California hospital, other defendants face employment and insurance fraud claims

Section 1871.7(a) of California’s Insurance Code makes it unlawful to knowingly employ steerers to procure patients to obtain services or benefits that would form the basis for a claim against an insurer.

Encino Hospital, LLC is a general acute care hospital. It entered into a management services agreement with SRCC Associates, LLC. Under the agreement, SRCC would manage Serenity Recovery Center under the hospital’s direction and control. Serenity operated at the hospital from November 2015 to January 2019 and provided short-term drug and alcohol detoxification services.

The case of State of California et al. v. Encino Hospital Medical Center et al. arose when the plaintiff filed a complaint on behalf of the State of California. She alleged employment-related claims and various violations of the Insurance Code against 10 defendants.

The California Department of Insurance intervened in the case. The insurance department amended the plaintiff’s complaint to allege employment and insurance fraud claims against 17 defendants.

The trial court ordered arbitration of the employment claims but put the arbitration on hold pending the trial’s outcome in the insurance fraud claims.

The insurance department again filed an amended complaint, this time against six defendants, including Encino Hospital and SRCC. It made claims of illegal patient steering under section 1871.7(a) of the Insurance Code and submission of false claims under section 1871.7(b).

The insurance department specifically alleged that Serenity employed Aid in Recovery, LLC (AIR), a call center, to funnel patients to its program in exchange for Serenity discharging acute-care patients to chronic-care facilities affiliated with AIR.

The trial court ruled that the insurance department failed to provide a clear definition of steering. According to the trial court, the insurance department failed to prove that the defendants employed anyone to steer patients to Serenity or exchanged any payments, remuneration, or benefits with AIR for referrals.

Instead, the evidence supported that it was common and ethical for a detox facility to help a patient find a long-term residential facility and that Serenity did not employ AIR to procure patients, the trial court said.

Steering theory not proven

The California Court of Appeal for the Second District agreed with the trial court’s decision. The appellate court found that the insurance department failed to establish its steering theory.

According to the appellate court, the insurance department also failed to prove the following:

• that the defendants engaged in insurance fraud by billing insurers for services performed in a detox center for which they lacked an appropriate license and by employing a referral agency to steer patients to the center
• that Serenity employed AIR by agreeing, in exchange for referrals, to honor a patient’s preplanned treatment regimen, which benefited AIR because the plan included later referral to an AIR-affiliated facility
• that Encino Hospital received compensation for referring patients to residential treatment centers or paid for referrals to the Serenity program
• that any remuneration was exchanged