Fee-Splitting Under Education Law § 6530(19): Courts Look Beyond the Face of the Agreement

Key Takeaways

• In South Shore Neurologic v Mobile Health, the Second Department found a prima facie showing that a commercial relationship was an unlawful fee-splitting arrangement under Education Law § 6530(19) and 8 NYCRR 29.1(b)(4).
• The proof: documents and deposition testimony showing certain contracts were a pretext to justify receipt of one third of the profits of South Shore’s MRI practice.
• Courts will look past the formal structure of management and service contracts to their economic substance.
• The net effect of the fee-sharing arrangement was left undecided — but the doctrine transcends no-fault and surfaces wherever a payor wants out of a contractual obligation.

In New York’s complex legal landscape, disputes over contractual arrangements often extend far beyond their apparent scope. Fee-splitting arrangements between healthcare providers have become a particular area of scrutiny, especially when parties seek to avoid contractual obligations. The intersection of professional regulations and commercial relationships creates unique challenges that courts must navigate carefully.

The South Shore Neurologic case demonstrates how allegations of improper fee arrangements can surface in various contexts, not just traditional no-fault insurance disputes. This principle has broader implications for healthcare providers who structure their business relationships, particularly when those arrangements might be challenged as pretextual. Understanding these dynamics is crucial for practitioners dealing with Mallela defenses and related challenges.

The Decision

Jason Tenenbaum’s Analysis:

South Shore Neurologic Assoc., P.C. v Mobile Health Mgt. Servs., Inc., 2014 NY Slip Op 06963 (2d Dept. 2014)

Self-referrals and fee splitting can garner attention whenever any payor wishes to avoid a contractual or quasi-contractual obligation. It transcends no-fault. This one looks interesting:

“South Shore established its prima facie entitlement to judgment as a matter of law declaring that the commercial relationship constituted an unlawful fee-splitting arrangement in violation of Education Law § 6530(19) and 8 NYCRR 29.1(b)(4) by submitting documents and deposition testimony showing that certain contracts were a pretext to justify the appellants’ receipt of one third of the profits of South Shore’s MRI practice ”

The net effect of this fee sharing arrangement was left undecided according to the Appellate Division.

The Legal Framework

New York’s prohibition on fee-splitting sits at the intersection of professional discipline and commercial law. Education Law § 6530(19) defines professional misconduct to include permitting a person who is not licensed to share in the fees for professional services, and 8 NYCRR 29.1(b)(4) makes fee-splitting with unlicensed entities unprofessional conduct across the licensed professions. The policy is straightforward: medical decisions should be driven by licensed professionals’ judgment, not by unlicensed investors holding a percentage of the revenue.

The recurring evasion is the management agreement. An unlicensed management company contracts to provide billing, equipment, marketing, or administrative services to a professional corporation — and the “fee” for those services is calculated as a percentage of the practice’s revenue or profits. On paper, that is a vendor relationship. In substance, it can be a profit split with an unlicensed party. South Shore shows what happens when the paper does not survive scrutiny: documents and deposition testimony established prima facie that the contracts were a pretext for the appellants to take one third of the profits of the MRI practice.

This substance-over-form inquiry is the same analytic move the Court of Appeals made in State Farm v Mallela, which held that carriers may withhold no-fault benefits from medical professional corporations that are fraudulently incorporated — nominally owned by a licensed physician but actually controlled by unlicensed parties. Whether the question is corporate control or fee structure, courts will look beyond the face of the agreement to who actually receives the economics of the practice. For the related question of how regulatory gaps affect these defenses, see the firm’s discussion of Insurance Law 5109 and the Mallela defense.

Notably, South Shore was not a no-fault case at all — it was a declaratory judgment fight between the parties to the arrangement itself. The Appellate Division affirmed the declaration that the relationship was unlawful while leaving the net effect of the fee-sharing arrangement undecided. Establishing illegality and determining its consequences are separate steps.

Why This Matters for Providers, Carriers, and Their Counsel

For medical providers, the case is a structural warning. Percentage-of-revenue and percentage-of-profit management compensation invites a fee-splitting challenge — and the challenger may not be a carrier. Here, it was effectively the other side of the deal seeking a judicial declaration. A provider whose management arrangement is later declared unlawful faces professional misconduct exposure, contract unenforceability arguments, and ammunition for every payor it bills.

For no-fault carriers, South Shore enlarges the toolkit around the Mallela defense. Fee-splitting evidence — pretextual contracts, profit-percentage compensation, deposition testimony about who really controls the money — is exactly the discovery that supports corporate-structure defenses to assigned no-fault claims. The court’s willingness to label contracts a “pretext” on documents and testimony shows these theories can be proven, not merely pleaded.

For transactional counsel, the drafting lesson is to keep management fees tethered to the fair market value of services actually rendered — flat or cost-based fees, not profit percentages. Contracts written as cover for a profit split tend to read that way at depositions.

Practice Pointers

• Audit the compensation formula. Percentage-of-profits compensation to an unlicensed entity is the single biggest red flag under § 6530(19) and 29.1(b)(4).
• In discovery, chase the money, not the labels. The South Shore showing was built on documents and deposition testimony about where the MRI profits actually went.
• Remember the open question. The Appellate Division left the net effect of the arrangement undecided — winning the illegality declaration does not automatically resolve restitution, enforceability, or disgorgement.
• Carriers: fold fee-splitting inquiries into Mallela-style examinations under oath and corporate-structure discovery.

Frequently Asked Questions

What is unlawful fee-splitting in New York medicine?

Education Law § 6530(19) and 8 NYCRR 29.1(b)(4) make it professional misconduct for a licensed professional to share fees for professional services with an unlicensed person or entity. Arrangements that pay an unlicensed company a percentage of practice revenue or profits — rather than fair value for actual services — are the classic violation.

Can a management agreement with a medical practice violate the fee-splitting rules?

Yes. Courts examine the substance of the arrangement, not its label. In South Shore Neurologic v Mobile Health, documents and deposition testimony showed the contracts were a pretext for an unlicensed party to take one third of the MRI practice’s profits, establishing a prima facie fee-splitting violation.

How does fee-splitting relate to the Mallela defense in no-fault cases?

Both doctrines police unlicensed control of medical practices. Mallela lets carriers withhold no-fault benefits from fraudulently incorporated providers; fee-splitting evidence — pretextual contracts and profit-sharing with unlicensed entities — is often the proof that supports that corporate-structure defense.

Related Resources

• Interesting Mallela case from the Appellate Term, Second Department
• Mallela limited to Mallela
• Ortho Med Supply v Mercury, Hidden Complexities in No-Fault Insurance Law
• Fraudulent procurement defense precluded — the firm’s fraudulent procurement cluster hub
• Browse the firm’s Legal Encyclopedia for more no-fault doctrine
• No-fault defense practice page