Court Validates Another Tool for Insurers in Fight against No-Fault Fraud

May 3, 2013 | Appeals | Insurance Coverage

Over a decade ago, in an effort to reduce no-fault insurance fraud involving the improper ownership or licensing of medical providers, the New York State Insurance Department (the precursor to the New York State Department of Financial Services (“DFS”)), adopted a regulation that declared that a health care services provider was eligible for reimbursement from a no-fault insurance carrier under Section 5102(a)(1) of the New York Insurance Law only if it met all relevant New York State or local licensing requirements.[1] Relying in large part on that regulation, the New York Court of Appeals subsequently held, in State Farm Mutual Automobile Ins. Co. v. Mallela, that insurers could bring lawsuits against health care providers alleging that they were not eligible for no-fault law reimbursement if the evidence established that the physicians that allegedly owned the medical practices were not the true owners, in violation of New York’s Business Corporation Law.[2]

Now, in another decision that is likely to assist in the fight against no-fault insurance fraud, U.S. District Court Judge Arthur D. Spatt of the Eastern District of New York has decided that Mallela may be extended from the Business Corporation Law context to the Public Health Law context.  

More specifically, the district court’s ruling, in Allstate Ins. Co. v. Elzanaty,[3] permits no-fault insurers to challenge the bona fides of so-called “Article 28 facilities,” which include hospitals and ambulatory surgery centers that are licensed and regulated by the New York State Department of Health (“DOH”) under Article 28 of the New York Public Health Law.
The Case

The Elzanaty case arose when three insurance companies filed suit seeking damages under the Racketeer Influenced and Corrupt Organizations Act (“RICO”)[4] and for common law fraud in connection with the defendants’ alleged creation and perpetration of a scheme that defrauded the insurers of millions of dollars over the course of many years. The complaint asserted that the defendants had engaged in fraud by creating fictitious medical facilities that held themselves out to the insurers as legitimately incorporated Article 28 medical entities so that they could obtain no-fault payments from the insurers.

One of the defendants was Uptown Health Care Management, Inc., a medical center incorporated under Article 28, doing business as East Tremont Medical Center, New York Neuro & Rehab Center, and Jerome Family Health Center (collectively, “Uptown”). Another defendant was Hisham Elzanaty, the owner of Uptown. Uptown rendered medical treatment to individuals covered by no-fault insurance who, in turn, assigned their claims for the covered medical expenses to Uptown so that Uptown could seek reimbursement directly from their no-fault insurance carriers, including the three insurer plaintiffs in this case.

The insurance carriers’ complaint alleged that (1) the Uptown facilities were not properly licensed because Uptown’s medical director was not licensed to practice medicine in New York State; (2) the Uptown facilities were not properly licensed because one specific facility “violated its site-specific Operating Certificate by sending its employees to facilities throughout New York to examine and/or treat patients”; and (3) the Uptown facilities were not properly licensed because they were Article 28 facilities that paid “unlawful kickbacks” for some patient referrals.

The defendants moved to dismiss, arguing, among other things, that the complaint failed to plead the existence of an actionable claim under RICO or for fraudulent conduct because the Health Department had determined that they were properly licensed under Article 28 and because the Health Department exercised continuing jurisdiction and review over their operations.  In particular, the defendants argued that where an Article 28 medical facility had been found to be in compliance with its applicable licensing requirements by the Health Department, it could not be prevented from rightfully collecting what it allegedly was owed under the no-fault insurance scheme.

The Court’s Decision

In its decision, the court explained that the insurance carriers’ RICO and fraud claims rested on the assertion that Uptown was “improperly licensed” as an Article 28 medical facility, thus rendering Uptown ineligible to collect under New York’s no-fault law for the services it had provided to the insurance companies’ injured insureds. Spatt then rejected the defendants’ argument that because the Health Department had continuously reviewed Uptown’s operations and had decided to continue its certificate of authority, the insurers were precluded from asserting that it was not in compliance with the requirements of the Public Health Law. In other words, the court ruled that the insurers had adequately stated a claim under RICO and for fraud on the premise of improper licensing, despite the fact that Uptown had been approved and licensed by a state authority.

Spatt reasoned that Mallela stood for the proposition that an insurer could bring an action for fraud or unjust enrichment, based on fraudulent incorporation, to recover payments made to fraudulently incorporated providers. The focus of that decision, the court continued, was on fraudulent incorporation under N.Y. Business Corporation Law §§ 1507 and 1508 (and under N.Y. Education Law § 6507(4)(c)).

In Elzanaty, the court pointed out, the issue with respect to Uptown was not proper or improper incorporation under the Business Corporation Law but, instead, was proper or improper licensing under Article 28 of the Public Health law. Spatt stated that similar to the idea under the Business Corporation Law that only a licensed medical doctor could control a medical professional corporation (“PC”), a non-doctor could control a hospital, but only under the strict circumstances found in 10 NYCRR §751.4, such as that there must be a medical director who “is a physician licensed by and currently registered with the New York State Education Department,” who “develops and recommends to the operator policies and procedures governing patient care in accordance with generally accepted standards of professional practice,” and who “is responsible for the supervision of the quality assurance program and for reporting the activities of the program to the operator.”

Thus, the court found, the question in Elzanaty was not about who could control a medical business and how – which was governed by the state’s Business Corporation Law and the Department of Education – but, rather, who could control a medical hospital and how, which was governed by the state’s Public Health Law.

The court then pointed out that Mallela had made no distinction between health care providers incorporated as business entities pursuant to the Business Corporation Law and health care providers licensed as Article 28 facilities under the Public Health Law. The court in Elzanaty found that the type of licensing document at issue whether a certificate of authority issued to a PC (as in Mallela)or an operating license issued to an Article 28 facility (as in Elzanaty)– was “immaterial.” As Judge Spatt explained, the DFS regulation governing health care services providers, including Article 28 facilities,[5] stated that a provider of health care services was not eligible for reimbursement under Insurance Law Section 5102 if the provider failed to meet “any New York State or local licensing requirements.”

In the court’s view, because Public Health Law Article 28 was in existence at the time that regulation was promulgated, if there was an intent to exclude Article 28 facilities from its scope, “such an exclusion would have been included.” It then determined that the result urged by the defendants would be in “direct conflict” with the Court of Appeals’ advice that insurers may “look behind the face of licensing documents to identify willful and material failure to abide by state and local law.”[6]

Therefore, Spatt held that the insurance companies could properly assert a fraud and RICO action against the defendants despite the state’s licensing scheme and its previous approvals. In the court’s view, the insurers could allege that the defendants were not eligible for reimbursement on the ground that they did not meet the applicable state licensing requirements because they violated the statutes, rules, and regulations governing and controlling the establishment and/or operation of an Article 28 facility.[7] The court added that the fact that there might be a higher degree of oversight in the public health context as opposed to the business corporation context did not necessitate a different outcome. Quite simply, it concluded, the insurers could premise their fraud and RICO claims on licensing that had been approved by the state.


An insurance company that believes that an Article 28 facility is not properly licensed can resort to the New York State Commissioner of Health under Insurance Law §5108(c), which states that “[e]very insurer shall report to the commissioner of health any patterns of overcharging, excessive treatment or other improper actions by a health provider within thirty days after such insurer has knowledge of such pattern.” However, this language should not – and, in fact, the court specifically found that it did not – preclude insurers from filing the type of action that the insurers had filed in Elzanaty.

Indeed, Judge Spatt’s decision in Elzanaty makes it clear that an Article 28 facility may not disguise fraudulent conduct behind the shield of its operating certificate. The Elzanaty court has provided insurers with another mechanism to directly challenge whether a health care provider licensed under Article 28 is entitled to receive no-fault reimbursement.

[1] The regulation, 11 N.Y.C.R.R. § 65-3.16(a)(12), states:

A provider of health care services is not eligible for reimbursement under section 5102(a)(1) of the Insurance Law if the provider fails to meet any applicable New York State or local licensing requirement necessary to perform such service in New York or meet any applicable licensing requirement necessary to perform such service in any other state in which such service is performed.

[2] 4 N.Y.3d 313 (2005) (the author and his firm represented the insurer in this case).

[3] No. 11-cv-3862 (ADS)(ARL) (E.D.N.Y. Jan. 7, 2013).

[4] 18 U.S.C. §§ 1962(c).

[5] 11 NYCRR §65-3.16(a)(12), supra n. 1.

[6] Mallela, 4 N.Y.3d at 321.

[7] See 10 NYCRR §600.5(a)(1), which states that the DOH can revoke, limit, or annul the approval of an Article 28 establishment if the operator is guilty of fraud or deceit in procuring approval, or if it has failed to comply with any condition, limitation, or other requirement imposed as part of, or in conjunction with the approval of the establishment.

Reprinted with permission from the May 3, 2013 issue of the New York Law Journal.  All rights reserved.

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