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Item 3. Legal Proceedings

2021-02-03 compared with 2020-02-05 · 45 added, 60 removed, 28 unchanged (79% of the section changed)

LEGAL PROCEEDINGS

Regulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to

interpretation.

Compliance with such laws and regulations can be subject to future governmental review and interpretation and the alleged failure to comply can result in significant regulatory action, including fines, penalties, and exclusion from certain governmental programs.

Included in these laws and regulations is the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which requires healthcare providers (among other things) to safeguard the privacy and security of certain health information.

In late December of 2016, we learned of a potential issue at one of our independent operating entities in Arizona which involved the limited and inadvertent disclosure of certain confidential information.

The issue has been fully investigated, addressed and disclosed as required by law.

This matter was resolved in the second quarter of 2019.

We believe that we are presently in compliance in all material respects with applicable HIPAA laws and regulations.

Regulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation.

Compliance with such laws and regulations can be subject to future governmental review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from certain governmental programs.

Included in these laws and regulations is HIPAA, which requires healthcare providers (among other things) to safeguard the privacy and security of certain health information.

Cost-Containment Measures — Both government and private pay sources have instituted cost-containment measures designed to limit payments made to providers of healthcare services, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affect us.

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Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on our balance sheets for any of the periods presented.

Department of Justice Civil Investigative Demand - On May 31, 2018, we received a Civil Investigative Demand (CID) from the U.S.

Department of Justice stating that it is investigating to determine whether there has been a violation of the False Claims Act and/or the Anti-Kickback Statute with respect to the relationships between certain of our independently operated skilled nursing facilities and persons who served as medical directors, advisory board participants or other potential referral sources.

The CID covered the period from October 3, 2013 to the present, and was limited in scope to ten of our Southern California independent operating entities.

In October 2018, the Department of Justice made an additional request for information covering the period of January 1, 2011 to the present, relating to the same topic.

As a general matter, our independent operating entities maintain policies and procedures to promote compliance with the False Claims Act, the Anti-Kickback Statute, and other applicable regulatory requirements.

We are fully cooperating with the U.S.

Department of Justice to promptly respond to the requests for information.

However, we cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on the Company.

Litigation — We are party to various legal actions and administrative proceedings, and are subject to various claims arising in the ordinary course of business, including claims that services provided to patients by our independent operating entities have resulted in injury or death and claims related to employment and commercial matters.

Although we intend to vigorously defend ourselves in response to these claims, there can be no assurance that the outcomes of these matters will not have a material adverse effect on operational results and financial condition.

In certain states in which we have or have had independent operating entities, insurance coverage for the risk of punitive damages arising from general and professional liability litigation may not be available due to state law public policy prohibitions.

In connection with the Spin-Off, certain landlords required, in exchange for their consent to the Spin-Off, that our lease guarantees remain in place for a certain period of time following the Spin-Off.

These guarantees could result in significant additional liabilities and obligations for us if Pennant were to default on their obligations under their leases with respect to these properties.

Department of Justice Civil Investigative Demand - On May 31, 2018, we received a CID from the U.S.

Department of Justice stating that it was investigating to determine whether there had been a violation of the False Claims Act and/or the Anti-Kickback Statute with respect to the relationships between certain of our independently operated skilled nursing facilities and persons who serve or have served as medical directors, advisory board participants or other potential referral sources.

The CID covered the period from October 3, 2013 through 2018, and was limited in scope to ten of our Southern California independent operating entities.

In October 2018, the Department of Justice made an additional request for information covering the period of January 1, 2011 through 2018, relating to the same topic.

As a general matter, our independent operating entities have established and maintain policies and procedures to promote compliance with the False Claims Act, the Anti-Kickback Statute, and other applicable regulatory requirements.

We have fully cooperated with the U.S.

Department of Justice and promptly responded to their requests for information, and have recently been advised that the U.S.

Department of Justice has declined to intervene in any subsequent action filed by a relator in connection with the subject matter of this investigation.

Litigation — We and our independent operating entities are party to various legal actions and administrative proceedings, and are subject to various claims arising in the ordinary course of business, including claims that services provided to patients by our independent operating entities have resulted in injury or death, and claims related to employment and commercial matters.

Although we intend to vigorously defend against these claims, there can be no assurance that the outcomes of these matters will not have a material adverse effect on operational results and financial condition.

There can be no assurance that our independent operating entities will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage is not available.

The skilled nursing and post-acute care industry is extremely regulated.

As such, in the ordinary course of business, we are continuously subject to state and federal regulatory scrutiny, supervision and control.

The skilled nursing and post-acute care industry is heavily regulated.

As such, we are continuously subject to State and Federal regulatory scrutiny, supervision and control in the ordinary course of business.

Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which are non-routine.

In addition to being subject to direct regulatory oversight of state and federal regulatory agencies, the skilled nursing and post-acute care industry is also subject to regulatory requirements which could subject us to civil, administrative or criminal fines, penalties or restitutionary relief, and reimbursement;

In addition to being subject to direct regulatory oversight from State and Federal agencies, the skilled nursing and post-acute care industry is also subject to regulatory requirements which could subject us to civil, administrative or criminal fines, penalties or restitutionary relief, and reimbursement;

authorities could also seek the suspension or exclusion of the provider or individual from participation in their programs.

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Adverse determinations in legal proceedings or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on our financial position, results of operations, and cash flows.

Additionally, the U.S.

House of Representatives Select Subcommittee on the Coronavirus Crisis launched a nation-wide investigation into the COVID-19 pandemic, which includes the impact of the coronavirus on residents and employees in nursing homes.

In June 2020, the Company received a document and information request from the House Select Subcommittee.

The Company is cooperating in responding to this inquiry.

However, it is not possible to predict the ultimate outcome of any such investigation, or whether and what other investigations or regulatory responses may result from the investigation and could have a material adverse effect on our reputation, business, financial condition and results of operations.

In addition to the potential lawsuits and claims described above, we are also subject to potential lawsuits under the Federal False Claims Act and comparable state laws alleging submission of fraudulent claims for services to any healthcare program (such as Medicare) or payor.

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Such exclusions could have a correlative negative impact on our financial performance.

Some states, including California, Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations.

In addition, the Deficit Reduction Act of 2005 created incentives for states to enact anti-fraud legislation modeled on the Federal False Claims Act.

Under the qui tam or "whistleblower" provisions of the False Claims Act, a private individual with knowledge of fraud may bring a claim on behalf of the Federal Government and receive a percentage of the Federal Government's recovery.

Due to these whistleblower incentives, lawsuits have become more frequent.

For example, and despite the decision of the U.S.

Department of Justice to decline to participate in litigation based on the subject matter of its previously issued Civil Investigative Demand, the qui tam relator may continue on with the lawsuit and pursue claims that one or more of the Company's independent operating entities have allegedly violated the False Claims Act and/or the Anti-Kickback Statute.

In addition to the Federal False Claims Act, some states, including California, Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations.

Further, the Deficit Reduction Act of 2005 created incentives for states to enact anti-fraud legislation modeled on the Federal False Claims Act.

As such, we could face increased scrutiny, potential liability, and legal expenses and costs based on claims under state false claims acts in markets in which our independent operating subsidiaries do business.

In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) which made significant changes to the Federal False Claims Act (FCA) and expanded the types of activities subject to prosecution and whistleblower liability.

In May 2009, Congress passed the FERA which made significant changes to the Federal False Claims Act (FCA) and expanded the types of activities subject to prosecution and whistleblower liability.

Following changes by FERA, health care providers face significant penalties for the knowing retention of government overpayments, even if no false claim was involved.

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This includes the retention of any government overpayment.

The government can argue, therefore, that a FCA violation can occur without any affirmative fraudulent action or statement, as long as it is knowingly improper.

The government can argue, therefore, that an FCA violation can occur without any affirmative fraudulent action or statement, as long as the action or statement is knowingly improper.

In addition, FERA extended protections against retaliation for whistleblowers, including protections not only for employees, but also contractors and agents.

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The alleged failure to meet these requirements can, among other things, jeopardize a facility's compliance with requirements of participation under certain State and Federal healthcare programs;

it may also subject the facility to a notice of deficiency, a citation, a civil money penalty, or litigation.

it may also subject the facility to a notice of deficiency, a citation, a civil monetary penalty, or litigation.

These class-action “staffing” suits have the potential to result in large jury verdicts and settlements.

We expect the plaintiffs' bar to continue to be aggressive in their pursuit of these staffing and similar claims.

We and our independent operating subsidiaries have been, and continue to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment as well as employment related claims.

A significant increase in the number of these claims, or an increase in the amounts owing should plaintiffs be successful in their prosecution of these claims, could materially adversely affect the Company’s business, financial condition, results of operations and cash flows.

In August 2011, we were named as a Defendant in a class action litigation alleging violations of state and federal wage and hour law.

In January 2017, we participated in an initial mediation session with plaintiffs' counsel.

In March 2017, we were invited to engage in further settlement discussions to determine whether a resolution of the case was possible in advance of a decision on class certification.

In April 2017, we reached an agreement in principle to settle the subject class action litigation, without any admission of liability and subject to approval by the California Superior Court.

Based upon the change in case status, we recorded an accrual for estimated probable losses of $11.0 million , exclusive of legal fees, in the first quarter of 2017.

In June 2017, the settlement of the class action lawsuit was approved by the Court.

We funded the settlement amount of $11.0 million in December 2017, and the funds were distributed to participating class members in the first quarter of 2018.

We received back $1.7 million related to unclaimed class settlement funds remaining after completion of the settlement process, and the recoveries were recorded in the first quarter of 2018.

A class action staffing suit was previously filed against us and certain of our California independent operating entities, alleging, among other things, violations of certain Health and Safety Code provisions and a violation of the Consumer Legal Remedies Act.

In 2007, we settled this class action suit, and the settlement was approved by the affected class and the Court.

A second such class action staffing suit was filed in Los Angeles in 2010, and was resolved in a settlement and Court approval in 2012.

Neither of the referenced lawsuits or settlements had a material ongoing adverse effect on our business, financial condition or results of operations.

Other claims and suits, including class actions, continue to be filed against us and other companies in the post-acute care industry.

We and our independent operating entities have been subjected to, and are currently involved in, class action litigation alleging violations (alone or in combination) of state and federal wage and hour law as related to the alleged failure to pay wages, to timely provide and authorize meal and rest breaks, and related causes of action.

In addition, we and our independent operating subsidiaries, and others in the industry, are subject to claims and lawsuits in connection with COVID-19 and facilities preparation for and/or response to the COVID-19 pandemic.

While we have been able to settle or otherwise resolve these types of claims without an ongoing material adverse effect on our business, a significant increase in the number of these claims, or an increase in the amounts owing should plaintiffs be successful in their prosecution of future claims, could materially adversely affect the Company’s business, financial condition, results of operations and cash flows.

Claims and suits, including class actions, continue to be filed against us and other companies in the post-acute care industry.

We and our independent operating entities have been subjected to, and/or are currently involved in, class action litigation alleging violations (alone or in combination) of State and Federal wage and hour law as related to the alleged failure to pay wages, to timely provide and authorize meal and rest breaks, and other such similar causes of action.

We do not believe that the ultimate resolution of these actions will have a material adverse effect on our business, cash flows, financial condition or results of operations.

We and our independent operating entities have in the past been subject to class action litigation involving claims of violations of various regulatory requirements.

While we have been able to settle these claims without a material ongoing adverse effect on our business, future claims could be brought that may materially affect our business, financial condition and results of operations.

Other claims and suits continue to be filed against us, our independent operating entities, and other companies in the industry.

In addition, professional negligence claims have been filed and will likely continue to be filed against our independent operating entities by residents or responsible parties.

Medicare Revenue Recoupments — We and our independent operating subsidiaries are subject to regulatory reviews relating to the provision of Medicare services, billings and potential overpayments resulting from reviews conducted via RAC, PSC and MIC (collectively referred to as Reviews).

As of December 31, 2019 , eight of our independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process, both pre- and post-payment.

The Company anticipates that these Reviews will increase in frequency in the future.

If an operation fails a Review and/or subsequent Reviews, the operation could then be subject to extended review or an extrapolation of the identified error rate to all billings in the same time period.

As of December 31, 2019 , our independent operating subsidiaries have responded to the requests and the related claims are currently under Review, on appeal or in a dispute resolution process.

Government Inquiry and Corporate Integrity Agreement — In late 2006, we became the subject of an on-going criminal and civil investigation by the DOJ.

The investigation was prompted by a whistleblower complaint and related primarily to claims submitted to the Medicare program for rehabilitation services provided at certain of our independently operating skilled nursing facilities in Southern California.

We resolved and settled the matter for $48.0 million in 2013.

In October 2013, we executed a final settlement agreement with the Government and remitted full payment of $48.0 million .

In addition, we executed a corporate integrity agreement with the Office of Inspector General HHS as part of the resolution.

In the first quarter of 2019, we received notice from the OIG that our five-year CIA with the OIG had been completed.

Upon receipt of our fifth and final annual report, the OIG confirmed that the term of the CIA is concluded.

See additional description of our contingencies in Notes 15, Debt , 17, Leases and 18, Commitments and Contingencies in Notes to Consolidated Financial Statements.

For several months during the COVID-19 pandemic, CMS suspended its Targeted Probe and Educate program.

Beginning in August 2020, CMS resumed Targeted Probe and Educate program activity.

As of December 31, 2020, four of our independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process.

We anticipate that these Reviews could increase in frequency in the future.

If an operation fails a Review and/or subsequent Reviews, the operation could then be subject to extended review or an extrapolation of the identified error rate to billings in the same time period.

As of December 31, 2020, our independent operating subsidiaries have responded to the requests and the related claims currently under review, on appeal or in a dispute resolution process.

MINE SAFETY DISCLOSURES

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 3. Legal Proceedings