In light of the recent New Jersey Supreme Court decision, Allstate Insurance Company v. Northfield Medical Center, dental service organizations (“DSOs”) in New Jersey should take extreme caution when structuring their business arrangements.

In light of the recent New Jersey Supreme Court decision, Allstate Insurance Company v. Northfield Medical Center, dental service organizations (“DSOs”) in New Jersey should take extreme caution when structuring their business arrangements. The Allstate decision, considered in connection with New Jersey State Board of Dentistry’s regulations and an amicus brief filed by the New Jersey Dental Association in connection with the case, signal strict limitations on management arrangements between dental practices and DSOs, especially with regard to “captive agreements” commonly employed by DSOs to retain control over dental practices otherwise owned by licensed dentists.  Even more significant, however, are the potentially severe and costly criminal and civil penalties that could result from violating these regulations.

Allstate Insurance Company v. Northfield Medical Center

On May 4, 2017, the New Jersey Supreme Court issued its decision in the long-running case of Allstate v. Northfield, in which the court strongly disapproved of a business arrangement between a non-physician owned management company and a physician-owned medical practice.  The arrangement at issue provided for the provision of certain administrative services by a management company owned and operated by a chiropractor, J. Scott Neuner, on behalf of a separate medical corporation which Dr. Neuner had formed to be owned, at least on paper, by a licensed physician.  Dr. Neuner then required the physician-owner of the medical practice—who never actually practiced medicine on behalf of the practice—to execute various “captive” documents, which effectively allowed the management company to remove and replace the physician-owner at will.  In addition, the management company and medical practice entered into several interlocking contracts whereby all of the profits of the medical practice were diverted to the management company through leases and service agreements that required the practice to make payments to the management company at rates well above-market.

The court in Allstate found that this dual-entity structure was a mere “sham” intended to evade well-established restrictions prohibiting a chiropractor from maintaining any majority ownership and control of a medical practice.  The court held that the Dr. Neuner, and his advisors who assisted him in developing the business structure, intentionally created the practice to appear as if it was physician controlled while at the same time entering into side agreements to ensure that this was not actually the case.  Although Dr. Neuner was granted immunity in exchange for his testimony against his advisors who assisted him in developing the business structure, the court determined that the arrangement violated the New Jersey Insurance Fraud Protection Act (IFPA), resulting in a $4 million judgment in Allstate’s favor.

Implications on New Jersey Dentists and DSOs

New Jersey’s strict regulations governing the practice of dentistry have long restricted the ability of non-dentists to be involved in the ownership of a dental practice.  In addition to expressly restricting the ownership, control or supervision of a dental practice by a non-dentist, New Jersey’s Dental Board regulations also restrict non-dentists from receiving compensation that is contingent upon the profits of a dental practice.  This is the case even when non-dentists have provided legitimate administrative or other permitted services that do not require licensure.  Dental practices and associated non-dentists that fail to comply with these restrictions open themselves up to potential demands for reimbursement of previously-paid claims from insurance companies as well as discipline by the Dental Board.

Although Allstate considered regulations promulgated by the New Jersey Board of Medical Examiners in connection with a chiropractor’s ownership of a medical practice, its findings make it clear that individuals who intentionally circumvent State regulations may also be subject to significant civil and criminal penalties under the IFPA.  While non-dentists can still provide legitimate administrative management services through DSOs, such arrangements must be carefully tailored to ensure that those DSOs do not exercise any control or dominion over the practice.  Though not intended to be an exhaustive list, below are several factors to consider when structuring arrangements with DSOs in New Jersey:

• Any voting rights or ownership interest in a dental practice must be owned by a dentist licensed to practice dentistry in the State of New Jersey.

• A DSO should not make above-market loans to the dental practice. The dental practice should pay fair market value for all services provided by the DSO.

• The DSO cannot employ any individuals involved in the provision of dentistry nor should it have any duty or right to supervise the patient treatment provided by the practice. All treatment of patients must be provided and overseen by a dentist.

• The DSO should have no authority with respect to the discipline or termination of dentists and other individuals providing dentistry on behalf of the practice.

• The practice should have the right to terminate the management arrangement with the DSO.

• The DSO should not have any right to replace the owner of the dental practice with another dentist.

As made clear from the Allstate decision, the consequences of entering into an improper business arrangement with a DSO in New Jersey can be risky, costly, and publicly damaging.  DSOs in states other than New Jersey, though not governed by Allstate, should also consider whether they are subject to similar restrictions and potential consequences. Before proceeding with any DSO arrangement, whether in New Jersey or otherwise, you should speak to a knowledgeable and experienced attorney who can help you navigate the various legal requirements.