Diversicare Lawsuit: $9.5M False Claims Act Settlement and CIA

The Diversicare lawsuit most people are searching for is the 2020 False Claims Act case that ended in a $9.5 million settlement with the U.S. Department of Justice. Diversicare Healthcare Services, a Brentwood, Tennessee-based long-term care operator, resolved allegations that it billed Medicare for medically unnecessary rehabilitation therapy between 2010 and 2015 and submitted forged physician certifications to TennCare, Tennessee’s Medicaid program. A second, smaller settlement followed in 2023 over falsified therapy records at an Alabama facility. Diversicare denied wrongdoing in both matters, and neither settlement included any determination of liability.

The 2020 $9.5 Million Settlement

The Justice Department announced the settlement on February 28, 2020. It covered conduct from January 2010 through December 2015 and resolved two distinct sets of allegations.¹

The Medicare allegations were the larger piece. Prosecutors said Diversicare used corporate budgets, goals, and quotas to push patients into the “Ultra High” therapy reimbursement category regardless of clinical need, and that staff who fell short of therapy-minute targets faced threats or adverse consequences. The therapy billed, according to the government, was “not reasonable, necessary, or skilled.”¹

The TennCare allegations concerned paperwork. The government said Diversicare submitted forged, photocopied, or pre-signed physician signatures on the pre-admission evaluation certifications required to bill nursing facility services to Tennessee’s Medicaid program.¹

Of the total, roughly $9.08 million went to the federal government and about $420,850 to Tennessee. Diversicare was permitted to pay over five years, with additional payments possible if it sold healthcare properties in that window.²³

Diversicare said it settled to “avoid the uncertainty and expense of litigation” and pointed out that the alleged conduct predated its current leadership.³ The agreement contained no admission of liability.⁴

How the Alleged Therapy Billing Scheme Worked

Understanding the scheme requires understanding how Medicare paid nursing homes at the time. Under the Resource Utilization Group (RUG-IV) system in place through most of the alleged conduct, Medicare reimbursed skilled nursing facilities based on the number of therapy minutes a resident received each week. More minutes meant a higher-paying category. The top tier, “Ultra High,” required at least 720 minutes of therapy per week across at least two disciplines.⁵

That structure created a financial incentive to deliver as much therapy as possible. By fiscal year 2017, more than 60% of Medicare-covered nursing home stays were billed under one of the three Ultra-High rehabilitation categories, and CMS research found that 65% of all Ultra-High scores fell between 720 and 730 minutes, right at the threshold.⁶⁷

The government’s allegation against Diversicare was that the company built its therapy operations around hitting those thresholds. Corporate quotas drove therapy minutes up, patients were classified at Ultra High regardless of what they needed, and staff who missed targets were pressured.⁴ CMS replaced RUG-IV with the Patient-Driven Payment Model in October 2019, tying reimbursement to patient characteristics rather than therapy volume.⁶

The Whistleblowers Behind the Case

The investigation began with a sealed qui tam complaint filed on July 3, 2012, by former Diversicare employee Mary Haggard in the U.S. District Court for the Middle District of Tennessee. Her lawsuit alleged false claims to Medicare, TRICARE, and Medicaid for therapy that was not medically necessary. A second former employee, Bryant Fitzmorris, filed a related lawsuit on August 9, 2016, in the Western District of Texas, later transferred to the Middle District of Tennessee.²

The United States intervened in both cases at settlement. Haggard received approximately $1.4 million as her share of the recovery. Fitzmorris received approximately $145,350.⁴ The False Claims Act’s qui tam provisions let private citizens sue on behalf of the government and collect between 15% and 30% of any recovery, which is why nursing home fraud cases so often start with therapists, nurses, or billing staff who see the pressure from the inside.

The Corporate Integrity Agreement

As a condition of the 2020 settlement, Diversicare signed a five-year Corporate Integrity Agreement with the HHS Office of Inspector General, running from February 14, 2020 through August 29, 2025.⁸ The agreement required Diversicare to appoint a dedicated compliance officer reporting directly to the CEO, hold quarterly board reviews of the compliance program, submit to annual claims reviews by an independent review organization, screen employees monthly against the OIG exclusion list, run annual compliance training, operate a non-retaliation reporting hotline, and disclose overpayments and probable violations directly to the OIG.⁹

The OIG now lists the CIA as closed, with no publicly available reports of violations during its term.⁸

The 2023 Canterbury Facility Settlement

In July 2023, the DOJ announced a second, separate settlement involving Diversicare’s Canterbury Health Care Facility in Phenix City, Alabama. Diversicare Healthcare Services, LLC and two occupational therapy assistants, Kellie S. Lemons and Charles M. James, agreed to pay $1.38 million to resolve allegations covering March 2018 through September 2020.¹⁰

According to the government, Lemons and James would clock in at Canterbury, leave to work for other home health companies, and bill Medicare for therapy at Diversicare that was never delivered.¹¹ Prosecutors alleged that Diversicare knew about and condoned the moonlighting and knowingly submitted the resulting claims. The $1.38 million represented three times the damages plus per-claim penalties.¹²

A former Diversicare employee filed the whistleblower complaint that triggered this case and was set to receive more than $200,000. Canterbury was removed from Diversicare’s portfolio as of March 2023.¹⁰¹²

Ownership Since the Settlements

Diversicare is no longer a public company. In November 2021, DAC Acquisition LLC, a New York-based entity managed by Ephram Lahasky, acquired Diversicare, paid stockholders $10.10 per share, and delisted the stock from the OTCQX exchange. The deal was financed with a $100 million term loan and a $10 million revolving credit line from CIBC Bank USA.¹³¹⁴

Lahasky’s broader nursing home network has drawn separate legal scrutiny that is not part of the Diversicare federal cases described above. CMS lists him as the owner of 97 skilled nursing facilities, though regulatory and business filings suggest his network spans roughly 200 facilities across 24 states, with only 3% meeting federally recommended staffing levels.¹⁴ In November 2022, New York Attorney General Letitia James sued Lahasky and two other owners, alleging they diverted $18.6 million from an Orleans County, New York, nursing facility through related-party transactions, causing chronic understaffing and severe harm to residents. That lawsuit sought to remove Lahasky from ownership and managerial roles at the facility.¹⁵

1
U.S. Department of Justice. Diversicare Health Services Inc. Agrees to Pay $9.5 Million to Resolve False Claims Act
2
U.S. Securities and Exchange Commission. Diversicare Settlement Agreement
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Diversicare Healthcare Services. Diversicare Announces Resolution of DOJ Investigation
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U.S. Department of Justice. Diversicare Health Services Inc. Agrees to Pay $9.5 Million to Resolve False Claims Act Allegations
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Illinois Occupational Therapy Association. CMS PPS Breakdown FAQ
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Center for Medicare Advocacy. Final Rules for New Medicare Reimbursement System for Skilled Nursing Facilities
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Montero Therapy Services. Will CMS Pull RUG SNF
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HHS Office of Inspector General. Corporate Integrity Agreement – Diversicare Healthcare Services Inc.
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AAPC. Diversicare Healthcare Services Inc. Corporate Integrity Agreement
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U.S. Department of Justice. Diversicare and Two Occupational Therapy Assistants Pay Over $1.3 Million to Resolve False Claims
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AL.com. Ex-Alabama Nursing Home Owner, 2 Workers Settle Medicare Scam Suit for $1.4 Million
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McKnight’s Long-Term Care News. Diversicare Therapists Hit With $1.4M Settlement Over Moonlighting Allegations
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Skilled Nursing News. DAC Acquisition Completes Deal to Acquire Diversicare
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Skilled Nursing News. MarketWatch Shines a Light on Diversicare Acquirer Lahasky
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New York Attorney General. Attorney General James Sues Orleans County Nursing Home for Years of Fraud and Resident Neglect