Currently on appeal in New York is an insurance fraud case that involves “fraudulent incorporation” and the defense of an insurance carrier’s decision to withhold payments because of it.

The case originated in light of New York law prohibiting corporate medical practices.

The New York law

To ensure that only licensed medical professionals make medical decisions, New York law prohibits the corporate practice of medicine. Furthermore, licensed medical professionals cannot share profits or split fees with those who do not hold a license. Violations of this law arise when physicians engage the business management services of non-licensed companies.

About the case

In April of 2017, the Second Judicial Department upheld the judgment put forth by the Richmond County Civil Court relative to the matter of Andrew Carothers, M.D., P.C. v. Progressive Insurance Company. The insurance company defended its decision to withhold payment to the corporation because non-physicians controlled a majority of the medical practice in violation of New York law.

The background

In 2004, Dr. Carothers established a professional service corporation to perform MRI scans. Non-physicians Hillel Sher and Irina Vayman controlled the entity. As shown in evidence during the trial, Sher and Vayman received $12.2 million in profits from the practice between 2005 and 2006 through inflated lease payments. Dr. Carothers received $133,000. It was also revealed that Dr. Carothers was not involved in the management of the practice in any significant way.

Appealing the decision

Jurors ultimately found that the insurance company had proved its nonpayment defense in that the medical practice was fraudulently incorporated and that, in further violation of the law, the doctor was not practicing medicine while the practice was in business.

Looking ahead

Fraud exists in many forms that involve finances or the payment of services. For example, there is credit card fraud, internet fraud, check fraud and, as in the New York case, insurance fraud. The severity of the crime determines penalties, which can include restitution, heavy fines and possible jail time. In the Carothers v. Progressive case, penalties have yet to be assessed because the decision of the Second Judicial Department now goes to the New York Court of Appeals.