In the Matter of South Island Orthopaedic Group, P.C., Appellant,v.Thomas P. DiNapoli, as Comptroller of the State of New York, et al., Respondents.BriefN.Y.April 2, 2013Albany County Index Nos. 724/10 and 4182/09 ORAL ARGUMENT NOT REQUESTED Appellate Division, Third Department Docket Nos. 510690 and 510692 (!Court of ~ppeals of tbe ~tate of ..t!etu ~ork IN THE MATTER OF THE APPLICATION OF MARVIN H. HANDLER, M.D., P.C., Petitioner-Appellant, FOR A JUDGMENT UNDER ARTICLE 78 OF THE CIVIL PRACTICE LAW AND RULES -against- THOMAS DINAPOLI, COMPTROLLER OF THE STATE OF NEW YORK, Respondent-Respondent, -and- UNITED HEAL THCARE INSURANCE COMPANY OF NEW YORK, Respondent. (Caption Continues on Reverse) BRIEF FOR RESPONDENT UNITED HEALTHCARE INSURANCE COMPANY OF NEW YORK Dated: September 23, 2013 GREENBERG TRAURIG, LLP Attorneys for Respondent United HealthCare Insurance Company of New York 54 State Street, 6th Floor Albany, New York 12207 Tel: (518) 689-1400 Fax: (518) 689-1499 IN THE MATTER OF THE APPLICATION OF SOUTH ISLAND ORTHOPAEDIC GROUP, P.C., FOR A JUDGMENT UNDER ARTICLE 78 OF THE CIVIL PRACTICE LAW AND RULES -against- THOMAS DINAPOLI, COMPTROLLER Petitioner-Appellant, OF THE STATE OF NEW YoRK, AND UNITED HEAL THCARE INSURANCE COMPANY OF NEW YORK, Responden~-Responden~. STATEMENT PURSUANT TO RULE 500.1(0 Respondent-Respondent UnitedHealthCare Insurance Company of New York, Inc. is a New York corporation and has no subsidiaries. Its corporate parent is UnitedHealth Group, Inc., which has no parent corporation and no publicly-held company owns more than 10% of its stock. 3 TABLE OF CONTENTS TABLE OF AUTHORITIES ................................................................................................. ii PRELIMINARY STATEMENT .......... ... .... ....... ........... ..... ... ........ ... .... ................ ............. .. .. 1 QUESTIONS PRESENTED .... .... ......... .... ...... ..... ... ... .. ... ...... .. ..... .. .. ... ... ... ........ .. ................ ... 4 STATEMENT OF THE CASE .............................................................................................. s A. The New York State Health Insurance Plan .......................................... 5 B. The Comptroller's Audit of United's Payments for Services Rendered by South Island to Members ................................................. 7 C. The Comptroller's Audit of United's Payments for Services Rendered by Handler to Members .......................... ..... .......................... 8 SUMMARY OF PROCEEDINGS ........ .............................. ....... ... ..... .. ....... ................. .. .... 10 ARGUMENT ............................................................................................................................ 11 THE COMPTROLLER'S LIMITED REVIEW OF APPELLANTS' RECORDS WAS INCIDENTAL TO THE MANDATORY AUDIT OF UNITED AND WAS THEREFORE CONSTITUTIONAL ..................... 11 CONCLUSION ........................................................................................................................ 12 TABLE OF AUTHORITIES Cases Matter of New York Charter Schools Assn., Inc. v. DiNapoli, 13 N.Y.3d 120 (2009) .................................................................................... 3, 10 Blue Cross & Blue Shield of Central New York v. McCall, 89 N.Y.2d 160 (1996) ...................................................................................... 3, 4 11 PRELThflNARYSTATEMENT At issue in this case is the ability of the State and UnitedHealthCare Insurance Company of New York ("United"), as insurer for the State's Empire Plan, to recoup hundreds of thousands of dollars in overpayments made as a result of fraudulent billing practices by physicians who treat members of the Empire Plan. Petitioners-Appellants ("Appellants") challenge the constitutional authority of the New York State Comptroller ("Comptroller") to perform a limited review of their billing records, which they provided without objection, in connection with an audit of payments made by United. As the Appellate Division, Third Department correctly found, the Comptroller's review of Appellants' records was incidental to his mandated audit of United, and therefore proper. The Empire Plan is the primary health benefits plan for active and retired State, participating local government and school district employees and their dependents. The New York State Department of Civil Service and the Empire Plan contract with United as the insurer of medical and surgical benefits provided to Empire Plan members. Although United adjudicates medical and surgical claims under the Plan, the expense of all claims payments is directly incurred by the State as part of plan premiums. Thus, to the extent United overpays any claims, those overpayments are charged directly to the State. 1 In 2009, the Comptroller audited United's claim payments for Appellants' services to determine whether Appellants had improperly waived Empire Plan members' out-of-pocket costs as a matter of course, thereby causing overpayments of state funds. In each case, the Comptroller randomly selected a small subset of claims and, in order to fully review them, requested from Appellants' the billing records for those claims. Appellants did not object to the request on constitutional or other grounds, but rather provided the Comptroller with the records. Ultimately, the Comptroller issued two audit reports in which he concluded that Appellants had engaged in fraudulent billing practices that caused United- and consequently the State - to overpay claims by more than $1.7 million. The audit reports directed United to take certain actions in light of the overpayments, including recoupment of monies paid. In order to escape the consequences of their own misfeasance, Petitioners brought separate Article 78 proceeding seeking to invalidate the Comptroller's audits and to permanently enjoin United from recouping any current or future overpayments made to them for their services. Appellants' constitutional challenge begins from the unsupported premise that the Comptroller conducted a "performance audit" of Appellants. Having mischaracterized the audit as such, South Island relies on this Court's prior decisions for the proposition that the Comptroller lacks constitutional authority to coriduct performance audits of private entities. However, the record establishes, 2 and the Appellate Division properly concluded, that the audit concerned State payments made pursuant to contract, and a limited, cursory review of South Island's financial records was necessary to determine the propriety of those State payments. Indeed, it is undisputed that the only way to ensure the accuracy of the State's payments to United for the services provided to Empire Plan members by Appellants was to review Appellants' records. Appellant's reliance on Matter of New York Charter Schools Assn., Inc. v. DiNapoli, 13 N.Y.3d 120 (2009) is clearly misplaced. In that case, this Court held that the Legislature exceeded its constitutional authority when it directed the Comptroller to conduct academic performance audits of charter schools. Specifically, the Comptroller was to assess whether the charter schools met "quantitative academic achievement goals and complied with student selection procedures and criteria," among other things. !d. at 128. There, unlike here, the Comptroller examined the management, operations and academic achievements of the charter schools. !d. Here, in significant contrast, the Comptroller performed an audit of expenditures of public monies. The Comptroller's limited review of South Island's financial records was incidental to his mandated audit of payments made under the Empire Plan. Nor is this Court's decision in Blue Cross & Blue Shield of Central New York v. McCall, 89 N.Y.2d 160 (1996) controlling here. At issue there was the 3 constitutionality of legislation which authorized the Comptroller to conduct audits of private health insurers. Consistent with the plain language of the Constitution, this Court held that the Legislature is prohibited from assigning any administrative duties to the Comptroller "that are not incidental to the supervision of the fiscal affairs of the State." !d. at 167. Because audits of private insurers would not serve the fundamental duties of the Comptroller, the Court concluded that the Legislature's delegation was unconstitutional. !d. Here, in significant contrast, the Comptroller's audit directly concerned State payments and thus the fiscal affairs of the State. Appellants' arguments are unavailing, and this Court should affirm the Third Department's decision. QUESTIONS PRESENTED 1. Whether the Comptroller's limited examination of Appellants' records m connection with its audit of United's payments to Appellants for services rendered to Empire Plan members was constitutional. This question should be answered in the affirmative. 2. Whether the present constitutional challenge to the Comptroller's audits is moot because Appellants consented to and fully cooperated with the audits, the audits are complete, and the audit findings have been published. This question should be answered in the affirmative. 4 STATEMENT OF THE CASE A. The New York State Health Insurance Plan The New York State Health Insurance Program ("NYSHIP") arranges for the provision of health insurance coverage to active and retired state, participating local government, and school district employees and their dependents. (Record on Appeal ("R.") 105.) The Empire Plan is the primary health benefits plan for NYSHIP. (!d.) The New York State Department of Civil Service administers NYSHIP and the Empire Plan and contracts with United as the insurer of medical and surgical benefits provided to Empire Plan Members ("Members"). (!d.) United is obligated to adjudicate such claims in accordance with the reimbursement obligations defined in the Empire Plan Certificate of Coverage (the "Certificate"). (!d.) Under the terms of the fully-participating contract between United and New York State, the expense of all claim payments is directly incurred by the State as part of plan premiums. (!d.) United contracts with certain health care providers to provide medical services to Members. (!d.) These providers agree to accept a negotiated rate for their services in exchange for serving as participating providers in the Empire Plan. (!d.) Although the Empire Plan allows Members to receive services from both participating and non-participating providers, it encourages Members to use participating providers in order to minimize costs. (R. 105-106.) When a Member 5 uses a participating provider, the Member is responsible only for a nominal co- payment and United pays the participating provider directly at the agreed-upon rates. (R. 105.) In contrast, the Certificate requires Members to pay higher out-of- pocket costs (including deductibles and co-insurance) when they use non- participating providers. (R. 105-106.) In addition, when a Member uses a non-participating provider, United pays the Member the lesser of: (1) 80% of the "reasonable and customary" rates for the services provided, or (2) the actual amount of the billed charges. (R. 106.) United bases its payment upon the charges billed by the non-participating provider. (!d.) The Member is responsible for the remaining 20% of the charge for services (the co-insurance) and for settling any unpaid balance with the non-participating provider. (!d.) Non-participating providers must seek collection of the remaining 20% of the fee. (R. 1666.) A non-participating provider who fails to collect the remaining fee is subject to both civil and criminal penalties for insurance fraud. (!d.) These penalties have been established because of the recognition that routine waivers of out-of-pocket member costs - such as the case here - lowers the customary fee charged. (!d.) Accordingly, non-participating providers who routinely waive co- payments artificially inflate the amount sought for their services and thereby cause United and the State to make gross overpayments. (!d.) 6 B. The Comptroller's Audit of United's Payments for Services Rendered by South Island to Members In December 2008, the Comptroller conducted an audit of claims approved by United for services rendered by Appellant South Island Orthopaedic Group, P.C. ("South Island"), a non-participating provider, to Empire Plan Members. (R. 611, 772.) The Comptroller's review focused on claims submitted by South Island during the period January 1, 2001 through October 31, 2008 in which United paid a total of $7.8 million for South Island's services rendered to Empire Plan Members. (R. 776.) Out of the millions of dollars' worth of claims, the Comptroller, in accordance with generally accepted government auditing standards, randomly selected a sample of only 190 claims for review. (Id.) On May 5, 2009, the Comptroller issued an audit report to United. (R. 770- 779.) The audit report was not directed to South Island, and did not direct South Island to take any action. Rather, the Comptroller instructed United that "[t]his audit's results and recommendations are resources for you to use in effectively managing your operations and in meeting the expectations of taxpayers." (R. 772) The Comptroller found that South Island routinely waived Members' required out-of-pocket costs for services provided and that, as a result, United - and consequently the State - overpaid claims submitted by South Island during the Audit period by $787,134. (R. 772-779.) The Comptroller noted that "the waiver of members' out-of-pocket costs tends to drive up costs for the Empire Plan, 7 because it increases the likelihood that members will use non-participating providers" and that the "routine waiver of out-of-pocket costs may violate the State Insurance Law." (R. 774.) The Comptroller made three recommendations to United based upon the Audit: (1) recover the $787,134 in overpayments; (2) formally advise South Island of the advantage of becoming a participating provider and request that South Island do so; and (3) work with the Department of Civil Service to pursue an appropriate course of action to prevent South Island from waiving out-of-pocket costs in the future should it remain a non-participating provider. (R. 779.) C. The Comptroller's Audit of United's Payments for Services Rendered by Handler to Mem hers In the fall of 2009, the Comptroller conducted an audit of claims approved by United for services rendered by Appellant Marvin H. Handler, M.D., P.C. ("Handler"), a non-participating provider, to Empire Plan Members. (R. 84-98.) The Comptroller's review focused on claims submitted by Handler during the period January 1, 2004 through December 31, 2008, in which United paid a total of $4.9 million for Handler's services rendered to Empire Plan Members. (R. 94.) Out of the millions of dollars' worth of claims, the Comptroller, in accordance with generally accepted government auditing standards, randomly selected a sample of only 178 claims for review. (!d.) 8 On November 19, 2009, the Comptroller issued its audit report to United. (R. 85-98.) The Comptroller instructed United that "[t]his audit's results and recommendations are resources for you to use in effectively managmg your operations and in meeting the expectations of taxpayers." (R. 89) The Comptroller found that Handler routinely waived Members' required out-of-pocket costs for services provided and that, as a result, United - and consequently the State - overpaid claims submitted by Handler during the audit period by $903,563. (R. 91.) The Comptroller noted that "the waiver of members' out-of-pocket costs tends to drive up costs for the Empire Plan, because it increases the likelihood that members will use non-participating providers" and that the "routine waiver of out-of-pocket costs may violate the State Insurance Law." (!d.) The Comptroller made three recommendations to United based upon the audit: (1) recover the $903,563 in overpayments; (2) formally advise Handler of the advantage of becoming a participating provider and request that Handler do so; and (3) work with the Department of Civil Service to pursue an appropriate course of action to prevent South Island from waiving out-of-pocket costs in the future should it remain a non-participating provider. (R. 98.) The audit was not directed at Handler, and did not direct Handler to do anything. (R. 85-98.) 9 SUMMARY OF PROCEEDINGS On June 1, 2009, South Island filed its Verified Petition in Albany County Supreme Court. (R. 620-633.) On March 3, 2010, the trial court issued a Decision and Order holding that the principles enumerated in New York Charter Schools prohibit the Comptroller from conducting an audit of South Island. (R. 610-618.) On February 3, 2010, Handler filed its verified Petition in Albany County Supreme Court. (R. 20-22, 39-55.) On June 18, 2010, the trial court issued an order granting Handler's petition to the extent of setting aside the Comptroller's audit, based on the principles enumerated in New York Charter Schools. (R. 8-19.) The Comptroller and United appealed to the Appellate Division, Third Department. By Memoranda and Orders entered October 27, 2011, the Third Department reversed the trial court orders. (R. 1665-70, 1679-81.) The Third Department rejected Appellants' characterization of the Comptroller's audits as "performance audits" of Appellants. The court held that the Comptroller's limited examination of Appellants' billing records was incidental to his mandated audit of United, and proper under the principles set forth in New York Charter Schools. (R. 1669.) The Third Department's well-reasoned analysis of this issue was presented in its Memorandum and Order issued in Handler v. DiNapoli, (R. 1665-70), with a reference thereto in its South Island v. DiNapoli decision (R. 1679-81 ). 10 The Third Department remanded the cases to Supreme Court, Albany County, for further proceedings to address Appellants' remaining challenges to the audit findings. (R. 1670; id. 1681.) The trial courts subsequently issued orders rejecting Appellant's remaining arguments and dismissing the Petitions. (R. 1672- 76; id. 1683-88.) On February 4, 2013, Appellants filed Notices of Appeal with this Court. (R. 1677, 1663.) ARGUMENT THE COMPTROLLER'S LIMITED REVIEW OF APPELLANTS' RECORDS WAS INCIDENTAL TO THE MANDATORY AUDIT OF UNITED AND WAS THEREFORE CONSTITUTIONAL United relies upon and hereby incorporates by reference the arguments presented by the New York State Attorney General on behalf of the Comptroller in the Brief for Respondent-Respondent DiNapoli, and, in the interest of judicial economy, will not restate those arguments here. 11 CONCLUSION For all the reasons set forth herein and in the Brief for Respondent- Respondent DiNapoli, the Court should affirm the decision of the Appellate Division, Third Department. Dated: Albany, New York September 23, 2013 ALB 1723302v7 Respectfully submitted, By: Haro N. Iselin Cynthia E. Neidl 54 State Street, 6th Floor Albany, New York 12207 Tel.: (518) 689-1400 Fax: (518) 689-1499 Attorneys for Respondent UnitedHealthCare Insurance Company of New York 12