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Using the Corporate Practice of Medicine Doctrine to Combat Fraud

Strategies to balance fiduciary duties to insureds with the legal obligation and financial incentive to combat insurance fraud.

August 20, 2014 Photo

In the world of insurance claims, defense litigation, and special investigation unit (SIU) investigations, we are well aware of the billions of dollars that carriers and self-insureds lose to insurance fraud perpetrators. Even if they cannot prove it, investigators and claims handlers certainly “smell” it on a routine basis. So how can carriers balance their fiduciary duties to insureds with the legal obligation and financial incentive to combat insurance fraud? In other words, how do we stop the bleeding?

In the context of first-party personal injury protection (PIP) or third-party liability claims, one effective strategy is to employ a claims handling model that can effectively check medical providers to ensure that all medical treatment submitted for reimbursement is reasonable, necessary, and billed appropriately. Payments made on suspect claims can be monitored and tracked. Under federal law, carriers may have a cause of action to recoup monies paid for services improperly or never actually rendered and can obtain an award for punitive damages, treble damages, and attorney’s fees. A financial recovery also could include a portion of the dollars paid in third-party claims settlements in which a carrier relied on bogus medical reports to evaluate (and unwittingly inflate) the value of claims. This is not simply a matter of stopping the bleeding; it is a blood transfusion of recovered funds and profits.

The positive ripple effects of combating medical provider fraud do not stop there. An effective recovery strategy could reduce the cost of premiums and improve medical care for insureds. Honest medical providers would no longer need to compete for business with providers that engage in fraudulent practices.

In an effort to recover damages caused by fraud, one effective and often underutilized tool to add to your antifraud arsenal is the Corporate Practice of Medicine Doctrine (CPOM Doctrine). The doctrine prohibits doctors and other medical professionals from working as paid employees of a corporation owned by unlicensed medical professionals. It seeks to elevate the practice of medicine and level of care provided to patients. The CPOM Doctrine’s requirement that individuals who own entities that provide medical care must be licensed is based on the premise that a doctor working for a nondoctor will have divided loyalty between providing appropriate care for patients and meeting the employer’s demands. The doctor will be vulnerable to commercial exploitation to the detriment of the patient. In essence, the CPOM Doctrine seeks to prevent an unlicensed business owner from controlling the level of patient care.

One of the oft-cited landmark legal decisions adopting the CPOM Doctrine, authored by the Supreme Court of Pennsylvania, states: 

[A] licensed practitioner of a profession may not lawfully practice his profession among the public as the servant of an unlicensed person or a corporation; and that, if he does so, the unlicensed person or corporation employing him is guilty of practicing that profession without a license. A corporation as such cannot possess the personal qualities required of a practitioner of a profession. Its servants, though professionally trained and duly licensed to practice, owe their primary allegiance and obedience to their employer rather than to the clients or patients of their employer. (Neill v. Gimbel Bros. Inc.)

Over the past 75 years, the CPOM Doctrine has taken many forms, varying by jurisdiction and type of treatment rendered, and has been adopted in some form or another in many states. Penalties can be imposed against medical providers that fail to adhere to strict state guidelines with regard to mandated corporate structure. For example, in Pennsylvania, the Medical Practice Act and the Chiropractic Practice Act impose civil penalties against any person who practices medicine and surgery, chiropractic, or other areas of practice requiring a license without being properly licensed to do so (63 P.S. §§ 422.39 & 625.703). Under such laws, it is important to closely monitor medical providers for compliance of not just their billing practices, but also business formations. Noncompliance may be used as a red flag for further investigation, as leverage in settlement negotiations, or in affirmative litigation to recover funds.

However, therein lies the rub. In many jurisdictions, while state administrative bodies can impose fines, there is no private cause of action available for violation of these laws. So while a hefty fine could be assessed by the state medical board for the unlawful practice of medicine, an individual or insurance carrier cannot bring suit against a medical provider solely on the basis of violation of a codified doctrine to recover funds.

However, for the strategic thinkers among us, this should not mean violations of CPOM Doctrine-related laws are useless to insurers, prosecutors, and other groups that combat fraud. For example, violating a state’s codified doctrine could be used as grounds for denying payment under a state motor vehicle code’s statutory framework for the obligations to pay PIP benefits. Logic dictates—and legal authority could be found to support the argument—that a carrier is only required to pay for medical treatment authorized by law, depending on the nuanced requirements of the particular jurisdiction.

Further, if there is an avenue to prosecute a claim against a provider under the Racketeer Influenced and Corrupt Organizations Act (RICO) or an insurance fraud statute, a doctor’s violation of corporate requirements may be admissible as evidence of fraud. In short, the CPOM Doctrine is a theory worth exploring that could yield tremendous results for insurers, prosecutors, and others dedicated to combating fraud.

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About The Authors
Joshua Romirowsky

Joshua Romirowsky is an attorney with CLM Member Firm Gordon & Rees LLP. He is a member of CLM’s Insurance Fraud Committee and can be reached at (215) 717-4016,  jromirowsky@gordonrees.com

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CLM’s Insurance Fraud Committee identifies, analyzes, and offers education on emerging fraud schemes and tactics; monitors and reports on developments in case law, state fraud statutes and applicable regulations; collaborates with other anti-fraud industry organizations and associations; and seeks to provide amicus support in matters of importance in the fight against insurance fraud.

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