel of the New York State Department of Health are not compiled or published in any generally available form, hence, there is no uniform system of citation. Efforts are underway to induce the Department to make them available on the Internet with an accompanying search engine.
[8] Note that an earlier ruling letter dated February 3, 1993 by Peter I. Millock rendered to a New York State Department of Services, on page 2 paragraph 2, specifically provided that a “click fee” compensation provision by a medical practice to a provider of radiology equipment was permissible as a form of per use leasing.
[9] 715 S.W. 2d 782 (Ct. of Appeals, 5th Dist.)
[10] Id. at 733
[11] 192 N.J. Super., 44; 469 A2d 65 (N.J. Sup. Ct. App. Div. 1983, cert. den. 96 N.J. 279, 475 A2d 578 (1984)
[12] 469 A. 2d at 71
[13] Id. at 69
[14] Id. at 73
[15] Id. at 74, note 1
[16] Id. at 74
[17] 328 N.J. Super. 611 (Law Div. Morris Co.) 746 A2d 546 (1999)
[18] N.J.S.A. 17:33A-1230
[19] (Id. at 617)
[20] 300 N.J. Super. 510, 693 A2d 500, (N.J. Sup. Ct. App. Div.) certif. granted, 151 N.J. 67, 697 A2d 541, aff’d on remand, 304 N.J. Super. 278, 700 A2d 372 (App. Div. 1997)
[21] 125 N.J. 491, 507-14, 593 A2d 768 (1991)
[22] 325 N.Y. Super. 54, 737 A2d 711 (Law Div. Morris Co. 1999)
[23] Id. at 619
[24] Id. at 626
[25] Id. at 614, N.1
[26] Id. at 12
[27] cf supra at N. 15
[28] IBID
[29] (App. Div.1st Dept.) (9-26-96)
[30] Index No. 001828/99 by Judge Burton Joseph (Sup. Ct. Nassau Co.)
[31] N.Y.L.J. December, 23 1999, page 37, col. 6 (Sup. Ct. NY Co.)
[32] Index No. 602614/00 (Sup. Ct. N.Y. Co. )
[33] Id. at 4
[34] Id. at 5
[35] Index No. 600403/00 (Sup. Ct. N.Y.Co. January 11, 2001)
[36] Id. at 4
[37] N.Y. Sup. Ct. Index No. 601112/00
[38] 18 U.S.C. section 1962(d)
[39] Opinion at p. 14
[40] E.D.N.Y. Cv-00-4923
[41] Id. at 22
[42] Id. at 29
[43] 42 Ibid
[44] Id. at 30, citing Deutsch v. Health Insurance Plan of Greater New York, 573 F. Supp. 1443 (SDNY 1983)
[45] Id. at 34
[46] 1999 W.L. 223152 (SDNY 1999).
[47] 1999 W.L. 223152, at 223157. To the same effect, see, Senior Life Management v. Dowling , 650 N.Y.S. 2d 437 at 440 (App. Div. 3rd Dept. 1996)
[48] Id. at 36
[49] Id. at 31 – 32
[50] Id. at 32, Note 12
[51] Ibid. Although arbitration decisions can in no way be said to capture or state New York law on this subject, there have been a number of arbitration decisions in this area, one of which is worth mentioning because of its prefiguring of the holding in Judge Sifton’s decision. This was a master arbitration decision of November 18, 1998, Medical Health Office of Stony Brook v. Pearless Insurance Company (Case No. 17R 970 21235/98) The Master Arbitrator noted that “the arbitrator below, on her own volition, raised the issue of the proprietary of the corporate structure of the corporation….” The Master Arbitrator overturned the denial of claim for payment by the provider corporation holding “the matter may very well be one for the New York State Public Health Department, but not for a No-Fault arbitrator”.
[52] S.D.N.Y. 01 Cv 5231 (Judge Kimba Wood)
[53] Complaint, paragraph 3
[54] S.D.N.Y. 01-CR-49-1, filed 01/29/01
[55] Indictment at paragraph 29(q). This case is pending before Judge Barrington D. Parker, Jr.
authored by Senate Health and Human Services Chair Jane Nelson are intended to promote higher quality of care at lower cost. The collaboratives would allow groups of providers, such as hospitals and doctors, to bargain collectively with the people who pay them. The goal is to give providers more leverage in price negotiations with an eye to cutting overall health care costs. But staff at the Federal Trade Commission (FTC) say giving these collaboratives antitrust protection could have the opposite effect and could harm consumers. Staffers have flagged this key provision of the Lieutenant Governor’s health care agenda for the session, indicating that a tool intended to improve the efficiency and quality of care in Texas might in actuality “lead to dramatically increased costs and decreased access to health care for Texas consumers.” To get around any antitrust issues, SB 8 specifically gives collaboratives exemption from antitrust laws. The bill is in the final stages of passage and could be headed to the House floor at some point in the last 10 days of the legislative session.