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Denial of Claims of NJ Medical Practices Based On Contracts With Management Companies in the Aftermath of Allstate

OPMC Medical Malpractice

Last May, the New Jersey Supreme Court issued its ruling in Allstate Insurance Company vs. Northfield Medical Center, P.C., et al., finding that a medical practice’s relationship with a management company resulted in violations of that state’s Insurance Fraud Prevention Act (“IFPA”).  This case is reflective of a state-wide trend among insurance carriers to avoid payment of medical practice claims by alleging violations of the IFPA.  In light of this risk, New Jersey medical practices, as well as other licensed health care groups such as dental practices, should evaluate their ownership structure and any current relationships with management companies.

In Allstate, a multi-disciplinary practice structure created in the 1990’s was reviewed, whereby a chiropractor controlled a medical practice through a series of contractual arrangements ranging from space and equipment leases to a management agreement.  While a licensed physician had majority ownership in the medical practice entity, control was seceded to the chiropractor, who had the authority to hire / fire physicians who treated patients.  Through the aforementioned contracts, the management company effectively received the medical practice’s profits.  Under the New Jersey corporate practice of medicine doctrine, a practitioner with a plenary license (such as an M.D. or D.O.) cannot be employed by or under the control and direction of a practitioner with a limited scope license (such as a D.C.).  The New Jersey Supreme Court affirmed the trial court’s opinion that the practice structure at issue was “little more than a sham” intended to evade the state’s corporate practice of medicine doctrine.  The award to Allstate for violations of the IFPA totaled approximately $4 million, which included treble damages and attorneys’ fees.

The court’s decision in Allstate comes at a time when insurance carriers such as Allstate are increasingly likely to pursue medical practices under the IFPA.  Typically such efforts commence with a questionnaire from the carriers to those healthcare professionals who are participating providers.  The questionnaire seeks information regarding practice structure and contractual arrangements.  The carriers’ goal is to elicit information revealing that the medical practices are structured in a manner that is not compliant with state licensing rules.  Once non-compliance is verified, the carriers allege that any claims for services submitted by the medical practice violate the IFPA.

Given this trend toward aggressive pursuit of IFPA violations, medical and other licensed health care practices in New Jersey should review their ownership structures and relationships with non-licensed providers to ensure compliance with licensure rules.  Areas of review should include: ownership interests and capital contributions from plenary and non-plenary licensed individuals in a multidisciplinary practice; responsibility for day-to-day operations of the medical practice; and all aspects of relationships with management companies, including a review of the management fee structure.

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