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Massive False Claims Act Verdict Reinstated Against a Skilled Nursing Management Company and Its Affiliates

In Short

The Situation: A jury had originally handed down a large verdict in a False Claims Act ("FCA") case that resulted in $347 million judgment. The district court threw out that verdict, however, and the relators appealed.

The Result: The U.S. Court of Appeals for the Eleventh Circuit reinstated the vast majority of the verdict. Among other things, it held that the jury could have properly determined that management company "caused" the submission of false claims and that the relator could continue to bring an FCA suit even after selling a portion of her interest in the litigation to a litigation financing firm. It also held that certain misstatements were "material" as required to sustain an FCA claim. 

Looking Ahead: This case puts those involved in the management or operations of a provider on notice that they too can be held liable for the alleged False Claims of the billing entity. Unfortunately, health care has become high risk for whistleblower claims; enhanced compliance procedures are advised.

A $347 million judgment based upon what a federal district court termed "a handful of paperwork defects"? The healthcare industry had previously heaved a sigh of relief when the district court in U.S. ex rel. Ruckh v. Salus Rehabilitation, Inc. threw out the jury's verdict. Yet on appeal, the Eleventh Circuit recently reinstated the lion's share of that verdict, including against the skilled nursing facility's affiliated management company.

The allegations were that a skilled nursing facility operator and its affiliates had submitted, or caused to be submitted, false claims to Medicare via (i) upcoding by submitting claims reflecting higher levels of therapy (Resource Utilization Groups) than defendants actually provided; and (ii) "ramping" by providing more therapy to patients during government assessment periods, such that facility billing was increased. The Department of Justice declined to intervene, but the relator proceeded with the case. Following a month-long trial, the jury found the defendants liable for both Medicare and Medicaid fraud, and based upon the jury's single damages number of approximately $115 million, the district court entered a $347 million judgment of damages and penalties, but then granted judgment notwithstanding the verdict, holding the relator had not shown the allegedly false statements were material, or that the entities' management company had actually "caused" the submission of any false claims.

On appeal, the Eleventh Circuit addressed several key points. First, it adopted a proximate cause standard in determining whether a company had "caused" false claims to be presented. The court then relied upon testimony that the management company had "reprimanded employees constantly for failing to meet [particular] budgets" and had emphasized in meetings that "we needed to get the [codes showing the severity of the level of treatment] higher" to hold that the management company was liable for knowingly "causing" the submission of false claims.

Second, it rejected defendants' argument that entering into a litigation financing arrangement eliminated the relator's standing, both on constitutional and statutory grounds. The court reasoned that the FCA did not explicitly prohibit such agreements. Furthermore, the relator sold "less than 4% of her share of the judgment originally entered by the district court," and thus, she continued to have a sufficient interest in the litigation to represent the interests of the United States.

Third and finally, the Court of Appeals held that the relator's evidence had satisfied the FCA's "demanding" materiality standard for the Medicare claims, given that upcoding and ramping would directly affect the reimbursement the defendants received for the alleged care. In contrast, however, the Eleventh Circuit affirmed the district court's judgment notwithstanding the verdict with respect to Medicaid claims―there, the relator had contended that the defendants had submitted false claims to Medicaid when they allegedly failed to prepare and maintain comprehensive care plans for their residents, as required by Florida Medicaid regulations. Yet defendants had self-disclosed such conduct to Florida Medicaid, and there was no evidence that Medicaid officials refused or recouped payment at any point on the basis of such a violation. The court thus remanded with instructions for the district court to reinstate the jury's verdict on the Medicare claims in the amount of $85,137.095 and to enter judgment on those claims after applying trebling and statutory penalties.

Conclusion

The Eleventh Circuit's decision reflects the risk to not only the entity submitting reimbursement claims, but also those who play a role in their management. While promoting sound business and profitable operations is appropriate, crossing a line that could be viewed as encouraging overbilling could lead to significant liability. The sheer size of this judgment also raises potential concerns for private equity and other investors in health care entities, who should put procedures in place to avoid such exposure. And it again illustrates that creative and aggressive relators continue to pursue FCA matters, often with the backing of litigation financing companies or other investors.

Three Key Takeaways

  1. The FCA presents risk not only to those who present claims to the federal government, but also those who "cause" such claims to be submitted, including in certain cases managing companies or affiliates.
  2. Monitoring business performance is appropriate, but private equity funds, investors, and other managers of health care providers have a significant interest in avoiding the appearance of encouraging improper billing.
  3. FCA trials are relatively rare precisely because of the potential judgments at stake, such as the nine-figure one in this case.

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