Anatomy of Massive No-Fault Insurance Fraud Alleged by GovernmentMay 4, 2012 | |
As has been highlighted in this column on a number of occasions, insurance fraud in connection with New York’s no-fault automobile insurance law is a tremendously large problem that affects both automobile insurance companies and policyholders, leading to millions of dollars in losses and increased premiums. In an effort to combat no-fault insurance fraud, insurance carriers, more and more frequently, have been suing health care providers and others for fraudulently obtaining or seeking to obtain benefits.
Now, the federal government has stepped in – in a big way. It recently indicted three dozen people – including 10 doctors and three lawyers – for allegedly participating in a quarter-of-a-billion-dollar no-fault insurance fraud scheme; prosecutors claim that this is the largest single no-fault automobile insurance fraud ever charged. Significantly, the case also is the first of its kind to allege criminal violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”).
The allegations in the indictment are strikingly broad and, if true, reflect a brazen fraud of remarkable proportions. They also reveal a great deal about how the Department of Justice believes the alleged fraud was perpetrated – and illustrate some of the most significant ways that no-fault insurance fraud can take place.
New York’s no-fault law requires that every vehicle registered in the state have no-fault automobile insurance, enabling the driver and passengers of a registered and insured vehicle to obtain benefits of up to $50,000 per person for injuries sustained in an automobile accident, regardless of fault. The no-fault law requires prompt payment for medical treatment, thereby obviating the need for claimants to file personal injury suits to be reimbursed. Under the no-fault law, patients can assign their right to reimbursement from an insurance company to others, including medical clinics that provide treatment for their injuries; these insurance carriers typically compensate medical practitioners at a rate pursuant to a fee schedule for various medical services performed on accident victims.
The law also requires, however, among other things, that all medical clinics in the state must be incorporated, owned, operated, and controlled by a licensed medical practitioner to be eligible for no-fault reimbursement. Insurance companies do not have to honor claims for medical treatments from a medical clinic that is not actually owned, operated, and controlled by a licensed medical practitioner. A person who has suffered a “serious injury” as a result of an accident may file a personal injury claim or lawsuit for damages other than no-fault damages.
The indictment contains allegations that most of the key requirements of the no-fault law were evaded or violated. It charges that a “criminal organization” (referred to in the indictment as the “No-fault Organization”) in the United States defrauded automobile insurance companies that provide health care benefits to accident victims of more than $275 million. To do so, they allegedly created no-fault medical clinics (referred to in the indictment as “No-fault clinics”) that “routinely” billed automobile insurers for medical treatments that were either never provided or that were unnecessary.
In addition, the government asserts, the No-fault clinics were not owned, operated, and controlled by a licensed medical professionals. Instead, according to the charges, the actual owners, operators, and controllers were individuals who were not licensed physicians and who were not identified on documents filed with New York authorities.
The actual “controllers,” according to the indictment, paid a fee or salary to licensed physicians so that they would incorporate a professional corporation under which a no-fault clinic could bill insurance companies; open a bank account for the clinic; sign the lease for the clinic property; sign the clinic’s bills for treatments under the no-fault law; and/or make “excessive and unnecessary prescriptions and referrals for additional treatments and medical supplies to other fraudulent medical clinics.” According to the government, one doctor who was among those who were indicted had incorporated 35 professional corporations since the late 1990s.
The government also alleged that the controllers arranged for fraudulently incorporated entities (“modality clinics”) to provide excessive and unnecessary medical treatments for which the controllers received cash kickbacks for each referral from the owners and operators of the modality clinics. Among the alleged unnecessary treatments were physical therapy, acupuncture, and chiropractic treatments – as many as five times per week for each – and treatments for psychology, neurology, orthopedics, and audiology. There also allegedly were unnecessary magnetic resonance imagings (MRIs), x-rays, orthopedics, and medical supplies.
According to the indictment, to increase the number of medical treatments that could be billed to automobile insurers and referred to modality clinics, the controllers used individuals – whom the indictment referred to as “runners” – who recruited patients to the no-fault clinics. The controllers allegedly paid runners between $2,000 and $3,000 per patient referral, depending on the quality of the police accident report and the ease of reimbursement from an insurance company. The government asserts that runners often coached patients about “which fake injuries they should claim” to support additional treatments.
Moreover, the indictment charges, controllers also referred patients to personal injury lawyers so that they could file personal injury claims and lawsuits for damages separate from the $50,000 no-fault damages. In return, according to the charges, the lawyers and the controllers “entered into kickback arrangements, which included, but were not limited to, a common arrangement in which the lawyers paid approximately $1,000 for each patient referral.”
The specific RICO allegations in the indictment are particularly noteworthy. The government charges that the No-fault Organization had two primary operating branches, each of which owned, operated, and controlled multiple no-fault clinics and modality clinics and laundered proceeds through shell companies, structured checks, and check cashers. According to the government, the alleged racketeering conspiracy dated from at least in or about 2007 through the date of the indictment with an alleged pattern of racketeering that involved mail fraud (through the use of the Postal Service) and money laundering.
With respect to money laundering, the government asserts that checks were mailed from automobile insurance companies to the no-fault controllers and those who operated and controlled the modality clinics (“modality clinic controllers”) and were then deposited into their bank accounts. According to the government, although the signatories on the accounts were the no-fault doctors and the professionals at the modality clinics who had incorporated the professional corporations for the no-fault and modality clinics, the accounts were “actually controlled” by the controllers of the clinics, who paid fees and salaries to the no-fault doctors and the professionals at the modality clinics from the accounts.
In addition, the indictment alleges, the modality clinic controllers paid kickbacks to the no-fault controllers in return for patient referrals. They did so, according to the charges, by providing checks to the accounts that were “often falsely characterized” as “rent” payments for the use of space at the no-fault clinics by the modality clinics. These rent checks, according to the government, had the dual purpose of satisfying some of the monies owed for kickbacks and also falsely representing to the automobile insurance companies that the business relationship between the no-fault clinics and the modality clinics was legitimate.
Additionally, other expenses of the no-fault clinics were sometimes paid by check directly from the accounts of the modality clinics as “an additional means of making kickback payments” to the controllers of the no-fault clinics, the indictment asserts. Finally, on some occasions, according to the indictment, the controllers of the modality clinics paid a portion of the kickbacks owed to the controllers of the no-fault clinics by “structuring” checks of less than $10,000 to the no-fault clinic controllers.
What did the no-fault clinic controllers allegedly do with these checks? The government contends that they often used check cashers to conceal the source of the proceeds and to reinvest the proceeds into the scheme. They allegedly did so by writing blank checks from the clinic accounts in amounts structured to be less than $10,000 to avoid financial reporting requirements and provided those checks to individuals who would cash the checks with a check casher for up to a 10 percent fee.
The government contends that the check cashers would then return the remainder of the funds in cash to the clinic controllers. The modality clinic controllers then would use this cash to pay the no-fault clinic controllers to satisfy the monies owed for patient referrals and, in turn, the no-fault clinic controllers paid runners in cash for referring patients to the no-fault clinics, according to the indictment.
The indictment also contends that, after depositing checks from automobile insurance companies into the accounts, the clinic controllers used some of the funds to pay for various personal expenses, including jewelry, limousines, and luxury goods. Also, according to the charges, the clinic controllers directed checks to be written from clinic accounts to certain shell companies they controlled; money from these shell companies then was used to pay for various personal expenses including car payments, credit card bills, and “lavish” vacations.
The Government’s Case
How does the government believe it will be able to prove its charges? It asserts that, for example, when a patient arrived for treatment at a no-fault clinic, the patient was evaluated by a doctor, who recommended a standard, usually uniform schedule of treatment – regardless of actual medical need – that included physical therapy, chiropractic, and acupuncture. The government contends that it has expert physicians who will testify that this course of treatment was “medically unnecessary on its face.”
In addition, according to prosecutors, in almost every case, a no-fault doctor prescribed a near-identical assortment of medical supplies provided by a durable medical equipment clinic that were “uniformly unnecessary and excessive.” The government says that in some cases insurance companies received bills for supplies that were not actually provided to patients. The government also asserts that no-fault doctors “usually” referred every patient for at least one MRI, which were “generally medically unnecessary.” To support its allegations, the government contends that it has evidence that includes testimony from cooperating witnesses, recordings of extensive wiretap interceptions of telephone calls and text messages, financial records, law enforcement testimony and surveillance photographs.
It remains to be seen whether the government will be able to prove its case or whether some or all of the defendants will reach a plea agreement. It certainly cannot be debated that the scheme alleged by the government is far from unique, as evidenced by the dozens of civil recovery cases already filed by insurers making similar allegations. Perhaps of most interest is that the indictment not only includes the businesspeople who allegedly controlled the medical practices and the medical doctors who allegedly allowed their licenses to be abused, but also the attorneys who allegedly counseled the other defendants in regard to the scheme and allegedly participated in the money laundering.
The willingness of federal authorities to bring criminal charges in a case allegedly involving a massive no-fault automobile insurance fraud headquartered in the heart of New York City should be a great relief to people concerned about insurance fraud – and a warning to anyone participating in no-fault insurance fraud that civil lawsuits seeking the return of money are not the only penalty for such misconduct. Criminal charges, conviction, and incarceration also are distinct possibilities.
 See, e.g., Evan H. Krinick, “Courts Weigh Arbitration of No-Fault Claims,” NYLJ, March 2, 2012); Evan H. Krinick, “Are Statutory Changes To No-Fault Law on the Horizon?,” NYLJ, Nov. 4, 2011.
 N.Y. Ins. Law § 5101 et seq.; 11 N.Y.C.R.R. § 65 et seq.
 See, e.g., Evan H. Krinick, “Wave of Civil Claims Being Asserted by Insurers Against Alleged Fraud,” NYLJ, Jul. 1, 2011.
 The federal indictment was announced by the U.S. Attorney’s office for the Southern District of New York, the New York office of the Federal Bureau of Investigation, and the New York City Police Department.
 U.S. v. Zemlyansky et al., S1 12 Cr. 171 (JPO) (S.D.N.Y. Feb. 29, 2012). Around the country, other recent federal indictments of health care professionals for fraud include U.S. v. Heary, No. 1:12CR170 (N.D. Ohio Apr. 3, 2012); U.S. v. Roy, No. 12-054 (N.D. Tex. Feb. 23, 2012); U.S. v. Capote, No. 2:12-cr-26 (M.D. Fla. Feb. 15, 2012).
 18 U.S.C. §?1961 et seq.
 See State Farm v. Mallela, 4 N.Y.3d 313 (2005). The author represented State Farm in the Court of Appeals in this case.
 See 18 U.S.C. § 1341.
 See 18 U.S.C. §§ 1956-1957.
This article is reprinted with permission from the May 4, 2012 issue of the New York Law Journal. Copyright ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.