South Brooklyn No-Fault DME Fraud Indictments Announced

SEVENTEEN INDIVIDUALS CHARGED AND TWELVE LOCATIONS SEARCHED IN MAJOR HEALTH CARE FRAUD AND MONEY LAUNDERING PROSECUTION

On June 15, 2010, United States Attorney Loretta E. Lynch announced four separate indictments charging 17 individuals for their participation in health care fraud and money laundering schemes in the Eastern District of New York.  In addition, agents of Immigration and Customs Enforcement (ICE), the Federal Bureau of Investigation, and Internal Revenue Service searched offices of 12 durable medical equipment retail companies located in South Brooklyn that were operated by the defendants and seized assets from bank accounts maintained by the defendants’ retail companies.

According to the indictments, the defendants filed fraudulent claims with private insurance companies with no-fault insurance plans.  Specifically, the defendants – through their retail companies – allegedly submitted false invoices to the insurance companies for reimbursable expenses for durable medical equipment at prices well in excess of the price paid by the defendants, as well as for durable medical equipment that was never obtained.   The indictments allege that it was also part of the defendants’ schemes to engage in financial transactions to conceal the identity, source, and destination of the fraudulent proceeds by “laundering” them through checks they issued to the same wholesale companies.   The checks were then negotiated at check cashing stores and the resulting cash was delivered back to the defendants.

According to the U.S. Attorney's press release, the indicted defendants are:

ALEKSANDR AFANASEV
Age: 44
EDUARD BODRUNOV
Age: 49
GRIGORY BRANFENBRENER
Age: 57
GENNADIY BRONSHTEYN
Age: 51
LYUBOV GROYSMAN
Age: 56
VLADIMIR KHMELNITSKI
Age: 45
ILIYA MUGERMAN
Age: 46
BELA RUD
Age: 38
VIKTOR SEMERIK
Age: 44
ARKADI SHAPIRO
Age: 59
DENIS ZAGLADKO
Age: 29
IGOR SHTURMAN
Age: 48
MARIYA GOMELSKAYA\
Age: 27
IGOR VETUKH
Age: 50
ANDREI KOZLOVSKI
Age: 42
IGOR LADANOV
Age: 28
ARTEM YURYEV
Age: 31

The press release notes that the charges announced are merely allegations, and the defendants are presumed innocent unless and until proven guilty.

`Twas Brillig, and the Slithy Toves Did Gyre and Gimble in the Wabe

NO-FAULT – FRAUDULENT BILLING – INSURER RECOVERY ACTION – FAIR PRICE
Lincoln Gen. Ins. Co. v. Alev Med. Supply Inc
(Nassau Co. Dist. Ct., 1st Dist., decided 9/28/2009)

Lewis Carroll wrote  Jabberwocky for his brothers and sisters in 1857 when he was 23 years old.  Fair Price Medical was decided by the New York Court of Appeals in 2008 when New York's no-fault law was 31 years old.  For over 150 years, the academic debate has continued over what the text of Jabberwocky means.  In just over a year, Fair Price continues to spawn unusual decisions such as this one.  In the words of young Alice from the Wonderland fame, "It seems very pretty, but it's rather hard to understand."

Andrey Armstrong was injured in an automobile accident on September 5, 2008.  On October 4, 2008 and October 9, 2008, defendant Alev Medical Supply, Inc. purportedly provided medical supplies to Armstrong. Armstrong assigned his right to no-fault benefits for these items to Alev, which submitted bills for the medical supplies to the plaintiff, Lincoln General Insurance Company.

Lincoln received the bills from Alev on November 10, 2008 and paid the bills in part and denied the bills in part 24 days later on December 4, 2008.  Lincoln issued checks to Alev for the portions of the bills it paid and issued denials for the balance of the bills.  Lincoln denied a portion of the bills on the ground the charges for the medical supplies and equipment were not in accordance with the no-fault payment schedule, 11 NYCRR Part 68.  Alev received and deposited the checks issued in payment of the claims.

On December 18, 2008, Armstrong testified at an examination under oath that he never received any of the equipment Alev claims it provided to him.  Based on that testimony, Lincoln commenced this action seeking to recover the money it paid to Alev on the claim.  Alev defaulted in the action, and Lincoln moved for a default judgment against Alev.

In denying Lincoln General's unopposed motion for a default judgment, Nassau County District Court Judge Fred Hirsh relied principally on the Court of Appeals' decision in Fair Price Medical and held that since Lincoln General had not denied Alev's bills within 30 days for fraud, it could not seek to recover its payment of those bills based on fraud:

An insurer's time to pay or deny a claim is tolled or extended if the insurer timely requests verification and/or upon receipt of the verification, timely requests additional verification of the claim. St. Barnabas Hospital v. American Transit Ins. Co., 57 AD3d 517 (2nd Dept. 2008); and Central Suffolk Hosp. v. New York Central Mut. Fire Ins. Co., 24 AD3d 492 (2nd Dept. 2005); lv. dnd. 7NY3d 704 (2006)^[FN1]When a insurer timely requests additional verification, the 30 day period in which to pay or deny the claim is tolled pending receipt of the additional verification. Kingsbrook Jewish Medical Center v. Allstate Ins. Co., supra ; and Montefiore Medical Center v. Government Employees Ins. Co., 34 AD3d 771 (2nd Dept. 2006).

Lincoln did not request verification of the claim submitted by Alev.

With limited exception, none of which are relevant to this case, an insurer is precluded from raising defenses including fraud not asserted in a timely denial. Fair Price Medical Supply Corp. v. Travelers Indemnity Co., 10 NY3d 556 (2008); Hospital for Joint Disease v. Travelers Property Casualty Ins. Co., supra ; and Careplus Medical Supply, Inc. v. Selective Ins. Co of America, -Misc.3d-, 2009 WL 679251 (App.Term 9th & 10th Jud. Distrs. 2009).  

Lincoln could have denied the claim on the grounds it was fraudulent. Fair Price Medical Supply Corp. v. Travelers Indemnity Co., supra . Lincoln did not. It paid the claim in part and denied the claim in part. The denial of the claim was based not upon fraud but upon the charges not being in accordance with the no-fault payment schedule.

The purpose of the no-fault law is "...to ensure prompt compensation for losses incurred by accident victims without regard to fault or negligence, to reduce the burden on the courts and to provide substantial premium savings to New York motorists." Medical Society of the State of New York v. Serio, 100 NY2d 854, 860 (2003). See, Fair Price Medical Supply Corp. v. Travelers Indemnity Co., supra ; and Hospital for Joint Disease v. Travelers Property Casualty Ins. Co., supra . An insurer can contest an illegitimate or fraudulent claim, but it must do so within the strict time periods and processes established by the no-fault law and regulations. Presbyterian Hosp. in the City of New York v. Maryland Cas. Co., 90 NY2d 274(1997).

The core objective of the no fault law and regulations is "...to provide a tightly timed process of claim, disputation and payment." Id. at 281. See, LMK Psychological Services, P.C. v. State Farm Mutual Auto Ins. Co., 12 NY3d 217 (2009).

Permitting Lincoln to recover in this action would allow an insurer to avoid or evade the time restrictions of the no fault law and regulations by paying and then investigating a claim and suing to recover the previously paid benefits if the investigation reveals the claim was fraudulent. To permit this would subvert the entire no-fault system which establishes strict time limits by which an insurer must process, dispute and pay a claim.

The no-fault law and regulations require insurers to promptly investigate and pay claims. The regulations provide insurers with the verification process in order to obtain additional information designed to ferret out illegitimate or fraudulent claims.

While the 30 day period plus any applicable tolls for paying or denying a claim may be "...too short of a time frame in which to detect billing fraud, any change is up to the Legislature." Fair Price Medical Supply Corp. v. Travelers Indemnity Co., supra at 565.

All bases that an in insurer has for denying a no fault claim, except for specific and limited exceptions, must be raised in a timely denial.^[FN2] The only way an insurer can avoid paying a fraudulent no fault claim is to deny the claim as fraudulent in a timely denial and to assert and prove the defense at trial. Id.; and Lenox Hill Radiology and MIA, P.C. v. Global Liberty Ins. Co. of New York, 24 Misc 3d 1225(A) (NY Civil Ct. 2009).

With due respect to Judge Hirsh and an appreciation of the case law context in which he was required to consider Lincoln General's motion, there is no indication that as of December 4, 2008, only three months after the accident, Lincoln General "could have denied [Alev's bills] on the grounds [sic] that [the claim] was fraudulent" or even had reason to request verification of those billings from Alev.  Fair Price Medical addresses the legal consequence of a no-fault insurer doing nothing within 30 days of receiving what may be fraudulent billings.  It does not, in this blogger's opinion, support or require the holding that a no-fault insurer which, in good faith, makes timely payment of a bill later discovered to be fraudulent cannot sue the provider on a fraud theory to recover that payment.  Fair Price Medical and its ilk address only the preclusion of defenses to payment under Insurance Law § 5106(a) and Regulation 68.

Lincoln General was not seeking to "avoid or evade the time restrictions of the no fault law and regulations" in this case; it paid Alev's bills in a timely fashion.  That fact alone should render the preclusion rule of § 5106(a) inapplicable.  Permitting no-fault no-fault insurers that have timely paid bills later discovered to be fraudulent to sue the providers to recover those payments would not "subvert the entire no-fault system which establishes strict time limits by which an insurer must process, dispute and pay a claim."  The system's objectives are met if, in the first instance, bills are timely paid.  Certainly New York courts would not have no-fault insurers delay payment of bills by requesting verification of them when there is no apparent reason to do so.  The 30-day preclusion rule is not a period of incontestability; it is a defense to payment rule.  Once timely payment is made, the rule should be irrelevant.  No further extension of that rule, from its genesis in Presbyterian Hospital through its unusual manifestation and application in Fair Price Medical is needed or warranted as respects an insurer's right to recover payments that it was fraudulently induced into making.

All mimsy were the borogoves, and the mome raths outgrabe.

Galumph.

Third Department Confirms Revocation of Medical License of Gary Tsirelman Based on Sustained Charges of Fraudulent Medical Practice, Filing False Reports and Moral Unfitness

NO-FAULT – FRAUDULENT BILLING – MEDICAL LICENSE REVOCATION
Matter of Tsirelman v. Danes
(3rd Dept., decided 4/9/2009)

In December 2007, the Hearing Committee of the NYS Health Department's Office of Professional Medical Conduct revoked the medical license of Gary Tsirelman and fined him $100,000, having sustained 51 of 69 charges of professional misconduct, including ones alleging that he conducted a fraudulent medical practice, willfully made or filed false reports, ordered treatment not warranted by the patient's condition and moral unfitness.  Gary Tsirelman is also a New York attorney who maintains a "no-fault collection law" practice in metropolitan New York and whose website borrows liberally from a May 2004 article published in The American Lawyer.  Gary Tsirelman, P.C., was the firm that represented the plaintiff medical provider in East Acupuncture PC v. Allstate Ins. Co., decided by the Second Department on February 17, 2009 (tolling provision of 11 NYCRR § 65-3.9[c] applies to both assignors and assignees). 

The professional medical misconduct charges were based primarily upon Mr. Tsirelman's submission of numerous no-fault bills to Allstate Insurance Company for invasive nerve destruction procedures (NDPs) that were neither medically necessary nor actually performed.  Tsirelman admitted that he had never performed NDPs, but blamed the charges on the billing service that had prepared the bills for his medical clinic. He claimed that the billing service had misread his notes concerning the noninvasive "synaptic" procedure he had regularly performed, assigned an additional billing code for the much more expensive NDPs and then, without his knowledge or authorization, used a stamp bearing his signature to certify those bills. The Hearing Committee found Tsirelman's explanation to be unbelievable, held him responsible for the content of his bills and concluded that he knew that all of the identical billings were false and that he had submitted them to Allstate with the intent to deceive.

Mr. Tsirelman commenced an Article 78 proceeding to challenge his MD license revocation.  The Third Department, Appellate Division, has original jurisdiction of such proceedings, and reviews administrative findings such as the one the OPMC's Hearing Committee made in this matter to determine whether they are supported by substantial evidence.  In doing so in this matter, the Third Department confirmed the Hearing Committee's findings of Tsirelman's guilt on 41 of the 69 charges, sustaining both his MD license revocation and the $100,000 fine.

With respect to Tsirelman's claims that he did not know others were using his signature stamp and that double billings to Allstate were just a mistake, the Third Department held:

The record confirms that petitioner, who has owned a number of clinics over the years, denied ever having or using a signature stamp, yet other evidence showed that his stamp was regularly used to bill for his services. He also testified that, had he ever seen any of the bills for NDPs, he "would certainly not have authorized them." Yet, after he graduated from law school and was admitted to the practice of law in New York, he transferred ownership of his clinic to another physician and, acting as the attorney representing his former clinic in no-fault arbitration proceedings, he sought to collect bills, similar to those at issue here, charging for NDPs and bearing his signature stamp. Further, petitioner initially denied any association with the clinic prior to purchasing it, yet he later conceded that he had previously worked for it for several years. Citing this and other evasive, fabricated and inconsistent testimony, the Committee found that petitioner's claims, including that the double billing amounted to no more than a mistake, completely lacked credibility. 

Applying the standard that physicians are ultimately responsible for the accuracy of their bills, and given the findings of petitioner's long-term relationship with the clinic and his complete lack of credibility, the Committee could infer his knowledge that the bills were false, rather than merely inaccurate, and that he had willfully intended to mislead and deceive the insurer (see Matter of Ross v State Bd. for Professional Med. Conduct, 45 AD3d 927, 929 [2007], lv denied 10 NY3d 701 [2008]; Matter of Ostad v New York State Dept. of Health, 40 AD3d at 1253; Matter of Corines v State Bd. for Professional Med. Conduct, 267 AD2d 796, 799-800 [1999], lv denied 95 NY2d 756 [2000]; Matter of Post v State of N.Y. Dept. of Health, 245 AD2d 985, 987 [1997]). Thus, the evidence presented and the inferences reasonably flowing therefrom amply support the sustained charges of fraudulent medical practice, filing false reports and moral unfitness. 

The Third Department also rejected Tsirelman's contention that he was denied his rights to a fair hearing and due process by the Committee's admission and consideration of patient records that were uncertified and allegedly incomplete:

Inasmuch as "the strict rules of evidence do not apply in administrative proceedings" (Matter of Sundaram v Novello, 53 AD3d 804, 806 [2008], lv denied 11 NY3d 708 [2008] [internal quotation marks and citation omitted]), petitioner was required to show that the lack of certification infected the entire proceeding with unfairness in order to establish a deprivation of due process (see id. at 806-807). This he did not do. As for the assertion that the records were incomplete, petitioner argues that the complete treatment records for his patients would have reflected that he never ordered NDPs or listed them as having been performed. We note, however, that the only documents in the record which listed the NDPs were the bills. Thus, additional treatment records showing their absence would have been redundant and irrelevant to the issues of his knowledge and intent. The record also shows that, with one exception discussed below, the Committee did not sustain any charge where additional patient records could have been exculpatory. The Committee fully explored the discrepancies in the records that were provided and gave petitioner every opportunity to submit additional records (see Matter of Sundaram v Novello, 53 AD3d at 807).  

Finally, the Third Department did annul 10 of the originally sustained 51 of 69 charges against Tsirelman, finding that, with respect to the billed NDPs, "the evidence does not support the Committee's conclusion that petitioner ordered treatment not warranted by the patients' condition."  Even without those 10 charges, however, the Third Department noted that "because the Committee stated that petitioner's fraudulent practice of medicine standing alone warranted the revocation of his license and the fine imposed, the exclusion of those charges does not require reconsideration of the discipline administered here[.] * * * Viewing only the remaining sustained charges, we are not able to say that the penalty imposed is so disproportionate to petitioner's fraudulent behavior that it shocks our sense of fairness[.]"

With the Third Department's finding that the "sustained charges of fraudulent medical practice, filing false reports and moral unfitness" against Mr. Tsirelman were "amply supported" by evidence before the OPMC's Hearing Committee, it remains to be seen whether such findings can or will form the basis of discipline against him under Rule 8.4 and other provisions of New York's new Rules of Professional Conduct applicable to lawyers that went into effect on April 1, 2009. Most of the provisions of the "new" Rule 8.4 existed under Disciplinary Rule 1-102 of the now replaced New York Code of Professional Responsibility.

Queens Doctor, Alexander Israeli, M.D., Pleads Guilty to No-Fault Insurance Fraud

Billed Insurers for Costly Medical Tests Never Performed; Medical License To Be Revoked

Queens District Attorney Richard A. Brown announced yesterday that a Middle Village physician who was to begin trial on charges of falsely billing insurance carriers under New York’s no-fault law for costly medical tests never provided to motor vehicle accident victims has pleaded guilty in the case. He is the second doctor charged with insurance fraud from the same Jamaica, Queens, clinic.

District Attorney Brown said, “No-fault fraud and abuse is a billion dollar a year business in New York fueled by unethical health care professionals. Such rip-offs are costing the typical New York motorist $300 to $400 a year in higher insurance premiums and are the major reason why New York’s automobile insurance coverage costs an average of nearly $2,000 per driver, the second highest in the nation. Today’s guilty plea sends a clear message to those who are attempting to use the system for their own personal gain that law enforcement’s fight against insurance fraud is ongoing and that those who cheat will be sought out and brought to justice.”

The District Attorney identified the defendant as Alexander Israeli, 57, of 61-59 Dry Harbor Road in Middle Village, Queens, who practiced at L&B Medical, located at 153-25 Hillside Avenue in Jamaica, Queens. The defendant pleaded guilty today to fourth-degree insurance fraud before Queens Supreme Court Justice Gregory L. Lasak in satisfaction of the charges pending against him.  Justice Lasak set sentencing for February 25, 2009, at which time he indicated that he would sentence the defendant to a three-year conditional discharge.

District Attorney Brown said that the defendant was charged with submitting insurance claims for costly nerve conduction studies and needle electromyographs (“NCV/EMGs”) between January and December 2006 that, in fact, were not performed on seven individuals. A NCV tests the flow of electrical currents across the nerves, and an EMG is a recording of the electrical activity in muscles and nerves. As a result of the false claims, insurance companies paid out more than $21,000 to the defendant’s employer – the medical clinic.

The District Attorney said that, as a result of the defendant pleading guilty to a felony, the New York State Department of Health’s Office of Professional Medical Conduct will commence action to revoke his license to practice medicine in New York State.

Among the insurance companies victimized by the defendant’s scheme were GMAC Insurance Company, KEMPER Auto and Home Insurance, AllState Insurance Company and GEICO Insurance.

District Attorney Brown noted that a second physician who also practices at L&B Medical – Dr. Yakov Raufov – was charged on May 22, 2007, with third- and fourth-degree grand larceny, third- and fourth-degree insurance fraud and first-degree falsifying business records. He is scheduled to stand trial on March 9, 2009. Raufov, 43, of 21 Carlyle Drive in Glen Cove, Long Island, faces up to seven years in prison if convicted.

Assistant District Attorney Robert E. Miller, of the District Attorney’s Organized Crime and Rackets Bureau, prosecuted the case under the supervision of Assistant District Attorneys Gerard A. Brave, Bureau Chief, Mark Katz, Deputy Chief, and Mary M. Lowenburg, Chief of the Auto Crime and Insurance Fraud Unit, and the overall supervision of Executive Assistant District Attorney for Investigations Peter A. Crusco and Deputy Executive Assistant District Attorney for Investigation Linda M. Cantoni.

The Queens County District Attorney's Office's full press release is here.

Reporting Health Care Provider Overcharging & Excessive Treatment

From the latest disciplinary action release of the New York State Insurance Department comes this reminder for New York no-fault insurers:

"Respondent also failed to comply with Department Regulation No. 83 [11 NYCRR § 68.8] which states that insurers are required to report provider overcharging and excessive treatment by health providers and to designate a claims person in each No-Fault claims processing office to maintain a master file of each instance of inappropriate practice[.]"

No Limitations Placed on Non-Party Deposition of Treating Doctor

NO-FAULT – MEDICALLY UNNECESSARY CPT TESTS – DISCOVERY – NON-PARTY DOCTOR'S DEPOSITION – SUBPOENAED BANK RECORDS
State Farm Mutual Auto. Ins. Co. v. CPT Medical Services, P.C.
(EDNY, decided 7/22/2008)

State Farm brought this action against 47 defendants, alleging that it was defrauded when defendants CPT Medical Services, P.C., Hoss Medical Services, P.C., Channel Diagnostics, P.C., and East-Way Chiropractic, P.C. performed medically unnecessary diagnostic current perception threshold tests ("CPT tests") on patients covered by State Farm insurance, and then submitted bills to State Farm for those tests with fraudulent documentation purporting to support the medical necessity of those tests. State Farm also alleged that the defendants who performed the CPT tests, Drs. Huseyin Tuncel and Andrew Susi, owned and operated the Defendant Medical Corporations in name only, when in fact they were secretly owned and operated by layperson Richard Weinstein through defendant management companies Richard's Medical Management Corp. and Weinstein Healthcare Management, Inc. in violation of New York law requiring medical corporations to be owned by licensed physicians. To carry out their fraudulent scheme, Weinstein and the Weinstein Entities allegedly paid kickbacks to either the treating physicians or other lay persons who controlled the medical corporations in order to obtain patient referrals and letters of medical necessity that they submitted to State Farm to bolster their claims.

State Farm subpoenaed Dr. John McGee, a non-party, to appear for a deposition on April 1, 2008. It claimed that Dr. McGee was one of the treating physicians who ordered CPT tests from the Defendant Medical Corporations. He was also the principal of two non-party medical corporations, Ostia Medical and Wexford Medical, that allegedly billed State Farm for medically unnecessary CPT tests and submitted fraudulent supporting documentation almost identical to that submitted by the Defendant Medical Corporations. State Farm asserts that Dr. McGee's deposition was necessary to:

provide direct testimony about why CPT Tests billed by the CPT Medical Defendants were performed, the basis for certain statements about CPT Testing that State Farm alleges were fraudulent, and the conduct of named defendants in the case, including the CPT Medical Defendants, the Weinstein Entities, Richard Weinstein, Huseyin Tuncel, Andre Susi, Yan Moshe and Dr. Riaz Ahmad.

Dr. Gee moved to quash that subpoena, based on his belief that at his deposition State Farm would question the propriety of his medical practice and whether he violated any rules of professional conduct. Dr. McGee asserted that State Farm has in the past used depositions of other physicians to "intentionally seek[] out information of professional misconduct in order to report the doctors to state authorities," thereby gaining the added benefit of "being able to deny all pending and future insurance claims from those doctors." Dr. McGee contended that he should be afforded a qualified privilege not to answer questions regarding his medical practice because if he were subjected to similar questioning from a professional disciplinary committee he would be given notice of the claims against him, given time to prepare a defense, and granted a hearing.

The magistrate judge overseeing discovery denied that motion, holding:

The court declines to stay Dr. McGee's deposition and directs Dr. McGee to answer all questions that are relevant to the claims and defenses of the parties to this action or that are likely to lead to the discovery of admissible evidence. Dr. McGee has not demonstrated the existence of any privilege that would allow him to avoid answering relevant questions that might put his medical license at risk. Dr. McGee's assertion that disciplinary proceedings may be commenced against him as a result of his deposition testimony are speculative at this time, nor has he shown that he would not be afforded due process in any disciplinary proceedings against him.

District Court Judge Leo Glasser upheld the magistrate's ruling:

With respect to Dr. McGee's deposition, there is no authority for limiting depositions based on mere speculation that some questions might put the witness at risk of appearing before a professional disciplinary committee. Dr. McGee is not protected by any privilege, and as such must answer all relevant questions regarding his relationships to defendants and the submission of claims for CPT tests as they relate to State Farm's allegations.

State Farm had also served subpoenas on the Bank of America and Morgan Stanley for financial documents related to Weinstein and the Weinstein Entities to determine how the alleged kickback payments were made. The Weinstein defendants moved to quash the bank subpoenas, arguing that the subpoenas were overly broad, missing return dates, and that State Farm should not be permitted to pursue its own discovery when it had failed to properly respond to the Weinstein defendants' discovery demands.

The magistrate judge denied the motion to quash, and the district court upheld that decision:

The Court is also not aware of any authority that would allow the Weinstein defendants to quash State Farm's subpoenas to the Banks based on the alleged noncompliance by State Farm with discovery requests. Moreover, that objection is now moot pursuant to Judge Matsumoto's finding on July 7th that State Farm has fulfilled its discovery obligations. See Docket Minute Entry dated July 7, 2008. Defendants' objection based on the procedural defects of the subpoenas, namely that they were missing relevant return dates, is also moot because those defects have since been corrected by Plaintiff, as noted in Judge Matsumoto's Memorandum & Order. Thus, the Court finds that, with Judge Matsumoto's directive to add temporal limits in accordance with the dates set out in the Amended Complaint, the subpoenas are tailored to produce relevant evidence directed at whether the Weinstein defendants made kickback payments to the other defendants, and if they did, how those payments were made.

Fair Price Medical -- Affirmed

NO-FAULT – FRAUDULENT BILLING – 30-DAY RULE
Fair Price Med. Supply Corp. v. Travelers Indem. Co.
(Ct. Apps., decided 6/5/2008)

In a 5-2 decision, the Court of Appeals has AFFIRMED the Second Department's decision.

Judge Read wrote the majority opinion, in which Chief Judge Kaye and Judges Ciparick, Graffeo and Jones concurred. Judge Smith wrote the dissent, in which Judge Piggott concurred.

The majority answered "yes" to the certified question before it of whether the Second Department's decision and order were properly made. With apparent approval of its sentiment, Judge Read quoted from the Appellate Term's decision:

The two-Justice majority opined that the "clear implication" of Presbyterian Hosp. in City of N.Y. v Maryland Cas. Co. (90 NY2d 274 [1997]) was that "a defense based on a provider's alleged fraudulent claim for no-fault benefits is precluded by an insurer's failure effectively to invoke its remedies in the 'contestable period,' one of the 'tradeoff[s] of the no-fault reform' which the Legislature recognized as the cost of providing 'prompt uncontested, first-party insurance benefits'" (Fair Price Med. Supply Corp. v Travelers Indem. Co., 9 Misc 3d 76, 79 [App Term, 2d and 11th Jud Dists 2005], quoting Presbyterian, 90 NY2d at 285 [alteration in Appellate Term opinion]).

As some commentators had predicted, the majority cited the Court's own decision from November 2007 in Hospital for Joint Diseases v. Travelers Prop. Cas. Ins. Co. (9 NY3d 312 [2007]), in which the court reviewed "the basic no-faul regime" and verification process in the context of Insurance Law § 5102(a)'s 30-day pay or deny rule. Turning next to the question of what no-fault defenses fall within and without that preclusion rule, the majority held:

Thus, the key issue here — as was also the case in Hospital for Joint Diseases — is whether the facts fit within the narrow no-coverage exception to the preclusion rule. Travelers argues that they do, and so it is "irrelevant" that Fair Price's claims were pending for nearly two years before Travelers finally denied them. Specifically, Travelers argues "where . . . the medical supplies and equipment for which the plaintiff provider is suing to recover payments were never provided to the insured-assignor, there is no coverage in the first instance, and a defense of fraud based upon the plaintiff provider's failure to provide the supplies and equipment cannot be waived, even if its denial of claim was untimely."

But there are important differences between this case and Chubb. As already noted, the majority in Chubb emphasized the "narrow[] . . . sweep" of the exception for "denial[s] of claims [] premised on lack of coverage" (90 NY2d at 199). Moreover, the relevant statutory language reveals "neces[sity]" and "incur[sion]" to be of a kind in Insurance Law § 5102 et seq. (see id. at § 5102[a][1] [providing coverage for "[a]ll necessary expenses incurred for services"]), which is important because we explicitly stated in Chubb that billing for unnecessary procedures — i.e., overbilling — was subject to preclusion, not the no-coverage exception (see e.g. Chubb, 90 NY2d at 199 ["We would not, for example, extend this exceptional exemption to excuse Chubb's
untimely defense in relation to treatment being deemed excessive by the insurer. That would not ordinarily implicate a coverage matter and, therefore, failure to comply with the Insurance Law time restriction might properly preclude the insurer from a belated rejection of the billing claim on that basis"] [emphasis added]).

More fundamentally, determining whether a specific defense is precluded under Presbyterian or available under Chubb entails a judgment: Is the defense more like a "normal" exception from coverage (e.g., a policy exclusion), or a lack of coverage in the first instance (i.e., a defense "implicat[ing] a coverage matter")? In our view, a defense that the billed-for services were never rendered is more akin to the former. In this case, there was an actual accident and actual injuries. As the Appellate Division put it, "coverage legitimately came into existence" (42 AD3d at 285), thus removing this fact pattern from the realm of cases where preclusion would "create coverage where it never existed" (Matter of Worcester Ins. Co. v Bettenhauser, 95 NY2d 185, 188 [2000]).

While preclusion requires Travelers to pay a no-fault claim it might not have been obligated to honor if timely disclaimed, the same can be said of any policy defense subject to preclusion. Moreover, although there may be some merit to Travelers' protest that a 30-day (plus potential tolling) window is generally too short a time frame in which to detect billing fraud, any change is up to the Legislature [FN2]. As we observed in Presbyterian and repeated in Hospital for Joint Diseases:

"No-fault reform was enacted to provide prompt uncontested, first-party insurance benefits. That is part of the price paid to eliminate common-law contested lawsuits. . . . The tradeoff of the no-fault reform still allows carriers to contest ill-founded, illegitimate and fraudulent claims, but within a strict, short-leashed contestable period and process designed to avoid prejudice and red-tape dilatory practices" (Presbyterian, 90 NY2d at 285 [citations omitted]; see also Hospital for Joint Diseases, 9 NY3d at 320, quoting Presbyterian, 90 NY2d at 285).

Finally, Travelers and amici curiae argue that, unless we adopt the approach they advocate, insurers in the future will be forced to blanket insureds and their assignees with demands for additional verification in order to combat fraud. A flurry of verification requests, however, is unlikely to burden the no-fault system more than the uncertainty and delay apt to result from judicial expansion of the no-coverage exception. And in this case, of course, Travelers discovered potential billing fraud well within the 30-day time period. Rather than acting on Fair Price's claims in a timely fashion, however, Travelers waited for almost two full years.

And there you have it. We learned in law school that bad facts make bad law. If you are inclined to view this decision as bad law, that last sentence is telling. Nonetheless, at this point, it won't matter whether the lateness is two years, two months, or two days. Unless the New York State Legislature "overrules" this decision, like it or not, New York no-fault insurers must regard and treat a defense that billed-for services were never rendered as falling within the 30-day preclusion rule.

Judge Smith's dissent offers some valid points:

The rule of Central Gen. Hosp. and Zappone is difficult to apply. Despite our use of the word "strict" in Central Gen. Hosp., there is no theoretically perfect way to distinguish lack of coverage defenses from others. It can plausibly be said that any claim not payable under the terms of the policy is a claim the policy does not cover (see Zappone, 55 NY2d at 140-143 [Gabrielli, J., dissenting]). In Zappone, we said that to preclude a defense based on lack of coverage "would be to impose liability upon the carrier for which no premium had ever been received" (55 NY2d at 135-136), but every loss for which a carrier did not agree in its policy to pay is one for which it never received a premium. Nevertheless, it is clear under Presbyterian that insurers must pay most such claims if they do not assert their defenses in a timely way.

The Zappone/Central Gen. Hosp. rule is best understood as requiring different treatment for defenses of such fundamental importance that, unlike most defenses, they should not be subject to waiver by insurance company inaction. These defenses are treated as "lack of coverage" defenses. The defense we upheld in Zappone was that the liability sued on was "incurred neither by the person insured nor in the vehicle insured" (id. at 135). The defense in Central Gen. Hosp. was that the injuries for which the insured was treated did not arise out of an automobile accident. That no medical supplies were provided to the insured is an equally fundamental objection to a claim, and should be treated as a defense based on lack of coverage. That is consistent with the plain meaning of the words "lack of coverage." Neither the insurance policy at issue here nor any other covers wholly fabricated claims.

If indeed Travelers' insured never received the supplies for which Travelers was billed, to uphold these claims would be to countenance a particularly gross form of fraud. I acknowledge that, under Presbyterian, some "illegitimate and fraudulent claims" must be paid if a defense to them is not asserted promptly (90 NY2d at 285); no doubt padded medical bills, overpriced merchandise and other relatively petty abuses will sometimes slip through. But I agree with Justice Golia, dissenting from the Appellate Term's ruling in the present case, that the line should be drawn at what he called "pure fraud" or "classic fraud" (Fair Price Med. Supply Corp. v Travelers Indem. Co., 9 Misc 3d 76, 81 [App Term 2d Dept 2005] [Golia, J., dissenting]). An attempt to distinguish this kind of fraud from the lesser kinds would not succeed perfectly, and would no doubt be the cause of some delay and administrative inconvenience, but I think it would be worth the cost.

The impact of fraud on this State's no-fault system is notorious, as the Appellate Term majority and the Appellate Division acknowledged, even while rejecting Travelers' defense. The Appellate Term referred to "the steep increase in fraudulent no-fault benefits claims arising . . . from provider claims where the services or supplies were . . . never rendered" (9 Misc 3d at 78); the Appellate Division said that "the fraud and abuse that plagues the no-fault insurance system is a serious problem with widespread consequences" (42 AD3d 277, 285-286 [2d Dept 2007]). Today's decision, I believe, unjustifiably hinders insurers' efforts to keep that problem within bounds.

Notice that neither the majority nor the dissent mentions what recourse a no-fault insurer might have if, precluded by the 30-day rule from denying payment for services or supplies that were never rendered or delivered, it must such payment. Will the New York courts permit insurers to counterclaim in provider recovery suits for such repayment? Or bring separate, affirmative actions for recovery? Technically speaking, what occurs when the 30-day rule is not adhered to is neither a waiver (intentional relinquishment of a known right or defense) nor an estoppel (words or conduct by the insurer upon which the insured or assignee reasonably relies to her/its detriment). Consequently, there arguably should be no legal or equitable impediment to seeking recovery under theories of either fraud or unjust enrichment.

Fair Price Medical -- Oral Argument Scheduled at Court of Appeals

The long awaited oral argument at the Court of Appeals of the 2nd Department's decision in Fair Price Medical Supply Corp. v. Travelers Indem. Co. is scheduled for Wednesday, April 30, 2008. In Fair Price, the 2nd Department upheld the lower court's ruling that fraudulent no-fault billings (DMEs never delivered or supplied) is not a lack of coverage defense and, thus, must be included in a timely NF-10. At stake in this appeal are millions of dollars in bills for no-fault services or supplieds that either were not rendered or were rendered to people who were not really injured in either real accidents or staged events. Coverage Counsel expects to have an observer in court to report how oral argument went.

One would have thought the logic as being straightforward and self-evident: the no-fault endorsement provides reimbursement "for basic economic loss sustained by an eligible injured person on account of personal injuries caused by an accident", BEL which by definition includes health service benefits, lost earnings and other necessary expenses. Even the greenest coverage attorney knows that something not covered by reason of lack of inclusion cannot implicate waiver, estoppel or statutory preclusion. If there has been no BEL "sustained", such as the non-delivery of DMEs, there can be no coverage obligation -- not because of the appplicability of an exclusion or breach of condition subsequent to coverage, but because the facts (and non-existence of covered services or expenses) do not trigger coverage in the first place. Similarly, if there has been no "accident", PIP coverage does not lie, again not because of the appplicability of an exclusion or breach of condition subsequent to coverage, but because the insuring agreement of the PIP endorsement has not been triggered. The New York courts have repeatedly and correctly noted this tenet of insurance coverage in 3rd-party liability coverage cases, and yet seem to have overlooked it in the no-fault claim context, instead focusing slavishly on the 30-day pay or deny rule of Insurance Law § 5106(a) and the ever-expanding legacy of the Court of Appeals' decisions in Presbyterian Hosp. in City of N.Y. v. Maryland Cas. Co., 90 NY2d 274 (1997) and Central Gen. Hosp. v. Chubb Group of Ins. Cos., 90 NY2d 195 (1997).

Fair Price continues to cause consternation in the courts. Recently, Judge William A. Viscovich of Queens Civil in Northern Medical P.C., a/a/o Jose Rodriguez, v. State Farm Mut. Auto. Ins. Co., 2008 NY Slip Op 50753U, 2008 N.Y. Misc. LEXIS 2030 (NY City Civ. Ct., Queens Co., 3/19/08), in "regretfully" awarding judgment to the plaintiff, wistfully observed:

Unfortunately, the only issue which this court may address under Fair Price is whether there was a lack of coverage as contended by defendant on the basis that the alleged July 31, 2002 accident was "staged". Any testimony by Rodriguez regarding his treatment or lack thereof is being used by the court solely as evidence as to whether the loss in question resulted from an actual "covered" accident or arose from a staged collision. Any evidence that Mr. Rodriguez was not treated as claimed by the plaintiff provider or was treated to a lesser extent than claimed, has relevance only to the extent that common sense dictates that it is less likely that the participants in such a "staged" collision would actually receive treatment than in a true accident. It also follows that the alleged victim of a "staged" accident would be less likely to actually accept the risk of real injury arising from an unnecessary course of treatment (Keep in mind that this court does concede that a real injury may arise from a staged accident, but does not believe this to be the case herein).

What distresses the court is that while the defendant was not able to meet its burden of proof as to a "staged accident", there was credible evidence of provider fraud. While a full trial on that issue may reveal that there was no fraud and that services were in fact rendered, the holding in Fair Price assures that neither the court nor the defendant are able to delve further into that issue. The end result is that this court is put in the potential position of having to make an award to a possibly unethical provider.

This is exactly the concern expressed by Justice Joseph Golia in his dissent in the Appellate Term rendering of Fair Price Medical Supply Corp. a/a/o Nivelo v. Travelers Indemnity Company, 9 Misc 3rd 76 [ App. Term, 2nd & 11th Jud. Dists. 2005], in which the majority decision was upheld by the Appellate Division in the Fair Price decision that controls herein. Like Justice Golia, this court is "under the firm and unshakable belief that neither the Legislature nor the Insurance Department ever intended for an insurance carrier, or anyone else for that matter, to be forced to pay for medical equipment [or in this case, medical treatment] that was never provided "(Fair Price, supra, dissent at 82). But, alas, that is the potential outcome all but acknowledged by both the Appellate Term and Appellate Division Fair Price holdings.

It's time for the Court of Appeals to re-read its seminal decision in Zappone v. Home Ins. Co., 55 NY2d 131 (1982) and apply its principle to fraudulent no-fault billings. Not rendered. Not covered.