State ex rel. Rapier v. Encino Hospital Medical Center (Dec. 21, 2022, B302426, B303196) __ Cal.App.5th __ [2022 WL 18396584], modified and ordered published Jan. 20, 2023

Acute care hospital needed no additional license or approval to operate drug detoxification center.

For about three years, Encino Hospital Medical Center, a licensed acute care hospital, operated at its facility the Serenity Recovery Center to provide acute drug and alcohol detoxification services.  Serenity provided no long-term or outpatient services; rather, its patients received round-the-clock care for three to seven days at the hospital. Most patients arrived with a planned transfer to long-term treatment facilities in place. Serenity obtained patients through in-house marketing programs or referrals from entities such as Aid in Recovery, LLC (AIR), which was Serenity’s largest referral source. Serenity did not pay for referrals. Mary Lynn Rapier, a former Serenity employee, filed a qui tam action against Encino Hospital, alleging employment claims and violations of the Insurance Frauds Prevention Act based on submission of false insurance claims and illegal patient steering. The California Department of Insurance (CDI) intervened and assumed primary responsibility for prosecuting Rapier’s claims. Following a bench trial, the court entered judgment for Encino Hospital. CDI appealed.

The Court of Appeal affirmed. First, the court rejected CDI’s argument that Encino Hospital made false insurance claims that misrepresented it was licensed to provide detox services when (according to CDI) the hospital had to obtain additional licensing and authorization to provide those services through Serenity. The court explained that general acute care hospitals such as Encino may provide chemical dependency recovery services as a supplemental service without obtaining a separate chemical dependency recovery hospital license.  (Health & Saf. Code, § 1250.3, subd. (d)(1).) The governing statute requires the unit of the hospital operating as a detox center to satisfy the criteria for approval as a chemical dependency recovery unit, but it does not require the hospital to obtain separate approval from the California Department of Public Health. Because Encino Hospital did not need any separate license or approval to operate the Serenity detox service, there was no basis for the CDI’s false insurance claims cause of action.

Next, the Court of Appeal rejected the CDI’s steering claim argument. It is unlawful to employ individuals for the purpose of procuring patients to receive services that will be the basis of insurance claims. (Ins. Code, § 1817.7.) Here, however, there was no evidence that Serenity or Encino Hospital either received compensation for referring patients to residential treating facilities or paid for referrals to the Serenity program. CDI nonetheless argued that Serenity employed AIR by agreeing to honor the referred patients’ predetermined treatment plans, which often included transfers to AIR-affiliated long-term care facilities, in exchange for AIR referral of patients to Serenity. Although no direct evidence of any such agreement existed, CDI argued that the agreement could be inferred because Serenity failed to follow an alleged universal standard that acute detox facilities should refuse to honor preplanned treatment regimens. However, no evidence supported the existence of any such universal standard; rather, the evidence showed it was common for patients to arrive at detox facilities with a predetermined discharge location for long-term care following detox. Because there was no evidence of remuneration, exchanges, or any agreement that Serenity employed AIR to obtain referrals, the CDI’s claim steering failed.

The bulletin describing this appellate decision was originally prepared for the California Society for Healthcare Attorneys (CSHA) by H. Thomas Watson and Peder K. Batalden, who are partners at the appellate firm Horvitz & Levy LLP, and is republished with permission.

For more information regarding this bulletin, please contact H. Thomas Watson, Horvitz & Levy LLP, at 818-995-0800 or htwatson@horvitzlevy.com.