Diversicare Reaches Tentative $9.5M Agreement to Settle DOJ Investigation

Diversicare Healthcare Services (Nasdaq: DVCR) on Monday announced that it has reached a tentative agreement to settle an investigation into its therapy practices and other issues that had long served as a drag on its operations.

“For six years, we’ve had this open investigation, but we’re now closer to having certainty on the matter,” CEO Jay McKnight said on the Brentwood, Tenn.-based skilled nursing operator’s second quarter earnings call with investors and analysts.

While the $9.5 million accord with the Department of Justice (DOJ) is not yet final, McKnight said Diversicare expects to enter into a five-year payment plan with the federal government, with an initial payment of $500,000. A corporate integrity agreement is also likely once the False Claims Act case wraps, McKnight said.

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The company has been forced to lay out significant legal fees during the course of the investigation, which also focused on Diversicare’s filing of certain paperwork related to Medicare and the state of Tennessee’s Medicaid program, TennCare. Back in November, for instance, McKnight and Diversicare blamed a $6.4 million litigation expense for a $7.4 million loss incurred in the third quarter of 2018.

McKnight emphasized that the investigation dated back to 2010, and was launched less than a month after he joined the company in 2012 as chief financial officer.

The company still reported a $24.6 million loss for the second quarter of 2019 — $20 million of which consisted of a non-cash tax expense charge related to a valuation allowance.

“The accounting guidance related to matters like this is very complicated, but because of our government settlement and other financial factors we were required to complete the process of evaluating these assets this quarter,” McKnight said in a statement. “We believe we have significant positive financial evidence that we will continue to evaluate each quarter going forward.”

McKnight classified the tentative settlement as an important step toward pulling off a “near complete reset” of the beleaguered provider.

“We’ve made significant changes that we believe will improve our outlook,” he said.

Some of those changes include the company’s previously announced exit from the Kentucky market, which McKnight said is on track to close by the third quarter of this year, as well as a decision to enter Texas’s Quality Incentive Payment Program (QIPP) for nursing homes. Under that initiative, which rewards providers for improving certain metrics and investing in resident care, Diversicare expects to bring in $2.1 million in revenue add-ons during its first fiscal year of participation — a key boost in Texas, which is known for persistently low Medicaid rates.

“The Medicaid rates are on the lower end of the spectrum, and we believe this program will be a boost to our centers there,” he said.

The company is also in the process of appealing a December delisting warning from the Nasdaq, which it received after its market cap fell below the exchange’s minimum over 30 consecutive trading days. Should Diversicare lose the appeal, McKnight said, the company has already received approval to trade on the over-the-counter market.

Diversicare’s shares closed Monday’s trading flat at $3.08 per share, though the agreement and quarterly results were announced after market close.

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