California District Court of Appeal’s Opinion in People ex rel. Allstate Ins. Co. v. Discovery Radiology Physicians, P.C. Makes the MRI Brokering Business Model Illegal in California
For many involved with diagnostic radiology businesses that cater to personal injury and workers’ compensation applicant attorneys in California, the way they conduct business will need to undergo a significant change after a recent California appellate decision in People ex rel. Allstate Ins. Co. v. Discovery Radiology Physicians P.C. (2023 Cal.App.LEXIS 618, August 15, 2023).
In a unanimous opinion written by Justice Lee Smalley Edmon, the Second District Court of Appeal reversed Judge William F. Fahey of the Los Angeles Superior Court, ruling that Allstate sufficiently alleged MRI “brokering” schemes in both cases under California’s insurance fraud qui tam statute, the Insurance Frauds Prevention Act (IFPA),1 and the Unfair Competition Law (UCL).2
The appeal arose from two lawsuits filed by Allstate in 2020. While not identical, both lawsuits alleged that a layperson “broker” created radiology practices with fictitious business names that sounded like professional radiology practices; solicited and accepted the referral of patients from attorneys; controlled all significant aspects of the business; falsely held out licensed physicians as owners of the radiology practices; entered into contracts with diagnostic facilities and radiologists to administer and interpret MRIs at a low cost; steered patients to the contracted facilities and radiologists in exchange for kickbacks; prepared false, fraudulent, or misleading bills that made it appear that the broker-created business administered and interpreted the MRI studies even though it did not; and significantly inflated the actual cost of the services rendered, knowing that the inflated bills would be presented to insurers in support of claims.
Allstate alleged that written contracts between the broker on the one hand and the diagnostic facilities and radiologists on the other gave the broker complete control over all medical aspects of the practice, including the selection of diagnostic radiology equipment; selection of MRI facilities to which the claimants were referred; selection of physicians to read and interpret MRIs; preparation of billing statements; determination of CPT codes and corresponding charges; collection of monies paid by carriers; and distribution of profits.
Allstate further alleged that although the broker was out of pocket only about $200 per MRI—with about $175 going to the MRI facility that administered the MRI and about $25 going to the teleradiologist—the broker, through the personal injury attorneys, billed Allstate close to $2,000 per MRI. The grossly inflated invoices for the MRI services ensured that the broker would realize a substantial profit for doing nothing more than acting as a “middleman” in referring personal injury claimants to medical providers, even if the carrier or the attorney paying the bill on a lien paid less than the full billed amount.
The defendants in the two lawsuits challenged the allegations by filing demurrers to Allstate’s complaints, claiming that the conduct alleged was legal and thus not actionable under the IFPA or UCL. The trial court agreed with the defendants, sustained the demurrers without leave to amend, and dismissed Allstate’s lawsuits. Judge Fahey found that the defendants’ conduct as alleged did not violate California law, that the conduct was not actionable under the IFPA or UCL, and that Allstate had not pleaded its fraud-based allegations with sufficient specificity. Justice Edmon and the Second District Court of Appeal plainly disagreed with the lower court, reversing Judge Fahey’s order dismissing the actions and ordering the court to overrule the demurrers, thereby reinstating Allstate’s lawsuits.
In the published opinion,3 Justice Edmon asked two important questions raised by the allegations: “(1) Are the business models alleged in the amended complaints unlawful? (2) If the alleged business models are unlawful, do they give rise to causes of action under the IFPA and UCL?” To each, the appellate court answered “yes.” The Court found that Allstate alleged valid claims against each defendant for engaging or assisting in the unlicensed practice of medicine in violation of California’s Medical Practices Act, based on the layperson broker’s control over the provision of diagnostic radiology services. The Court rejected defendants’ position that the practices alleged are “nothing more than a permissible business model.”
Observing that a “claim need not contain an express misstatement of fact to be actionable under California Penal Code section 550 and Insurance Code section 1871.7,” the appellate court relied on two prior IFPA cases—People ex rel. Monterey Mushrooms, Inc. v. Thompson (2006) 136 Cal.App.4th 24, which addressed the unlicensed practice of medicine, and People ex rel. Allstate Ins. Co. v. Suh (2019) 37 Cal.App.5th 253, which addressed the unlicensed practice of law—concluding that both support the proposition that so-called “structural fraud” can give rise to IFPA and UCL claims.
The appellate court also reaffirmed the requirements for finding liability under the IFPA: “… these sections only require that a person knowingly, and with intent to defraud, ‘(1) present a claim that is false or fraudulent in some respect, (2) present, prepare, or make a statement containing false or misleading information about a material fact, or (3) conceal an event that affects a person’s right or entitlement to insurance benefits.’” In concluding that Allstate’s allegations give rise to a cause of action under the IFPA, the Court relied on the standard set forth in State ex rel. Wilson v. Superior Court (2014) 227 Cal.App.4th 579, 601— “[a]n insurance claim is fraudulent under [Penal Code] section 550 and [Insurance Code] section 1871.7, subdivision (b), when it is ‘characterized in any way by deceit’” or “result[s] from deceit or conduct that is done with an intention to gain unfair or dishonest advantage.”
The business model alleged in Allstate’s amended complaints continues to be widely implemented by unlicensed persons across the United States, providing support – albeit fraudulent support – for personal injury and workers’ compensation claims. The inflated and fraudulent bills prepared by unlicensed brokers and lay operators of purported radiology practices are regularly presented to insurance companies in support of claims to fraudulently increase special damages and ultimately to increase the claim or lawsuit’s settlement value.
The Discovery Radiology Physicians opinion should have widespread impact on persons involved in the ownership, operation, and control of radiology practices catering to the needs of attorneys and chiropractors, as well as insurers and other payers who may receive bills for services provided pursuant to this model. It should likewise impact attorneys who use MRI brokers to fraudulently inflate the value of claims by referring their clients to such brokers. The impact of the opinion will be most profound when it comes to unlicensed laypersons who own, operate, or control purported diagnostic radiology practices; MRI brokers; legitimate diagnostic radiology facilities that contract with brokers or their management companies for the referral of patients; and radiologists who enter into agreements with unlicensed persons referring studies for interpretation.
On the payer side, auto carriers handling bodily injury, uninsured motorist, underinsured motorist, and medical payments claims in California should critically review and reassess investigation protocols regarding MRI bills presented in support of claims, as well as criteria for Special Investigation Unit referrals involving MRI bills and standards for evaluation upon discovering the illegal MRI brokering model in claims. Workers’ compensation carriers likewise should investigate the legitimacy of MRI bills and liens and utilize lien consolidation actions as a method for both obtaining discovery and reaching global resolution of pending bills and liens.
Knox Ricksen LLP, with offices in the San Francisco Bay Area, Los Angeles, and Texas, represents whistleblowers and victims of fraud, including insurance carriers and other payers in qui tam and other healthcare fraud-related litigation. It represents Allstate in the Discovery Radiology Physicians lawsuits and appeal.
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[1] The IFPA, codified at California Insurance Code section 1871.7, enables any interested party to bring suit for civil penalties and assessments against persons engaged in running, capping, and steering, or violation of the provisions of California’s insurance fraud criminal statute, Penal Code section 550. Under section 1871.7, the plaintiff sues on behalf of the State of California to recover civil penalties of no more than $10,000 and no less than $5,000 per claim in which violation of section 1871.7(a) or Penal Code section 550 is proven. In addition, the plaintiff is entitled to recover up to three times the amount claimed in those claims in which violations occurred. Per the terms of the statute, any recovery is shared with the State of California, after the plaintiff recovers its losses, attorneys’ fees, and costs.
[2] California’s UCL, codified at California Business and Professions Code section 17200 et seq. prohibits any unlawful, unfair, or fraudulent business act or practice.
[3] Published or “citable” opinions of the appellate courts are opinions ordered published in the Official Reports and may be cited or relied upon by other courts and parties. This opinion currently has the status of a “slip” opinion, which is an as-filed version of an opinion certified for publication or ordered published; it does not reflect enhancement, editing, and correction for the Official Reports.