DFS Continues Long History of Strongly Supporting Anti-Fraud Reg

May 3, 2019 | Evan H. Krinick | Appeals

Nearly two decades ago, in 2001, New York state’s insurance regulator—then known as the New York State Insurance Department and now known as the New York State Department of Financial Services (DFS)—promulgated a powerful anti-fraud regulation. The regulation, 11 N.Y.C.R.R. §65-3.16(a)(12), was intended to require that a health care provider, as a condition of eligibility for no-fault reimbursement, be owned and controlled by licensed physicians and not by non-physicians who disguise their ownership and control and secretly siphon all profits away from the physician whose name appears on the license issued by the state.

Since then, and under a number of different insurance superintendents and attorneys general, the state has continued to strongly support the regulation and its longstanding, straightforward, and well understood meaning. As the DFS has once again just reiterated, under §65-3.16(a)(12), a medical professional corporation (PC) is ineligible for no-fault insurance reimbursement if it fails to meet any condition of licensure, including the requirement of physician control.

The Regulation

Article 15 of New York’s Business Corporation Law (BCL) permits the formation of a PC to practice medicine where ownership and control resides entirely in one or more licensed physicians who practice in the corporation. This requirement was intended to ensure that a physician’s allegiance was to his or her patients, and not to unlicensed individuals running the PC.

Regulation 68, codified at 11 N.Y.C.R.R. part 65, was promulgated in 2001 to address “rampant abuse” of the no-fault system—including the “growing incidence of fraud” caused by “the corporate practice of medicine by nonphysicians.” See Matter of Medical Society of State of N.Y. v. Serio, 100 N.Y.2d 854 (2003).

Section 65-3.16(a)(12), which is part of Regulation 68, states that 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.” In support of that requirement, every time a medical PC seeks reimbursement of no-fault benefits from an insurance company, it must certify to the no-fault insurer that it is owned by licensed physicians and, therefore, that it satisfies the prerequisite for reimbursement mandated by §65-3.16(a)(12).

The DFS’s Position

The DFS has a long history of support for §65-3.16(a)(12) and its essential requirement. For example, in 2004, the Department of Insurance adopted regulations governing the no-fault fee schedules that provided that only “properly formed” and “properly structured” health providers could claim reimbursement. See 11 N.Y.C.R.R. §68.1(b)(2), (3); 26 N.Y. Reg. 12, 13 (Oct. 6, 2004).

The following month, Gregory V. Serio, who then was superintendent of the Department of Insurance, submitted an amicus brief to the New York Court of Appeals in State Farm Mutual Automobile Ins. Co. v. Mallela, 4 N.Y.3d 313 (2005) (a case in which my firm and I were counsel for State Farm), which was considering whether, under §65-3.16(a)(12), a medical corporation that had been “fraudulently incorporated” because it was owned or controlled by nonphysicians was “entitled to be reimbursed by insurers … for medical services rendered by licensed medical practitioners.”

The department’s amicus brief explained that §65-3.16(a)(12) was designed “to prevent a health provider who is not lawfully authorized to provide and bill for health care services in New York from obtaining reimbursement under the No-Fault Law.”

The Court of Appeals agreed with that view and unanimously held that medical PCs are not entitled to reimbursement if they “fail to meet the applicable state licensing requirements, which prohibit nonphysicians from owning or controlling medical service corporations.” Notably, the court did not limit the reimbursement prohibition to cases where the actual care received by patients was either unnecessary or improper.”

Now, the DFS has filed another amicus brief with the Court of Appeals, this time in Andrew Carothers, M.D., P.C. v. Progressive Ins. Co., No. APL-2017-00225 (N.Y.) (a case in which my firm is among several counsel for the insurers), reiterating its longstanding position on §65-3.16(a)(12).

In this amicus brief, the DFS once again explains that §65-3.16(a)(12) states that a medical provider “is not eligible for reimbursement” under the No-Fault Law “if the provider fails to meet any applicable New York State or local licensing requirement necessary to perform such service in New York.” (Emphasis added.) The DFS observes that there is “no dispute” that an “applicable New York State … licensing requirement” is that a medical PC must be owned and controlled solely by licensed physicians. It then points out that the court concluded in Mallela—agreeing with the DFS’s interpretation of §65-3.16(a)(12)—that the regulation unambiguously makes a medical PC ineligible for reimbursement if it “fails to meet” the “licensing requirement” that bars nonphysicians from “owning or controlling” such corporations. “Nothing more is required,” the DFS says.

For example, the DFS states in its amicus brief that no additional proof of criminality such as fraudulent billing or fraudulent intent is necessary to deny reimbursement to a medical PC controlled by nonphysicians.

With respect to fraudulent billing, the DFS’s amicus brief points out that the court in Mallela adopted the superintendent’s position that it is irrelevant whether an improperly structured medical PC seeks reimbursement for legitimate services performed by licensed doctors, or whether “the actual care received by patients was unnecessary or improper.” In other words, the DFS says, even when patients receive appropriate care from licensed professionals, §65-3.16(a)(12) “forecloses reimbursement if the medical PC is improperly owned or controlled by nonphysicians.”

Similarly, with respect to fraudulent intent, the DFS asserts in its amicus brief that when a medical PC is structured in violation of state licensing requirements, it is not eligible for reimbursement even if that unlawful structure was somehow inadvertent, such as if the incorporating physician or nonphysician partners subjectively misunderstood the facts or law. According to the DFS, nothing in §65-3.16(a)(12) “remotely suggests that a subjective finding of scienter is necessary to bar reimbursement to a medical PC with an objectively unlawful structure.”

The DFS’s amicus brief explains why that is so, stating that by operating against PCs that fail to meet “any licensing requirement,” §65-3.16(a)(12) “deters formation of the unlawful business structures that have enabled large-scale frauds.” In the DFS’s opinion, §65-3.16(a)(12) “operates as a prophylactic against fraud” and not merely “as a punishment for those proven to have committed intentional fraud.”

The DFS’s amicus brief makes the point quite forcefully, declaring that, as the superintendent “has consistently explained,” a medical PC “that operates in violation of a core licensing requirement—one to which it has repeatedly and falsely certified compliance—cannot obtain reimbursement, irrespective of whether an insurer can prove that the incorporating physician or his nonphysician partners subjectively intended to violate the law.”

Moreover, the DFS adds, requiring an element of subjective fraudulent intent would “flip on its head the general rule that ignorance of the civil legal consequences of one’s intentional activity is not a defense to those consequences.” As an example, the DFS points out that a physician who is unaware of “basic structural aspects of the practice” operating under the physician’s license should be “strong evidence that the physician lacks the necessary oversight and control of the PC.”

Finally, the DFS’s amicus brief concludes that public policy counsels strongly against limiting the scope of §65-3.16(a)(12). The DFS says that, at a time when no-fault abuse “remains stubbornly prevalent” and “ubiquitous,” the public “would be harmed by any new limits on an essential tool to curb the unlawful structures that enable large-scale abuse.” The DFS reiterates that New York has long recognized “that patients are best served when physicians—not corporations motivated solely by profit—are responsible for care and treatment decisions.”


No-fault fraud remains a pervasive problem in New York. For instance, in 2017, the DFS’s Insurance Frauds Bureau received 12,887 reports of suspected no-fault fraud, accounting for 88 percent of all healthcare fraud reports and 54 percent of all insurance fraud reports. See Department of Financial Services, Investigating and Combating Health Insurance Fraud 3-6 (March 15, 2018).

These kinds of frauds commonly are facilitated by unscrupulous non-physicians who disguise their ownership and control of medical professional corporations so as to attempt to defraud insurers and the public. See, e.g., Allstate Ins. Co. v. Buziashvili, 2017 N.Y. Slip Op. 50542(U), at 1-3 (Sup. Ct. N.Y. Co. 2017); United States v. Gabinskaya, 829 F.3d 127 (2d Cir. 2016) (“large-scale scheme to defraud insurance companies” where nominal physician owner had “no actual oversight” of PC); GEICO v. Simakovsky, No. 14-cv-3775 (E.D.N.Y. Sept. 6, 2015) (operation of corrupt no-fault clinics by fraudsters who recruited licensed chiropractor to “pose as [medical PCs’] true owner”); Allstate Ins. Co. v. Lyons, 843 F. Supp. 2d 358 (E.D.N.Y. 2012) (“massive conspiracy to defraud” insurers where PCs “owned on paper by licensed medical doctors” were “in fact controlled by other[s]”); Allstate Ins. Co. v. TMR Medibill, Inc., No. 00-cv-2 (E.D.N.Y. July 13, 2000) (corrupt medical clinics where “nominal share-holder doctor” transferred all control).

The DFS’s continuing support for and longstanding interpretation of §65-3.16(a)(12) is a critically important step in support of efforts to curtail no-fault insurance fraud and its implications for patients, policyholders, and the public in general.

Reprinted with permission from the May 3, 2019 issue of the New York Law Journal. © ALM Media Properties, LLC.  Further duplication without permission is prohibited.  All rights reserved.

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