On October 10, 2014, the United States Department of Justice (“DOJ”) announced a civil settlement agreement (the “Settlement”) with Extendicare Heath Services, Inc. and its subsidiary Progress Step Corporation (collectively, “Extendicare”) resolving a series of False Claims Act (“FCA”) allegations that Extendicare not only billed Medicare and Medicaid for medically unnecessary rehabilitation therapy services simply to maximize reimbursement, but also provided skilled nursing services so substandard to be considered “effectively worthless.” Beyond the $38 million price tag that Extendicare is required to pay the federal and eight state governments as a result of what the DOJ characterized as the “largest failure of care settlement with a chain-wide skilled nursing facility in the department’s history,” the Settlement contains several intriguing legal features and factual nuances that warrant further consideration and may signal a notable trend in the DOJ’s approach to FCA enforcement for healthcare providers.

Qui Tam Allegations And Beyond
The Settlement is the culmination of two separate qui tam actions filed by a former Extendicare midlevel supervisor and a former Extendicare patient and his son. The midlevel supervisor essentially alleged (with support from emails and contemporaneous meeting notes) that the business component was able to systemically overrule patients’ therapeutic needs by ordering therapists to provide medically unnecessary rehabilitation services in such a manner and frequency to maximize reimbursement under Medicare Part A. United States ex rel. Lovvorn v. Extendicare Health Services, Inc. et al., 2:10-CV-01580, Eastern District of Pennsylvania. The patient’s complaint alleged (with support from an affidavit by an independent treating physician) that, following a stroke, he was ordered by Extendicare physicians to remain in rehabilitative care at a skilled nursing facility months after he had reached maximum recovery, again simply to maximize reimbursement. United States ex rel. Gallick and Gallick v. Extendicare Health Services, Inc. et al., 2:13-CV-0092, Southern District of Ohio.

Significantly, the Office of Inspector General for the United States Department of Health and Human Services (“DHHS OIG”) investigated further into the actual quality of care provided by Extendicare. As evidenced in Paragraph G.1 of the Settlement, the DOJ cited a myriad of additional malpractice-type allegations supporting its contention that Extendicare’s services “were materially substandard and/or worthless because Extendicare failed to provide care to residents that meets federal standard of care and federal statutory and regulatory requirements” (emphasis added). The allegations read like a checklist for a state common law medical malpractice lawsuit and may be expected to give rise to a second round of tort litigation.

The DHHS OIG’s apparent willingness to dig deeper into a quality of care inquiry signals that it is critically important that healthcare providers’ compliance departments thoroughly investigate potential whistleblower allegations, including issues related to quality of care, and report any concerns to the Board of Directors.[1]

The DOJ’s Reliance on “Substandard Care” to Invoke “Worthless Services” Theory
Under the “worthless services” theory of FCA liability, a healthcare provider can be deemed to have submitted a “factually false” claim if it is proven that the provider knew that the services were so deficient that they are effectively worthless. See, e.g., United States ex rel. Blundell v. Dialysis Clinic, Inc., No. 5:09-CV-00710 at pp. 20-21 (N.D.N.Y. Jan. 19, 2011). The Seventh Circuit has recently added that this threshold requires more than evidence of services with a “diminished value”—i.e., truly “worthless” services cannot merely be “worth less.” United States ex rel. Absher v. Momence Meadows Nursing Center, Inc., 764 F.3d 699, 710 (7th Cir. 2014).

On the other hand, “substandard care” allegations generally fall under a separate “legally false” theory and are analyzed to determine whether the healthcare provider submitted an implied false certification. See United States ex. rel. Mikes v. Straus, 931 F. Supp. 248 (S.D.N.Y. 1996). Under this theory, a relator alleges that a healthcare provider’s certifications implicitly and necessarily contain, as a condition for payment, a representation that the healthcare provider has complied with Medicare or Medicaid’s legal and regulatory standards of care. See United States v. NHC Healthcare Corp., 115 F. Supp. 2d 1149 (W.D. Mo. 2000). Notably, courts have been loathe to embrace this “substandard care” corollary to the “implied false certification” theory because “permitting qui tam plaintiffs to assert that defendants’ quality of care failed to meet medical standards would promote federalization of medical malpractice, as the federal government or the qui tam relator would replace the aggrieved patient as the plaintiff.” Mikes, 274 F. Supp. at 700.

Yet, the DOJ adopted the “substandard care” approach in the Settlement. Further, as quoted above, the government seemed to equate two distinct FCA theories of liability when it alleged that Extendicare’s quality of care was “materially substandard and/or worthless.” The Settlement and the DOJ’s announcement further suggest that when certain “essential” Medicare and Medicaid requirements are not met when providing medical services, the government may argue that those services have no value.

This subtle choice of language may signal a strategy on the part of the government that could be concerning to providers. The willingness of the DOJ to recast essentially malpractice allegations as “worthless services” has incredibly broad implications, forecasting perhaps the government’s intention to pursue those claims under a more straightforward “factually false” theory rather than the more nuanced “legally false” theory.

Corporate Integrity Agreements: Additional Costs of FCA Liability
An additional cost of the Settlement that will be borne by Extendicare comes in the form of a five-year Corporate Integrity Agreement (“CIA”). The expansive CIA will require Extendicare to revamp a wide range of compliance protocols, including establishing a new Compliance Officer, Compliance Committee, and Code of Conduct Policy, and establishing certain new staffing requirements. Essentially, Extendicare agreed to build an entirely new compliance function from the ground up.

Further, Extendicare agreed to retain an independent quality monitor to evaluate Extendicare’s internal quality control systems, responses to quality of care issues, proactive steps taken to ensure resident care, compliance with staffing requirements, and more. The Monitor is granted full and immediate access to a wide range of Extendicare documents and records, as well as patients, plus any other data the monitor determines is relevant to fulfilling its duties.  Of particular note, the government’s focus in the CIA is again aimed most directly at their quality of care allegations, as opposed to the overbilling allegations. 

Takeaways from the Settlement
There are several important points to take away from the Settlement: 

• It is important for every healthcare provider to empower its compliance function to impartially referee what may be legitimate disputes between the business and patient-services functions of the business. A compliance department can serve as an important filter between corporate interests and clinical decisions, to avoid even the appearance of improper influence upon nurses and physicians. This approach will also help ensure the compliance department detects potential FCA issues earlier. 
• It is critical for the healthcare provider to conduct a thorough internal investigation once an issue is identified that dives deeper into the allegations. The Settlement clearly shows that the DHHS OIG is willing to do so, and of the $38 million settlement figure, $28 million is based off of quality of care issues that were not part of either whistleblower complaint.
• Healthcare providers need to be vigilant in the government’s or relator’s attempt to cross-pollinate legal theories of liability. Understanding the nuance of the government’s position is critical to a successful litigation strategy. The subtleties of the Settlement demonstrate the DOJ’s willingness to push the envelope--in some respect beyond the relators’ claims. If not vigilant, healthcare providers could essentially be exposed to the equivalent of federalized malpractice lawsuits. 
• While the civil monetary penalty imposed may grab the headlines, there are additional significant costs of resolving FCA liability in the form of CIAs.

Notes:
[1] This is consistent with joint guidance from the American Health Lawyers Association (“AHLA”) and the OIG. See OIG and AHLA, Corporate Responsibility and Corporate Compliance: A Resource for Health Care Boards of Directors, available at: https://oig.hhs.gov/fraud/docs/complianceguidance/040203CorpRespRsceGuide.pdf.