Health Dimensions Rehabilitation, Inc., et al. v. RehabCare Group Inc.

Filing 433

MEMORANDUM AND ORDER IT IS HEREBY ORDERED that the motion for partial summary judgment filed by the Government is DENIED with respect to liability on Count I, and DENIED as moot as it relates to Defendants affirmative defenses, and DENIED without pre judice with respect to the question of the appropriate measure of damages. (Doc. No. 306.) IT IS FURTHER ORDERED that the motion for summary judgment filed by Defendants RehabCare Group East, Inc., and RehabCare Group, Inc., is DENIED. (Doc. No. 310) IT IS FURTHER ORDERED that the motion for summary judgment filed by Defendants Health Systems, Inc., and Rehab Systems of Missouri is DENIED. (Doc. No. 313.) Signed by District Judge Audrey G. Fleissig on 8/30/13. (JWJ)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION

UNITED STATES OF AMERICA ex rel.
HEALTH DIMENSIONS
REHABILITATION, INC.,
Plaintiff,
vs.
REHABCARE GROUP, INC.;
REHAB SYSTEMS OF MISSOURI;
HEALTH SYSTEMS, INC., and
REHABCARE GROUP EAST, INC.;
Defendants.

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Case No. 4:12CV00848 AGF

MEMORANDUM AND ORDER
This qui tam action is before the Court on (1) the motion filed by the United States
for partial summary judgment on liability and Defendants’ affirmative defenses (Doc. No.
306); (2) the (sealed) motion for summary judgment filed by Defendants RehabCare Group
East, Inc., and RehabCare Group, Inc. (jointly “RehabCare”) (Doc. No. 310); and (3) the
(sealed) motion for summary judgment filed by Defendants Health Systems, Inc., (“HSI”)
and Rehab Systems of Missouri (“RSM”) (Doc. No. 313). Relator brought this action, in
which the Government later intervened, under the False Claims Act, 31 U.S.C. § 3729, et
seq. (“FCA”), alleging that Defendants submitted or caused to be submitted to the United
States false claims for payment under the Medicare and/or Medicaid programs, as the
result of a scheme that violated the Anti-kickback Statute (“AKS”). Oral arguments were

heard on the three motions noted above on Thursday, August 22, 2013. For the reasons
set forth below, the motions shall all be denied.
BACKGROUND
HSI is a nursing-home management company. James Lincoln is the majority
owner of HSI, a nursing home management company; of the more than 60 HSI-managed
nursing facilities in Missouri at issue; and of RSM, a company that provided contract
therapy services to residents of the nursing homes. HSI receives a percentage of the gross
revenues of the nursing homes with which it has a management agreement. Tom
Hudspeth is a part owner of RSM.
RehabCare is a provider of therapy to patients at skilled nursing facilities around the
country. In 2003, RehabCare was interested in acquiring “‘in-house’ therapy companies
owned/operated by nursing home owner/operators.” Acquisition of such a company was
contingent upon the concurrent entry into long-term therapy contracts with the nursing
home chain. Generally contracts for therapy services are one-year contracts, terminable
without cause, but RehabCare wanted longer contracts terminable only with cause. In
July 2003, RehabCare proposed acquiring RSM for $7 million, if RSM’s contracts with
HSI could be lengthened to five years, terminable only for cause. An email chain from
September 9 and 10, 2003, between RehabCare and RSM indicates that the parties thought
the deal as proposed might violate the AKS–that by lengthening the contracts from one
year to five and changing the termination provision from termination for any reason to
termination for cause, RehabCare could be perceived as purchasing a guaranteed five-year
stream of revenue. RehabCare did not acquire RSM in 2003.
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In 2004, all of the nursing homes in question entered into new contracts with RSM,
changing them from one year to five years, and providing for termination only for cause.
At oral argument, Plaintiffs acknowledged that they had no evidence that RehabCare was
involved in or advised in 2004 of this change in the form of contracts. In August 2005,
RehabCare, RSM, and HSI restarted negotiations and in February 2006, RSM and
RehabCare entered into a five-year “Subcontract Agreement” that called for RehabCare to
provide the therapy services at HSI-managed nursing homes and RSM to provide
supervision and administrative services. In exchange, RehabCare agreed to pay RSM a
one-time payment of approximately $600,000, as well as a percentage (10% and 15%) of
the profit from the therapy services that would be performed by RehabCare. At the same
time, RSM and RehabCare entered into a “Recruitment and Non-Solicitation Agreement,”
which provided that RSM could not solicit its former therapists for a period of five years.
According to the Government, RehabCare’s continuing percentage of profits
amounted to approximately $2 million per year since the agreements were entered into.
The Government’s theory of the case is that the $600,000 payment and the ongoing
percentage profit RSM receives constitute illegal kickbacks in violation of the AKS, which
prohibits the acceptance or provision of remuneration “in return for referring an individual
. . . for . . . any item or service for which payment may be made . . . under a Federal Health
Care Program.” 42 U.S.C. § 1320a-7b(b)(1)(A). As posited by the Government, the
agreement between RehabCare and RSM resulted in kickbacks paid from RehabCare to
RSM in exchange for referrals of business reimbursed by Medicare and Medicaid. The
amended complaint claims that from approximately March 2006 to the time of the
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Government’s intervention in the lawsuit, Defendants thereby knowingly presented, or
caused to be presented, to the United States, claims for Medicare and Medicaid payments
that falsely certified that the claims were in compliance with the law, in violation of the
False Claims Act (“FCA”), 31 U.S.C. § 3729(a)(1) (FCA pre-2009 amendments) and 31
U.S.C. § 3729(a)(1)(A) (current version of FCA). The Government also asserts state
common law claims of unjust enrichment and “payment by mistake.”
Defendants contend that the agreements between RehabCare and RSM provide for
valid activities–“paying a fee to secure and protect an in-place work force assembled by
another or employing a subcontract arrangement that generates a profit for the primary
contractor.” In Defendants’ view, Lincoln, as the majority owner of RSM and the nursing
homes at issue, “structured the transaction with RehabCare in a way that comported with
[federal] guidelines and permitted him to centralize and distribute profits as he saw fit.”
(Doc. No. 122 at 102.)
Relator, a therapy provider that competes with RehabCare, filed its complaint in this
action under seal on July 11, 2007. On August 4, 2011, the Government intervened in
relevant part (Doc. No. 47) and the complaint was unsealed. On December 5, 2011, the
United States filed an amended complaint, asserting violation of the False Claims Act
(Count I); unjust enrichment (Count II); and payment by mistake (Count III). (Doc. No.
49.)1

The complaint was filed in the United States District Court for the District of
Minnesota and transferred to this Court on May 10, 2012.
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ARGUMENTS OF THE PARTIES
Government’s Motion for Partial Summary Judgment
The Government seeks summary judgment on liability on Count I of the Amended
Complaint (violation of the FCA), arguing that the evidence shows that, other than
continuing to direct the therapy business to RehabCare, RSM provided no services to
RehabCare. The Government notes that it is undisputed that RMS had no W-2 employees
after the 2006 subcontract agreement, and it contends that the evidence shows that RMS
provided no services or anything else of value. The Government also points to certain
emails it believes establish that RSM told RehabCare that RSM would not enter into the
subcontract agreement absent the up-front payment and continuing percentage payments.
The Government also asserts that the undisputed evidence shows that Defendants knew
that this transaction was wrongful because Defendants backed away from consummating
the 2003 acquisition based on AKS concerns.
The Government further argues that it should be granted summary judgment on
Defendants’ “affirmative defense” that “damages should be reduced by the reasonable cost
of the medically necessary services furnished by the Defendants” to federal healthcare
programs. The Government argues that this is incorrect as a matter of law, and that the
proper measure of damages is the full value of each “tainted” claim. 2

The Government also challenged other affirmative defenses, such as the statute of
limitations and waiver, but these have been withdrawn by Defendants, and that aspect of
the Government’s motion shall therefore be denied as moot.
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Motion for Summary Judgment Filed by RehabCare
In general, RehabCare contends that it is entitled to summary judgment because the
Government has failed to marshal sufficient admissible evidence to prove its FCA claims
at trial. RehabCare argues that the Government’s case is based on speculation, and
although required to establish a knowing and willful violation of the criminal AKS if its
claim is to survive, the Government has no evidence (testimony, documents, or emails)
from any representatives or employees of any Defendant indicating that anyone had any
intent to violate the AKS when the Subcontract Agreement and the Recruitment and
Non-Solicitation Agreement were negotiated and entered in 2006, or thought that the 2006
agreements provided improper kickbacks in order to obtain referrals.
RehabCare argues further that the Government cannot prevail because it cannot
prove that Defendants received remuneration for referrals, rather than for something of
value, without comparing the fair market value of what RSM was providing and what
RehabCare paid RSM, and the Government has presented no such comparison.
RehabCare points to the lack of evidence by the Government that, in fact, RSM did not
provide the supervision and administrative services the subcontract called for. In addition
RehabCare argues that there is a complete lack of evidence that Defendants knew what
they were doing was wrong. RehabCare argues that the Government’s claims for unjust
enrichment and payment by mistake fail for the same reasons as its cause of action under
the FCA.

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Motion for Summary Judgment filed by HSI and RSM
Similarly, RSM and HSI argue that the evidence is insufficient to establish that the
negotiated rates in the subcontract were not fair market value rates, that no direct evidence
exists to prove RSM or HSI knowingly and willfully accepted kickbacks, nor does any
indirect or circumstantial evidence support an inference of criminal knowledge and
willfulness. They argue, as do the other Defendants, that the Government cannot meet its
burden of establishing illicit remuneration in return for referrals, an essential element of an
AKS case, because it has no evidence comparing what RehabCare paid RSM with the fair
market value of obtaining an assembled work-force and agreeing not to solicit that work
force. They further argue that the Government has no evidence that RSM did not provide
RehabCare with supervisory and administrative services.
DISCUSSION
Summary Judgment Standard
Summary judgment is appropriate where there are no genuine issues of material fact
and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a).
The court must view the record “in the light most favorable to the nonmoving party and
drawing all reasonable inferences in that party’s favor.” Chambers v. Pennycook, 641
F.3d 898, 904 (8th Cir. 2011). Rule 56 mandates the entry of summary judgment against a
party who fails to make a showing sufficient to establish the existence of an element
essential to that party's case, and on which that party will bear the burden of proof at trial.
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
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The FCA and the AKS
The FCA imposes liability on any person who “knowingly presents, or causes to be
presented, a false or fraudulent claim for payment or approval” by the government, or who
conspires to do so. 31 U.S.C. § 3729(a)(1)(A), (C). FCA states that the terms “knowing”
and “knowingly” mean that “(A) a person, with respect to information -- (i) has actual
knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the
information; or (iii) acts in reckless disregard of the truth or falsity of the information; and
(B) require no proof of specific intent to defraud.” 31 U.S.C. § 3729(b)(1); see United
States ex rel. Vigil v. Nelnet, Inc., 639 F.3d 791, 796 (8th Cir. 2011); Minn. Ass’n of Nurse
Anesthetists v. Allina Health Sys. Corp., 276 F.3d 1032, 1053 (8th Cir. 2002) (“The
question on intent here is whether the defendants knew (or would have known absent
deliberate blindness or reckless disregard) that their bills would lead the government to
believe that they had provided services that they actually did not provide.”).
The AKS provides that,
whoever knowingly and willfully solicits or receives any remuneration
(including any kickback, bribe, or rebate) directly or indirectly, overtly or
covertly, in cash or in kind - (A) in return for referring an individual to a
person for the furnishing or arranging for the furnishing of any item or
service for which payment may be made in whole or in part under a Federal
health care program, or, (B) in return for purchasing, leasing, ordering, or
arranging for or recommending purchasing, leasing, or ordering any good,
facility, service, or item for which payment may be made in whole or in part
under a Federal health care program, shall be guilty of a felony.
42 U.S.C. § 1320a–7b(b)(1)(A)-(B). The mens rea required for a violation of the AKA
only requires proof that the person “knew that his conduct was wrongful, rather than proof
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that he knew it violated a known legal duty.” United States v. Jain, 93 F.3d 436, 441 (8th
Cir. 1996).
Compliance with the AKS is a condition of reimbursement from Medicare
programs, and a violation of the AKS is sufficient to state a claim under the False Claims
Act. United States ex rel. Kosenske v. Carlisle HMA, Inc., 554 F.3d 88, 94 (3d Cir. 2009);
United States v. Omnicare, Inc., No. 07 C 05777, 2013 WL 3819671, at *9 (N.D. Ill. July
23, 2013); United States ex rel. Pogue v. Diabetes Treatment Ctrs. of Am., Inc., 238 F.
Supp. 2d 258, 266 (D.D.C. 2002). The Court adopts the rule adopted by those courts that
have considered the question, that the AKS is violated not only if the “primary motivation
of [the] remuneration” was to induce referrals, but merely “if ‘one purpose of the payment
was to induce future referrals.’” United States v. Borrasi, 639 F.3d 774, 782 (7th Cir.
2011) (quoting United States v. Greber, 760 F.2d 68, 69 (3d Cir. 1985)); see United States
v. McClatchey, 217 F.3d 823, 835 (10th Cir. 2000).
The Court concludes that a rational jury could come out on either side’s
favor on the material questions of whether Defendants paid remuneration in
exchange for referrals, and if so whether this wrongful conduct was willful. While
the evidence that the up-front payment and continuing percentage payments were
for referrals, rather than for services and/or other assets from RSM, is not
conclusive so as to entitle the Government to summary judgment, neither is it
completely lacking so as to entitle Defendants to summary judgment. The Court
believes that the Government’s case is thin, because it has not presented evidence of
the value (if any) of the services RSM did or did not perform pursuant to the
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subcontract agreement and/or the value of work force of therapists in place that
RSM would not solicit for five years. However, the Court believes that a jury
could find from various emails and testimony that the value of the subcontract
agreement and recruitment agreement other than for the referrals was substantially
less than what RehabCare agreed to pay RSM, and that at least one purpose (and
perhaps even the primary purpose) of the payments was for referrals.
Lack of fair market value, per se, is not an element the Government must
provide. The cases cited by the Government on this point are persuasive. See,
e.g., United States v. Bay State Ambulance & Hosp. Rental Serv., Inc., 874 F.2d 20,
29-30 (1st Cir. 1989) (“The trial court did not err in not specifically instructing the
jury that the government had to prove that the payments received were not
reasonable for the actual work done. The gravamen of Medicare Fraud is
inducement.”); Borrasi, 639 F.3d at 782 (“Because at least part of the payments to
Borrasi was ‘intended to induce’ him to refer patients to Rock Creek, the status was
violated, even if the payments were also intended to compensate for professional
services.”) (citation omitted).
The evidence surrounding the 2003 negotiations establishes that Defendants
were aware of the strictures of the AKS, and that their conduct in 2006 may have
been wrongful. See United States v. Mousavi, 604 F.3d 1084, 1092 (9th Cir. 2010)
(“[A]wareness of the relevant provisions of the Code or regulations [is] one source
of such evidence [of willfulness].”) (citation omitted). Based on this and other
circumstantial evidence, the Court believes that summary judgment against the
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Government based on the argument that there is a lack of proof of Defendants’
willfulness is not warranted.
With respect to the dispute about the proper measure of damages in this case,
the parties did not address the matter at oral argument on the understanding that the
question would be more appropriately raised later in the litigation of this case by
way of a motion in limine or a motion to strike. Accordingly, that aspect of the
Government’s motion for summary judgment will be denied without prejudice.
CONCLUSION
Accordingly,
IT IS HEREBY ORDERED that the motion for partial summary judgment filed
by the Government is DENIED with respect to liability on Count I, and DENIED as moot
as it relates to Defendants’ affirmative defenses, and DENIED without prejudice with
respect to the question of the appropriate measure of damages. (Doc. No. 306.)
IT IS FURTHER ORDERED that the motion for summary judgment filed by
Defendants RehabCare Group East, Inc., and RehabCare Group, Inc., is DENIED. (Doc.
No. 310)
IT IS FURTHER ORDERED that the motion for summary judgment filed by
Defendants Health Systems, Inc., and Rehab Systems of Missouri is DENIED. (Doc. No.
313.)
________________________________
AUDREY G. FLEISSIG
UNITED STATES DISTRICT JUDGE
Dated this 30th day of August, 2013.
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