Encino Hospital engaged SRCC Associates to manage and operate Serenity Recovery Center (Serenity) at the hospital, under the hospital’s direction and control, to provide acute (i.e., short-term) drug and alcohol detoxification services.
In 2016 Mary Lynn Rapier filed this qui tam action on behalf of the People of the State of California, alleging violations of the Insurance Fraud Prevention Act (IFPA) against Encino Hospital and other defendants. California Department of Insurance (CDI) elected to intervene and take over prosecution of the action.
CDI filed the operative second amended complaint, which was eventually pared down to allege a cause of action for “illegal patient steering,” in violation of subdivision (a) of Insurance Code section 1871.7, and a cause of action for “submission of false claims” in violation of subdivision (b) of that section. CDI alleged the causes of action against six defendants: Encino Hospital, Prime Healthcare Services, Inc., and Prime Healthcare Foundation, Inc. and SRCC Associates, its principal, Jonathan Lasko, and JNL Management, LLC (collectively.
The CDI alleged that although Encino Hospital was properly licensed as a general acute care hospital, it could not legally operate a medical detoxification facility because it had no separate license as a chemical dependency recovery hospital. The CDI alleged that in billing for detox services for which they had no proper license, defendants knowingly submitted at least 1,858 fraudulent insurance claims, requiring an award of damages of at least $57,678,436 before trebling. And that that Serenity employed a referring party to funnel patients to its program in exchange for Serenity discharging acute-care patients to chronic-care facilities affiliated with the referring party.
After a bench trial, the trial court found that CDI’s fraud theory was unsupported by any evidence of a false statement or omission, specific intent to defraud, materiality, or reliance. On the contrary, the undisputed evidence was that all defendants intended to follow the law, consulted attorneys when unsure about what to do, and relied on a lack of information from any agency, including CDI, that their practices were improper, even after the allegations in this case were made public.
The court found that CDI’s claims, “including the CDI itself, constituted a vast overreach as to parties, theories, and scope. Thus the trial court found in favor of the defendants, and the Court of Appeal Affirmed in the published case of State of Cal. v. Encino Hospital Medical Center – B303196 (January 2023)
On appeal, CDI contend the trial court erred by interpreting the IFPA as applying only to fraudulent claims as opposed to simply false claims, and by interpreting subdivision (a) of section 1871.1 as requiring a cash exchange as opposed to an exchange of any item or service of value. CDI further contends the trial court erred in denying it a jury trial.
The IFPA, originally enacted in 1993, consists of eight articles concerning insurance fraud. The Court of Appeal reviewed amendments to the Act since then, and the legislative intent. Although the former law allowed actions arising from any workers’ compensation claim even if the claim was not fraudulent, according to the Senate Committee on Criminal Procedure, section 1871.7 as amended in 1995 required proof that a claim was illegal and fraudulent. Section 1871.7 was amended again in 1999, by adding the last sentence to subdivision (b), which provided for the first time that penalties are to be assessed for each fraudulent claim presented to an insurer, instead of for each violation of subdivision (a).
Here, CDI alleged that Encino Hospital misrepresented to insurers that it was properly licensed to provide detox services when it was not. The trial court found no evidence suggesting that defendants presented a false claim to any insurer. The Court of Appeal agreed and said “no authority of which we are aware or to which we have been directed obligates Encino Hospital to hold any license other than its license as a general acute care hospital.“
Because Encino Hospital needed no separate license or approval, and no evidence showed it concealed any provider, the CDI’s cause of action for false claims fails for lack of a predicate. The Court concluded by saying “We therefore need not decide whether the IFPA requires a showing of scienter or materiality.”
CDI demanded a jury trial but failed to deposit jury fees. The trial court therefore granted Prime’s motion to strike the demand for a jury trial, finding that jury fees were not timely paid, and in any event CDI’s causes of action were not subject to jury trial.
On this issue the Court of Appeal concluded that on the merits, CDI was not entitled to a jury trial on its claims. “The IFPA affords no explicit right to a jury trial on causes of action it creates.”