[UPDATED] As Receivership Looms, ManorCare DOJ Case Moves Forward

As Quality Care Properties (NYSE: QCP) seeks receivership for HCR ManorCare properties, a date has been set for the False Claims Act case against ManorCare for allegedly providing unnecessary therapy services to residents and billing to Medicare.

The trial date has been set for January 22, 2018 and is likely to result in a settlement, according to Jeffrey Downey, the lawyer representing Christine Ribik, an occupational therapist and the whistleblower who filed the initial complaint against ManorCare in January 2009. Downey recently spoke with Skilled Nursing News, laying out his perspective on the case.

The Department of Justice intervened and filed a consolidated complaint in April 2015.

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“The government has reflected in its complaint a pretty strong case,” Downey said. “Part of that case is based on ManorCare’s own data which shows that during the relevant period of time, the percentage of ultra-high billing more than doubles.”

HCR ManorCare, a Toledo, Ohio-based skilled nursing and assisted living chain with 500 locations and 34,000 beds, declined to comment on the upcoming trial.

ManorCare is owned by the Carlyle Group, a global private equity fund with $170 billion of assets under management. In 2010, real estate investment trust (REIT) HCP acquired much of ManorCare’s real estate in a $6.1 billion deal. Then, last year, HCP spun out Quality Care Properties (NYSE: QCP) into a separate, publicly traded REIT to take on the struggling properties.*

Downey questions how these changes are tied to the impending litigation.

“The companies that benefitted from the [fraud] income, Carlyle and HCP, were not ultimately included in the Justice Department investigation and prosecution, which means that they escaped free and clear from any potential liability,” Downey said.

This separation of operating companies and property-owning companies into “OpCo-PropCo” arrangements has been common over the past ten years. Downey suggests this is because under the False Claims Act, it must be proven that the entity being sued is engaged in the fraudulent activity.

“If you set up a complex corporate structure that essentially removes the operating entity from the entity that controls the assets, then you could have an operating entity that’s essentially judgement-proof,” Downey said. “What I mean by that is, they don’t own assets, they don’t have cash, all they have is basically the right to receive payments through the federal government as the operating entity. And then they transfer large amounts of money up through the corporate chain as lease payments.”

He links this to the QCP spin-off.

“The reason they spun those assets off, in my opinion, is because HCP was encumbered by this Justice Department prosecution,” Downey said. “Because ManorCare essentially got caught, and the government changed some of their reimbursement procedures, I think ManorCare had a hard time continuing their revenue stream because, essentially, their ability to defraud the government was reduced by the fact that they got caught.”

Now ManorCare is in default to its landlord QCP. The publicly traded REIT says it can now, under the terms of its lease, take control of the situation by seeking to place its ManorCare properties under the operational control of a receiver.

“It’s clear that one of the reasons QCP is seeking receivership is because they believe the corporate executives who are managing the company have essentially irreconcilable conflicts,” Downey said. “Some executives are now personal defendants in a shareholder derivative suit that, in short, alleges that HCP and ManorCare did not inform the stockholders of the decreased value of the company based on the Department of Justice prosecution.”

Settlements across the industry

This is the latest in a string of settlements on similar issues involving large nursing home chains, including RehabCare, Genesis (NYSE: GEN) and Life Care Centers of America, all of which were allegedly involved in Medicare fraud schemes.

“Interestingly, they all got caught around the same time and they all got caught basically through the whistleblower statute that allows and encourages private employees to file these lawsuits and alert the government to the fraud and then the government essentially takes over the case,” Downey said.

The Justice Department is very selective about the cases in which they decide to intervene. When they do intervene, they prosecute aggressively and effectively, according to Downey.

“The rate of Justice Department successful intervention is over 95%” said Downey. “In other words, over 95% of the cases the Justice Department takes and intervenes in in the health care arena result in settlements that are favorable to the taxpayer.”

In many of these cases, such as in the Life Care Centers of America case, the government will base the settlement on ability to pay, in an effort to require a settlement without bankrupting the company.

Downey originally filed his case to include Carlyle and HCP, but couldn’t get the government to intervene with those companies because they were too far removed from the fraud conduct. Similar REITs have gotten out of similar situations by maintaining their separate corporate identities, Downey said.

“In the 1990s and early 2000s there was a big concern that private equity companies were taking control of nursing home chains,” Downey said. “The concern was that if a company had that kind of control and set up these complex corporate structures, that essentially there would be no accountability.”

“I’d like to see laws that prevent that kind of dissociation, especially in health care facilities,” Downey said.

Editor’s Note: This story has been updated from a previous version, which stated that ownership of ManorCare has changed hands in recent months. The ownership of ManorCare’s properties changed hands when QCP spun off from HCP last year.

Written by Elizabeth Jakaitis

Photo Credit: “Whistle” by Kate Ter Haar, CC BY 2.0

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