RehabCare Group Inc. to Pay $30 Million to Resolve False Claims Act Allegations

RehabCare Group Inc. and RehabCare Group East Inc. (together, RehabCare) as well as Rehab Systems of Missouri (RSM) and management company Health Systems Inc. have agreed to pay $30 million to resolve civil claims that they violated the False Claims Act (FCA) by engaging in a kickback scheme related to the referral of nursing home business. Additionally, as part of this settlement, the entities have agreed to restructure certain business arrangements related to the alleged kickback scheme. The companies have denied any wrongdoing.

A U.S. Department of Justice press release issued on January 17 states that between March 1, 2006 and December 31, 2011, RehabCare allegedly paid RSM to obtain RSM’s contracts to provide therapy to patients residing in 60 nursing homes controlled by RSM’s majority owner James Lincoln. The transaction involved an agreement styled as a “Subcontract Agreement” under which RehabCare paid RSM a one-time payment of $600,000 as well as a percentage (10% to 15%) of the profit from the ongoing therapy services performed pursuant to the contracts.

The parties litigated the case through summary judgment before reaching settlement. The case—which premises alleged FCA liability on underlying violations of the Anti-Kickback Statute (AKS)—has several notable elements.

In deciding the defendants’ motion to dismiss, the court rejected an argument made by RSM that it could not have violated the FCA because it had ceased operations and exited the business after completion of the corporate transaction. Rather, the court found that the alleged unlawful payments, which continued to be made to RSM after the closing of the transaction, could violate the AKS, and therefore the government’s allegations were sufficient to withstand a motion to dismiss.

The court also rejected the defendants’ argument that the case was subject to the public disclosure bar because the relator—a corporate entity and a competitor of RehabCare—had initially learned of the potentially fraudulent activity while listening to a publicly available RehabCare earnings conference call. While expressing some skepticism as to the timing of the filing of the case because the relator took a full year from the date of the conference call to investigate and determine the existence of the potential fraud, the court nevertheless concluded that the alleged fraud would not have been understood by the government without the analysis prepared by the relator, which was based on information gleaned from the publicly disseminated earnings materials.

Finally, the court rejected cross-motions for summary judgment on liability finding that the government’s evidence was sufficient to proceed to trial based, in part, on the defendants’ email traffic from which the jury could permissibly conclude that the fair market value of the contracts at issue and certain related non-compete agreements was less than what RehabCare paid to RSM permitting an inference that one purpose for the payments was to induce referrals.

Originally published in American Health Lawyers Association’s Fraud and Abuse Practice Group email alert on January 30, 2014. The information obtained by the use of this service is for reference use only and does not constitute the rendering of legal, financial, or other professional advice by the American Health Lawyers Association.