U.S. ex rel. Augustine v. Century Health Services

• Decision Date: 30 November 2000
• Docket Number: No. 3-96-1048.,No. 3:97-0504.,3-96-1048.,3:97-0504.
• Citation: 136 F.Supp.2d 876
• Parties: UNITED STATES of America ex rel., Edward T. AUGUSTINE, Plaintiffs, v. CENTURY HEALTH SERVICES, INC. et. al., Defendants. Alexis M. Herman, Plaintiff, v. George D. Gilley, et. al., Defendants.
• Court: U.S. District Court — Middle District of Tennessee

136 F.Supp.2d 876

UNITED STATES of America ex rel., Edward T. AUGUSTINE, Plaintiffs, v. CENTURY HEALTH SERVICES, INC. et. al., Defendants.

Alexis M. Herman, Plaintiff, v. George D. Gilley, et. al., Defendants.

No. 3-96-1048.

No. 3:97-0504.

United States District Court, M.D. Tennessee, Nashville Division.

November 30, 2000.

Rachel L. Waterhouse, Office of the United States Attorney, Nashville, TN, Thomas Neal Bateman, Robert Thomas Bateman, Bateman, Bateman & Darnell, Clarksville, TN, Stanley E. Keen, Office of the Solicitor, U.S. Department of Labor, Atlanta, GA, and Michael Taxay, Department of Justice, Washington, DC, for USA, ex rel.

Thomas Neal Bateman, Robert Thomas Bateman, Bateman, Bateman & Darnell, Clarksville, TN, for Edward T. Augustine.

John S. Colley, III, Colley & Colley, Columbia, TN, William P. Suriano, Riverside, IL, for Century Health Services, Inc., Century Home Health Care of Smithville, Inc., Century Home Health Care of Jackson, Inc., Century Home Health Care of Dickson, Inc., Century Home Health Care

of Northeast Tennessee, Inc., Century Home Health Care of South Tennessee, Inc., Century Home Health Care of West Tennessee, Inc., Century Home Health Care of Nashville, Inc., Century Home Health Care of Lake Charles, Inc., Century Home Health Care of Memphis, Inc., Century Home Health Care of Illiana, Inc., Bill D. Goforth, George D. Gilley.

MEMORANDUM

HAYNES, District Judge.

This consolidated action is comprised of two enforcement actions by the United States and the Secretary of Labor under different federal statutes against several common defendants. This Court granted the Secretary's motion for summary judgment (Docket Entry No. 97) in Alexis M. Herman v. George D. Gilley, et. al., No. 3:97-0504, and on August 28, 2000, entered final judgment in that action.

In United States ex rel. Edward T. Augustine v. Century Health Services, Inc. et al., No. 3:96-1048, the United States, acting through its Department of Justice, on behalf of the Department of Health and Human Services (HHS), joined Edward T. Augustine, the relator, to file a complaint under the False Claims Act, 31 U.S.C. §§ 3729 through 3733, coupled with common law theories of unjust enrichment and payment by mistake against the defendants: Century Health Services Inc. (Century); Century Home Health Care of Smithville, Inc., Century Home Health Care of Jackson, Inc., Century Home Health Care of Dickson, Inc., Century Home Health Care of Northeast Tennessee, Inc., Century Home Health Care of South Tennessee, Inc., Century Home Health Care of West Tennessee, Inc., Century Home Health Care of Nashville, Inc., Century Home Health Care of Lake Charles, Inc., Century Home Health Care of Memphis, Inc., Century Home Health Care of Illiana, Inc., Bill D. Goforth, and George D. Gilley.

The United States' complaint alleges in sum, that by taking Medicare funds intended for the Plan for their Company's use, the defendants misrepresented the status of the Plans and also concealed their obligations to repay these Medicare funds into Century's ESOP after defendants Gilley and Goforth arranged a loan of Century stock to the Plan.

Specifically, Count I of the amended complaint alleges that the defendants knowingly presented or caused to be presented to the Fiscal Intermediary (FI)¹ for fiscal years 1993 and 1994 cost reports and cost statements that sought payment by Medicare Part A for unallowable, false, or fraudulent ESOP contribution costs, in violation of 31 U.S.C. § 3729(a)(1).

Count II alleges that the defendants knowingly made, used, or caused to be made or used for fiscal years 1993 and 1994 cost reports and cost statements that sought payment by Medicare Part A for unallowable, false, or fraudulent ESOP contribution costs, in violation of 31 U.S.C. § 3729(a)(2).

Count III alleges that the defendants conspired to include unallowable, false, or fraudulent ESOP contribution costs on cost reports and cost statements submitted by Century Health Services (CHS) and CHS Agencies for fiscal years 1993 and 1994, in violation of 31 U.S.C. § 3729(a)(3). Count III further alleges that pursuant to this conspiracy, the defendants submitted or caused to be submitted false claims, and made or caused to be made false statements, for payment by Medicare Part A for fiscal years 1993 and 1994, in violation of 31 U.S.C. § 3729(a)(3).

Count IV alleges that in submitting false or fraudulent cost reports and cost statements to the FI for fiscal years 1993 and 1994, and in making false representations to the FI auditor, the defendants knowingly concealed or caused to be concealed information that would have caused HCFA to disallow the $2,760,000 in ESOP contribution costs and to make retroactive adjustments to the cost reports to recover the Medicare ESOP payments, in violation of 31 U.S.C. § 3729(a)(7).

Count V asserts a claim for common law unjust enrichment against the defendants, and Count VI asserts a common law claim of payment by mistake against the defendants.

Under Counts I-IV, the United States and Augustine seek treble damages and penalties for injuries to the Medicare Trust Fund due to defendants' misrepresentations for and misuse of $2.76 million that was disbursed by Medicare to fund the Century's Employee Stock Ownership Plan ("ESOP" or "the Plan"). Under Counts V-VI, the United States seeks repayment of the $2,600,000 that Medicare paid to Century to fund the ESOP.

A bench trial was held on September 20-21 and September 25, 2000. Set forth below are the Court's Findings of Fact and Conclusions of Law in accordance with Fed.R.Civ.P. 52(a).

A. FINDINGS OF FACT

The Century ESOP

From 1993 through 1996, Century served as an umbrella organization for ten home health agencies for which Century was the central organizational entity ("home office"). Century was formed when defendant Gilley purchased the assets of several home health companies organized under the name G & G Health Services for $30,000. Gilley obtained the assets of G & G for such a low purchase price because the company was saddled with debt. As a condition of the sale, Medicare regulators required Century to assume G & G's tax liabilities and debts to federal health programs as a result of overpayments to G & G. Gilley incorporated Century and its subsidiaries sometime in 1993.

Gilley initially owned 100% of Century's stock, but later offered defendant Goforth 50% of Century's stock, if Goforth would become Century's President and take charge of operating the company. Goforth accepted Gilley's offer because he thought that Century could become extremely profitable if Congress adopted legislation allowing home health agencies to be reimbursed on a "prospective pay" basis as discussed below. Thus, Gilley and Goforth became Century's sole shareholders with each owning 50% of the company's stock. Gilley served as Chairman of Century's Board of Directors, and Goforth as board member and Century's President.

As Chairman, Gilley, a lawyer, played a very active role in management of the company, among other things, taking the lead on legal issues and closely monitoring the Medicare reimbursement process. As Century's President, Goforth was in charge of company operations, and the Medicare reimbursement process was under his direct supervision. Together, Gilley and Goforth owned, controlled, and ran Century.² From the start, Century provided home health services through its subsidiaries.

The vast majority of Century's revenues, 80-90%, was derived from the federal Medicare program. Medicare reimburses home health agencies on a "reasonable cost basis"; that is Medicare will provide reimbursement only for the reasonable costs of providing services. Gilley and Goforth were aware of proposed legislation that would allow home health companies to be reimbursed on a "prospective pay basis." "Prospective pay" would provide home health agencies with a fixed reimbursement for services, allowing them to earn a profit if they could provide the services for a cost below the fixed reimbursement rate. Gilley and Goforth were certain that they could turn Century into a very profitable company, if home health agencies were paid on a "prospective pay basis." They were also certain, however, that Century would collapse if it continued to be paid on a "reasonable cost basis" because the company would not be able to generate enough profits to pay off its tax liabilities and debts to federal health programs. In fact, within months of forming Century, it became clear to Gilley and Goforth that Century's financial crisis was so severe that's its survival was threatened.

On August 12, 1993, Gilley and Goforth met with Century's Chief Financial Officer, Jimmy Monroe, and an outside consultant, Charles Fridell, to discuss the company's financial status. Fridell was President of PRN Home Health Management (PRN), that provided billing and financial management services to Century. During this August 12, 1993 meeting, Monroe reported on the seriousness of Century's financial crisis. Monroe reported that Century had a negative value when it was purchased by Gilley and the companies were "technically bankrupt" as of this meeting. At that time, Century owed an estimated $2.5 million to the Government, that included $1 million to the Internal Revenue Service for back payroll taxes, $1 million to Medicare, and $500,090 to Medicaid. Century also owed $1.6 million to PRN.

Gilley and Goforth Century attributed Century's history of financial problems to the fact that Century was saddled with massive debts. Century and its subsidiaries received over 80% of their revenues through reimbursements from the federal Medicare program, that did not generate profits with which to pay off accumulated debts. Moreover, some of Century's prior owners had been convicted of Medicare fraud, and Medicare authorities had disallowed cost reimbursements for some of the costs Century had incurred. As a result of these...