Defense Digest

Who's The Boss?

The  cost of health care in this country continues to rise at an alarming rate. Insurance carriers, as the principal payors of health care services, have had to shoulder the brunt of these rising costs. Sadly, some medical providers have taken it upon themselves to maximize reimbursement beyond the amount standard market forces will bear. The industry is fraught with corrupt providers who conspire with claimants to bill insurance carriers for non-existent or highly exaggerated medical treatment. Claimants in these situations claim soft tissue trauma such as headaches, whiplash, sprains, and strains. The insurance industry term used to identify corrupt medical facilities has come to be known as the medical mill. Medical mills come in innumerable forms and sizes, but they all share one common characteristic. They exist for the sole purpose of generating two pieces of paper - a medical bill and a medical report.

One type of organizational form for the medical mill that is appearing across the health care landscape with increased regularity of late is the multi-disciplinary practice. A multi-disciplinary practice (hereinafter "MDP") is a facility that houses at least one medical doctor and one chiropractor under the same roof. More commonly, MDPs employ several medical doctors, chiropractors, and physical therapists, who bounce a patient back and forth between practitioners or medical subspecialty departments through a series of intra-office referrals. This method of practice results in a continuous stream of medical bills from one facility over longer periods of time than can be justified by a facility offering only one type of medical subspecialty service. It also results in a series of medical reports allegedly drafted by various practitioners, creating the impression of a consensus of opinion across medical disciplines of the presence of an injury. But perhaps the most appealing benefit from a provider's perspective to operating as a MDP is that MDPs present the opportunity for lesser licensees, practitioners holding licenses to practice chiropractic or physical therapy, to share in the profits generated by plenary licensees, practitioners holding licenses to practice medicine and surgery, which typically return a higher profit margin on the services billed.

Most states have regulatory schemes in place prohibiting a medical facility practice structure that leaves the plenary licensee beholden to the lesser licensee. It is commonly understood that the plenary licensee must meet the highest ethical and treatment standards. Thus, the public policy behind these regulatory prohibitions is to ensure that patients receive medical treatment grounded in sound medical judgment rather than profit seeking. If it can be established that the practice is improperly organized, then the medical bills are non-reimbursable as personal injury protection benefits and the medical records are inadmissible in a bodily injury action. When adjusting any claim involving medical bills and medical reports generated by a MDP, like a Tony Danza re-run, one must ask, "Who's the boss?"

Though this article will limit discussion of the issues relevant to the MDP medical mill to the law as it currently exists in New Jersey, the scope of the material addressed is applicable to every state.

The Problem

The New Jersey State Board of Medical Examiners (hereinafter "BME") is commissioned by the Legislature with the power to regulate the practice of medicine and surgery in New Jersey. The BME may adopt rules and regulations to effectuate its regulatory power. One such regulation adopted by the BME governs how a licensee may be employed. Specifically, N.J.A.C. 13:35-6.16(f)3 states:

The regulation above is unequivocal insofar as it states that plenary licensees may not be "employed" by lesser licensees. However, there is no prohibition against joint ownership of a medical practice by plenary licensed physicians and lesser licensees. Thus, for a period of time in New Jersey, a lesser licensee, such as a chiropractor or physical therapist who had the desire and capital on hand to open a MDP, could circumvent the regulation above by simply naming a physician as shareholder in the practice. Chiropractors were opening up MDPs, and, rather than entering into employer/employee arrangements with physicians to expand the scope of services offered at the practice, the chiropractors were simply offering physicians a nominal ownership percentage in the practice (ranging from 1-10%). The effect of these arrangements was that the practice structure did not appear to violate the BME regulation in its strictest interpretation, yet the substantial control of the practice and its profits remained with the lesser licensee.

Greater Scrutiny

However, by the mid to late 1990s, this type of practice structure began to undergo greater scrutiny. A series of decisions turned the tide on medical providers seeking to generate profits from a MDP under sham compliance with BME regulations. In May 1997, the Appellate Division published Allstate Insurance Co. v. Orthopedic Evaluations, Inc., 300 N.J.Super. 510 (App. Div.), cert. granted and cause remanded, 151 N.J. 67 (1997). This case was argued on behalf of Allstate by Frank P. Brennan, Esquire, now a shareholder and supervisor of the Insurance Fraud Litigation Practice Group at Marshall, Dennehey, Warner, Coleman & Goggin. In that case, Allstate filed a complaint for declaratory judgment against a mobile orthopedic center, seeking a declaration that the services rendered by the entity were not eligible for personal injury protection reimbursement because the BME requirements for a diagnostic center were not met. The court recognized that the BME regulations mandate that this entity be owned and under the responsibility of a plenary licensed physician. The physician in this case was nothing more than a 1% shareholder for convenience in an attempt to comply with the BME regulations. The practice structure violated the BME regulations because the physician did not have "dominion and control, cannot make decisions for this company and apparently has not made decisions in the past." Id. at 513. As such, the entity was not entitled to PIP reimbursement. Though this case dealt with a diagnostic entity rather than a MDP, the door had been opened by this decision for carriers to begin to insist that providers of health care services comply with any significant qualifying requirements of law that bear upon rendition of the service before the carrier becomes liable to that provider for payment of medial expenses.

Two years later in Allstate Insurance Co. v. Harry Schick, D.C., 328 N.J.Super. 611 (1999), the principles enunciated in Orthopedic Evaluations were applied to the MDP structure. In that case, Allstate sued a chiropractor, along with several other medical providers, alleging that the providers conspired to defraud Allstate, the insurance industry, and ratepayers by creating a complex network of companies with the intent to circumvent the laws that regulate health care in New Jersey. Allstate sought declaratory relief, disgorgement of PIP benefits, and compensatory and treble damages under the Insurance Fraud Prevention Act. When the medical providers moved to have the complaint dismissed, Allstate presented evidence supporting its allegation that the medical companies were owned in whole or in substantial part by a chiropractor, a non-licensed businessperson, or by other companies these individuals owned. The named ownership of plenary licensed physicians on corporate documents was a sham designed to circumvent the administrative regulations of the BME. The trial court dismissed the defendants' motion, holding that it could not be found that the plenary licensed physicians were not "employees" of the lesser or non-licensees when the physicians did not have dominion and control over the practices and could not make decisions on behalf of the practices. Id. at 625. See also, Varano, Damian & Finkel, L.L.C. and Ramsey Medical, P.A. v. Allstate Insurance Co., 366 N.J.Super. 1 (2004) (holding that a settlement agreement between an insurance carrier and a medical entity improperly operating in violation of N.J.A.C. 13:35-6.16(f)3 such that it was owned, operated, and controlled by lesser licensees rather than by the plenary licensed physicians listed in the corporate documents was not enforceable.)

Provider Response

Certainly from these cases it is now well settled that MDPs with disproportionate ownership structures favoring lesser licensees over plenary licensed physicians do not comport with the mandates of the BME regulations. In response, entrepreneurial chiropractors, physical therapists, and lay persons seeking to collect proceeds from services at the generally higher fee schedule rates afforded medical doctors have begun forming more complex MDP structures. In the typical arrangement, the plenary licensed physician is the named shareholder in a professional services corporation of 51 or more percent of the existing and outstanding shares. As the majority owner of the entity, it would seem that the plenary licensed physician maintains "dominion and control" over the MDP. However, so as not to divest himself from sharing in the profits of the medical corporation, the lesser licensee asks the plenary licensee, as a condition of ownership, to execute a series of agreements that are intended to sweep virtually all of the revenue generated by the practice back to the lesser licensee. This has come to be known as the "doc-in-the-box" scam.

In a typical "doc-in-the-box" scam, a plenary licensed physician may be asked to sign a premises lease agreement, an equipment lease agreement, a billing management agreement, and an employment agreement. A premises lease agreement is entered into when the physical location of the MDP is owned by the lesser licensee. Under the premises lease, the MDP practice of which the plenary licensee is the majority owner will be charged rent far in excess of fair market value. An equipment lease agreement is entered into when the office and/or medical equipment used at the practice is owned by the lesser licensee. Again, under the equipment lease, the MDP is charged rent far in excess of fair market value. A billing management agreement is entered into when the lesser licensee has a financial interest in a billing management or medical consultant company. Under the management agreement, an excessively high fee is charged to the MDP by the billing management company to generate bills on behalf of the practice. Finally, an employment agreement is entered between the MDP and the lesser licensee wherein an excessively high salary or compensation structure is paid to the lesser licensee by the MDP. Under this scenario, the substantial portion of the revenue of the MDP is applied toward operating expenses, leaving little, if anything, as profits that could be paid out as a dividend to the plenary licensee shareholder. The money applied toward operating expenses is then swept back to the lesser licensee by operation of the aforementioned agreements.

Uncovering the existence of a "doc-in-the-box" arrangement, as outlined above, for a MDP will explain in whose hands the revenue from the practice will eventually end up. However, uncovering such a scam many not answer the ultimate question of whether such an arrangement is a violation of the BME regulation prohibiting a plenary licensee from being employed by a lesser licensee. This is because courts in this state and the BME have never unequivocally defined what the phrase "employed by" means. Is a physician's employment linked to the percentage ownership he has in the practice or the percentage revenue he receives from the practice? It can be argued that a physician who receives so small a percentage of the total revenue cannot seriously be considered anything other than an employee of the individual or entity who receives the majority of the practice's revenue as total compensation from its operation. Invariably, though, this argument will be met with the counterpoint that the practice holds the physician out as a named shareholder with a controlling interest. Thus, the physician majority shareholder cannot be considered an employee in this scenario.

Looking Forward

The answer to this question is likely not that the status as employee of a practice is linked exclusively to a practitioner's ownership percentage or the percentage of revenue he receives as compensation, but rather, a practitioner's status as an employee must be viewed in light of numerous factors. A recent United States Supreme Court decision is illustrative in helping to define the factors that must be weighed in determining whether a physician shareholder is nothing more than an employee of the practice. In Clackamas Gastroenterology Associates v. Wells, 123 S.Ct. 1673 (April 2, 2003), a lawsuit was initiated by an employee of the medical practice after she was fired following eleven years of service as a bookkeeper. The former bookkeeper suffered from a mixed connective tissue disorder. She alleged that the medical practice did not comply with her requests for reasonable accommodations in her job responsibilities, which were necessary due to her condition, and eventually fired her. She requested relief under Title I of the Americans with Disabilities Act, in addition to state and common law grounds. The medical practice moved for summary judgment, claiming that it was not subject to ADA compliance under a regulatory exemption for businesses with less than fifteen employees for twenty weeks. The issue before the U.S. Supreme Court was whether the physician shareholders of the practice were considered employees for the purposes of the ADA exemption. After analyzing numerous definitions of "employee" found in statutes and common law and concluding that each was unsatisfactory for the purposes of this dispute, the Court settled on a definition borrowed from the Equal Employment Opportunity Commission. In administrative reference documents, the EEOC suggested, "if the shareholder directors operate independently and manage the business, they are proprietors and not employees; if they are subject to the firm's control, they are employees." In determining whether the physician shareholders operate independently, the Court adopted the EEOC's six factor test: (1) to what extent the organization can hire or fire the individual or set the rules and regulations of the individual's work; (2) to what extent the organization supervises the individual's work; (3) whether the individual reports to someone higher in the organization; (4) to what extent the individual is able to influence the organization; (5) whether the parties intended that the individual be an employee, as expressed in written agreements or contracts; and (6) to what extent the individual shares in the profits, losses, and liabilities of the organization. Id. at 1680. The Court announced that, in determining whether a physician shareholder is an employee, all six factors should be given equal weight and no one factor should be decisive.

Though the Clackamas case involved liability under the ADA, the six-factor test has application beyond the context of that decision. So long as MDPs continue to organize and operate under a complex web of interlocking agreements and arrangements with the intent to mask the true seat of control under which they practice, then courts in this state will have no alternative but to recognize and apply a test to determine compliance with the language and intent of the BME regulations prohibiting employment of a physician by a lesser licensee.

The Solution

It is only a matter of time before this six-factor test enunciated by the U.S. Supreme Court, or a similar test, is recognized in New Jersey. Carriers should be aware of these six factors when adjusting any claim involving MDPs. Certain measures should be taken when investigating and defending a PIP or BI claim. First, adjusters should note any red flags that appear for possible suspect MDPs. Next, it should be determined whether the clinic is operating as a registered business entity in the state or is it operating under an assumed name. All shareholders, directors, and officers of the corporation should also be identified. This can be accomplished by requesting this information directly from the state agency responsible for monitoring and registering corporations. Once the principal players involved are identified, all relevant ownership, management, and licensing information of the practice should be requested directly from the appropriate corporate officer of the entity. To the extent that the corporate records do not provide enough information to make a determination about the legality of the practice structure based on the Clackamas six-factor test, sworn statements of the shareholders and employees should be pursued for the purpose of clearing up the information gaps.

If it can be established that the practice structure of a MDP violates the BME prohibition on physicians being employed by lesser licensees, then claims should be adjusted accordingly. In the PIP context, in New Jersey, the No Fault Act provides for the payment of medical expenses for insureds injured in automobile accidents. Medical expenses is defined under N.J.S.A. 39:6A-2.e to mean "reasonable and necessary expenses for treatment or services as provided by the policy . . . provided by a health care provider licensed or certified by the State . . .." Courts in New Jersey have interpreted this language to require that any health care service authorized by the No Fault Act, in order to be eligible for recognition as a PIP benefit, must also comply with any significant qualifying requirements of law that bear upon rendition of that service. An insurer may properly deny PIP benefits under the Act based upon a health care provider's failure to comply with the statutes and administrative regulations governing the practice of health care in New Jersey. Allstate Insurance Co. v. Orthopedic Evaluations, Inc., 300 N.J.Super. 510 (App. Div. 1997). Thus, where bills are received from an improperly organized MDP, those bills are non-reimbursable.

In the bodily injury context, medical reports and expert medical testimony are only admissible to prove injury if the report or testimony is provided by a witness qualified to give such testimony. However, if it can be established that a physician's opinion on a patient's medical condition was generated during a period of time he was practicing in violation of the mandates of his license, the physician is not qualified as an expert, and his opinion is not admissible. Where a plaintiff cannot establish that he was injured, he cannot recover for economic or non-economic damages.

Conclusion

In summary, multi-disciplinary medical practices pose a great potential to increase the exposure on any claim for medical expenses or bodily injury. Those practices that are motivated by profit seeking rather than sound medical judgment and treatment are the greatest offenders. However, for those practices that are structured in such a way that violates the regulations governing health care, their bills are non-reimbursable and the reports carry no value. The key for a carrier to successfully limit its exposure on claims involving suspicious MDPs is to aggressively investigate these practices in an effort to determine who's the boss. If the investigation reveals evidence that supports the suspicion, claims can be defended with remarkable savings.

*Nestor and Jack are associates in our Cherry Hill, NJ office. They can be reached at (856) 414-6000 or nsmith@mdwcg.com and jsenechal@mdwcg.com.