DOJ Charges HCR ManorCare with Medicare Fraud

HCP Inc. (NYSE: HCP) on Monday disclosed that the U.S. Department of Justice is charging its major skilled nursing facility tenant, HCR ManorCare, with submitting false Medicare claims. The news came two months after analysts pressed HCP leaders about the ongoing government investigation into ManorCare, and less than a month after the large-cap real estate investment trust (REIT) renegotiated the master lease on its 333-property ManorCare portfolio.

The DOJ complaint stems from three separate, previously-sealed lawsuits filed by former ManorCare employees, according to a Form 8-K filed by HCP. The charges revolve around Medicare claims for therapy. The therapy services should not have been reimbursed by Medicare because they were not covered by the skilled nursing facility benefit, were not medically reasonable or necessary, and were not skilled in nature, the complaint alleges.

More specifically, ManorCare allegedly set billing goals that were not tied to the actual clinical needs of patients, threatened to terminate skilled nursing facility managers and therapists if they did not provide the unnecessary treatment, and kept patients in facilities after they were fit to be discharged, the DOJ stated in a press release issued today.

One of the whistleblowers had named HCP as a defendant, but the federal government is not pursuing charges against the REIT, according to HCP’s filing with the Securities and Exchange Commission. 

In whistleblower (qui tam) cases, an individual brings charges on behalf of the government, which then can decide whether to intervene. If the government does intervene, the whistleblower stands to receive a portion of any damages recovered. If the government does not intervene, the individual whistleblower is free to pursue the charges independently.

HCP acquired the roughly 330-property portfolio of Toledo, Ohio-based ManorCare in a $6.1 billion cash deal in 2011. The performance of that portfolio—and the potential government lawsuit—both were much discussed during HCP’s 2014 fourth-quarter and full-year earnings call, which took place in February.

ManorCare has agreed to sell 50 HCP properties deemed non-strategic, HCP President and CEO Lauralee Martin said on the call. The decision came after changes in Medicare reimbursement cut into the skilled nursing operator’s bottom line. 

Under the subsequently announced renegotiated lease, HCP provided an annual rent reduction on $68 million, beginning April 1. The REIT also acquired 100% fee ownership in nine post-acute care facilities owned and operated by HCR ManorCare, valued at $275 million. The lease amendment and asset sale transactions reduced HCP’s tenant concentration in HCR ManorCare from 29% to 25%.

Analysts on the February earnings call also pressed HCP leaders on a statement in the earnings report that ManorCare was under investigation by the Department of Justice. While acknowledging that the investigation had been mentioned in previous reports, it had not been so prominently highlighted, they said.

The investigation began in 2013 and involved similar issues as those faced by other large skilled nursing companies, including Kindred (NYSE: KND) and Genesis (NYSE: GEN), Martin said.

In addition to the companies named by Martin, Extendicare Health Services Inc. also has been involved in this type of case. Extendicare and its subsidiary therapy company in October agreed to a historic $38 million settlement with the DOJ over therapy overbilling and quality of care charges. Extendicare Inc. (TSX: EXE) is based in Ontario; the company sold its U.S. operations to an investor group led by Formation Capital LLC for $870 million in November.

“We strive for a system whereby health care providers provide reasonable and necessary services without overbilling Medicare for unreasonable and unnecessary services” stated U.S. Attorney Dana J. Boente of the Eastern District of Virginia, in today’s DOJ press release. “We will continue our robust investigations of the companies operating in this important sector of our economy.”

HCR ManorCare intends to “vigorously defend” against the charges, according to HCP.

The three separate whistleblower cases now have been consolidated into a single action in the U.S. District Court for the Eastern District of Virginia.

Written by Tim Mullaney