Over the past several years, insurance carriers have aggressively pursued civil suits against doctors and other medical providers in an effort to fight healthcare insurance fraud. Besides theories of liability based upon common law claims such as fraud and unjust enrichment, insurers have more frequently asserted claims under the federal Racketeer Influenced and Corrupt Organizations Act, a.k.a. RICO, as well as its state law analogues, as tools in their litigation arsenal.  Thirty-three states, as well as Puerto Rico and the U.S. Virgin Islands, have state civil RICO statutes.

Civil RICO claims entail demanding proof of the defendants’ operation of an criminal enterprise intended to harm another and engaged in a pattern of racketeering activities, which are statutorily-defined and typically involve a list of specific criminal acts. Notwithstanding its arduous proof requirements, civil RICO claims provide a substantial incentive for success:  an award of three times actual damages as well as recovery of attorneys’ fees and expenses.

A suit filed this month in New York federal court by the GEICO insurance companies, Gov’t Employees Ins. Co. v. Bakst, No.: 15-cv-537 (E.D.N.Y., filed Feb. 4, 2015), illustrates the expanding use of civil RICO claims by insurers against doctors and other medical providers.

In Bakst, plaintiff insurance companies assert that the defendants — two doctors, three medical professional corporations, and the professional corporations’ alleged managers — engaged in a racketeering scheme to defraud GEICO of over $6.25 million in fees for treatment of injuries sustained in motor vehicle accidents.  The insurers in Bakst allege that the defendant medical professional corporations, which sought No-Fault benefit payments based upon assignments of benefits from their patients, are fraudulently incorporated and operated, and as a result, are ineligible to receive No-Fault benefits under New York law.

Specifically, plaintiffs allege that the defendant doctors were recruited to “sell” their names and medical licenses and pose as the nominal owners of the professional corporations on behalf of the non-physician alleged “management” defendants, who allegedly own, control, and operate the professional corporations in violation of applicable New York law.  Besides the lack of corporate control and management by the defendant doctors, plaintiffs also allege that the defendant doctors do not actually practice medicine through the professional corporations as required under New York law, that they unlawfully split fees with non-physicians in violation of New York law, and that the medical services for which payment is sought are frequently provided by independent contractors, not by the professional corporations or their employees.  Also, the plaintiffs allege that the professional corporations provide radiology and diagnostic services to patients without regard to a determination of medical necessity and on multiple dates in order to advance the pecuniary interests of the non-physician defendants rather than the independent medical judgment of the defendant doctor-owners.

Plaintiffs claim that as a result of the defendants’ fraudulent organization, ownership and operation of the defendant professional corporations, the defendant submitted hundreds of materially false and misleading bills for services over a six year period, constituting a pattern of racketeering activity consisting of repeated violations of the federal mail fraud statute, 18 U.S.C. § 1341.  Plaintiffs seek compensatory damages in excess of $3.25 million for payments allegedly wrongfully made to the defendants as well as a declaration that the plaintiff insurers are not legally obligated to reimburse the defendants in excess of an additional $3 million in pending claims.

At this point, the defendants have not yet filed an Answer to the plaintiffs’ Complaint. While the case includes allegations that patients were treated without regard to medical necessity, the primary focus of the Bakst Complaint, and presumably of the evidence underlying the insurers’ allegations, is that the defendants organized, owned, and operated professional corporations purporting to practice medicine but not complying with applicable laws relating to medical professional corporations.  As a result of the defendants’ holding themselves out as lawful professional corporations, the defendants’ submission of claims to the plaintiff insurers for reimbursement for services rendered is allegedly fraudulent.

Irrespective of the ultimate resolution of these allegations, Bakst reflects a trend towards increased focus upon strict compliance with applicable laws relating to the organization, ownership and operation of professional corporations.  Doctors and healthcare providers are well advised to pay close attention to all applicable legal requirements pertaining to the organization, ownership and operation of the professional corporations.  As in Bakst, besides denial of claims for reimbursement, failure to adhere to applicable legal requirements could subject the doctors and providers to a civil RICO claim, with the potential of a treble damages and attorneys’ fee award.  Given the recent successes of insurers asserting civil RICO claims to recover for healthcare fraud, we are likely to seemore of these claims from insurers going forward.