Friendship Home Healthcare, Inc., et al., DAB No. 3000 (2020)

FINAL DECISION ON REVIEW OF ADMINISTRATIVE LAW JUDGE DECISION

Friendship Home Health, Inc., et al. (Appellants, Friendship Entities), appeal the October 31, 2019 decision of an Administrative Law Judge (ALJ) upholding the determination of the Office of the Inspector General (IG, OIG) of the Department of Health and Human Services that the Friendship Entities must pay $1,322,500 in stipulated penalties for breaches of a corporate integrity agreement (CIA), Friendship Home Healthcare, Inc., et al., DAB CR5458 (2019) (ALJ Decision).

As explained in this decision, we uphold the ALJ’s conclusion that Appellants failed to comply with multiple obligations under the CIA to make timely repayment of overpayments received from Medicare and Medicaid after receiving notice of the results of the year’s audit showing the overpayment amount.  We agree with the ALJ that Appellants were properly subject to stipulated penalties arising from those failures.  We further conclude that the CIA authorizes per-day stipulated penalties for each failure to make timely repayment and those penalties run concurrently where the continuing failures to satisfy each repayment obligation overlap.

Background1

Appellants consist of several corporate entities and two individual owners collectively engaged in providing home health and nursing services in Tennessee.  ALJ Decision at 1. Appellants settled a False Claims Act (FCA) case, brought by a qui tam relator and joined by the state and federal government, for $6,500,000.  Id. at 1-2.  The FCA case charged that various Friendship Entities (Appellants before us) used unauthorized personnel, employed false documentation, and relied on falsified authorizations in the care they provided and for which they billed Medicare and Medicaid.  Id.  The IG then entered into a five-year CIA, effective June 1, 2015, with the Friendship Entities, agreeing not to

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impose a permissive exclusion from participation in all federal health care programs in exchange for the Friendship Entities undertaking numerous compliance obligations.  IG Ex. 1.

Among other requirements under the CIA, the Friendship Entities were to develop a compliance program with a defined structure to be reviewed annually by a compliance expert and a written code of conduct, policies and procedures.  Id. at 3-8.  The Friendship Entities were also required to develop and carry out extensive training with IG approval.  Id. at 8-10.  Furthermore, as part of the compliance program, the Friendship Entities had to obtain the services of an Independent Review Organization (IRO) to review Medicare and Medicaid claims submissions and prepare annual reports, as well as identify and make recommendations about systemic weaknesses.  Id. at 10-12, App. B.  The detailed requirements for and responsibilities of the IRO, including the IG’s authority to remove an unacceptable IRO, are set out in Appendix A of the CIA.  Appendix B provides specific details of how the IRO is to perform the annual reviews, including the use of statistical sampling of claims and extrapolation procedures, and of overpayment refund requirements.  The Friendship Entities were to repay any overpayments identified through the annual reports within 30 days.  Id. at App. B, ¶ A.7.  The CIA further provided the IG with inspection, audit and review rights more extensive than those under existing law.  Id. at 26.

It is undisputed that Appellants were notified of combined Medicare and Medicaid overpayments for the listed periods on the listed dates, with repayment expected as listed 30 days after each notification:

ALJ Decision at 5-6.  Appellants do not claim to have made any of the repayments and do not deny receiving the notices of overpayments.3

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The IG demanded stipulated penalties in the total amount of $1,322,500 based on failure to make repayment of the overpayments for each of the three periods: 

December 31, 2017 through November 19, 2018 (324 days);
April 6, 2018 through November 19, 2018 (228 days); and
November 15, 2018 through November 19, 2018 (5 days).

ALJ Decision at 10.  The end date for each period (November 19, 2018) is the date that the IG presented the demand.  The IG calculated the total (overlapping) number of days during which each of the overpayments remained outstanding (557 days) multiplied by the per-day stipulated penalty of $2,500 for failure to repay a reported overpayment to arrive at the total stipulated penalties of $1,392,500, but demanded a lesser amount of $1,322,500.  Id. at 9-10.

The ALJ determined that Appellants were obligated to make timely repayments and failed to do so, and rejected arguments that actions short of repayment sufficed to meet the contractual obligations.  Id. at 5-7.  The ALJ further found that the time for repayment was 30 days from the receipt of notice that the IRO had identified an overpayment and that none of Appellants’ communications with the IG constituted a timely written request for an extension of time to comply with those obligations.4  Id. at 6-7.  The ALJ concluded that Appellants were liable for the full amount of stipulated penalties demanded, rejecting Appellants’ contention that any stipulated penalties should be limited to $2,500 per day total (as opposed to $2,500 per day for each unfulfilled obligation).  Id. at 8-10.

Corporate Integrity Agreement provisions

This case hinges on understanding and applying the terms of the contractual obligations into which Appellants entered in order to avoid discretionary exclusion from participation in federal health care programs.5  The provisions which govern the Friendship Entities’ liability for failure to comply with obligations under the CIA are therefore the applicable governing authority.  We set out here the key language applicable to the dispute and reference other related provisions in our analysis below where appropriate.

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Appendix B contains the following definition of “overpayment” for purposes of claims reviews: 

Overpayment:  The amount of money the Friendship Entities have received in excess of the amount due and payable under Medicare or any state Medicaid program requirements, as determined by the IRO in connection with the claims reviews performed under this Appendix B, including any extrapolated Overpayments determined in accordance with Section A.3 of this Appendix B.

I.G. Ex. 1, at App. B, ¶ A.1.a.6  The Friendship Entities must “repay within 30 days any Overpayment(s) identified” by the sampling and any extrapolated actual overpayments and provide documentation to the IG “that reflects the refund of the Overpayment(s) to the payor.”  Id. at App. B, ¶ A.7.

The CIA specified that the Friendship Entities were “expected to fully and timely comply with all of their CIA obligations” and spelled out consequences for breaches and defaults of such obligations, including the following stipulated penalties: 

X. BREACH AND DEFAULT PROVISIONS

The Friendship Entities are expected to fully and timely comply with all of their CIA obligations.

 A.       Stipulated Penalties for Failure to Comply with Certain Obligations

As a contractual remedy, the Friendship Entities and OIG hereby agree that failure to comply with certain obligations as set forth in this CIA may lead to the imposition of the following monetary penalties (hereinafter referred to as “Stipulated Penalties”) in accordance with the following provisions.

        1.        A Stipulated Penalty of $2,500 (which shall begin to accrue on the day after the date the obligation became due) for each day the Friendship Entities fail to establish and implement any of the following obligations as described in Sections III and IV:

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1. a Compliance Officer;
2. a Compliance Committee;
3. the Board of Directors compliance obligations and the engagement of a Compliance Expert, the performance of a Compliance Program Review and the preparation of a Compliance Program Review Report, as required by Section III.A.3.;
4. the management certification obligations;
5. a written Code of Conduct;
6. written Policies and Procedures;
7. the development and/or implementation of a Training Plan for the training of Covered Persons, Relevant Covered Persons, and Board Members;
8. a risk assessment and internal review process as required by Section III.E;
9. a Disclosure Program;
10. Ineligible Persons screening and removal requirements;
11. notification of Government investigations or legal proceedings;
12. policies and procedures regarding the repayment of Overpayments;
13. the repayment of Overpayments as required by Section III.I and Appendix B;
14. reporting of Reportable Events; and
15. disclosure of changes to business units or locations.

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Id. at 27-28 (emphasis added).  The same Section then lists other daily stipulated penalty provisions (ranging from $1000 to $50,000 for failure to comply with such obligations as employing an IRO, submitting reports, or allowing required access, and for such breaches as submitting false certifications.  Id. at 28-29.

The CIA provides for review of stipulated penalties demanded by the IG, as follows:

Stipulated Penalties Review.  Notwithstanding any provision of Title 42 of the United States Code or Title 42 of the Code of Federal Regulations, the only issues in a proceeding for Stipulated Penalties under this CIA shall be: (a) whether the Friendship Entities were in full and timely compliance with the obligations of this CIA for which OIG demands payment; and (b) the period of noncompliance.  The Friendship Entities shall have the burden of proving their full and timely compliance and the steps taken to cure the noncompliance, if any. . . .

Id. at 32.

Standard of review

The Board’s standard of review on a disputed issue of law is whether the ALJ’s decision is erroneous.  42 C.F.R. § 1005.21(h).7  The Board’s standard of review on a disputed issue of fact is whether the ALJ’s decision is supported by substantial evidence on the whole record.  Id.

Analysis

1.    Appellants breached their obligations to make timely repayments of overpayments identified by its IRO.

On appeal, Appellants argue that, even though “there is no dispute that Appellants owe the overpayments,” stipulated penalties are “only appropriate ‘for each day that the [Appellants] fail to establish and implement’ the obligations set forth in the CIA.”  Appellants Br. at 4, 5 (quoting IG Ex. 1, at 27) (emphasis in brief).  Appellants assert that a “plan to fulfill their repayment obligations” was “established and implemented” in that they communicated multiple times to the IG that they were “making every effort to seek financing and/or identify a buyer and execute on a plan to make the repayments once the company is sold.”  Id. at 5 (quoting Appellants Br. to the ALJ at 4).  By providing a letter of intent from a potential buyer to the IG and expressing a plan to use the proceeds to

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repay the overpayments, Appellants contend they not only established but implemented a repayment procedure, “more than just a preliminary effort.”  Id.  Thus, according to Appellants, the ALJ erred in treating the failure to repay as sufficient to trigger stipulated penalties.  Id. 

We find Appellants’ purported interpretation of their obligations entirely inconsistent with the language of the CIA.  The applicable requirement is plain on its face.  The Friendship Entities had to “establish and implement” the obligation for “the repayment of Overpayments.”  IG Ex. 1, at 27-28.  No reasonable interpretation of this language would make locating a buyer who might provide enough money and planning to repay from the proceeds equivalent to meeting an obligation to “establish and implement” the “repayment of Overpayments.”  Id. at 28.  The CIA offers no specific definition of “to implement,” but the common meaning involves effectuating something.  For example, Merriam-Webster’s definition includes to “carry out,” to “accomplish,” or to give “practical effect to and ensure of actual fulfillment by concrete measures.”  Merriam-Webster.com Dictionary, Merriam-Webster, https://www.merriam-webster.com/dictionary/implement (last accessed May 28, 2020).  The obligation to repay was not actually fulfilled, carried out, or accomplished.  The practical effect of Appellants’ attempt to sell the companies to meet their repayment obligation was nil.8  In short, we conclude that an intention to do an action, even with taking steps toward doing it in the future, simply does not amount to doing it.

At oral argument, Appellants’ counsel suggested that the concept that establishing and implementing a procedure to repay rather than making repayment was sufficiently derived from the introductory language of section X.A.1 of the CIA providing for stipulated penalties if the Friendship Entities “fail to establish and implement any of the following obligations as described in Sections III and IV.”  I.G. Ex. 1, at 27; see Tr. at 22.  According to Appellants, Sections III and IV of the CIA set out many procedures and policies that the Friendship Entities were required to adopt, and therefore the obligation for repayment at subsection X.A.1.m should be read as an obligation to make a procedure

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to repay.  Id.  This contorted reading ignores the actual wording of subsection X.A.1.m, which specifies stipulated penalties for failure to establish or implement “the repayment of Overpayments as required by Section III.I and Appendix B.”  IG Ex. 1, at 28 (emphasis added).  Section III.I spells out the Friendship Entities’ responsibility to make repayment of any overpayments identified by the Entities themselves (without waiting for the IRO audits).  Id. at 15-16.  Appendix B provides the instructions for the IRO audits and repayment of overpayments identified in them.  The reference to Sections III and IV means that whichever parts of those Sections apply to each of the listed obligations should be consulted for the content of the relevant obligation.  For example, in assessing whether the Friendship Entities failed to “establish and implement” the obligations for a Compliance Committee, the IG is to look to the Compliance Committee requirements set out in Section III.A.2.  As to repayment of overpayments, the applicable requirements are set out in Section III.I for self-identified overpayments and at length in Appendix B for overpayments reported after IRO audits.  We find no basis to read into the reference to Sections III and IV in subsection X.A.1.m some general sense of a plan, policy, or procedure as an adequate substitute for actual repayment.

Moreover, Appellants’ reliance on the idea that only a plan or procedure for repayment was required undermines rather than supports their interpretation of the CIA.  The subsection directly above the one applicable here creates a separate obligation to “establish and implement” the “policies and procedures regarding the repayment of Overpayments.”  Id.  As a general rule, we interpret provisions in a manner that does not make any language superfluous.  If the obligation to establish and implement repayment merely required a process or intention to repay, then it would be subsumed in the obligation to establish and implement a procedure for repayment.  But even were we to accept that implausible interpretation, it would remain clear that Appellants did not actually implement their plan for repayment because they never consummated any sale.

We therefore conclude that Appellants breached their obligations to make timely repayments as to each of the overpayments at issue here of which they were notified.

2.    Each notification of a distinct period’s overpayments triggered a new obligation to make timely repayment within 30 days.

Appellants argue in the alternative that, even if we should find them in breach of their obligations and liable for stipulated penalties, we should nevertheless conclude that the amount demanded by the IG and upheld by the ALJ is excessive.  Appellants Br. at 5-6.  Appellants have not been entirely clear or consistent about the basis for this contention.

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In their appeal brief, Appellants explain their reasoning as follows:

It is undisputed that Appellants learned of the first overpayment on November 30, 2017, which covered the period of June 2, 2015 through May 31, 2016.  Almost immediately thereafter, the IRO issued the second report on March 6, 2018, which covered the period of June 1, 2016 through May 31, 2017.  Thereafter, a final demand was made on November 19, 2018.  Appellants should not be penalized for the fact that the IRO conducted its audit in phases, resulting in stipulated penalties that the I.G. alleges run concurrently.

*        *        *

Appellants would be liable for stipulated penalties totaling 324 days, not 557 days as determined by the ALJ. 

Appellants Br. at 6.  Evidently, Appellants seek to characterize the overpayment notifications as cumulative, leading to a “final demand” on November 19, 2018.  This characterization is untenable on the record. 

The IROs did not conduct “an audit in phases,” but rather audited three separate annual periods and notified the Friendship Entities of the overpayments discovered in each, as required by the CIA.  IG Ex. 1, at App. A, B.  The report for the first period was delayed because the Friendship Entities failed to promptly obtain the services of a qualified IRO, which was their responsibility under the CIA.9  The succeeding notifications were not repeated notices of the original outstanding overpayments but new notices of overpayments in later periods.  The third notification of audited overpayments for the period June 1, 2017 through May 31, 2018 occurred on October 15, 2018.  See chart supra.  The November 19, 2018 demand letter from the IG was not a “final demand” for the overdue repayments.  IG Ex. 2.  It was a new demand for stipulated penalties due as a result of the non-payment of the outstanding repayment obligations that arose from each of these overpayment notifications after each of the annual audits.

Appellants’ counsel reframed their position in oral argument as that there was “really, in essence, only one continuing non-payment of the overpayments” and that, because the IG would not “sign[]off” on the proposed sale, the obligations to repay should not be

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“stack[ed].”  Tr. at 10.  In response to Board questions, however, counsel conceded that stipulated penalties could properly be “stack[ed]” from different penalty provisions in X.A, sections 1 through 7.  Id. at 28-29.  Nevertheless, counsel contended that the obligations listed in subsections (a) through (o) of X.A.1 could not result in “stacked,” or concurrent penalties.  Id.  Later, counsel stated that he would “have to think . . . harder” about whether penalties for different subsections (a) through (o) could be stacked (responding to a hypothetical situation in which a party to the CIA might fail to employ a compliance officer and then during the same period might fail to meet screening and removal requirements, under subsections (a) and (j) respectively).  Id. at 29-31.  In any case, counsel argued, overlapping penalties for failure to meet obligations under a single subsection (in this case, subsection X.A.1.m) have no clear basis in the CIA because they are not separately listed.  Id. at 31. 

Overall, Appellants’ position is that any ambiguity in the CIA must be construed against the IG as the drafter.  Id. at 7, 18, 20, 22, 28-29, 31.  Thus, Appellants argue that nothing in this document says the IG has “the right to impose these obligations concurrently.  Therefore, since that’s not there, you have to interpret against the drafter.  If they meant them to run concurrently, they would have put it in there.”  Id. at 18.  The IG responds that Section X.A of the CIA authorizes concurrent stipulated penalties if “there are multiple violations that are listed in X.A.1(a) through (o), or if there are multiple occurrences of the violations.”  Id. at 32.  Further, according to the IG, concurrent penalties apply in the present case because the Friendship Entities did not violate Section X.A.1.m once, but rather “at three different times because there was three different times when they had an obligation to repay under the CIA and have failed to meet it at each separate time.”  Id. at 32-33. 

Appellants offer no evidence that the IG was the sole drafter of the CIA, or of the specific provisions at issue, apart from counsel’s bald assertion.  The IG counsel disputed this assertion at oral argument, pointing out that the Friendship Entities were represented by counsel and had the opportunity to negotiate the terms of the CIA, but IG counsel acknowledged not having been personally involved in the CIA development or discussions at the time.  Id. at 35-36.  The IG did not provide evidence of the negotiating process, but Appellants’ own exhibit supports the I.G.’s portrayal.  In a memorandum to the IG, dated February 6, 2018, from counsel (identified as WTR), the attorney stated that his “firm negotiated Friendship’s Corporate Integrity Agreement,” and expected to develop the Entities’ compliance plan, but the firm’s engagement was terminated in August 2015.  P. Ex. 1, at 1.  It is certainly plausible that the IG insisted on strict compliance and enforcement provisions before agreeing to take discretionary exclusion off the table.  We cannot conclude on this record, however, that the IG drafted the CIA language unilaterally without the Friendship Entities’ participation nor can we agree that ambiguity, if any, must be construed against the IG.

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The IG argues that the CIA, in any case, is not ambiguous and plainly authorizes stipulated penalties for failure to make a repayment within 30 days of notification which begin accruing on the day after the time to repay expires.  IG Br. at 12 (citing IG Ex. 1, at 27); Tr. at 16-17, 36.  Thus, the IG explains, “each review resulted in a distinct Overpayment, each of which [Appellants] had a distinct obligation to repay” and “each failure to repay the Overpayments represents an independent violation of a separate obligation [Appellants] agreed to under the CIA,” so it follows that “each failure results in an independent assessment of Stipulated Penalties that run concurrently.”  IG Br. at 11‑12 (citing ALJ Decision at 10).

We determine that the CIA is best understood in light of its stated purpose.  The preamble of the CIA records that both parties enter into the agreement in order “to promote compliance with the statutes, regulations, and written directives of Medicare, Medicaid, and all other Federal health care programs . . . .”  IG Ex. 1, at 1.  

Turning to the language and structure of the stipulated penalty provision, we note the introduction to all of the stipulated penalty provisions states that “[t]he Friendship Entities are expected to fully and timely comply with all of their CIA obligations,” and that they agree as a “contractual remedy” to the imposition of stipulated penalties for “failure to comply with certain obligations.”  Id. at 27.  The CIA then lists seven stipulated penalty provisions.  Id. at 27-29 (Sections X.A.1 through X.A.7).  All but one provision impose per-day penalties accruing from a specific date related to a failure to comply with the stated obligation.10  Clearly, the overarching purpose of the stipulated penalty provision is to incentivize prompt return to compliance with those obligations singled out for remediation in the context of expecting full compliance with all obligations.

Appellants concede, as noted above, that concurrent stipulated penalties may run for violations of more than one section of X.A.1 through X.A.7, although no specific reference is made to concurrent or “stack[ed]” penalties.  See Tr. at 28-29.  Appellants’ counsel expressly denied that the CIA called for a cap or ceiling on the number of stipulated penalties that could apply for violations of multiple sections.  Id. at 28.  The concession is reasonable in light of the purposes set out for these penalties since otherwise no incentive would exist to achieve compliance with any of the identified obligations so long as a failure to comply with any individual obligation persisted.

Section X.A.1 calls for $2,500 per-day stipulated penalties “for each day the Friendship Entities fail to establish and implement any of the following obligations” and provides that the penalties “shall begin to accrue on the day after the date the obligation became

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due.”  IG Ex. 1, at 27.  The subsections specify fifteen categories of obligations to which these stipulated penalties apply.  Appellants’ counsel expressed uncertainty about whether stipulated penalties for these subsections could run concurrently, distinguishing them from section X.A.2 through X.A.7 on the basis that the latter are “different numbered stipulated penalties.”  Tr. at 28.  We see no logical reason that numbered sections, as opposed to lettered subsections, would necessarily demand different treatment in terms of how the applicable stipulated penalties in each could be imposed for multiple violations.  Certainly, it is hard to see what incentive there would be to prevent additional failures once the Friendship Entities were in breach of and subject to stipulated penalties for failure to comply with one obligation listed in the lettered subsections (as in the hypothetical mentioned above).

We now arrive at the situation in the present case involving multiple distinct failures to meet an obligation listed in one of the lettered subsections, i.e. X.A.1.m.  Appellants’ position is that this case is clearly distinguishable and raises “a different question  . . . where you only have one component which is really your failure to implement obligations to repay, because that’s obviously a continuing violation.”  Tr. at 30.  Thus, according to Appellants, failure to make repayment is addressed in a single subsection and amounts to a single continuing violation.  Id. at 30-31.  Appellants suggest that, had the IG intended to be able to “stack” penalties relating to this subsection, the IG could and should have made separate sections for each stipulated penalty, as the CIA does with X.A.1 through X.A.7.  Id.

We find Appellants’ suggestions unpersuasive and inconsistent with the language of the subsection and the purpose of the CIA.  Subsection X.A.1 provides that stipulated penalties “begin to accrue on the day after the date the obligation [for repayment] became due.”  I.G. Ex. 1, at 27.  Obligations to repay overpayments become due 30 days after the IRO provides notice of its annual audit results.  Id. at App. B, ¶ A.7.  On its face, the wording appears to tie the stipulated penalties for failure to make a repayment to the due date of the particular repayment.  The CIA does not, for example, state that stipulated penalties run from the due date of the first unsatisfied repayment, so it appears the intent was for any failure to repay to trigger liability for a stipulated penalty.  It is hard to imagine the solution suggested by Appellants of creating a series of sections stating that the first failure to repay triggers one stipulated penalty, the second failure to repay a different stipulated penalty, and so on, unless the per-day amount of the stipulated penalties had escalated with repeated failures. 

To the extent the wording is less than conclusive, we return to the purposes of the CIA in general and the stipulated penalties for breaches in particular.  Effectively promoting full and timely compliance with the obligation to make repayments of identified overpayments after audits each year would be ill-served if the Friendship Entities’ failure to make repayment one year resulted in the same daily stipulated penalty amount as their

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failure to, as here, make repayment for three consecutive annual audits in which they were found to have obtained improper overpayments from federal health care programs. We conclude that the CIA authorizes the IG to impose separate stipulated penalties for each failure to meet a repayment obligation when due.  This authority exists even where, as here, the failures overlap and result in concurrent stipulated penalties.

Conclusion

For the reasons explained above, we affirm the ALJ Decision upholding the full amount of stipulated penalties demanded by the IG.