Growing Role of Discovery in Providers’ Cases Seeking No-Fault BenefitsSeptember 6, 2013 | |
In recent years, more and more no-fault insurance carriers and health care providers have become parties to an escalating battle over providers’ requests to obtain payment from no-fault insurers for care the providers allegedly provided to injured people (so-called “assigned first-party no-fault benefits”). At the heart of the dispute is State Farm Mutual Automobile Ins. Co. v. Mallelaand its progeny. Mallela held that health care providers are not eligible for no-fault reimbursement if the physicians who allegedly own the providers are not the true owners.
A growing aspect of this litigation involves insurance companies seeking – and being granted – discovery to be able to demonstrate that a provider was fraudulently incorporated. That is because the factual foundation of a so-called Mallela defense involves proof that someone who is not a medical doctor is the actual owner of the health care provider or actually is controlling the operation of its business. In particular, insurers that raise a Mallela defense assert that the licensed professional has done little more than permit his or her license to be used as a basis to form the business and that the licensed professional has turned the operation of the corporation over to non-professionals by signing management agreements that provide for excessive fees for routine office or practice management services and office and equipment leases that provide for excessive lease payments. This information typically is within the health care provider’s possession and not the insurance carrier’s, which is why carriers seek to discover the information from the providers.
Courts now consistently rule that insurance carriers are entitled to discover documents and to take discovery of the physicians who claim to own the health care providers. Recently, for example, in All Boro Psychological Servs., P.C. v. Allstate Ins. Co., the Appellate Term, Second Department, affirmed a trial court’s decision granting an insurance carrier discovery as to whether the health care provider might be ineligible to recover assigned first-party no-fault benefits on the ground that it was a professional service corporation that failed to comply with applicable licensing laws. The appellate court held that the provider was obligated to produce to the insurance carrier the information the insurer sought, and that the insurance company was entitled to depose the physician who was the health care provider’s owner.
The clear trend in the cases makes the recent Nassau Country District Court decision in Huntington Regional Chiropractic, P.C. v. Allstate Ins. Co.perplexing. Here, the court granted the insurance carrier’s discovery motion – but it ordered the provider to turn its information over to the court for an in camera review.
The case arose after Allstate Insurance Company received numerous no-fault claims from medical facilities owned by Dr. Joseph Perez and it began to investigate how these providers operated. During the claims verification process, Allstate conducted an examination under oath of Dr. Perez, who testified that he used management companies to pick the location for his medical facilities, to hire and handle payroll for his support staff, and to handle billing. Allstate asserted that it repeatedly requested copies of the management agreements during the claims verification process but that it did not receive them.
Huntington Medical Plaza, P.C., a facility owned by Dr. Perez, sued Allstate for payment of assigned first-party no-fault benefits. In response, Allstate alleged, among other things, that the facilities owned by Dr. Perez had engaged in a systematic pattern of overbilling, that Dr. Perez had billed no-fault for services provided by independent contractors, and that there had been a pattern of providing similar if not identical treatment to patients who were examined by Dr. Perez or other doctors at facilities he owned. Allstate claimed that these circumstances led it to believe that Dr. Perez’s facilities were subject to a Mallela defense. Therefore, it sought to obtain discovery with respect to that defense.
Allstate served a notice for discovery and inspection requesting that Huntington Medical Plaza, P.C., produce copies of its banking records and banking resolutions, tax returns, office and equipment leases, management agreements, and other corporate records it would need to establish its defense. Huntington Medical objected to producing this material, asserting that the demands were overbroad, unduly burdensome, and irrelevant. It asserted that Allstate was engaged in nothing more than a “fishing expedition” and that discovery was unrelated to the real issues: Allstate’s denial of claims on the grounds the fees were not in accord with the fee schedule and the medical services were not medically necessary.
After Huntington Medical filed a Notice of Trial and Certificate of Readiness for Trial, Allstate moved to strike on the ground that discovery had not been completed.
In its decision on Allstate’s motion, the court, relying in large part on Andrew Carothers, M.D., P.C. v. Insurance Companies Represented by Bruno, Gerbino & Soriano, LLP, explained that, when an insurer asserts a Mallela defense, the issue is the control the management company has over the operation of the medical practice and the extent to which the management company realizes financial benefits from the medical practice’s operation.
The court then observed that the issues in determining whether a medical facility is subject to a Mallela defense include whether the fees being paid to the management company for routine services were excessive, whether the management company was renting office supplies, equipment, and space to the medical provider for payments that were excessive, whether the management company’s employees were the sole signatories to the medical practice bank accounts, whether the medical provider actually performed the medical services for which the professional corporation was formed, the extent to which the licensed professional was involved in the decisions relating to the facility’s operation, and whether the licensed professional was “more like a salaried employee or the owner of the business.”
In other words, the court explained, the issue was whether the licensed professional was involved both medically and operationally in the operation of the business or whether the medical professional simply provided a license that permitted people who lacked a license to operate, control, and benefit from the operation of the facility or practice.
Thus, the court declared, if a management company actually was operating Huntington Medical and if Dr. Perez was providing his license to Huntington Medical, Huntington Medical “would be subject to a Mallela defense” and “would not be eligible to receive payment of no-fault benefits.”
After properly setting forth the applicable standard, the court granted Allstate’s motion – but ordered that Huntington Medical produce materials for an in camera inspection. Why the court ordered an in camera review is puzzling when the law is so clear that insurance carriers are entitled to obtain this information themselves in these kinds of no-fault cases. Moreover, it is a practice that, if widely adopted, could overwhelm courts and might expand beyond the no-fault world. One suspects that in camera review will not become the norm.
By now, the rules pertaining to an insurance carrier’s ability to obtain discovery in these cases are so well-established that, in some instances, courts have gone so far as to dismiss a provider’s action for payment of no-fault benefits when it failed to comply with discovery orders. For example, in Terra Chiropractic, P.C. v. Hertz Claim Management Corp., a health care provider sued to recover assigned first-party no-fault benefits and the defendant answered and submitted numerous discovery demands. After the provider did not respond to its demands, the defendant moved for preclusion pursuant to CPLR 3126. A judicial hearing officer (“J.H.O.”) conditionally granted the defendant’s motion by directing the provider to give verified responses to the defendant’s written discovery demands within 60 days or else be precluded from offering evidence at trial.
Several months after that deadline had passed, the defendant moved to strike the complaint, pursuant to CPLR 3126, due to the provider’s alleged failure to comply with the J.H.O.’s order. A second J.H.O. conditionally granted the defendant’s motion unless the provider completely responded to all of the defendant’s interrogatories and provided the defendant with corporate documents by a stated deadline. The provider subsequently gave responses to those interrogatories that it determined to be material and necessary, but those responses were not provided by the deadline – and the provider did not give the defendant the corporate documents that it had requested.
The defendant then moved, pursuant to CPLR 3126, to strike the complaint due to the provider’s failure to comply with the two J.H.O. orders. The court granted the motion and the provider appealed.
In its decision, the Appellate Term explained that the provider “could not merely provide responses solely to those items it deemed material and necessary.” Because the provider had offered “inadequate and unreasonable excuses for its failures” to comply with the court orders, the failures to comply could be considered “willful and contumacious.” Accordingly, it found that the order dismissing the complaint was not an “improvident exercise of discretion,” and it affirmed the decision.
Courts have found other information available for discovery, and have permitted other forms of discovery. For example, an insurance carrier may have the right to depose not only a physician-owner of a health care provider seeking payment of assigned first-party no-fault claims but also other individuals, such as the alleged true owner. It is worth noting that there also seems to be an increase in providers’ requests for discovery from insurance carriers, such as an insurer’s Special Investigation Unit file, and a growing body of case law addressing that.
With deadlines to help limit litigation delays and with the availability of protective orders to limit overreaching, discovery has proven to be an effective and fair tool that insurance companies can use to help explore the validity of claims and to reduce insurance fraud in “fraudulent incorporation” cases, as well as in other situations. Given the stakes involved, more litigation over discovery issues in these kinds of cases can very well be expected.
 N.Y. Ins. Law §5101 et seq.; 11 N.Y.C.R.R. §65 et seq.
 4 N.Y.3d 313 (2005) (the author and his firm represented the insurer in this case).
 See, e.g., Allstate Ins. Co. v. Elzanaty, No. 11-cv-3862 (ADS)(ARL) (E.D.N.Y. Jan. 7, 2013); see also Evan H. Krinick, Court Validates Another Tool for Insurers in Fight against No-Fault Fraud, N.Y.L.J. May 3, 2013, available at http://www.newyorklawjournal.com/PubArticleNY.jsp?id=1202598477913&slreturn=20130725161507.
 A related issue not explored in this column is the range of documents that an insurance carrier can obtain during the claim verification stage, before litigation commences.
 2013 N.Y. Slip Op. 51124(U) (App. Term 2d Dep’t July 5, 2013).
 See, also, RLC Medical, P.C. v. Allstate Ins. Co., 29 Misc. 3d 134(A) (App. Term 2d Dep’t 2010).
 967 N.Y.S.2d 639 (D.Ct. Nassau Co. 2013).
 CPLR 3101(a) provides for full disclosure by a party to an action of “all matter material and necessary in the prosecution or defense of an action regardless of the burden of proof.” Information is “material and relevant” for the purposes of CPLR 3101(a) if it, “will assist preparation for trial by sharpening the issues and reducing delay and prolixity. The test is one of usefulness and reason.” Allen v. Crowell-Collier Publishing Co., 21 N.Y.2d 403 (1968).
 26 Misc 3d 448 (Civ. Ct. Richmond Co. 2009). The judgment was affirmed in Andrew Carothers, M.D., P.C. v. Progressive Ins. Co., 2013 N.Y. Slip Op. 23232 (App. Term 2d Dep’t July 5, 2013) (the author and his firm were co-lead counsel for the insurers in this case).
 29 Misc. 3d 127(A) (App. Term 2d Dep’t 2010).
 Cf. B.Y., M.D., P.C. v. Lancer Ins. Co., 26 Misc. 3d 146(A) (App. Term 2d Dep’t 2010) (dismissal is a “drastic sanction”).
 See, e.g., All Boro Psychological Servs., P.C., supra.
 See CPLR 3122(a), 3133(a).
 See CPLR 3103(a).
 See, e.g., Flatlands Medical, P.C. v. Allstate Ins. Co., 35 Misc. 3d 127(A) (App. Term 2d Dep’t 2012) (insurer asserting “staged accident” defense).
Reprinted with permission from the September 6, 2013 issue of the New York Law Journal. All rights reserved.