Nursing home care and costs—and their connection to Medicare—are issues that sporadically receive media attention and, last weekend, were the subjects of a large expose and op-ed in the NY Times. A few days before those articles were published, the Seventh Circuit issued its anticipated decision in US ex rel. Absher v. Momence Meadows Nursing Center, which addresses nursing home care and Medicare payments in a context familiar to readers of this blog: the False Claims Act. In a decision of interest to nursing home and other healthcare providers—as well as other types of service providers to the federal Government—the appeals court reversed a dangerously expansive trial court interpretation of the “worthless services” theory of FCA liability. The Seventh Circuit’s decision leaves some important questions for another day, but it provides some good news for businesses contracting with the Government.

The Absher case was pursued by relators (DOJ declined to intervene) who were former nurses at the Momence nursing home. At trial, the relators “presented evidence of numerous instances of non-compliant care provided at Momence and harm” to patients associated with the substandard care. Momence was compensated by Medicare and Medicaid on a “flat per diem amount for each resident” and obtained reimbursement by submitting a “Minimum Data Sheet” (MDS) describing the care, and certifying to the accuracy of the forms and that it was complying with the programs’ requirements.

The relators alleged that Momence had knowingly submitted “thousands of false claims to Medicare and Medicaid” that were inconsistent with the MPS certifications. The jury agreed, finding that Momence had submitted 1,729 false claims; the trial court imposed a $11,000 penalty for each claim and awarded compensatory damages of just over $3 million. (The jury also accepted the relators’ retaliation allegations and compensated them for that claim as well.) The district court vacated the $19 million in penalties, which violated the Eighth Amendment’s Excessive Fines clause, and trebled the compensatory damages, entering a $9 million judgment against Momence.

The substantive part of the appeal focused on two sets of issues: the “worthless services” theory of FCA liability and the relators’ attempts to support its judgment on appeal with “false certification” arguments.

The Seventh Circuit explained that several other circuit courts (the Second, Sixth, Eighth, and Ninth) have issued rulings basing FCA liability “on the theory that the defendant received reimbursement for products or services that were worthless.” But these decisions have defined “worthless services” in a relatively narrow manner:

[T]he performance of the service [must be] so deficient that for all practical purposes it is the equivalent of no performance at all. It is not enough to offer evidence that the defendant provided services that are worth some amount less than the services paid for. That is, a “diminished value” of services theory does not satisfy this standard. Services that are “worth less” are not “worthless.”

The trial court’s jury instruction was not so narrow. The district court had explained “that ‘[s]ervices can be worthless, and the claims for those services can, for that reason be false, even if the nursing facility in fact provided some services to the patient. To find the services worthless, you do not need to find that the patient received no services at all.” The jury instruction was akin to the “‘diminished value’ of services theory” that was rejected by the precedent discussed by the Seventh Circuit—and “was incorrect.”

The Seventh Circuit held that the relators’ evidence regarding the nursing services that Momence provided could not support the jury’s determination that they were “truly or effectively ‘worthless.’” To explain this conclusion, the court relied on the government regulators’ surveys of the nursing care facilities: “[A]ny such claim would be absurd in light of the undisputed fact that Momence was allowed to continue operating and rendering services of some value despite regular visits by government surveyors.”

The connection between the Seventh Circuit’s Momence ruling and the NY Times coverage mentioned above relates to the Government ratings. The paper’s expose addressed the Centers for Medicare & Medicaid Services’ (CMS) “Five Star Quality Rating System.” That rating system was created in 2008 and post-dated the surveys taken by government regulators in the Momence case, but a nursing home under attack could base its FCA defense to a “worthless services” FCA theory on the Momence rationale and a multi-star CMS ranking. In future cases, relators will presumably counterattack with assertions that CMS’ rating system is flawed based on criticisms such as those made in the NY Times.

Finally, the Seventh Circuit decision provides a good discussion (and rejection) of the relators’ flawed “false certification” arguments. To support their “express certification” theory, the relators pointed to, among other documents, the certifications in the MDS forms and asserted that they were erroneous based on the evidence of problematic care. The appeals court explained that FCA relators cannot connect the dots in this manner. The relators failed “to come forth with evidence that particular MDS forms contained false certification or evidence of precisely how many of the MDS forms contained false certifications”; they even failed “to offer evidence establishing that even a roughly approximate number of forms contained false certifications.” That is woefully inadequate evidence of a false express certification.

With respect to implied certification, the court declined to revisit the Seventh Circuit precedent “holding that the FCA ‘specifically requires a claimant to point to a specific [false] claim.’” The question whether to join the First, Third, Sixth, Ninth, and Tenth Circuits, which have permitted FCA claims on that theory, was left for another day because the relators did not argue to the jury that the purported implied certifications were conditions of payment—and could not raise the argument for the first time on appeal.

“Worthless services” allegations by FCA relators are not new, but nursing care facilities, other healthcare providers, and other types of services providers are likely to see such claims rise as healthcare spending and elder care issues continue to be a focus of public attention. The Momencedecision will be helpful for facilities battling such allegations.