Insurer Must Pay for Services from Multi-Care Clinics
MINEOLA – A change in insurance regulations has failed to prompt a federal judge to reverse his ruling issued last year in a decision that could affect several pending actions by no-fault insurers totaling almost $75 million in alleged damages.
U.S. District Judge Charles P. Sifton, in the Eastern District, rejected arguments made by State Farm Mutual Automobile Insurance Co., which asserted that a modification in regulations regarding the licensing of health care providers required him to vacate his previous decision.
Instead, Judge Sifton adhered to his prior ruling made in September 2001, which determined that State Farm could not refuse to pay no-fault benefits to services from so-called multi-care medial clinics, which include chiropractors and acupuncturists, because of their allegedly unlawful corporate structure.
The 2001 decision, which dismissed without prejudice the insurer’s private right to action under the state’s Business Corporation Law, further held that State Farm’s recourse, instead of withholding payment, was to report alleged violations to the commissioner of the state’s Department of Health.
The prior ruling in State Farm v. Mallela, 00-CV-4923, also held that a policyholder’s right to coverage should not depend on the legality of the provider’s corporate structure.
But in its second amended complaint, State Farm alleged that Judge Sifton should reconsider the action in light of new regulations. Those new regulations state that “a provider of health care services is not eligible for reimbursement . . . if the provider fails to meet any applicable New York State or local licensing requirement necessary to perform such service in New York.”
State Farm’s second amended complaint also relied upon the Department of Insurance’s notice published prior to the new regulation’s effective date, which stated that the language was added to clarify that a health care provider must be properly licensed to be eligible for reimbursement under no-fault insurance.
New York Business Corporation Law requires professional health service corporations to be owned and controlled only individuals who are licensed to practice medicine.
State Farm argued that some 36 multi-care medical clinics were illegally structured corporations in which physicians unlawfully “sold” their names to set up practices comprised mainly of chiropractors, acupuncturists and unlicensed professionals.
That corporate structure, State Farm alleged, violated Business Corporation Law and therefore exempted the insurer from having to pay the practices.
Specifically, State Farm asserted that Dr. Robert Mallela and Dr. Swapnadip Lahiri served as the licensed physicians to set up about 36 practices in the metropolitan area. The practices, State Farm asserted, actually were controlled by Tatiana Rybuk and Paul Schneider, both of whom were not licensed to practice medicine and who pleaded guilty in 1997 to attempted enterprise corruption, a scheme to defraud and 12 counts of insurance fraud.
Several other lawsuits are pending involving the defendant corporations set up by Drs. Mallela and Swapnadip, in addition to corporations created by other defendants.
In New York Supreme Court, a case initiated by Progressive Auto Insurance is slated for trial in February. In addition, Justice Gammerman presided over a similar lawsuit filed by Oxford Health Plans. In that case, which involved other defendants as well, he dismissed claims fraud based solely on alleged unlawful corporate structure. Oxford had appealed that decision.
Further, a case brought by Allstate, Progressive and Encompass insurance companies is pending in the U.S. District Court for the Southern District.
Those cases, including the current $6 million lawsuit filed by State Farm, equal as estimated $75 million in damages.
In th latest ruling, Judge Sifton found that State Farm’s interpretation of the new regulations would defeat the rationale of no-fault insurance. He concluded that under such an interpretation, health care providers would be required to give insurance proof that they had complied with every prerequisite of obtaining a license in order to complete a verification of their claims.
“Such an obligation would directly undermine the no-fault law’s purpose of providing prompt, uncontested first-party benefits,” the judge wrote in his decision. (The decision will be published in Wednesday’s Law Journal.)
Justice Sifton also noted the “myriad grounds” that could be used to challenge licenses of professional service corporations, besides those alleged by State Farm against the defendants, such as failure to hold an annual meeting or failure to pay license renewal fees.
“Taken to a logical extreme, an insurer could question a provider about whether all of its owners and physicians have been making their child support payments, because failure to pay child support in New York triggers the revocation of professional licenses under Domestic Relations Law §244-c,” he wrote.
In reaching his decision, the judge observed that although the New York Court of Appeals has not addressed the precise issue in the case before him, it has set forth “in some detail” how to resolve conflicting interpretations of the state’s Insurance Law and no-fault regulations.
In Presbyterian Hospital v. Md. Cas. Co., 90 NY2d 274 (1997) and in Aetna v. Nelson, 67 NY2d 169 (1986), the state’s high court refused to read rights or obligations not expressly created by the Legislature or the Insurance Department into no-fault law or regulations.
Because of the Court of Appeals’ reasoning in those two cases, in addition to the defendants’ public policy arguments and the Insurance Department’s notice statement, which he found “does not clarify the ambiguity,” Judge Sifton followed his previous decision.
Law of the Case
State Farm had argued that no less than 67 decisions by no-fault arbitrators, state courts and federal courts supported its position that providers such as those in the Mallela case must be lawfully licensed and operating within the scope of those licenses to be eligible for no-fault benefits.
But Judge Sifton noted that of those 67 decisions, 48 were issued before his order last year and therefore could not change the law of the case. Of the remaining decisions, he wrote that he had considered some in his previous decision and that others were made by the American Arbitration Association rather than state or federal courts.
The judge wrote that four other decisions were issued by state Supreme Court. Two of those decisions, which had no precedential vale, stemmed from proceedings to confirm arbitration awards in which the court was limited to considering whether the award was arbitrary and capricious.
The other remaining two state court decisions were distinguishable, he wrote. In Advanced Care of New York v. Friscia, the service providers did not possess licenses at all and were seeking to enforce an illegal contract, two critical differences, Judge Sifton found.
Regarding the last remaining case, Kew Forest Medical v. Progressive Insurance Co., Judge Sifton concluded that the decision there focused on matters not at issue in the case before him.
Finally, two federal court decisions cited by State Farm also failed to persuade Judge Sifton. In one of those cases, Universal Acupuncture v. State Farm, Judge Shire Scheindlin considered the insurer’s allegations that it suffered from the provider’s false representations regarding its ownership.
But Judge Sifton found that the Universal case was not on point because it did not address whether a provider with a facially valid, but unlawful license could sue for no-fault benefits based on the unlawfulness of the license.
No Intervening Change Found
In Judge Sifton’s case, State Farm also relied on an Eastern District decision, which he found actually supported neither party. In Great South Bay Medical Care v. Allstate, F.Supp.2d (2002), Judge Leonard D. Wexler dismissed the service provider’s claims of defamation, unjust enrichment, fraud and breach of contract on the grounds of abstention because the disputed issues involved state law. As such, Judge Sifton determined the cases cited as precedent by State Farm did not require a modification to his decision.
“Having considered the legal developments that have occurred since the issuance of the Prior Order, I conclude that there has been no intervening change in the controlling law that provides a compelling reason for reversing my ruling that an insurer may not refuse to pay a benefits claim based upon an allegation that the provider has a true owner who does not possess a license to practice medicine,” Judge Sifton wrote.
Evan Schwartz represented 46 defendants in the various actions. Mark L. Furman, with Lifshutz, Polland & Hoffman, in New York represented two of the defendant corporations in Judge Sifton’s case. Ross Silverman, with Katten Muchin Zavis Rosenman, in Chicago, represented State Farm.
Mr. Silverman said Judge Sifton’s decision is “contrary to other decisions in other forums.” State Farm is considering an appeal, he said.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack
833-824-5350
[email protected]