NEW YORK REAFFIRMS THAT THE CORPORATE PRACTICE OF MEDICINE DOCTRINE IS ALIVE AND KICKING

by Glenn P. Prives

The New York Court of Appeals recently issued an opinion on the State of New York’s corporate practice of medicine prohibition, holding that medical practices that give too much operational and financial control to Management Service Organizations (“MSOs”) are “fraudulently incorporated” and thus, no-fault automobile insurers have no obligation to reimburse such practices.

In the case of Andrew Carothers, M.D., P.C. v. Progressive Insurance Company 2019 N.Y. Slip Op. 04643, a MSO provided management services to a New York professional corporation that performed magnetic resonance imaging services. Several no-fault automobile insurance carriers stopped paying the practice’s no-fault claims claiming that the practice was fraudulently incorporated, and in response, the practice sued the insurance carriers for non-payment of the insurance claims. A jury found that the owners of the MSO controlled the practice, and that the practice was fraudulently incorporated such that the insurance companies could rightfully deny payment of claims.

The Court of Appeals agreed with the jury and found that, due to certain terms of the MSO arrangement, the practice ceded control of the practice to the MSO. In making its determination, the court pointed to several aspects of the arrangement including:  (i) the MSO leased equipment to the practice at above fair market value; (ii) the licensed physician had a limited role in the clinical and administrative aspects of the practice; (iii) the executive secretary of the practice with ties to the owners of the MSO ran certain clinical aspects of the practice including the discipline of providers and the handling of physician referrals to the practice; and (iv) the MSO had the right to terminate each lease without cause, regardless of payment, however no similar provision allowed the practice to terminate the leases without cause.  The court stated that “[a] material breach of the foundational rule for professional corporation licensure—namely that it be controlled by licensed professionals—[is] enough to render [that party] ineligible for reimbursement.” See Slip Op at 16. While the holding of this case is limited in scope to no-fault insurance reimbursement, the court’s examination of the relationship between the MSO and the practice is an indication that New York courts will continue to closely monitor these MSO-practice relationships to ensure that the spirit of the corporate practice of medicine remains intact.

New York’s Business Corporation Law prevents unlicensed persons from exercising control of professional corporations.  All shareholders, officers, and directors must be licensed in the profession the entity is being incorporated to practice.  Ceding too much control to non-physicians violates the Business Corporation Law.  Similar concepts apply to professional limited liability companies.

This decision does not mean that medical practices or other professional entities in New York cannot enter into arrangements with MSOs.  Instead, the decision reaffirms that these arrangements must be carefully crafted and implemented and operated with care to stay within the bounds of the law.