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Press Release: The False Claims Act case against HCR ManorCare moves into its final phase as Carlyle surrenders Control of its Equity Interest to QCP amid claims of financial insolvency

Press release – June 29, 2017
The Law Office of Jeffrey J. Downey

On June 11, 2017 the Washington Post reported that the Carlyle Group, a private equity powerhouse, was ceding control of the HCR ManorCare to Quality Care Properties, a publicly traded REIT, that was spun off by HCP. HCP had purchased the ManorCare properties from Carlyle for 6.1 billion in 2010. The Post also reported that various corporate executives had recently left the company, including James Pagoaga, the VP and head of Rehabilitation. Earlier in the month, the Post reported that the CEO of ManorCare, Paul Ormond, was seeking 100 million in deferred compensation as part of the original takeover deal, even though the company was allegedly in dire financial straits. QCP reported that it could not pay that type of money to Ormond and acknowledged that ManorCare was still being prosecuted by the United States Department of Justice for alleged Medicare fraud.

As the parties complete discovery over the summer, summary judgment motions are set to be argued on October 13, 2017, after which this matter will be set down for a trial on the merits. “While we can expect ManorCare to pursue various Motions to try and have the case dismissed before trial, that is very unlikely given the excellent record that the government has painstakingly built in this case,” explains Jeffrey J. Downey, attorney for the lead Relator in the case. Recent federal case decisions denying summary judgment in similar cases, most recently U.S, et rel Ruckh v. CMC II, LLC (Law 8:11-cv-1303-T-23TBM (M.D. Florida) and upholding statistical modelling used by the government to estimate damages, make it even less likely that ManorCare will avoid a trial on the merits.

It is no coincidence that top executives are jumping ship, but it’s not clear if they’ll have the benefit of their golden parachutes. QCP, as a publicly traded company, must disclose decisions that could have a material impact on the shareholders. Nor is bankruptcy a viable action. Under the False Claims Act a company cannot discharge a judgment in bankruptcy where it is determined that they engaged in intentional fraud. United States v. Spicer, 155 B.R. 795 (Bankr. D.D.C. (1993), aff’d 57 F.3d 1152 (D.D.C. 1994). Recent news reports suggest that QCP was pursuing a private reorganization that would avoid bankruptcy of its largest tenant. Now that Carlyle is out of the picture, QCP has more flexibility in reaching a resolution of the Justice Department prosecution before a potentially catastrophic trial, which could further erode ManorCare’s already tarnished reputation.

Companies being prosecuted under the False Claims Act for Medicare fraud face treble damages and significant penalties if found liable. Before the change in administration, the Obama Justice Department had resolved several high-profile Medicare fraud cases against large nursing home chains. In January 2016, the government announced a $133 million settlement with Rehab Care and Kindred Healthcare. The case alleged that Defendants falsely inflated therapy reimbursement claims to Medicare, based on unnecessary therapy and therapy that was not delivered. That same month, the Justice Department reached a $52.7 million dollar settlement with Genesis Healthcare, resolving four Justice Department investigations including improper billing of hospice services violating Medicare rules for physical therapy at two facilities.

On October 24, 2016, the Justice Department announced a $145 million settlement with Life Care Centers of America. The Life Care case was similar to the ManorCare in several respects. They both involved chains with over 200 nursing homes. Both chains allegedly engaged in a corporate-wide scheme to up-code therapy billing levels by pushing patients into the Ultra High Medicare reimbursement category. Both cases were defended by the same law firm.

When the Life Care case settled, the government noted that the $145 million dollar settlement was based on “ability to pay.” “When settlements are reached on the basis of ability to pay, that often reflects the reality that while actual damages were higher, the government chose not to drive the company out of business” explains Downey. In Life Care, payments were spread out over the course of three years to give the company time to pay the settlement.

“While Life Care provides some guidance on potential settlement value for these types of cases, there are also some important differences,” explains Downey. When we compare the government’s complaints in the two cases, it appears clear that ManorCare had higher RUG levels and more Medicare spend during the relevant damage period. The RUG level is the level of billing that ManorCare allegedly up-coded to reach the Ultra High RUG level (the highest level of reimbursement available to Medicare patients receiving skilled therapy). For example, the government alleged that by 2008 ManorCare billed 81.3% of its rehab days at the Ultra high level, compared to Life Care’s rate of 68%. During an approximate 6 year damage period, ManorCare billed over 6 billion for inpatient SNF services, compared to Life Care’s 4.2 billion.

ManorCare also has significantly higher revenues than Life Care, reducing the probability that any settlement would be discounted because of ManorCare’s purported inability to pay. In 2016 ManorCare ranked 74th on Forbes largest 100 companies, generating an estimated $5.3 billion in revenues with over 500 facilities. In October of 2016, the company that owns most of ManorCare’s physical properties, HCP, spun off some 320 properties to a new company, Quality Care Properties (QCP), which will operate as an independent, publicly traded REIT. This spinoff was likely designed to protect HCP from further stock value reductions which, in part, were driven by the government’s investigation and prosecution of HCR ManorCare.

“While ManorCare may be hoping for a better deal with the new administration, that type of wishful thinking is misplaced,” explains Downey. The prosecution of Medicare fraud has always been a bipartisan issue. The False Claims Act was originally enacted by President Lincoln during the Civil War to prevent the theft of government supplies.

Consistent with President Trump’s campaign promise to protect Medicare from waste and fraud, Attorney General Sessions affirmed his unyielding commitment to enforce federal law and specifically the False Claims Act (FCA) during his recent confirmation hearing. Chairman of the Judiciary committee and long term supporter of the FCA, Senator Grassley (R. Iowa), noted that the Act had resulted in the recovery of some 53 billion dollars since 1986. When asked by Senator Grassley if he would vigorously enforce the Act, Mr. Sessions said that he would and explained that he had filed a claim under the Act when he was a private lawyer.

It has saved this Country lots of money. And has probably caused companies
to be more cautious because they could have a whistleblower that would blow
the whistle on them if they try and do something that is improper . . .
I do support that Act.
(Confirmation hearing, Senator Jefferson Sessions)

“I am happy to see that the new administration is going to make Medicare fraud a priority,” explains Christine Ribik, OT, the lead whistleblower in one of the largest cases the government has ever prosecuted against nursing home chains. A former Occupational Therapist at HCR ManorCare in Virginia, Ms. Ribik filed her case back in 2009, at the start of the Obama Administration. In April 2015, the United States unsealed a consolidated complaint against HCR ManorCare and subsidiaries for allegedly submitting false claims to Medicare for rehabilitation services. HCR ManorCare, previously owned by the Carlyle Group, is one of the nation’s largest nursing home providers. On September 4, 2015, the federal judge hearing the case denied ManorCare’s Motion to Dismiss.

“The government has also expended enormous resources to take the ManorCare case through litigation,” explains Downey. The initial investigation was launched over eight years ago and involved the FBI, the DHHS Office of Inspector General, the Delaware Department of Justice, the Florida Attorney General’s Office, the Illinois State Police, the U.S. Attorney’s Office for the Northern and Southern Districts of Iowa, the U.S. Attorney’s Office of Southern District of Ohio, the U.S. Attorney’s Office of the Eastern District of Virginia and the Iowa Dept. of Inspections and Appeals, the National Association of Medicaid Fraud Units, the Ohio Attorney General’s Office, the Maryland Attorney General’s Office and the Michigan Attorney General’s Office. The Justice Department’s prosecution of HCR ManorCare now moves into the final phase of litigation, with a trial likely in 2017 or early 2018. “Given the enormous resources already spent on this case, a Trump administration may seek to beat prior fraud settlements obtained by the Obama Justice Department in similar cases. It should also not be lost on HCR ManorCare that the President is not shy about using the litigation process to pursue his policy objectives and has promised to protect Medicare against fraud,” explains Downey. With an estimated 60 billion a year in fraud involving government programs, the taxpayers expect the fiscal integrity of Medicare to be protected. Given the President’s promised tax cuts, curtailing excess government spending involving fraudulent Medicare expenditures takes on an even greater significance in a Trump administration.

Contact Information: for additional information on the ManorCare case or to learn more about the prosecution of Medicare fraud under the False Claims Act, contact the law office of Jeffrey J. Downey, Esq. 8270 Greensboro Drive, Suite 810, McLean Virginia, 22102, Phone- 703-564-7318, email:jdowney@jeffdowney.com. On the web at jeffdowney.com.

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