Landmark N.J. Supreme Court Ruling Boosts Fraud Fight

There seems to be no limit to the kinds of schemes that people create to defraud insurance companies and, by extension, the public, through higher premiums. Now, however, the New Jersey Supreme Court has issued a unanimous decision, Allstate Ins. Co. v. Northfield Medical Center, P.C., No. A-27 (N.J. May 4, 2017), that certainly will help to reduce insurance fraud in New Jersey—and that, if its reasoning is adopted by other jurisdictions, likely will have the same effect in states across the country.

In Northfield, the court adopted a broad interpretation of the knowledge requirement that a plaintiff must demonstrate to prove that a defendant has violated the state’s Insurance Fraud Prevention Act (IFPA), N.J.S.A. 17:33A-1 to -30. The court’s decision makes the IFPA a much stronger tool to use in the fight against insurance fraud.

Background
New Jersey—like New York and other states across the country—limits the corporate practice of medicine with various rules and requirements with respect to the ownership, control, and direction of a physician’s practice. For example, a medical doctor with a plenary scope of practice may not be employed by a licensee with a more limited scope of practice. That means, among other things, that a physician with a plenary license may be employed by another plenary licensed physician, but a medical doctor (M.D.) or a doctor of osteopathic medicine (D.O.) may not be employed by a podiatrist (D.P.M.), chiropractor (D.C.), midwife, or certified nurse midwife (R.M., C.N.M.).

On Nov. 16, 1995, the executive director of the New Jersey State Board of Medical Examiners (the Board), Kevin B. Earle, issued an extensive opinion letter in response to a hypothetical scenario in which a professional association was divided between a chiropractor holding a 70 percent interest and a medical doctor holding a 30 percent interest. The letter found the proposed situation improper, reasoning that it had the potential to override the physician’s professional judgment as well as the physician’s decisions as to how the practice should be conducted. The letter acknowledged that the professional association was nominally the “employer,” rather than the chiropractor, but it found that to be a “distinction without a difference.” It added that for “quality control,” a multi-disciplinary practice could not employ physicians who were not themselves shareholders in the practice.

Then, in April 1997, Director Earle issued a second advisory letter confirming “that a medical doctor and a chiropractor [may] form a professional corporation and both may own shares in such a corporation,” but that the medical doctor, as the licensee with a plenary scope of practice, had to own a majority of the stock in the corporation.

This was the context in which Northfield arose.

The Case
As the court explained, in the 1990s, Daniel H. Dahan, a chiropractor licensed in California, began organizing a series of lectures throughout the country through his company, “Practice Perfect.” Practice Perfect lectures were marketed to chiropractors and focused on the creation of multi-disciplinary practices in which chiropractors worked with physicians and other medical professionals. Robert P. Borsody, a New York-based health care attorney, made presentations at Practice Perfect lectures on the legal issues arising from such multi-disciplinary practices.

In late 1996, a New Jersey-licensed chiropractor, John Scott Neuner, attended a two-day Practice Perfect seminar at which both Dahan and Borsody presented. According to Neuner, Borsody explained that a chiropractor may not own a majority interest in a medical practice, may not split fees with a doctor, and must refrain from self-referrals and kickbacks. Neuner also said, however, that Borsody proposed a model form of practice that he had developed for a multi-disciplinary center that allowed an investing chiropractor to retain control of the finances of a medical practice by relying on a series of contracts between a management company owned by the investing chiropractor and a separate medical corporation owned by a doctor. The stated goal of the interconnected contracts was to protect the chiropractor’s financial investment in the medical practice.

The practice model developed by Borsody and discussed at Dahan’s programs included a number of safeguards to ensure continued control of the practice by the chiropractor-manager. First, the doctor designated as the owner of the medical corporation would be asked to sign an undated resignation letter. Second, the doctor would be asked to sign an undated “AFFIDAVIT OF NON ISSUED OR LOST CERTIFICATE,” bearing an unexecuted notary attestation for the doctor’s signature and the date. Through those two documents, the chiropractor could, if necessary, remove the doctor from his or her position and have it appear that the controlling interest in stock certificates previously held by the doctor was being transferred from the departing physician to another physician. Third, Borsody told lecture participants that the leases between the management company and the medical corporation should include a “break fee” of $100,000 to penalize the medical practice’s doctor-owner for breaking the lease. That combination of measures was intended to prevent the nominal doctor-owner of the medical corporation from seizing control of the practice from the real investor—the chiropractor.

On March 28, 1997, after attending a Practice Perfect seminar, Neuner signed a contract with Dahan to become a client of Practice Perfect. He incorporated JSM Management, a management company, and Northfield, a medical corporation. He hired several doctors to work at Northfield and one doctor as the initial doctor-owner of Northfield; he subsequently replaced her with a new doctor who later said that he had been told that he “could be like a hired CEO, [or] like a figure head on a board, and [he] would get compensation for that with limited time.”

In late 1998, Allstate Insurance, which had been receiving insurance claims for treatment provided at Northfield, began investigating the legality of Northfield’s practice structure and ceased paying claims to the practice. As a result of its investigation, Allstate refused payment on approximately $330,000 in claims of patients treated by Northfield.

The insurer then filed a civil action against Borsody and Dahan, among others. Allstate did not assert that claims submitted by Neuner’s practice were false. Rather, Allstate alleged that Borsody and Dahan had violated the IFPA by knowingly assisting Neuner in the creation and operation of a multi-disciplinary practice whose insurance claims were fraudulent under the IFPA because Neuner’s practice had failed to comply with the governing standards on the corporate practice of medicine, a necessary precondition to a valid insurance claim.

The Lower Court Decisions
After a bench trial, the trial court decided that Borsody and Dahan had violated the IFPA by assisting Neuner in the creation of an unlawful multi-disciplinary practice, which had submitted medical insurance claims to Allstate. The trial court determined that Borsody and Dahan had violated the IFPA to the extent they had promoted and assisted in the creation of a practice structure that was designed to circumvent regulatory requirements with respect to the control, ownership, and direction of a medical practice.

The appellate court reversed, finding that Allstate had not established that Borsody and Dahan actually had known that their practice model had violated regulatory requirements governing the lawful ownership and control of a medical practice, and that, even if there was evidence of that knowledge, Allstate had not established that Borsody and Dahan had known that a violation of those regulatory requirements could constitute insurance fraud under the provision of the IFPA that created liability for one who “knowingly assists, conspires with, or urges any person or practitioner to violate any of the provisions of [the IFPA].”

The dispute over the standard for a knowing violation under the IFPA reached the New Jersey Supreme Court, which reversed the appellate court’s decision.

The Supreme Court’s Decision
In its decision, the court said that there was no need for “contortions” in understanding the word “knowing.” It was, the court continued, “well understood” to be an awareness or knowledge of the illegality of one’s act. Moreover, the court added, that knowledge did not have to come from a prior court decision holding that the precise conduct at issue gave rise to a violation of a legal requirement. Indeed, the court ruled, a party’s knowledge as to the falsity or illegality of his or her conduct could be “inferred from the surrounding factual circumstances”—and, in a civil action under the IFPA, a defendant’s knowledge of a violation could be proven by “circumstantial evidence.”

This case, the court pointed out, did not involve “an honest mistake” made in the course of completing a reimbursement form submitted to an insurer. This case, in the court’s view, went to the “basic structure of a practice” and how it was “owned, controlled, and directed.”

Given the regulations in effect at the time, the court ruled, the trial court reasonably could conclude that Borsody and Dahan had known of the regulatory requirements and had promoted a practice scheme specifically designed to circumvent those requirements while appearing compliant but that was “little more than a sham” intended to evade “well-established prohibitions and restrictions governing ownership and control of a medical practice by a non-doctor.”

Accordingly, the court ruled that the trial court’s finding of a knowing violation of the IFPA was “amply supported” in the record, which contained “compelling evidence demonstrating how the structure shielded from view its effective circumvention of regulatory rules.” Specifically recognizing the “broad anti-fraud liability imposed under the IFPA,” the court added that holding Borsody and Dahan responsible for promoting and assisting in the formation of an ineligible medical practice—created for the “obvious purpose of seeking reimbursement for medical care delivered by that practice”—was not a novel or unanticipated application of the IFPA.

The court was not persuaded by Borsody’s contention that he had thought that vesting “bare legal title” of a medical practice in a medical doctor was sufficient to comply with New Jersey’s rules. In the court’s view, the documents and structure promoted and designed by Borsody and Dahan had accomplished what the regulations sought to avoid. “They placed control over the medical practice in the hands of a chiropractor, subjecting plenary licensees to his effective control through interconnected contracts and the imposition of the threat of substantial monetary penalties. Importantly, the plan sought to conceal thdoose features to appear compliant.”

Conclusion
The court’s decision will make it easier to impose liability on defendants under the IFPA for fraudulent schemes—even if the defendants never actually participated in the enterprise themselves. It will make it easier to challenge sham structures intended to avoid the rules relating to the corporate practice of medicine. Simply put, it will make it easier to prove that defendants had knowingly engaged in insurance fraud.

In my column exploring the Northfield litigation that was published soon after the New Jersey Supreme Court had agreed to review the appellate court’s decision, “N.J. Supreme Court to Decide Breadth of Insurance Fraud Act,” N.Y.L.J. (Jan. 8, 2016), I wrote that the court had the opportunity to confirm the broad reach of the IFPA and to declare that New Jersey was a state where insurance fraud was not tolerated. With its decision in Northfield, the court has done just that.

Reprinted with permission from the July 5, 2017 issue of the New York Law Journal.