No-Fault Insurance a Temptation to Fraudsters

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The plaintiffs (GEICO) sued accusing the defendants of submitting fraudulent insurance claims for expensive, medically unnecessary topical pain products prescribed to people with soft tissue injuries, whom the plaintiffs insured. The defendants filed approximately 467 individual arbitrations through the American Arbitration Association and 48 individual lawsuits in New York state courts to collect on the same claims. Many of those actions are pending. GEICO moved to stay the arbitrations and enjoin the defendants from bringing any new arbitrations or lawsuits.

In Government Employees Insurance Company, et al. v. SMK Pharmacy Corp, et al., No. 21-CV-3247 (AMD) (RLM), United States District Court, E.D. New York (February 23, 2022) GEICO sued SMK under RICO for presenting fraudulent claims for compound creams and sought a stay of hundreds of arbitrations and suits brought by the pharmacy while the declaratory relief action was pending.
BACKGROUND

Beginning in 2017, the defendants allegedly participated in a scheme to submit fraudulent insurance claims for expensive topical pain products purportedly provided to patients involved in automobile accidents. In furtherance of the alleged scheme, the defendants ― a Queens pharmacy and its owners ― paid kickbacks and other financial incentives to a network of No-Fault clinic controllers and prescribing providers, who in return directed patients insured by the plaintiffs to fill medically unnecessary prescriptions for the expensive products at the defendants’ pharmacy. To date, the defendants’ pharmacy has submitted over 12,000 allegedly fraudulent charges related to these medically unnecessary products, totaling over $4,023,200, of which $1,926,600 has not yet been paid.

The plaintiffs seek a declaratory judgment that they do not have to pay the defendants for the pharmacy’s pending claims, as well as money damages for violating civil RICO under 18 U.S.C. § 1962, common law fraud and unjust enrichment.
Medically Unnecessary Products

The topical pain products at issue ― compound creams, diclofenac sodium products and lidocaine products ― have extremely expensive “average wholesale prices, ” which the defendants used to inflate their pharmacy’s billing and maximize their profits. The defendants worked with No-Fault clinics, whose prescribing providers wrote prescriptions to the insureds for the products, and directed the insureds to go to the defendants’ pharmacy to fill their prescriptions. The insureds were involved in minor motor vehicle accidents and, according to a physician who reviewed patient records for the plaintiffs, the overwhelming majority sustained “ordinary soft tissue injuries, such as strains and sprains” particularly in their necks and backs.

The physician also concluded that the defendants “systematically and excessively” dispensed these products in large volumes “without regard to the needs of the patients.” For example, the patients’ examination reports did not document “whether oral medications were contraindicated,” and “the reasons why the topical pain products prescribed were medically necessary, ” “whether the topical pain products prescribed to a particular patient were used, ” and “whether the topical pain products provided any pain relief to the patient or were otherwise effective.” The physician concluded that prescribing these products represented a gross deviation from the standard of care, and that the products’ prescription and dispensation revealed a pattern designed to exploit the patients for financial gain.
Compound Creams

The defendants targeted compound cream, which is a combination of expensive ingredients compounded to create an “exorbitantly priced” cream ― primarily in the form of “DCLTM” cream ― that could generate huge revenues from billing. A single tube of the cream typically cost between $803.99 and $855.26 even though commercially available medications with proven therapeutic effects were significantly cheaper.

Compound creams are a last resort, to be used after a physician concludes that a patient could not tolerate oral medications, or that the oral medications were ineffective or contraindicated, and after trying other FDA-approved topical products.
Diclofenac Sodium and Lidocaine

The defendants targeted other allegedly medically unnecessary topical pain products, particularly two that used the ingredients diclofenac sodium and lidocaine. The plaintiffs argue that these topical pain products were also medically unnecessary. Moreover, prescribing providers also often prescribed heating pads, which were contraindicated with lidocaine patches.
Fraudulent Scheme

To drive their fraudulent billing scheme, the defendants allegedly colluded with No-Fault clinic controllers and providers to issue prescriptions for the products listed above, and to ensure that the insureds filled their prescriptions at the defendants’ pharmacy, even if other pharmacies were much closer and more convenient for the insureds or the providers.
LEGAL STANDARD

Courts in this district apply the preliminary injunction standard when a party seeks to stay pending No-Fault insurance claims and enjoin the filing of further claims.

In this circuit, a party seeking a preliminary injunction must establish:

irreparable harm and either

likelihood of success on the merits or

sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief.

DISCUSSION: IRREPARABLE HARM

The plaintiffs argue that the risk of inconsistent judgments in the various pending collection proceedings establishes irreparable harm, and that it wastes time and resources to participate in these arbitrations if the awards are eventually determined to be inconsistent with this Court’s declaratory judgment.

Irreparable harm is the single most important prerequisite for the issuance of a preliminary injunction. To establish irreparable harm, a party seeking preliminary injunctive relief must show that there is a continuing harm which cannot be adequately redressed by final relief on the merits and for which money damages cannot provide adequate compensation.

Courts in this district have routinely found that the risk of inconsistencies between arbitrations and a court’s ruling establishes irreparable harm. This includes cases in which an insurer alleges a risk of inconsistent judgments in No-Fault arbitrations and RICO- and fraud-based litigation in federal court, because an insurer would waste time defending numerous no-fault actions when those same proceedings could be resolved globally in a single, pending declaratory judgment action.

The defendants have brought 467 individual collection arbitrations through the American Arbitration Association, as well as approximately 48 individual collection lawsuits in New York state court, many of which are pending, and all of which involve the subject of this action’s declaratory judgment claim. The plaintiffs’ defenses in the arbitrations, as well as their request for declaratory judgment in this action, hinge in part on the lack of medical necessity for the pharmacy’s charges. Given the risk of inconsistency between the arbitrations and a declaratory judgment by this Court, the plaintiffs have established irreparable harm.

The plaintiffs seek, among other relief, a declaratory judgment that the defendants have no right to receive payment for any pending bills they submitted to the plaintiffs. Their complaint alleges that the defendants billed for services that were medically unnecessary and prescribed and dispensed pursuant to predetermined fraudulent protocols designed to exploit the patients for financial gain, without regard for genuine patient care. The complaint details the way the defendants carried out their scheme, in part by providing rubber stamps to prescribing providers and submitting fraudulent forms to the plaintiffs, and includes examples to support the allegations. The plaintiffs also provide a deposition from a physician who reviewed 50 claims, and supports the plaintiffs’ allegations.

The record as a whole ― including the complaint’s detailed allegations and exhibits, along with the physicians’ declarations and underlying treatment records ― establishes, at a minimum, a serious question going to the merits as to whether the defendants dispensed medically necessary products. Facially legitimate treatments may be provided with little variance across multiple patients, but it is only by analyzing the claims as a whole that the irresistible inference arises that the treatments are not being provided on the basis of medical necessity.

Defendants will suffer no prejudice if their right to collect the pending billing is adjudicated in a single declaratory judgment action. Granting the stay and injunction will actually save all parties time and resources.

GEICO’s motion was granted. Until this action is resolved, all No-Fault insurance collection arbitrations between SMK Pharmacy and the plaintiffs pending before the American Arbitration Association are stayed, and the defendants are enjoined from commencing any new No-Fault insurance collection arbitrations or state court collection lawsuits against the plaintiffs on behalf of SMK Pharmacy.
ZALMA OPINION

No-fault insurance was designed to save the public and insurers money. However, as this suit establishes, it also seems to have encouraged fraud by causing treatment for soft tissue injuries that are often cured with aspirin and heating pads by prescribing very expensive compound creams. Since each claim is small it takes a stay to resolve the issues and the USDC recognized that the fraud needs to stop to protect the parties and the intent of the statute that established no fault claims. GEICO should be encouraged to keep going after the fraud perpetrators.

© 2022 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

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