New Jersey has had historically high auto insurance rates in part because the policies have generous coverage. Among the cost drivers is PIP (Personal Injury Protection) coverage, which applies on a no-fault basis to pay the medical expenses of persons injured in an insured vehicle. In a partial attempt to control such costs by deterring abusive insurance claims, the Legislature adopted the Insurance Fraud Prevention Act in 1983. Among other things, it provides that a person violates the IFPA if he “knowingly assists, conspires with, or urges any person or practitioner to violate any of the provisions of this act.” N.J.S.A. 17:33A-4(b).

New Jersey also prohibits a physician from being employed by a chiropractor. N.J.A.C. 13:35-6.16(f) (person with plenary license may not be employed by person with limited license).

In the mid-1990s a New York healthcare attorney (Robert Borsody) and California chiropractor (Daniel Dahan) gave seminars marketed to chiropractors on how to create multi-disciplinary practices. Their activities would ultimately result in a judgment against them of nearly $4 million under the IFPA on account of some $91,000 paid for insurance claims submitted by a practice organized by a New Jersey chiropractor and an additional $330,000 claims that were submitted but not paid. Among the interesting features of this case is that Borsody and Dahan were found liable despite having had no interest in the New Jersey practice, and not having participated in the submission of the insurance claims. Allstate Ins. Co. v. Northfield Medical Center, P.C., 2017 WL 1739692, A.2d (N.J. 2017).

The story begins in 1996, when New Jersey chiropractor J. Scott Neuner attended a lecture in New York given by attorney Borsody under the auspices of Dahan’s company “Practice Perfect,” which marketed to chiropractors interested in setting up multidisciplinary practices. Borsody described a business model under which the chiropractor could effectively control and profit from a medical practice that was nominally owned by a physician, which he referred to as a “doc in the box arrangement.” To guard against the physician owner from “walking off with the practice” or seeking control of the finances, this person would only receive a fee for his or her participation, and not be employed by the practice, see patients, or control the hiring and firing of the doctors who actually worked in the practice. As stated by the trial court, Borsody “testified that an earlier experience in the State of New York led him to conclude that his chiropractor clients needed protection from ruthless medical doctors.” At the end of his lecture, Borsody said that he was available to set up such a practice for $7,500, but advised that participants should also consult lawyers in their own states.

Rather than retain Borsody to set up his practice, Neuner signed a consulting agreement with Practice Perfect and was referred to a company called Management Legal Services (MLS), which for $2,600 sold him the necessary forms. Neuner sent these forms to a New Jersey attorney and consulting him regarding practice structure. The New Jersey lawyer told Neuner that he would not simply “fill in the blanks” on the forms, but had to do his own analysis of New Jersey law. When Neuner told Dahan that the fees for the New Jersey attorney might exceed $5,000, Dahan told Neuner that this was “outrageous,” and Neuner proceeded to complete the form by filling in the blanks.

Neuner engaged a physician referred to him by Dahan as the owner, shareholder, director, and incorporator of the practice for a “standard annual consulting fee” of $4,000. At trial, it was revealed that this doctor similarly “owned” about two dozen medical corporations in New Jersey and New York.

Neuner’s practice also entered into a service agreement with a management company solely owned by Neuner to manage its nonprofessional aspects.

The following year, after the nominal physician-owner sought to become more involved with the practice, Neuner terminated her using forms from the set he had purchased from Dahan. He engaged a different doctor for the owner’s role at a lower annual fee.

Later that year, after having paid about $91,000 toward claims submitted by Neuner’s practice, Allstate stopped paying claims submitted by Neuner’s practice and asked him to give a statement under oath regarding its arrangement with the management company. Allstate never paid additional claims of approximately $330,000 submitted by Neuner’s practice.

Allstate then sued Neuner, Borsody, Dahan, and others for violation of the IFPA, contending in part that Neuner’s practice was ineligible to bill Allstate for PIP benefits because the practice was not owned by a physician. After settling with Neuner, Allstate went to trial against Borsody and Dahan and prevailed. Under the IFPA, Allstate was entitled not only to damages based on the roughly $91,000 in claims that it paid, but also to trebled attorneys’ fees, for a total judgment of almost $4 million.

The Appellate Division reversed, finding the evidence at trial insufficient to prove under IFPA that they had “knowingly” assisted or encouraged Neuner to violate the Act by submitting bills from an improperly structured practice. Specifically, the court held that the evidence was not sufficient to show that New Jersey law was settled enough at the time to conclude that Borsody and Dahan knew the structure they advocated was illegal, as opposed to being simply “frowned upon” by the New Jersey entity that licenses physicians. 2014 WL 8764091.

The New Jersey Supreme Court granted Allstate’s petition for discretionary review, and reversed in a unanimous decision released in May 2017. Because the Appellate Division had reversed the trial court’s judgment in Allstate’s favor based on its conclusion that the evidence was insufficient to show the defendants’ knowledge that Neuner’s practice structure was illegal, the Supreme Court’s opinion focused on this issue. Defending the Appellate Division’s holding, the defendants argued that IFPA’s knowledge requirement could be met only by evidence that they had to know, from dispositive case law or other binding interpretive action, both that (i) the practice structure they advocated violated New Jersey law, and (ii) mere violation of restrictions on the business structure of a medical practice could invalidate otherwise-insurance claims rendered by that practice. The Supreme Court rejected this argument.

In concluding that the evidence was sufficient to support the trial court’s finding that the defendants knew the practice structure they advocated was illegal, the Court emphasized their attempts to conceal the reality of the chiropractor’s control of the medical practice: [W]e find no basis for crediting the argument that defendants could not have known that their structure violated the Board’s regulatory requirements. The documents and structure promoted and designed by defendants accomplished what the regulations sought to avoid. They placed control over the medical practice in the hands of a chiropractor, subjecting plenary licensees to his effective control through interconnected contracts and the imposition of the threat of substantial monetary penalties. Importantly, the plan sought to conceal those features to appear compliant.

Here, there was an abundance of proof that the contracts and penalties—imposed on the doctor named as nominal owner in title of this practice—placed control of the medical practice in the hands of a chiropractor. That clearly supported finding is not overcome by any form-over-substance argument based on the placement of bare legal title in the plenary licensee who participated in this scheme. The trial court demonstrated clarity of vision in recognizing that this medical practice structure violated both the letter and spirit of the Board’s rule.

Moreover, the lengths that defendants went to in shielding the true controller of this practice from view undermine any basis for interfering with the trial court’s assessment of the mixed question of fact and law that was presented to the court. . . . Considering all of the circumstances involved in defendants’ interactions with Neuner, the trial court could reasonably conclude that defendants knowingly assisted Neuner in violating the Board’s rules and submitting ineligible and fraudulent medical claims for reimbursement through that practice structure, contrary to law.

As did the Supreme Court, the trial court also relied on the concealment of ownership and control in the structure advocated by Borsody as evidence that knew it violated the law:

Borsody knew that he was placing in the hands of a chiropractor the control that was lacking in his first experience in New York. The simple fact that the practice was intended to look as though a medical doctor was in control yet, with various side agreements, he was not, constitutes sufficient basis for the Court to conclude that Borsody knew what he was doing was not proper. . . . The truth can only stand the light of day. It need not hide in the shadows of side agreements.

A second key issue was the responsibility of Dahan and Borsody for the insurance claims made by Neuner’s practice. Dahan and Borsody argued that they could not have known that an unauthorized practice structure automatically voided even otherwise-legitimate insurance submissions, contending that a reasonable actor would not have appreciated this feature of New Jersey law until it was made clear by an Appellate Division opinion that post-dated their seminar and advice to Neuner. The Supreme Court rejected this argument, concluding that because the outcome of that case had been predictable, the defendants could not plead ignorance of the eventual outcome. Citing several earlier decisions, the Court held that the defendants were on notice that bills submitted to insurance by an improperly organized medical practice were disallowed:

The theory of all those cases reflects that in New Jersey a practice entity must comply with all statutes and regulations governing the permissible structures for control, ownership, and direction of a medical practice, including the use of professional services interconnected with a medical practice.

Health care services are highly regulated, and professionals engaged in the provision of health care—including persons such as defendants, who undertook to facilitate that activity—are on notice of the legal requirements applicable to their practice and operations. We do not deal here with an honest mistake made in the course of completing a reimbursement form submitted to an insurer. This case goes to the basic structure of a practice and how it is owned, controlled, and directed. Those concerns go to the core of who may practice medicine in this State. The practice of medicine is a privilege to be exercised in accordance with all licensing and practice requirements and restrictions. One cannot claim, or feign, ignorance of those regulatory requirements and restrictions until there is an express command applicable to a precise set of facts. (citation omitted)

What are we to make of this case? Does it stand for anything more than the proposition that “if it sounds too good to be true, it probably is?” In the author’s opinion, the answer is “yes.”

First, the structuring of business and corporate relationships to avoid or exploit laws and regulations is part of the lawyer’s stock in trade, ranging from tax to real estate to trust and estates. Whether Borsody was too aggressive and got what he deserved for crossing the line, or was unfairly held liable for zealous and aggressive representation, is for the reader’s judgment (although we know how the New Jersey Supreme Court answered the question in its unanimous opinion). Perhaps a better way to frame the issue is distinguishing between structuring a clever work-around of regulations (permissible) and structuring to conceal a violation (not permissible).

Second, regulated healthcare practices that submit bills to insurance companies are held to a higher standard than ordinary businesses. This not appear to sway the Appellate Division, which wrote that Dahan and Borsody “believed that the scheme was a legitimate tool for accomplishing the goal of allowing limited license holders to increase their earnings by creating multi-disciplinary practices.” The Supreme Court, by contrast, shattered this view with its observation that the defendants’ structure relied on a physician who “’sold’ her license to multiple practices utilizing the so-called ‘Doc-in-the-Box’ structure” and was “subject to the direction and financial control by a chiropractor-owner of a management company.” Any arrangement subject to characterization in this manner is one that raises a red flag in a regulated profession.

Third, it may be difficult for out-of-state or non-specialist lawyers to appreciate the local emphasis on certain types of activities. For example, the issue of automobile-insurance rates and the perceived impact on them by insurance fraud has been of concern in New Jersey for decades.

It is notable that the investigation of Northfield’s insurance claims and resulting prosecution of this case arose from claims submitted for PIP to an auto insurer and not in the context of health insurance. Dahan and Borsody may not have appreciated the risk of conduct in New Jersey that could be viewed as fraud on an automobile insurer, or the possibility that their positions one step removed from the actual medical practice, and two steps removed from its submission of PIP insurance claims, would nevertheless expose them to liability under New Jersey’s Insurance Fraud Prevention Act for a judgment of almost $4 million based on $91,000 of claims.