Extendicare Health Services Inc. (Extendicare) has agreed to pay $38 million to settle allegations that the company improperly billed Medicare and Medicaid for “worthless services” in violation of the False Claims Act. According to a press release from the Department of Justice, this is its largest “failure of care” settlement.

Although federal courts have held that “worth less” claims are not “worthless,” this settlement forecasts that the government and whistleblowers will continue to pursue recovery for alleged “worthless services,” even if the arguments may not prevail at trial or on appeal.

Is the Momence decision undercut by the Extendicare settlement? 

The settlement—in which Extendicare made no admission of liability—comes just two months after the Seventh Circuit overturned a $9 million jury verdict against Momence Meadows Nursing Inc. (Momence) in a similar qui tam case alleging substandard care, which we covered in a briefing earlier this year. In Momence, the Seventh Circuit concluded that services that are “worth less” are not “worthless” for the purposes of the False Claims Act (FCA).

Although the Seventh Circuit’s decision in Momence didn’t preclude the possibility of later recognizing a “worthless services” theory of FCA liability, it bolstered the interpretation that some service doesn’t count as a worthless service for the purposes of FCA liability.

The government, however, appears willing to aggressively pursue the theory, as shown by its $38 million settlement with Extendicare. The plaintiffs’ bar may take the settlement as a signal to continue to file qui tam lawsuits alleging false claims for worthless services or other quality-of-care claims, which may settle before judicial scrutiny to avoid the high costs of litigation.

The Extendicare settlement

Extendicare, which operates more than 140 nursing facilities in 11 states, settled allegations that the company improperly billed the government for substandard skilled nursing services and for medically unreasonable and unnecessary rehabilitation therapy services.

In the press release from Extendicare, the company “has denied engaging in any illegal conduct and has agreed to the terms of the final settlement without any admission of wrongdoing.”

The federal government will receive $32.3 million and the eight state Medicaid programs will receive $5.7 million from the Extendicare settlement. The two relators who brought separate cases against Extendicare will receive $1.8 million and $250,000, respectively.

The cases are United States ex rel. Lovvorn v. EHSI, et. al. C.A. 10-1580 (E.D. Pa) and United States ex rel. Gallick et al., v. EHSI et al., C.A. 2:13cv-092 (S.D. Ohio).

What are “worthless services” under the FCA?

This is the $38 million question.

In a seminal case, Mikes v. Straus, the Second Circuit explained that FCA liability could exist under a  “worthless services” theory if “the 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).

Determining if the quality of a service is so bad that billing the government for that service constitutes fraud, however, has yielded different results in federal courts.

For example, in 2010, an Oklahoma federal judge ruled that no reasonable jury could conclude that a mental health facility billed Medicaid for “worthless services” in a case that alleged patients at the facility suffered problems such as dehydration, pressure sores, and weight loss due to poor care, with one patient dying as a result. The judge concluded that, because at least some care was provided, there was nothing fraudulent about submitting a claim for that care to the government. United States v. AHS Tulsa Reg’l Med. Ctr. LLC, 754 F. Supp. 2d 1270, 1287 (N.D. Okla. 2010).

In contrast, in 2014, a Kentucky federal judge ruled that “cursory services” could be deemed worthless in a case that alleged that an optometrist billed the government for services for as many as 100 nursing home residents in a single day. The judge concluded that it was a “mathematical impossibility” to care for that many patients in a day, which was sufficient to support a claim that billing for those services was fraudulent. United States v. Associates in Eye Care, PSC, No. 13-27-GFVT (E.D. Ky. Feb. 4, 2014).

Especially as quality-of-care standards become conditions of payment by Medicare – not only conditions of participation in Medicare – providers face the risk of FCA allegations related to claims for alleged substandard care.