Corporate Healthcare Transactions: Avoiding Crimes, Dismissals and Embarrassment

Publication Source: The Nassau Lawyer

In today's complex legal healthcare world, it has become increasingly more important for lawyers in one practice group to consult with specialists in other areas of the law to ensure that all of the legal implications of a client's particular situation are understood and properly addressed. A recent decision of the Supreme Court, New York County, is a perfect example of the importance of coordinating the specialties of a law firm's different practice groups in analyzing and implementing a comprehensive legal plan that is best suited to protect the client. As explained below, effective use of corporate, healthcare, litigation and criminal practitioners could have avoided a very costly, embarrassing and criminally and professionally volatile situation.

In Donovan v. Rothman,¹ the Court's decision on a motion for summary judgment was one part of a lengthy, on-going dispute between shareholder-physicians of a radiology practice. The case involved a shareholder derivative action brought by shareholders of LH Radiologists, P.C. (the 'P.C.'). The individual plaintiffs were radiologists from the staff of Lenox Hill Hospital ('Lenox Hill'). They intended for the P.C. to contract directly with Lenox Hill to provide radiology services within the hospital. The P.C. would, in turn, employ the physicians who actually rendered those services and the P.C. would bill patients and third party payors directly for such services. Instead of being employed by Lenox Hill, the radiologists would be shareholders/employees of the P.C. Defendant Lewis Rothman, who was Director of Radiology at Lenox Hill, became the President of the P.C.

In 1987, Rothman, acting on behalf of the P.C., entered into a 'fee for services agreement,' whereby the P.C. would bill patients directly for services. He also entered into a separate 'supplemental agreement' with Lenox Hill, whereby the P.C. would forward a portion of the proceeds they received to Lenox Hill, and a fixed percentage of the P.C.'s net collections would be retained by Lenox Hill through its Department of Radiology fund, which was utilized for capital improvements, equipment and other expenditures for the Department. A separate additional percentage of the P.C.'s net collections was also to be paid to the Hospital's general fund. Pursuant to the 'supplemental agreement,' the P.C. paid or credited Lenox Hill approximately $3.75 million through Oct. 31, 1998.

The plaintiffs alleged that in 1988, unbeknownst to them, Rothman issued a stock certificate to himself for shares of the P.C., effectively making himself the sole shareholder, and unilaterally fixed salaries and entered into illegal transactions on behalf of the P.C. After they were granted access to corporate records, the plaintiffs brought this shareholder derivative action against Rothman and another physician concerning unilateral and allegedly illegal conduct referenced herein.

For purposes of this article, we focus specifically on a cause of action by the plaintiffs against Lenox Hill.2 The plaintiffs alleged that the payments made by the P.C. to Lenox Hill pursuant to the 'supplemental agreement' violated the Federal Anti-Kickback Statute.3 Interestingly, the plaintiffs relied upon this allegation in an attempt to terminate the contract, when they, in fact, had signed the 'supplemental agreement' and benefited from its provisions. Indeed, the plaintiffs had been the sole radiologists receiving referrals from Lenox Hill since the 'supplemental agreement' went into effect and, as a result, they obtained the benefit of the radiology work. Moreover, the plaintiffs were involved in the payment of a percentage of their net proceeds back to Lenox Hill.

Read the full article in the attached PDF.

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Kevin Schlosser is a Shareholder at Meyer, Suozzi, English & Klein, P.C., where he is Chair of the Litigation and Alternative Dispute Resolution Department which has a full roster of available private judges from virtually all disciplines of law. Mr. Schlosser also authors the popular blog, “New York Fraud Claims,” which analyzes the latest developments concerning civil fraud claims under New York law.

Reprinted with permission by The Nassau Lawyer.