An appeals court has stricken a $9 million False Claims Act (FCA) verdict for alleged nursing-home neglect, weakening the availability of the “worthless-services” theory as a basis for seeking treble damages against healthcare providers.

Momence Meadows Nursing Center, Inc. appealed a jury verdict in a qui tam case brought by two nurses who alleged quality issues relating to infection and pest control, facility cleanliness, and patient accidents, as well as the alleged concealment of non-compliant care from government regulators.

After instructions from the trial court that low-value services could be “worthless,” the jury imposed the maximum $11,000 civil penalty for each bill submitted, resulting in $19 million of liability.  The jury also awarded the government damages of $3 million, which was trebled under the FCA.  But the trial court entered only the $9 million judgment, finding that the other $19 million in penalties violated the 8th Amendment.

Now the US Court of Appeals for the Seventh Circuit has stricken all damages and vacated the judgment, refusing to characterize sub-standard services as services that carry no value and thus qualify as fraud.  According to the Seventh Circuit: “Services that are ‘worth less’ are not ‘worthless.'”

What is the worthless-services theory?

Under a “worthless-services” theory of FCA liability, quality problems can be so serious as to render the tests paid for by Medicare worthless.  In a seminal case, the Second Circuit explained that this theory applies when “performance of the service is so deficient that for all practical purposes it is the equivalent of no performance at all.”  United States ex rel. Mikes v. Straus, 274 F.3d 687, 703 (2d Cir. 2001).

In the Momence case, the Seventh Circuit agreed and explained that a “diminished value” of services theory does not create “worthless services.”  According to the Seventh Circuit, the trial court erred in applying a lower bar to the services at issue, and the relators had failed to offer evidence “that Momence’s services were truly or effectively ‘worthless.'”

The worthless-services theory is premised on a factually, not legally, false claim, meaning that the provider allegedly billed for healthcare services with no value at all.  As a matter of law the Seventh Circuit found no grounds for applying the worthless-services theory to Momence, and left the question of whether it would everrecognize a worthless-services theory of FCA liability as “best saved for another day[.]”

Although courts typically find that a provider’s services were better than nothing – and thus not worthless – these allegations can be difficult to dismiss, particularly during early stages of litigation.  For example, the Eastern District of Kentucky found that “cursory services” could be “worthless services” in a case in which the government has alleged that an optometrist claimed to have seen 100 nursing home residents in one day.  See United States v. Associates in Eye Care, PSC, No. 13-27-GFVT (E.D. Ky. Feb. 4, 2014).  In denying the defendants’ motions to dismiss, the court found that the “mathematical impossibility” of spending enough time with each patient would support an inference that false claims were submitted.

Beyond the theory of worthless services in Momence, other grounds of liability may have been available if the relators had adequately pursued them.  The Seventh Circuit dismissed theories on appeal that the facility had submitted legally false claims based on the lack of evidence at trial and on waived theories of materiality.  For example, the relators failed to argue before the jury that Momence’s certification of compliance with certain regulations was a condition of payment, which could have served as the basis for a theory of implied-false certification liability.

What does the Momence decision mean?

The Momence decision confirms the line of cases holding that as long as a service is better than nothing, it isn’t a “worthless service” for purposes of liability under the False Claims Act.  Even though whistleblowers will not likely abandon the theory of worthless services in bringing lawsuits against providers, the Momence decision should bolster a defense that the services provided did not amount to fraud.  Further, it may affect how healthcare providers interpret their obligations to return any identified overpayments or the scope of potential FCA liability.

Providers should, however, carefully assess whether they may have potential liability for legally false claims related to quality issues, such as when certifying compliance with Medicare and Medicaid regulations that have conditions of payment related to quality of care.  Although the relators in the Momence case failed to sufficiently develop and support these claims, the Seventh Circuit’s decision did not appear to reject or limit the availability of these alternate approaches to FCA liability.

Read the opinion in United States ex rel. Absher et al. v. Momence Meadows Nursing Center Inc. et al., case numbers 13-1886 and 13-1936, in the US Court of Appeals for the Seventh Circuit

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