Antitrust Law Daily Wrap Up, RICO—E.D. Mich.: State Farm moves forward with fraudulent billing claims, (May 28, 2015)

By Greg Hammond, J.D.

State Farm Mutual Automobile Insurance Co. alleged sufficient Racketeer Influenced and Corrupt Organizations Act (RICO) claims against an affiliated group of rehabilitation facilities and physicians for allegedly conspiring to submit false bills and documentation for payment of services and treatment provided to patients involved in motor vehicle accidents that were medically unnecessary, the federal district court in Detroit has decided (State Farm Mutual Automobile Insurance Co. v. Pointe Physical Therapy, LLC, May 27, 2015, Borman, P.).

Background. State Farm filed suit against an affiliated group of rehabilitation facilities, prescribing clinics, physicians, and a diagnostic testing facility, alleging that the group conspired to provide medically unnecessary treatment and submit false documentation for payment of benefits to patients involved in motor vehicle accidents, in violation of RICO. Specifically, State Farm alleged that the owners of the affiliated entities: (1) maintained referral relationships with personal injury attorneys who represented patients eligible to obtain benefits under Michigan’s No-Fault Act; (2) steered those patients to the controlled entities; and (3) submitted fraudulent bills to State Farm to obtain payment for services that were either never performed or not medically necessary. The defendants moved to dismiss the RICO claims for failure to state a claim.

Sufficient allegations. In denying the defendants’ motion to dismiss, the court first determined that State Farm adequately alleged an “injury to business or property.” Although the insurance company’s injury derived from business transactions that resulted in a proprietary loss, the Supreme Court has generally recognized that when a commercial enterprise suffers a loss of money it suffers an injury to both its “business” and its “property.”

Second, State Farm plausibly pleaded an association-in-fact enterprise, according to the court, because it claimed that the enterprise shared the common purpose of submitting false claims to State Farm and that the defendants worked together, through referrals and utilization of common billing services and forms, to achieve that purpose. The complaint further alleged in some detail the roles of each of the defendants in the RICO scheme to defraud.

Next, the court determined that State Farm plausibly alleged that the defendants conducted the affairs of the enterprise. State Farm “clearly alleged” that each defendant’s role in the enterprise is integral to the operation of the fraudulent payment submission scheme as a whole, according to the court. Further, the common control by the Management Group of the Prescribing Clinics and Treatment Facilities was clearly alleged, in addition to the details of each entity’s role in conducting illegitimate examinations, filling out fraudulent disability certificates, and ordering and carrying out medically unnecessary diagnostic tests. Each of the defendants were therefore on fair notice of what it is they are alleged to have done for their part in carrying out the alleged fraudulent scheme to obtain payment for medically unnecessary services and tests, the court concluded.

State Farm’s allegations of mail fraud were also pleaded with sufficient particularity, the court found. Specifically, the insurance company alleged that the defendants intentionally and knowingly made false and fraudulent statements of material fact to State farm by submitting hundreds of fraudulent bills and related documentation; the false representations of material fact included representations that clinics legitimately examined and prescribed physical therapy, legitimately determined patients were disabled, provided treatments that were medically necessary, and others; the defendants knew of the misrepresentations; and that the defendants knowingly conducted and/or participated directly or indirectly in the conduct of the treatment enterprise’s affairs though a pattern of racketeering activity consisting of repeated violations of the federal mail fraud statute.

Finally, the court determined that State Farm adequately pleaded a RICO conspiracy. It reasoned that because State Farm plausibly pleaded a §1962(c) claim, it has adequately pleaded a RICO conspiracy.

Claims not time-barred. The defendants additionally alleged that State Farm’s RICO claim is barred by the applicable four-year statute of limitations. The court rejected this argument, however, finding that State Farm plausibly pleaded fraudulent concealment. State Farm alleged that the fraudulent bills and documentation appeared legitimate on their face but that Defendants knew the bills and documentation were false, thus adequately pleading wrongful concealment. Further, State Farm claimed that it reasonably assumed that the defendants were complying with their ethical obligation to act honestly and with integrity and therefore could not have discovered the fraudulent scheme until it was able to review hundreds of bills and documentation together. These allegations were deemed sufficient at the current stage of litigation.

The case number is 14-cv-11700.

Attorneys: Jared T. Heck (Katten Muchin Roseman LLP) for State Farm Mutual Automobile Insurance Co. Benjamin J. Wilensky (Seikaly Stewart & Bennett, PC) for Pointe Physical Therapy, LLC. Michael S. Cafferty (Michael S. Cafferty & Associates) for New Era Physical Therapy, PC and New Era PT Services, Inc.

Companies: State Farm Mutual Automobile Insurance Co.; Pointe Physical Therapy, LLC; New Era Physical Therapy, PC; New Era PT Services, Inc.

Cases: RICO MichiganNews