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How one of the largest nursing home chains in Florida could avoid nearly all of $256 million fraud judgment

The Washington Post logo The Washington Post 9/14/2021 Christopher Rowland
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The Justice Department and a medical whistleblower have tentatively agreed to settle a $256 million civil fraud judgment against a large nursing home chain for $4.5 million, according to court documents filed Monday in U.S. Bankruptcy Court in Delaware.

Entities operating under Consulate Health Care, a chain based in Florida tied to private equity company Formation Capital, filed for Chapter 11 bankruptcy in March. The sixth-largest nursing home chain in the country with 140 facilities from the Mid-Atlantic to the Gulf Coast, it said it did not have the resources to pay the large False Claims Act judgment against it.

A federal civil jury in 2017, in a decision later upheld by the U.S. Court of Appeals, concluded that nursing homes now owned by Consulate defrauded taxpayers through inflated billings for rehabilitation services for residents. The penalty was the culmination of a whistleblower case brought in 2011 against an earlier owner of Consulate’s nursing homes by Angela Ruckh, a nurse who worked at two of the chain’s nursing homes.

In the proposed bankruptcy settlement, the United States will receive $3.375 million and Ruckh will get $1.125 million, according to a copy of the proposed agreement filed in court by Consulate’s lawyers. Consulate’s operations division, headquartered in Maitland, Fla., and two of its nursing homes will be sold to another entity that also is related to Consulate, according to public records and court documents.

A nursing home watchdog group criticized the proposed settlement.

“I am very troubled that one of the largest nursing home chains in the country is allowed to evade a $256 million court-ordered judgment against it by filing for bankruptcy and selling a handful of its facilities,” said Toby S. Edelman, senior policy attorney at the nonprofit Center for Medicare Advocacy.

The “pennies on the dollar” settlement, she said, undermines the government’s ability to make sure nursing homes comply with the laws regarding financial dealings and resident care. “What happens to accountability for the billions of dollars that nursing homes receive from the federal government for providing care to residents?” Edelman said.

Consulate and Formation did not immediately respond for requests for comment. The Justice Department and lawyers representing creditors in the bankruptcy case did not respond to comment. The settlement, which contains redactions and was not fully disclosed, still needs final approval of the parties and Bankruptcy Judge John T. Dorsey, which could come later this month.

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But Consulate’s outside bankruptcy consultant said in a court filing that the government and Ruckh likely would be unable to collect the original judgment through litigation. The devastating financial impact the pandemic has had on the nursing home industry has damaged not just Consulate but its corporate affiliates as well, said Paul Rundell, the company’s Chapter 11 restructuring officer, in a court filing Monday.

“The skilled nursing industry has been dramatically impacted by the covid-19 pandemic, including from the recent resurgence of infections from the delta variant,” he said. “Many large skilled nursing organizations, including Consulate, have encountered increased financial stress as a direct result. And the State of Florida, where many of Consulate’s skilled nursing facilities are located, is among the hardest hit.”

According to the latest data from the Centers for Disease Control and Prevention, nearly 135,000 nursing home residents have died as a result of coronavirus infection. Many industry beds remain unfilled, as families remain fearful to potentially place elderly relatives in harm’s way.

Earlier in the bankruptcy, the creditors committee asked the bankruptcy court to authorize an examination of Consulate’s financial relationship to its affiliated companies to determine, among other things, why its operations arm, CMC II LLC, transferred $1.6 billion to a parent entity in 2020. But the motion requesting the examination was withdrawn over the summer.

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“Consulate’s strategy has proven successful in protecting a billion-dollar company from taking even minimal financial and legal responsibility for poor care in its facilities,” said Charlene Harrington, a critic of the industry’s financial practices and professor emerita in the department of social and behavioral sciences at the University of California at San Francisco.

Atlanta-based Formation Capital also is an investment firm behind Genesis HealthCare, the largest nursing home chain in the nation. Genesis came close to bankruptcy in 2020 but instead transformed itself from a publicly traded company to a privately held firm in March 2021.

Whistleblower lawsuits are common in the health-care industry and often lead to settlements. They rely on the False Claims Act, which dates to the Civil War. The law allows insider private citizens to sue on behalf of the government to uproot fraud against taxpayers. In Ruckh’s case, the government declined to join the case as a plaintiff, but under the law it was still entitled to the proceeds of the judgment.

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