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No-Fault Newsletter: April 2006

The Malella Decision: One Year Later

Last year, the New York State Court of Appeals ruled that an insurance carrier could withhold no-fault reimbursement to a fraudulently incorporated health service provider. The Court suggested that a carrier could look beyond the face of licensing documents to identify willful and material failure to abide by state and local law, but limited such inquiries solely to situations where there exists “good cause” to do so. While the case settled many longstanding issues, it also left and/or created many others. Over the past year, several significant cases have further defined how this landmark decision impacts no-fault reimbursement.


The Court’s decision rested, in part, upon a new State Insurance Department regulation that went into effect on April 5, 2002, and suggested that a carrier could not seek to recover any monies already paid to a fraudulently incorporated provider’s services prior to that date. What the court failed to answer directly, however, was whether a carrier could withhold reimbursement to such a provider even though the services were rendered prior to that date. Although several lower Court decisions have taken up this issue of “retroactivity,” no consensus has yet emerged (some holding that a carrier may withhold payments prior to the new regulations; other holding that it may not). One of these decisions was appealed recently with papers due before the Appellate Term this month. Unfortunately, this particular Court is backlogged and a decision may not be forthcoming this year.


Another issue left unanswered by the Malella case was whether a carrier is “precluded” from raising the corporate structure defense if it failed to preserve that rationale in a denial of claim within the statutorily allowed thirty (30) days from receipt of the provider’s bill. Although one recent Appellate case on the issue, interpreting several prior cases related to provider fraud, hinted that it might, another Appellate case squarely held that under Malella the corporate structure defense survives preclusion (ie, the defense can be raised) regardless of whether it was contained in a timely issued denial.

Good cause/Founded belief

This same Appellate court, however, in yet another recent case interpreting Malella, limited the situations in which the carrier could raise the corporate structure defense. While acknowledging its prior decision to not preclude such untimely defense, the Court nonetheless rejected the carrier’s argument because it failed to establish a “founded belief” that the provider was ineligible to obtain no-fault benefits by reason of a fraudulent corporate filing. In this case, the provider established that it was a duly registered New York corporation, and the insurer’s bare assertion that it was otherwise improper, without “good cause” or actual facts was insufficient to withstand a motion for summary judgment.

Medical v. Financial Control of the PC

Finally, several insurance carriers recently filed suit to recover monies paid to several radiological PCs owned by the same doctor. The facts of this case test the limits of the Malella decision. It was conceded by all the parties that the physician owner DID control much of the professional aspects of the PCs, including reading a majority of the MRIs and the hiring and firing of the professional staff. The insurer alleged, however, that the management company he hired to handle the non-professional tasks of the PC received such a significant portion of all the revenues so as to establish de facto ownership over corporation. The Court, while deciding procedural issues related to the case and not the ultimate issue, nonetheless stated the Court of Appeals decision in Malella must be applied narrowly and that the Courts must balance the insurance carrier’s zeal to investigate fraud with the “good cause” required by the no-fault regulations. The judge indicated that the Court was not prepared, nor even authorized, to set the percentages of revenue and income of a health care provider that would constitute a valid provider in the eyes of the carriers. While the Court did not grant the carrier’s motion, neither did it dismiss the suit as the provider requested. Thus, the matter will proceed with discovery and potentially a trial.

If you have any questions concerning this newsletter specifically or no-fault medical collections generally, please contact Stuart Israel.

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