(Photo: Diego M. Radzinschi/ALM)

A federal magistrate judge has struck a key witness and ordered the U.S. Justice Department to pay legal fees to HCR ManorCare Inc., one of the country’s largest providers of skilled nursing facilities, for alleged missteps in a case the government touted in the crackdown on fraud in the health care industry.

The Justice Department jumped into the whistleblower case in Alexandria, Virginia, federal district court in 2015, alleging Maryland-based ManorCare routinely submitted millions of dollars in reimbursements to Medicare and Tricare for unnecessary therapy services. The government alleged a six-year nationwide scheme, starting in 2006, to maximize revenue. The company runs nearly 300 facilities across the country.

U.S. Magistrate Judge Theresa Carroll Buchanan of the Eastern District of Virginia last week lambasted government lawyers for bringing a False Claims Act case with an expert the judge said “must not be allowed to testify because of her utter lack of credibility.” Buchanan struck the expert’s report, her deposition testimony and forbid her to testify about her review of medical records in the case.

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“I don’t think this case should have ever been brought,” Buchanan said at a hearing, according to a transcript. “I have looked at this stuff, and I’m appalled, I’m embarrassed, I’m ashamed that the Department of Justice would rely on this kind of nonsense by a nurse reviewer to get involved in a qui tam case and cost these defendants millions of dollars in legal fees.”

Two department lawyers involved in the ManorCare case deferred comment to a spokesperson, who declined to talk about the ruling. “The United States respectfully disagrees with Magistrate Judge Buchanan’s ruling and will likely appeal it,” government lawyers said in a court filing on Thursday.

Reed Smith partner Eric Dubelier in Washington, a lead attorney for ManorCare, declined to comment on the ruling. A summary judgment hearing is scheduled for Nov. 9.

The False Claims Act is a powerful civil tool the Justice Department regularly has used to target health care companies, pharmaceutical manufacturers and the mortgage industry. Last year alone the Justice Department recovered nearly $5 billion through enforcement of the law. Chad Readler, the acting head of DOJ’s Civil Division, told Congress in June that the amount marked the seventh consecutive year the department had recovered more than $3 billion.

Lawyers for corporate clients know the law as a “cash cow” for the Justice Department, as two Mayer Brown partners called it in a blog post in September that looked at the pressure companies face to make a deal, or risk being sued and potentially paying a significant penalty.

“At least in the mortgage industry, allegations abound that the DOJ has abused its power by cajoling and pressuring settlements with questionable legal foundation on the bet that few want to be sued by the federal government,” Mayer Brown partners Krista Cooley and Laurence Platt wrote in their post.

The Justice Department in 2015 said “skilled nursing homes and rehabilitation facilities have also been fertile ground for civil fraud and false claims actions.” One company, Extendicare Health Services Inc., in 2014 agreed to pay $38 million to settle False Claims Act allegations rooted in the government’s claims of providing “materially substandard nursing services that were so deficient that they were effectively worthless.”

ManorCare, the Justice Department Clash in Court

For months, the Justice Department and the Reed Smith team for ManorCare had fought over evidence related to the critical expert witness, Rebecca Clearwater. Central to the dispute was the Justice Department’s belated disclosure of 131 pages of notes written by Clearwater, the government expert witness.

ManorCare’s defense lawyers, pointing to omissions in Clearwater’s three-day deposition in August, argued the case should be dismissed or that Clearwater shouldn’t be allowed to testify. ManorCare’s lawyers said the handwritten notes, which Clearwater did not disclose during her deposition, were “in certain material respects inconsistent” with the opinion she wrote in her report.

“DOJ’s arrogant and cavalier attitude towards its discovery obligations in this case is no longer confined to fact discovery, but has also carried over to the experts upon whom DOJ’s case completely relies,” ManorCare’s lawyers wrote in a court brief last month. “At this point it hardly matters if DOJ is dishonest or incompetent, or both.”

The Justice Department, in a brief filed before last week’s hearing, said Clearwater misunderstood what prosecutors meant by “notes” when they asked her for documents in discovery.

“DOJ inquired about notes taken during the review; however, at the time, Dr. Clearwater understood the requests for ‘notes’ to refer to notes of meetings and conversations with the nurse reviewers regarding the review. Dr. Clearwater did not seek clarification on this point, and DOJ was not aware of the misunderstanding,” prosecutors wrote.

The Justice Department described ManorCare’s requests for sanctions as “extreme” and suggested holding another deposition of Clearwater. The production of the notes, prosecutors said, was not an example of the government ignoring its discovery obligations.

“Rather, recognizing its duty to produce such information,” prosecutors wrote, “the United States took steps to obtain and produce the notes as quick as possible when it learned of the notes’ existence,” DOJ lawyers said in court papers.

At the Oct. 27 hearing, Allison Cendali, speaking for the Justice Department, told Buchanan “there was no bad faith on the part of the government. There was no bad faith on part of Dr. Clearwater.”

Buchanan, at the court proceeding, said she doubted Clearwater had misunderstood the request for her notes. She said it was “inconceivable and incredible” that Clearwater would not remember writing 131 pages of patient notes. “As I said, it’s a whole — it’s like writing a book. It’s a whole notebook full,” the judge said at the hearing.

Buchanan called the Justice Department’s case a “huge waste of money” and a “house of cards” that rested on Clearwater’s testimony. She declined to dismiss the case but said she would award fees for the cost ManorCare incurred for bringing the motion for sanctions against the Justice Department.

Referring to prosecutors’ proposal for another deposition, Buchanan said, “I understand the Department of Justice’s inclination to try to somehow repair this, but I don’t think that this is reparable.”

As the hearing ended, Buchanan said she wished she could award legal fees to ManorCare beyond the work in preparing the request for sanctions. “I cannot find a method for awarding those costs now, but I think that the defendants should be entitled to it because it’s obvious that her deposition was a waste of time,” the judge said.

Mike Scarcella contributed reporting from Washington.

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