Fraud Theories Fail Under Rigorous Standards for “Worthless Services” and Materiality

Earlier this week, a court in the Eastern District of Pennsylvania dismissed a declined qui tam action in which the relator, a licensed nurse, alleged that an operator of treatment facilities for disabled individuals fraudulently billed Medicare and Medicaid for substandard care and retaliated against her for investigating that fraud.

The relator alleged that, during the course of her employment with defendant Comhar, she either witnessed or heard of numerous instances of substandard care that resulted in Comhar submitting claims for services that “either did not occur or were of such ‘substandard quality that . . . [they] ceased to be compensable by Medicare and Medicaid.’”  These alleged instances of substandard care included: (1) residents not receiving their medications in a timely manner; (2) staff members over-medicating patients; (3) staff members abusing patients; (4) residents harming one another; and (5) staff members sleeping on duty.  The relator also alleged that staff members covered up these instances of substandard care and failed to report resident injuries or medication errors to state authorities despite having a duty to do so.

The relator asserted that Comhar’s claims for payment for the substandard care were false based on both a “worthless services” theory and an implied certification theory.  The court rejected both.  With respect to the worthless services theory, the court noted that such a theory was only viable in “instances in which either services are literally not provided, or the service is so substandard as to be tantamount to no service at all.”  The court stressed that allegations of services of merely “diminished value” were not sufficient and suggested that, adequately pled, a worthless services theory would raise an inference of patients coming to serious harm.  Applying this standard to the relator’s claims, the court held that her allegations were deficient either because they were “more suggestive of negligence than worthless services” or because they lacked the requisite particularly to satisfy Federal Rule of Civil Procedure 9(b).

With respect to the relator’s implied certification theory, the court noted that, to survive dismissal, the relator had to adequately plead that (1) Comhar’s allegedly substandard care violated a “statutory, regulatory, or contractual requirement,” and (2) had the government known of that violation, it would not have paid Comhar’s claims for that care.  The court held that the relator “sufficiently identified examples of negligent conduct that . . . appear[ed] to violate [Medicare and Medicaid] program regulations,” but failed to establish that those violations were material to the government’s payment decision.  Specifically, the court found that the relator’s allegations were deficient because she provided no evidence that the government “consistently refuses to pay claims” based on a provider’s noncompliance with those regulations.

Finally, the court dismissed the relator’s relation claim, finding that “her efforts were clearly directed to ameliorating noncompliance, not fraud” and therefore her retaliation claim lacked the necessary “nexus to the FCA.”

The court’s opinion can be found here.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.