Carothers Versus Progressive Holds Implications for the Dental Industry

Michael W. Davis, DDS
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On April 4, 2017, the Appellate Division of the Supreme Court of the State of New York decided in Carothers vs. Progressive Insurance Company.1 The four judges ruled unanimously in their decision. The insurance company, Progressive, prevailed in its defense not to pay Andrew Carothers, MD, for MRI radiology services. The court held that “an insurance carrier may withhold payment for medical services provided by a professional corporation which has been ‘fraudulently incorporated’ to allow nonphysicians to share in its ownership and control.”

The trial demonstrated that the profits of Andrew Carothers, MD, PC, were funneled to Hillel Sher and Irina Vayman, who were unlicensed third parties partnered with Carothers, “through grossly inflated equipment lease payments made to a company owned and controlled by Sher, and through Vayman’s transfers of funds to her own personal accounts.”

Further, “the lease agreements between the plaintiff (Carothers) and Sher’s companies were not made at arm’s length because the terms of those agreements were not mutually beneficial to both parties,” according to Progressive’s expert forensic accountant. “The facilities lease also contained the same one-sided termination provision and provided that, if the equipment lease was terminated, the facilities lease would also terminate as well.”

The bank accounts of clinics, which Carothers served as nominal owner, were actually controlled by his unlicensed partners. In the two-year operation of these radiology clinics, Carothers only earned $133,000, while his partners Sher and Veyman received $12.2 million. Carothers’ testimony demonstrated a fundamental lack of knowledge of his business operation and business finances.

The state appellate division court confirmed New York State statutes regarding the fraudulent incorporation defense by Progressive: “New York State law prohibits unlicensed individuals from organizing a professional service corporation for profit or exercising control over such corporations.” 

Implications for Dentistry 

Since the court’s ruling was under the jurisdiction of New York State, it’s difficult to extrapolate implications beyond New York. However, many states have similar statutes relating to corporate unlicensed practice of medicine or dentistry. Undoubtedly, this court’s decision will be cited and referenced in future litigation, both for New York and other states.

Seemingly, the “big dog” in disputes with the healthcare management service industry (inclusive of dental service organizations, or DSOs) is the insurance industry. This was also clearly observed in a recent New Jersey Supreme Court decision.2 If a DSO is deemed to be “fraudulently incorporated” in numbers of states, the DSO risks nonpayment of insurance claims, or a clawback of billing payments. This could hold equally valid for government healthcare payments under Medicaid and Medicare programs. In addition to the federal False Claims Act, some states have their own false claims acts, which invoke additional potential civil and criminal penalties.

Several factors cited in the Carothers ruling should raise awareness for potential unlicensed practice of medicine or dentistry and ensuing fraud, through fraudulent incorporation: 

  • Does the professional entity control the clinic finances and bank accounts, or are they handled by an unlicensed entity such as a DSO? 
  • Are lease agreements (office space, equipment, consulting fees, etc) at fair market value, or a means to extract profits to an unlicensed entity?
  • Does the duly licensed professional entity control and manage supportive staff (hiring, firing, salaries, and discipline), or are these tasks handled by an unlicensed party?
  • Do unlicensed entities beneficially own or are they partnered with the licensed healthcare entity?
  • Once a professional corporation is formed, is that entity transferred to unlicensed parties? 
  • Do licensed shareholders of a professional corporation unlawfully transfer voting power to an unlicensed entity?
  • Are agreements between a professional corporation and a management service organization such as a DSO conducted at arm’s length and not to the exclusive benefit of the management company?
  • Does the professional entity keep its own accounting records, tax filings, and other documents, or are those responsibilities assumed by an unlicensed entity that maintains unlawful beneficial ownership of the professional entity?

Finally, one often reads boilerplate phrases in business service agreements (BSAs) between DSOs and their nominee ownership dentists. Such phrasing might include similar wording to: “Practitioner’s decisions regarding the diagnosis and treatment of patients are solely the province of Practitioner, and all such decisions shall be the responsibility of Practitioner to be rendered in accordance with the standards of practice in the community.” Or, they may say “Under no circumstances will the clinical judgement of any doctor be influenced or interfered with.”

Such BSA contract wording is grossly inadequate, if unlicensed parties control factors such as hours of operation, equipment selection, required supplies, laboratory selection, selection of specialists, and support personnel management. Such contract phrasing may or may not be valid. Such wording may not protect the DSO if, in fact, that entity is engaged in an aspect of unlicensed practice of dentistry. Allegedly injured parties may assert a false or fraudulent claim against the DSO and/or complicit doctors.   

References  

  1. Carothers v Progressive Ins Co., 42 Misc 3d 30 (affirmed). April 5, 2017. NY Slip Op 02614 [150 AD3d 192]. http://www.nycourts.gov/reporter/3dseries/2017/2017_02614.htm. Accessed January 23, 2018.
  2. Davis MW. NJ Supreme Court decision has implications for the DSO industry. Dent Today. December 7, 2017. http://www.dentistrytoday.com/news/todays-dental-news/item/2703-nj-supreme-court-decision-has-implications-for-the-dso-industry?highlight=WyJsZWdhbCJd. Accessed January 23, 2018.

Dr. Davis practices general dentistry in Santa Fe, NM. He assists as an expert witness in dental fraud and malpractice legal cases. He currently chairs the Sante Fe District Dental Society Peer-Review Committee and serves as a state dental association member to its house of delegates. He extensively writes and lectures on related matters. He may be reached at mwdavisdds@comcast.net or smilesofsantefe.com.

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