Nursing Home “Worthless Services” Theory Can’t Support FCA Liability

Last month the Seventh Circuit rejected an attempt to predicate False Claims Act liability against a nursing home on a theory of “worthless services.”  In throwing out a $3 million jury verdict awarded to two former nurses-turned-whistleblowers, the court concluded that even if “worthless services” was a viable theory under the FCA, a relator would have to prove that the nursing home’s services were completely worthless and not just substandard.

Background

In United States ex rel. Absher, et al. v. Momence Meadows Nursing Center, Inc., Vanessa Absher and Lynda Mitchell brought a qui tam suit under the FCA against their former employer, Momence Meadows Nursing Center, Inc., and its owner, Jacob Graff.  Momence provided long-term care in Kankakee County, Illinois, and Graff was responsible for implementing policies related to the management of the facility.  During the time of the alleged acts, most of the resident-patients in the facility were covered by Medicare or Medicaid, which would pay Momence on a flat per diem basis.  Relators Absher and Mitchell worked as nurses at the facility at different times from between December, 1997 and February, 2003, with Absher resigning on February 8, 2003, and Mitchell being terminated later in the same month.

The relators sued Momence in September 2004, alleging that the nursing home had submitted “thousands of false claims to the Medicaid and Medicare programs” violating the FCA and the Illinois Whistleblower Reward and Protection Act.  According to the complaint, Momence’s claims for reimbursement were “false” because the services provided were essentially “worthless” due to the allegedly horrible standard of care and hygiene provided to the nursing home’s residents.  The former nurses also claimed that the facility retaliated against them for raising the standard of care issue through actual and constructive termination of their employment.  Although the Government declined to intervene in the case, the relators pressed forward with their suit and prevailed at trial.  A jury awarded the relators $3 million in compensatory damages (subject to trebling), determined that Momence should be fined $19 million and found that the nursing home had engaged in retaliation, resulting in additional six-figure awards for each relator.  The district court set aside  the fines as “excessive” and both sides appealed with the Government filing an amicus brief in support of the relators.

The Seventh Circuit Decision

After determining that the relators were an “original source”of the information and, therefore, that the district court had jurisdiction over the matter, the Seventh Circuit disassembled the relators’ case in toto.  The court first addressed the relators’ “worthless services” theory.  While acknowledging that the Second, Sixth, Eighth and Ninth Circuits had adopted the worthless services theory, the court was skeptical that FCA liability could be predicated on such a theory, viewing instead that evidence of worthless services could be used to support FCA liability under a false certification theory.  Nonetheless, the court found that even if a FCA suit could be based solely on a worthless services theory, the services provided to Momence’s residents would have had to have been completely “worthless” and not just poor or substandard:  “a ‘diminished value’ of services theory does not satisfy this standard.  Services that are ‘worth less’ are not ‘worthless’.”  Rejecting the trial court’s instructions that “services can be worthless . . . even if the nursing facility in fact provided some services to the patient,” the Seventh Circuit noted that Momence was still operating and providing services to its residents, despite various regulatory actions by government bodies.

The court then addressed the relators’ fallback “false certification” argument that, by accepting payments from the Medicare and Medicaid programs while providing its residents with substandard care, Momence falsely certified that it was in compliance with the federal healthcare programs’ regulations and requirements.  Unlike “worthless services,” the Seventh Circuit did not question the relators’ ability to predicate FCA liability on either an express or implied false certification theory.  However, the court found that the relators had failed to present either false certification theory to the jury and that even if they had preserved “the false certification theory of FCA liability based on the [provided] certifications . . . the relators’ case . . . still fails because of a fatal lack of evidence.”  According to the court, it was incumbent upon the relators to identify (even on an approximate basis) how many forms contained false certifications. Finally, while acknowledging that the court in United States. v. Rogan, et al., 517 F.3d 449, 453 (7th Cir. 2008) stated that “[s]tatistical evidence should suffice” in approximating the number of false certifications, the court noted that Rogan involved kickback and Stark Act violations, which by their nature rendered all the forms submitted to the Government “false.”

Observations

Under Absher, it is clear that no relator could realistically be expected to prove that a nursing home facility’s services were 100% worthless, making a FCA suit based on such a theory a non-starter.  Moreover, the Absher court raised the bar for would-be relators in establishing FCA liability on an express false certification theory as well, noting that a relator would have to quantify with some degree of certainty how many forms were falsely certified to the Government — even where the facility was at fault!  “A defendant’s wrongdoing does not shift the burden of proof to the defendant under the FCA,” citing United States, ex rel. Crews v. NCS Healthcare of Illinois, Inc., et al., 460 F.3d 853, 857 (7th Cir. 2006).  Of course, while it didn’t make a difference at trial, it probably didn’t help the relators’ cause that Absher’s own mother was a resident at Momence from 1995 – 2002 (i.e., during four of the years covered by the relators’ suit).

As we have observed in previous posts, federal appellate courts are often reluctant to permit the FCA to be utilized by relators and their counsel as a vehicle for regulatory enforcement.  See e.g., U.S. ex rel v. Rostholder, et al., v. Omnicare, et al., 745 F.3d 694 (4th Cir. 2014) (rejecting a relator’s FCA claim based on violations of the FDA’s Good Manufacturing Practices (GMP)).  In Absher, the Seventh Circuit could have adopted the worthless services theory (as a few other appellate courts have done) and still arrived at the same conclusion with respect to Absher’s and Mitchell’s claims. However, it seems clear that, like Rostholder, the court wanted to make the point that the FCA was not a “catch-all” remedy for regulatory failures. Indeed, while rejecting the relators’ false certification arguments, the court noted that “under the relators’ theory, even a single regulatory violation would be a condition of any and all payments subsequently received by the facility [and trigger FCA liability] inasmuch as the regulators could terminate the facility for practically any deficiency.  Such a result would be absurd” (emphasis added).

If more courts were to adopt Absher’s reasoning, it’s going to be tough sledding for relators and their counsel in using the FCA against hospitals, nursing homes and similar facilities.  In the absence of kickbacks and/or a decision by the Government to intervene, the best course of action for relators and their counsel will be to cut their losses and dismiss.

About José P Sierra

José Sierra is a partner at Laredo & Smith, LLP, in Boston, which provides respected advice and creative representation in business litigation, white collar criminal defense, government investigations, corporate compliance, and business and employment law. Prior to joining the Firm, Mr. Sierra was a principal at Fish & Richardson. Previously, Mr. Sierra was senior vice president, chief compliance and ethics officer for Sepracor Inc., and Kos Pharmaceuticals, and was legal director at Schering-Plough Corporation, and an assistant U.S. attorney in the Newark, NJ U.S. Attorney's Office.

Mr. Sierra's practice focuses on white collar criminal defense, government investigations and corporate compliance. Contact him at 617-443-1100 or via email.

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