64194603

Sep 11 2019
03:46PM

1 PETER A. STROTZ (CA State Bar No. 129904)

JAMES W. BOSWELL (Pro Hac Vice)
2 MICHAEL E. PAULHUS (Pro Hac Vice)
STEPHANIE F. JOHNSON (Pro Hac Vice)
3
KING & SPALDING LLP
4 633 West Fifth, Suite 1600
Los Angeles, California 90071
5 Telephone: (213) 443-4387
Facsimile: (213) 443-4310
6 PStrotz@KSLaw.com
7 JBoswell@KSLaw.com
MPaulhus@KSLaw.com
8 SFJohnson@KSLaw.com

9 Attorneys for Defendants

Prime Healthcare Services –Encino LLC
10 d/b/a Encino Hospital Medical Center;
11 Prime Healthcare Foundation, Inc.; and
Prime Healthcare Services, Inc.
12

13 SUPERIOR COURT OF THE STATE OF CALIFORNIA

14 COUNTY OF LOS ANGELES, CENTRAL DISTRICT
15
STATE OF CALIFORNIA ex rel. MARY Case No. BC641254
16 LYNN RAPIER, [Trial Judge: Honorable William F. Fahey]

17 Plaintiffs, NOTICE OF FINAL STATEMENT OF

DECISION
18 v.
19 Action Filed: November 18, 2016
SRCC ASSOCIATES, LLC, d/b/a SERENITY Trial Date: June 19, 2019
20 RECOVERY CENTER and/or SERENITY
RECOVERY CENTER AT ENCINO
21 HOSPITAL, et al.
22 Defendants.
23

24

25

26

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NOTICE OF FINAL STATEMENT OF DECISION

 1 TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD:

2 PLEASE TAKE NOTICE that on September 6, 2019 the Court entered a Minute Order in

3 the above-entitled matter, a copy of which is attached to this notice as Exhibit A.

4 As stated in the Minute Order, the Court intends to enter judgment in favor of Defendants

5 as set forth in its Final Statement of Decision, a copy of which is attached to this notice as

6 Exhibit B.

7 The Court further orders counsel for Defendants Encino Hospital and the Prime Entities

8 to lodge a [Proposed] Judgment by September 20, 2019.

9 A Status Conference regarding Lifting the Stay on Causes of Action 3-6 of the Second

10 Amended Complaint is scheduled for September 25, 2019 at 8:30 a.m. in Department 69 of the

11 Stanley Mosk Courthouse.

12 Counsel for Defendants Encino Hospital and the Prime Entities to give notice.

13

14 Dated: September 11, 2019 KING & SPALDING LLP

15

16 By:
17 PETER A. STROTZ

18 Attorneys for Defendants Prime Healthcare Services –

Encino LLC; Prime Healthcare Foundation, Inc.; and
19 Prime Healthcare Services, Inc.
20

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1
NOTICE OF FINAL STATEMENT OF DECISION
EXHIBIT A
 SUPERIOR COURT OF CALIFORNIA, COUNTY OF LOS ANGELES
Civil Division
Central District, Stanley Mosk Courthouse, Department 69

BC641254 September 6, 20 I 9
STATE OF CALIFORNIA VS ENCINO HOSPITAL 2:05 PM
MEDICAL CENTER ET AL

Judge: Honorable William F. Fahey CSR: None

Judicial Assistant: V. Solis ERM:None
Courtroom Assistant: E. Laskey Deputy Sheriff: None

APPEARANCES:
For Plaintiff(s): No Appearances
For Defendant(s): No Appearances

NATURE OF PROCEEDINGS: Final Statement of Decision

The Court's "Final Statement of Decision" issued and filed this date, is incorporated herein by
reference and summarized below.

Defendants are entitled to judgment in their favor. Accordingly,

IT IS ORDERED that counsel for the Prime/Encino defendants is ordered to lodge a [proposed]
Judgment by September 20, 2019.

IT IS FURTHER ORDERED that a Status Conference Re Lifting the Stay on Causes of Action
3-6 of the SAC is scheduled for 09/25/2019 at 08:30 AM in Department 69 at Stanley Mosk
Courthouse.

The Clerk is directed to give notice to counsel for Defendants, Prime/Encino, who is to give
notice to all parties.

Certificate of Mailing is attached.

Minute Order Page I of I

 Reserved for Clerk's File Stamp
SUPERIOR COURT OF CALIFORNIA
COUNTY OF LOS ANGELES
COURTHOUSE ADDRESS: FILED
Superk1r Court of Qliifornia
Stanley Mask Courthouse County or LosAngak!s
111 North Hill Street, Los Angeles, CA 90012
PLAINTIFF/PETITIONER: S!,oc,, R C 4 - ~ ~ l ~ ; l Cc«ofCou·t
Mary Lynn Rapier Ph.D. et al By: ", Dfr;::,;..;ty
DEFENDANT/RESPONDENT: Ve~1 :,a' So!is
Aid In Recovery, Inc. et al
CASE NUMBER:
CERTIFICATE OF MAILING BC641254

I, the below-named Executive Officer/Clerk of the above-entitled court, do hereby certify that I am not a
party to the cause herein, and that on this date I served the Minute Order (Final Statement of Decision) of
09/06/2019, Final Statement of Decision upon each party or counsel named below by placing the document
for collection and mailing so as to cause it to be deposited in the United States mail at the courthouse in
Los Angeles, California, one copy of the original filed/entered herein in a separate sealed envelope to each
address as shown below with the postage thereon fully prepaid, in accordance with standard court
practices.

Peter Auguste Strotz

King & Spalding LLP
633 W 5th St
Suite 1600
Los Angeles, CA 90071

Sherri R. Carter, Executive Officer/ Clerk of Court

Dated: 09/6/2019 By: Veronica Solis

Deputy Clerk

CERTIFICATE OF MAILING
EXHIBIT B
 NFORMED COPY
COOHIGINAL FILED .
S afior Court ol Cali!ottita
u8ounty of Los Angelos

SEP O6 2019
Sherri R. Carter, Executive Officer/Clerk
By veronica Solis, Deputy
STATE OF CALIFORNIA V. SRCC ASSOCIATES, LLC, et al.
BC 641254
September 6, 2019

FINAL STATEMENT OF DECISION

On November 18, 2016, relator Mary Lynn Rapier filed this action under seal. The
original complaint alleged various violations of the California Insurance Code and employment
related claims against 10 defendants. The case remained under seal until on or about February 5,
2018 when the California Department of Insurance ("CDI") elected to intervene. As a result,
CDI then had "the primary responsibility for prosecuting [this] action." Ins. Code 1871.7(£)(1).

On May 2, 2018, a First Arriended Complaint ("FA C") was filed, this time naming 17
defendants. On September 4, 2018; the Court granted a motion to compel arbitration on causes
of action 3-6 (the employment related claims), but stayed the arbitration pending the outcome at
trial of causes of action 1 and 2 (the insurance fraud claims).

On November 9, 2018, the operative 152 page Second Amended Complaint ("SAC") was
filed, also naming 17 defendants. As to the insurance fraud claims, four groups of defendants
were named: (1) the SRCC defendants; (2) the West Coast Wellness defendants; (3) the
Prime/Encino Hospital defendants and (4) the Epic defendants. Prior to trial, the Court
dismissed the Epic defendants and granted defendant Deering's Motion to Quash because CDI
had no basis to bring charges against a non-California resident. The West Coast Wellness
defendants settled.

The case was further narrowed as the result of rulings on multiple motions for summary
judgment/adjudication. In its June I 0, 2019 Order, the Court ruled as a matter of law that the
Prime defendants were properly licensed by the California Department of Public Health
("DPH"), but the SRCC defendants were not. The Comi then ruled that there was a material
question of fact as to whether these defendants had the requisite intent to defraud when they
submitted insurance claims. Finally, the Court ruled that CD I's jurisdiction was limited to claims
made only to California insurance companies and that claims made to HCSPs, HMOs and to
ERISA plans were not within the jurisdiction of the CDI.

In its Pretrial Report CDI advised that it intended to proceed to trial on the first cause of
action, alleging a violation oflns. Code 1871.7(a), which it called "illegal patient steering" and
the second cause of action, alleging a violation oflns. Code 1871. 7(b), identified as the
"submission of false claims."
 A bench trial commenced on June 19, 2019. The presentation of evidence was completed
on June 28, 2019. The parties submitted post trial briefs and closing arguments were heard on
August 2, 2019. The Court issued:its Tentative Statement of Decision on August 16, 2019.
Thereafter, CDI filed its Objections, which total 41 in number. The Court has fully considered
each of these objections, even though many consist of an improper attempt to reargue the merits.
See Heaps v. Heaps, 124 Cal. App. 4th 286, 292 (2004) (the purpose of an objection to a proposed
statement of decision is not to reargue the merits). 1 The Court now issues its Final Statement of
Decision.

A. FINDINGS OF FACT 2

In his opening statement, relator's counsel stated that CDI intended to prove that the
conduct of the six remaining Prime and SRCC defendants (involving at least 1858 fraudulent
insurance claims) required an award of "damages" of "no less that $57,678,436 and this is
subject to trebling." In seeking to prove this case, CDI presented the testimony of multiple
witnesses and introduced about 50 exhibits.

Defendant Lasko was CDI's first witness. He testified that in 2014 he got involved in the
medical detoxification business in Florida. He started the Garden Wellness clinic in that state.
Defendant JNL Management is Lasko's Florida company.

Lasko came to California in 2015 to examine the detox industry. He spoke with his
attorneys and Dr. Bhatia, the medical director at Encino Hospital, about setting up a "high
quality" detox center at that hospital. He took out a loan and formed SRCC. SRCC then entered
into a Management Services Agreement ("MSA") with Encino Hospital. Ex. 505. The MSA
was a lengthy and detailed contract which "went back and forth" between the lawyers. Lasko
wanted to follow the law and deferred to the lawyers regarding all licensing issues. E.g., Ex.
152.

1
CDI's improper objections also include references to "ambiguities," while failing to
clearly specify what is ambiguous, and references to reporter's transcripts without having
provided them to the Court, e.g., the proceedings on June 4, 2019 and August 2, 2019.
2
The key facts summarized herein are those that the Court has found were established by
the testimony of the witnesses and the exhibits received in evidence. To the extent that this
recitation differs from any party's position, that is the result of a determination as to credibility
and relevance, burden of proof considerations and the weighing of evidence.

2
 SRCC invested "a couple of million dollars" to set up the detox program on the third
floor of Encino Hospital. In November 2015, the detox center began operations and was named
the Serenity Recovery Center at Encino Hospital ("Serenity"). The hospital made 28 beds
available for the Serenity program. Lasko hired the director of operations and the director of
nursing. In 2016, he hired Rapier as director of clinical services.

To obtain patients, Serenity had an in house marketing program. It also had many referral
sources. One of them was Aid in Recovery, LLC ("AIR"), a call center, which referred patients
to Serenity for about nine or ten months. There was no written agreement between them and
Serenity did not pay for AIR's referral services.

Serenity's patients were only admitted with a doctor's approval. The patients were
provided 24 hour inpatient care and usually stayed for approximately three to seven days.
Serenity was not a "lock down" fadlity and its patients could chose to leave at any time. The
majority of the patients had a "discharge plan," i.e., they (or someone on their behalf) had already
chosen a long-term residential treatment facility to attend after they left Serenity. Lasko testified
that this was because the patients were addicts and were unable to make sensible decisions while
in a detox program. The patients' bills were covered by insurance companies or other providers.
Serenity relied on Encino Hospital to bill the providers. Serenity received 95% of the amounts
billed.

Lasko believably testified tnat, based on the advice of his attorneys, he did not think that
Serenity needed its own license to operate its program at Encino Hospital. He never heard
anything different from DPH or CDL In fact, the first time he heard that Serenity might have a
licensing issue was after this lawsuit had been filed. Serenity closed its program in early 2019.

Roland Santos is the Chief Nursing Officer for Sherman Oaks Hospital, which is a sister
hospital of Encino Hospital. He is also the licensing expert for both hospitals. He frequently
works with DPH, which sets the standards for hospitals. Encino Hospital is licensed by DPH as
a General Acute Care Hospital. Santos also testified that DPH did not have to approve
management contracts for services provided by others at Encino Hospital. 3

Santos met with members of the Encino Hospital executive team during the time the
Serenity program was being proposed. He believed that Serenity could operate under Encino

3
The Court sustains CDI's objections to the so-called "All Facilities Letters," Ex. 1017
and 1018.

3
Hospital's license. He did not have any discussion with SRCC about licensing.

Over the years, Santos had often spoken with Eric Stone, a program manager for DPH,
about licensing and other issues. In early 2016, Santos spoke with Stone who confirmed that
medical detoxification was an inpatient service that could be provided in a hospital's general
acute care beds. See also Ex. 1130, a September 2016 email which is consistent with Santos'
trial testimony.

Dr. Waldman was CDI's third witness. He is board certified in internal medicine and
now specializes in addiction medicine. He is currently working in Utah for a residential
treatment center which includes a detox program. In 2015, he interviewed with Lasko about
becoming the medical director for Serenity, but the job was not offered to him. Waldman agreed
with Lasko's testimony that the proper treatment plan for addicts was to start with a short-term
detox program and then participate;in a long-term residential program, usually for 30 to 60 days.
This should be followed by even longer outpatient treatment.

Waldman opined that a patient should not start a detox program with a discharge plan.
Nor should a patient get a discharge plan from a referral service. Instead, the choice of a long-
term residential plan should be made by the "interdisciplinary team" with input from the patient.
However, on cross-examination Waldman admitted that there is no agreed upon standard as to
when a discharge plan should be made. He also admitted that patients in detox had a disease of
the brain, they regularly lie, cheat and scam and they "may not be willing to be steered" as to a
proper discharge plan.

Plaintiff then called Em Garcia, the Chief Nursing Officer and Administrator for Encino
Hospital. Garcia is also the Administrator for Sherman Oaks Hospital. Encino Hospital had
provided detox services before its relationship with Serenity and does so now that Serenity has
left the hospital. He identified Ex. 1073 as the licenses for Encino Hospital.

In 2015 Garcia was involved in setting up the Serenity program at the hospital. SRCC
was hired because of its experience 'in treating addicts, including providing the necessary
professionals, marketing and business development. While he was not specifically involved in
any licensing decisions regarding Serenity, he did not believe that Serenity needed its own
separate license. In fact, Encino has management agreements with other groups which provide
licensed professional services in the; hospital, including for emergency treatment, rehabilitation
services, anesthesiology and occupational therapy. None of these other services requires a
separate license to operate within Encino Hospital. This was unrebutted and significant
testimony as to Encino Hospital's state of mind.

4
 As of 2016, the Serenity program had been operating for about 9-10 months. In late
2016, there was a Joint Commission audit and the issue of Serenity's license came up. The Joint
Commission is a private national accreditation agency which sets standards for the industry.
Garcia met with the surveyor and tried to explain the Serenity program. But the surveyor seemed
confused. See also Ex. 218, noting that the surveyor was sometimes "surprised" and
"perplexed." Garcia responded to the Joint Commission's findings in October 2016. Ex. 1070.
Garcia's position on the Serenity licensure issue in Ex. 1070 was consistent with his trial
testimony and was set forth more than one year before the charges in this case were unsealed.

In 2017, Garcia was involved with a DPH survey. Ex. 1156. No complaints were raised
about the licensing status of Serenity.
1
Garcia worked with Rapier 0n policies and procedures after she was hired by Serenity.
At no time did Rapier express any concerns about Serenity's license status, patient referrals or
the patient discharge process. Nor did any other Serenity employee express concern about
Serenity's licensing.

Garcia had no knowledge of AIR until this case was filed. He was not involved in the
intake of patients by Serenity. He never received any complaint from CDI or DPH about
Serenity's license status. In fact, DPH has continued to renew Encino Hospital's license even
after the allegations in this lawsuit were made public. 4

Stone testified that he retired from DPH in 2017. His job had been to enforce both state
and federal laws and regulations, including those involving licensing. Over the years, he had
many conversations with the Encino Hospital management team, including Santos. He claimed
to have no memory of the early 2016 conversation testified to by Santos. He also claimed to
have no memory of having received Ex. 1130. The Court found his Stone to be quite evasive in
his demeanor and in his claims of no memory. This is likely because he has learned that CDI is
taking a different position than he did while still employed by DPH.

Rapier testified about her education and work history, including referring patients to a
residential treatment facility in Arizona in 2009. But she admitted that, prior to and subsequent
to her brief employment at Serenity, she has had no experience in a hospital setting, in an acute
detox facility or as a clinical director.

In 2015, Rapier spoke with Lasko about running the clinical department at Serenity and

4
CDI objets to this finding but fails to provide a citation to any contrary evidence.

5
setting up its policies and procedures. She had what she described as a three month interview
process during which time she was at Serenity learning about their operation. She claimed that
she then wrote a three page letter about "things she found to be irregular." But she failed to
produce the letter as an exhibit at trial, thereby adversely affecting her credibility.

Rapier was eventually offered the job and started part time in March 2016. She began
full time employment on April 1, 2.016, which continued until she took a medical leave of
absence at the end of June 2016. Rapier testified that she was terminated by Lasko and received
her last paycheck in August 2016.

Rapier's credibility was also adversely affected because she did not testify that she
reported licensing or "illegal patient steering" to Lasko or anyone else before she was
terminated. 5 Nor did she produce at trial the "policies" and "procedures" she claimed to have
written but which were not adopted by Serenity.

Rapier testified that she supervised and trained interns and therapists. She testified that
she did not get along with Josh Canova, rarely spoke with Em Garcia and never met Dr. Bhatia.
She recommended her friend Jennifer Vachet for a job at Serenity. Rapier learned that Serenity's
patients often had predetermined discharge plans. Rapier's own clients from private practice did
not have such plans.

The Court did not find Rapier's testimony on the key issues very credible. Overall,
Rapier did nothing to advance CDrs case.

Evelyn Kim is a Texas based consultant on medical practices. 6 She also investigates
fraud claims on behalf of a Texas health plan. She was first approached by Rapier to get
involved in this case. Although she has never been qualified to give expert testimony, she was
later hired by Rapier's attorneys to bpine on what she said was a standard form used to bill
insurance companies. Ex. 279. Her opinion was that, if Encino Hospital used this form, SRCC
and its NPI number should have been listed as a provider of health care treatment. However,

5
CDI objects to this finding because "there was no evidence that Rapier was ever aware
of the underlying licensing issues uiltil after her employment with Serenity ended." This is
disingenuous to say the least. CDI's First Amended Witness List stated that Rapier would offer
''percipient, foundational facts for the allegations contained in Plaintiff's SAC," which of course
included the licensing allegations.
6
The motion to strike Kim's testimony is denied.

6
when asked to interpret the remainder of Ex. 279, Kim's testimony was rambling and difficult to
understand. The Court had the distinct impression that Kim was not really familiar with Ex. 279
and was making up her answers as she testified on direct examination.

Kim did not testify that she had any experience with the majority of the insurance
companies listed on Ex. 1061. Thus, she gave no testimony as to what these companies
considered to be material in terms of the disclosure of a provider of detox services.

On cross-examination, Kim admitted that she has never worked in a hospital nor has she
been involved in hospital billings. She has worked for only two insurance providers, Cigna and
Humana. She has no experience or background with the California Insurance Code or regulations.
She did not review any of the claim forms submitted by Encino Hospital and has no opinion as to
whether or not they were accurate. She has no opinion as to whether Encino Hospital or SRCC
had the intent to defraud any insurance provider.

Kim testified that she wrongly assumed that Serenity was a long term residential drug and
alcohol treatment program. She is familiar with management agreements and testified that they
are commonly used in hospitals, thereby corroborating Garcia. When she was finally shown Ex.
1200, the 109 page CMS Manual System prepared by the Department of Health and Human
Services, she changed her testimony about what information was required on Ex. 279.

In any event, upon review, the Court concludes that Ex. 1200 does not support Kim's
opinion that SRCC and/or Serenity had to be specified on a claim form. Moreover, Ex. 1111
shows that the Serenity detox program was identified on the Encino Hospital claim forms.
Ultimately, Kim's testimony was ofno value in showing that there were any material false
statements or omissions by Encino Hospital on the claim forms submitted to California insurance
companies.

Vachet testified that she is a licensed marriage and family therapist. She previously
worked for Rapier as a therapist. She has had no prior experience in a hospital setting or with a
detox facility. Rapier hired her to wbrk for Serenity in 2016 as the social services manager. She
worked there for seven months. Vachet testified about the two computer software systems used
by Serenity, Meditech and Kipu. B~t nothing in her testimony came close to showing that this
was unlawful or a "Rube Goldberg" scheme.

Vachet also testified about the patient discharge meetings which she attended. She
recalled that Vanessa Russo, who she believed was a Serenity employee, discussed insurance
coverage during discharge meetings. But Vachet agreed that no discharge decision was made for

7
a medically improper reason. She resigned after another employee lodged a complaint against
her.

Denise Durity was the last live witness called by CDI. She started work at Sherman Oaks
Hospital in 2002. She later also worked for Encino Hospital. In 2017 she went to work for
Hollywood Presbyterian Hospital.

In 2015 Durity began to handle Serenity's billings for Encino Hospital. Although she had
some memory that Lasko was involved in the admission decisions at Serenity, her overall memory
of specific events from four years ago was weak. She was not shown any claims submitted by
Encino Hospital to any insurance company. But she recalled that Encino Hospital used its NPI
number to bill for Serenity's services.

CDI presented excerpts of the deposition of Dr. Diamond. Ex. 487. Diamond testified
that he is an internist. However, no testimony was provided that he had any specialized training
or experience in the field of adult addiction disorders or in a detox facility, In any event, he was
hired as a hospitalist by Epic Medical Group in February 2016. In or around June 2016 he also
became the medical director for Serenity.

Diamond opined that discharge planning should begin at the time of admission. He did
not testify that this was a "universally and globally accepted standard." Instead, he called this a
"best practice," based on some unidentified "information that I researched to prepare this
document from insurance companies who would recommend this as well." CDI did not introduce
the "document" or other exhibits to corroborate his opinion. 7

Diamond testified that Serenity had daily interdisciplinary treatment group meetings at
which time discharge decisions would be discussed. He did not testify how often he attended
these meetings. He admitted that heJ1ad no responsibility for discharge decisions because he was
told they were "outside of [his] scope." He "partially" disagreed with this conclusion and then
testified that he occasionally expressed a disagreement at the meetings he attended. He felt that
his opinions "were not taken into consideration."

Later in his testimony, Diam6nd referred to a text message in which he accused Canova of

',
7
CDI correctly notes that Garcia testified that he believed discharge planning should
begin at admission. However, Garcia testified that he worked in only two acute detox programs:
Serenity and an unnamed "general acute care hospital." This limited experience did not qualify
him to opine about any "universally and globally accepted standard."

8
"fraud." The text message was not introduced into evidence. Diamond defined the fraud as
Casanova disagreeing with his opinion that "a patient was medically stable for discharge on a
specific date, and that would be overridden." The implication apparently is that Serenity
improperly held patients longer than necessary for financial reasons. But assuming arguendo this
is true, neither Diamond nor CDI identified any specific patient as to which this occurred. Nor did
they connect any patient in this category to a claim made to a California insurance company.

Diamond testified that he had no knowledge of discharge plans for patients prior to their
arrival. He stated that there were too many discharge locations for him to count. Finally, he
admitted that he had no evidence of any financial arrangements between Serenity and the
locations to which Serenity's patients would be discharged. At bottom, Diamond provided no
support for CDI' s so-called "illegali steering" theory.

CDI also introduced excerpts of Canova's deposition. Ex. 486. On September 15, 2015,
Canova was hired as director of op~rations at Serenity. He reported to Lasko and Em Garcia.
Serenity's non-medical employees reported to Canova.
I

Em Garcia told him on several occasions that the correct licensing was in place for
Serenity. Canova was not aware of any insurer questioning the licensure of Serenity. AIR was for
a time the largest referral source for Serenity's patients and those patients came with a discharge
location. But not all AIR referred patients discharged to a so-called "Deering controlled facility."
Canova was not aware of any payments made by Serenity to receive patient referrals.

Canova also testified about the daily interdisciplinary staff meetings. As for discharge
decisions, patients usually had a predetermined facility as part of their "continuity of care plan."
Canova disagreed with Diamond's testimony regarding disputes about discharge decisions.
Canova recalled that on occasion Diamond believed that a patient was medically cleared, but the
team concluded that a safe discharge location was hot then available. Canova also recalled that he
"was outvoted by Dr. Diamond a couple oftimes ... he didn't want to wait for the available bed for
a safe discharge location so the patient discharged to the street."

Defendants rested without calling any witnesses.

B. CONCLUSIONS OF LAW

CDI's Closing Brief takes a much more expansive position than advanced in its opening
statement. CDI now asserts that there were 4135 false claims for which "assessments" should be
imposed in the amount of $139,598,479, plus a penalty range of $20,675,000 - $41,350,000. But

9
it is important to note that CDI does not distinguish between or among the remaining six
defendants. Apparently, CDI seeks to have the Court impose a judgment of as much as $180
million jointly and severally against: (1) Prime Healthcare Services - Encino LLC, dba Encino
Hospital Medical Center ("Encino"); (2) Prime Healthcare Foundation, Inc; (3) Prime Healthcare
Services, Inc; (4) SRCC Associates, LLC; (5) Jonathan Lasko and (6) JNL Management LLC.

However, despite the conclusory allegations of aiding and abetting and conspiracy in the
SAC, CDI failed to put on any evidence which would even suggest liability on the part of three of
these defendants: Prime Healthcare! Foundation, Inc., Prime Healthcare Services, Inc. and JNL
Management LLC. Assuming arguendo that CDI at one time had a good faith basis for naming
these defendants, CDI knew or should have known at the outset of trial that it did not intend to
introduce evidence of their liability[ In any event, havii1g failed to introduce evidence of liability
against these three defendants, CDI should have moved to dismiss them at the conclusion of the
evidence. CDI's continued attempt to impose liability on these defendants is improper. 8

Next, the Court agrees with the Encino Closing Brief which argues that CDI "vastly
overreached in pursuing a case beyond its limited jurisdiction." CDI approved the filing of the
FAC (93 pages) and the SAC (152 pages). These pleadings named many defendants and detailed
dozens of alleged violations, the vast majority of which were jettisoned or dismissed prior to or at
trial.

CDI's theories also came artd went. In the SAC, CDI advanced a "disguised provider"
theory of liability. Shortly before trial
I
CDI decided to drop the "patient-by-patient" claims such as
the "medical necessity of admission [and] urine testing." At trial, CDI advanced a "Rube
Golberg" theory as to electronic medical records and a "leased bed" theory.

Additionally, CDI made unsupported arguments that it had jurisdiction of claims made to
out-of-state insurance carriers and as to providers regulated by another agency, the California
Department of Managed Health Care. This too was a vast overreach of authority.
I

There has been a long-standing compact between our government agencies and our
citizens. Almost 100 years ago, Justice Oliver Wendell Holmes held that, "men must tum square
comers when dealing with the government." Rock Island R. Co. v. United States, 254 U.S. 141
(1920). Ten years later, the U.S. Court of Appeals completed that compact, holding that "the

8
CDI objects that it was somehow foreclosed from putting on evidence as to these three
defendants. Not so. The one citation CDI provides clearly shows that relator's counsel was
seeking only to show the source of funds "used to actually build out part of Encino Hospital."

10
government ought to turn square corners when dealing with its citizens." Howbert v. Penrose, 38
F. 2d 577 (10 th Cir. 1930). Stated another way, it is the obligation of our government agencies to
"get it right," especially where substantial property and monetary issues are at stake. See, e.g.,
Byrne v. State Pers. Bd., 179 Cal. App. 2d 576, 582 (1960) (the citizens of California are entitled
to a "high standard of public service and a high standard of conduct in public service").

In this case, it is troubling that no government regulatory agency, including CDI and DPH,
ever advised the original 17 defendants that they had licensing issues or that they should cease and
desist from specified unlawful conduct. One would expect that agencies which are charged with
protecting the public would attempt to cure these problems before commencing expensive, multi-
year litigation. Instead, as witnesses testified, they were simply hit with a lawsuit which was
instituted by Rapier, a short-term SRCC employee. ·

Further, once the case was filed, it appears from the record that CDI did not fulfill its
obligation to be scrupulously fair when it proceeded against these many defendants on ever-
shifting theories of liability. This course of conduct put tremendous financial and business
pressure on the defendants, including having to pay enormous attorneys' fees and costs and
disrupting the day-to-day operations for document gathering, witness interviews and depositions,
all of which was brought to this Court's attention during the pretrial phase of this litigation.

Also troubling is that CDI appears to have abdicated its statutory responsibility for taking
"the primary responsibility for prosecuting [this] action." Throughout the pretrial phase of the
case, CDI ceded the primary responsibility for discovery and motion practice to the relator's
attorneys. At trial, relator's attorneys gave the opening statement, handled all but two minor
witnesses, argued key evidentiary issues and gave the closing argument.
I

A teHing moment at the trial occurred when relator's counsel spent a great deal of time
trying to introduce evidence that Serenity's patients were illegally offered services such as yoga,
hair treatment, massages, pedicure'.s and manicures. When defendants objected, the Court inquired
as to whether such services were prohibited by law. A recess was taken to enable relator's
counsel to consult with counsel for CDI. After the recess, relator's-counsel argued that:

"this (sic) was listed as an acute detox medical detox facility and was licensed as such.
And everything they did beyond tliat is a violation of the license. If it's.not contained within the
license, then they needed to get a different license or amendment to the license they had. And
they didn't do that. That is the fraud."

But CDI's trial counsel, Muallem, disagreed,

11
 "I'm not aware of any statute that says you're prohibited from offering what the current
testimony is geared towards. And I apologize for that." Muallem then stated "you're placing me
in an untenable position of disagreeing with lead counsel on this witness. So with all due respect,
your honor, I understand the Court.'s ruling, but I'm just not able to address it." (Emphasis
supplied). This response was also::inconsistent with Ins. Code 1871.7(£)(1) which states that,
when the Commissioner proceeds with the action, he "shall not be bound by an act of the person
bringing the action."

At another point during the trial a different conflict arose between relator's counsel and
Muallem having to with the prospective testimony of expert witness Kim. Muallam first
represented that Kim would give a specific limited opinion. Following a weekend, relator's
counsel sought to expand Kim's testimony to four opinions. The Court observed that "there are
too many cooks stirring the soup." In response, relator's counsel argued:

"It cannot all be turned on its head because of an off-the-cuff comment by Mr. Muallem."

Muallem responded and again apologized:

"Your honor, it is incumbent upon me to accept responsibility. Mr. Armitage is correct, I

had misspoken. Mr. Armitage has prepared a witness. The Waters, Kraus team has prepared the
expert disclosure. They have been working on this case for three years. I came into this case
rather late. I accepted my responsibility, I attempted to do the best job I could. Ifl have
misinformed the Court, I apologize to the Court. That was my responsibility to get it right."

A third example of CD I's abdication of its primary role occurred when defendants
complained of surprise because Stpne was to be called as a trial witness. As background,
defendants had contacted Muallem prior to trial for help locating Stone so as to take his
deposition. Muallem advised that\he was "not in touch with [Stone]." As it turned out, however,
relator's counsel had been in touch with Stone and had prepared him to testify. The Court
expressed concern about the apparent hiding of a witness and asked for a response. Muallem
chose not to respond and once again deferred to relator's counsel.

The record shows that Muallem was the second "lead counsel" for CDI, following attorney
Wang. But, as the above examples show, Muallem felt that he had to defer to relator's counsel
because he was not fully familiar With the case. Recently, the Court was advised that Muallem is
no longer with CDI. A different CDI attorney, Danielson, appeared as so-called "lead counsel" on
August 2, 2019. But like her pred~cessor, she chose to defer to relator's counsel, this time to give
closing argument. On September 3, 2019, CDI designated yet another "lead attorney."

12
 The Court understands that a party may use multiple attorneys during the course of
complex litigation. Here, however, it appears that CDI provided "lead counsel" in name only.
And at no time did these so-called lead counsel comply with the statutory mandate to take
"primary responsibility" for prosecuting this case. This was no small matter because, as it turned
out, relator's counsel took starkly different positions than CDI's counsel and also tried to put
defendants on trial for conduct which was not prohibited by law. Only when pressed by the Court
did CDI's trial counsel concede this point. In fact, he felt the need to apologize.

When serious charges are brought by a government agency, there must be a sound, legal
basis for doing so. When the Insurance Commissioner brings a case, it must be based on a
violation of the Insurance Code. In other words, the Commissioner must "tum square corners."
Moreover, defendants, as a matter bf due process, must know with specificity what conduct
violates which statute.

Turning to the substance of the fraud claim, CDI relies on Ins. Code 1871.7(b) which, in
tum, incorporates Penal Code 550i CDI argues that these statutes "reach all claims presented in
this case." CDI's theory is that defendants defrauded insurance companies by failing to disclose
that Serenity was providing the detox services at Encino Hospital. CDI relies on Ex. 1061 which
lists 4484 claims. 9 But Ex. 1061 was prepared for litigation and CDI makes no attempt to
correlate this exhibit to Ex. 1111, the actual claim forms, which are far fewer in number. And, as
noted, Ex. 1111 shows that the Serenity detox program was disclosed to insurance companies. In
sum, neither Ex. 1061 nor Ex. 11 U shows false statements or omissions.

Next, even if CDI had proved false statements or omissions, it has not proved that they
were made with the specific intent to defraud. See People v. Blick, 153 Cal. App. 4 th 759, 772
(2007), a case not distinguished by CDI. CDI's attempt to water down this standard to require
only "knowing" misconduct is not1persuasive. The evidence adduced shows that defendants
attempted, with the advice of coudsel, to navigate a complicated and confusing regulatory scheme.
When questions arose, they checked with their contact, Stone, at DPH. Stone did not raise any
concerns. The Court reasonably concludes that if Stone had concerns, he would have immediately
responded to Ex. 1130.

It is also significant to the Court that DPH never questioned the licensing status of

9
CD I's Closing Brief at 1:7 makes a suggestion that claims paid in cash and those
presented to government payors have been excluded, but CDI provides no information as to how
they made this determination. No calculations are shown as to how CDI gets to 4135 claims or,
for that matter, any of the lesser riumber of claims proffered.

13
Serenity, even after the allegations'in this case were made public. In fact, DPH continued to
license Encino even when the Serenity program was still operational. All of these factors lead to
the conclusion that DPH had found no violations of law.

These facts also require the application of the doctrine oflenity. See, e.g., Crandon v.
US., 494 U.S. 152, 158 (1990), another case not distinguished by CDI. Crandon holds that,
where a civil action relies on a criminal statute, the rule of lenity resolves "any ambiguity in the
ambit of the statute's coverage." Where, as here, no agency ever advised these defendants that
they had violated the law and whe1:e the various lawyers prosecuting the case could not agree as to
the regulatory prohibitions, it would be fundamentally unfair to interpret the law in a manner
adverse to the defendants. Instead; the confusing and ambiguous statutory and regulatory
language must be construed in favor of defendants and against CDI. See June I 0, 2019 Order on
Motions; see also H & S Code 1250, 1250.3, 1253, 11217(h); 22 C.C.R. 70067, 70301, 70401-
70657, 79221 (d) The Court concludes that CDI has not carried its burden of showing that these
defendants had the necessary intent to defraud anyone, including insurance companies and
government agencies.

Further, CDI has failed to prove, by any standard, that the alleged false statements or
omissions were material. CDI did inot call any California insurance company witness to testify
about materiality. The only witness called on this point was Kim but, as noted above, she failed
to give any persuasive testimony tl).at there were material false statements or omissions.

The Court agrees that CDI'1s calculation of assessments, based entirely on Ex. 1061, is
fundamentally flawed. This exhibit was received into evidence after a long colloquy as a result of
a defense motion to exclude CDI' s expert economist, Garcia. The exhibit is some 224 pages long
and purports to summarize the details of over 4000 claims made by Encino Hospital to various
providers. Each page contains multiple columns, starting with a patient account number. The
patients' names are redacted. The :subsequent columns show the total charges billed to each
patient, the total paid and the provider that paid.

Relator's counsel proffered that Garcia would testify about Ex. 1061 and provide "24
different methodologies to examin~ the robustness of the total figures of billings [of Encino
Hospital]." These methodologies included a "regression analysis and various other kinds of
techniques." But relator's counseL conceded that Garcia could not testify about "the categories of
claims that should be counted and not counted."

Once the exhibit was in evidence, the Court ruled that Garcia's testimony would not be
helpful and granted the defense motion to exclude him as a witness. But the Cami reminded the

14
parties that CDI had the "burden of showing that [the claims were made to] a California
healthcare provider consistent with; [the June 10, 2019 Order]." See R.T. June 21, 2019 at 61.

Thereafter, CDI chose not dall any witness to testify about the various insurance
companies and providers listed in :fi'.x. 1061 and whether they were in fact subject to the
jurisdiction of CDI. This was critical omission because Ex. 1061 included companies that, on
their face, appear to be outside the jurisdiction of CDI, including those insurance companies from
other states, PPO's, ERISA plans ahd plans regulated by the California Department of Managed
Health Care. 10 Instead, CDI choseito argue in its Closing Brief that "all claims" (less those paid
in cash and to government payors) submitted by Encino Hospital should be considered by the
Court. CD I's Closing Brief then sets forth some scenarios about eliminating certain claims. But
CDI does not provide an evidentiary basis to support the scenarios; it simply proffers different
"penalty ranges."

This approach is an improper attempt to shift the burden of proof. It was not defendants'
burden at trial, or at closing argument, to attempt to disprove some or all of CDI' s universe of
claims. Nor is it the burden of the Court to analyze a 224 page exhibit and, without any evidence,
calculate which claims should be eliminated from CDI' s gross assessment request.

As to the SA C's other theory of liability, relator's counsel during closing argument could
not provide a clear definition of"illegal patient steering," a term that does not appear in Ins. Code
1871.7(a) or in a reported case. CDI's Closing Brief argues that "former defendant Aid in
Recovery ("AIR") referred patients:to Serenity in exchange for its commitment to discharge those
patients to AIR-affiliated treatmenticenters." This, according to the Closing Brief, "violates Ins.
Code l 871.7(a)'s prohibition against using another 'to procure clients or patients to ... obtain·
services or benefits ... that will be the basis for an insurance claim."'

However, the case CDI relies on, State ex rel. Wilson v. Superior Court, 227 Cal. App. 4th
579,593 (2014), made it clear that f'using another" is not the test. Instead, the key word in the
statute is "employ." And in Wilson, employment was assumed so there was no need to define the

10
As to PPO's, there is a substantial disagreement about whether they fall within the
jurisdiction of CDI. CDI offered tb no fact or expert witness on this point. Instead, its Closing
Brief offers various legal arguments which are rebutted by Encino/Prime in particular. Because
CDI failed to introduce admissible evidence on the specific PPO's listed on Ex. 1061, it failed to
meet its burden of proving that any PPO falls within CDI' s jurisdiction.

15
term. 11

CDI then asserts that no cash exchange is necessary to prove a violation of the statute. But
the case CDI cites, People ex rel. GEICO v. Cruz, 244 Cal. App. 4 th 1184 (2016), has no such
holding. In reversing the trial court's summary judgment ruling, the Court of Appeal did not
define the word "employ" or hold that Ins. Code 1871. 7(a) could be violated even in "the absence
of a cash exchange." In fact, the opinion noted that a payment "styled as rent [which] exceeds the
fair market value of the space," may constitute an unlawful referral fee. Id. at 1198. In other
words, there must be some cash coiisideration to make the referral unlawful.

This is the point that defendants make in their closing briefs: nothing in Ins. Code
1871.7(a) suggests that an agreement to provide a non-monetary benefit for a referral constitutes
"employment." Moreover, the doctrine oflenity once again prohibits this Court from construing
the statute in the manner suggested by CDI. Because CDI failed to introduce any evidence of
payments or remuneration of any kind, the Court concludes that CDI did not meet its burden of
showing that defendants "employed" AIR as an unlawful "steerer."

Even if arguendo CDI's "aqsence of a cash exchange" argument was legally sound, the
facts do not support an unlawful sttjering scheme. Instead, the evidence showed that it is common
and ethical for patients to be "steered" through the process of obtaining appropriate care for
addiction. As Waldman testified, this continuum of care starts with a detox facility, then a patient
is refen-ed to a longer term residential facility, to be followed by even longer term outpatient
treatment. While Waldman believed that referral decisions should be made during the detox
program, he was clear that there is no agreed upon standard. And Diamond provided no evidence
of unlawful steering. ·

Finally, each defendant is erititled to a separate consideration of their conduct. CDI failed
to prove that the Prime/Encino defe~dants or JNL Management had any knowledge of AIR
referrals or, for that matter, the relationship between AIR and the AIR affiliated treatment centers.
Nor did CDI put on evidence that these defendants had any involvement, including monetarily, in
the referrals to a long term residential facility. 12

11
'
CDI now provides the correct citation to People ex rel. Alzayat v. Hebb, 18 Cal. App.
th
5 801 (2017), but the dictum in that case did not deal with the issue- specifically addressed in
Wilson and which is present in this case.
12
The Court has considered but rejects COi's argument that Em Garcia "must have
known" about AIR referrals because he sometimes attended daily meetings and because he

16
 C. CONCLUSION

Defendants are entitled to judgment in their favor. Accordingly,

IT IS ORDERED that counsel for the Prime/Encino defendants is ordered to lodge a

[proposed] Judgment by September20, 2019.

IT IS FURTHER ORDERED that a Status Conference re Lifting the Stay on Causes of

Action 3 - 6 of the SAC is set for Sdptember 25,2019 at 8:30 a.m.

Notice by Prime/Encino.

"wanted to know anything and everything" about Serenity's operations. This thin circumstantial
evidence is insufficient to show participation in an unlawful steering scheme.

17
 1 PROOF OF SERVICE
State of California ex rel. Mary Lynn Rapier vs. SRCC Associates, LLC
2 Los Angeles Superior Case No. BC641254
3
I, the undersigned, declare: I am a citizen of the United States, over 18 years of age and
4 not a party to the within action. I am employed in the County of Los Angeles; my business
address is 633 West Fifth Street, Suite 1600, Los Angeles, CA 90071.
5
On the date specified below, I served a copy of the foregoing document described as:
6

7 NOTICE OF FINAL STATEMENT OF DECISION

8 on the interested parties in this action by causing a true copy thereof to be distributed as follows:

9  BY ELECTRONIC SERVICE VIA FILE & SERV EXPRESS: File & Serve Express
for service on all counsel of record by electronic service pursuant to the Order
10 Authorizing Electronic Service and pursuant to California Code of Civil Procedure
§1010.6 and California Rules of Court 2060(c). This transmission was reported as
11
complete without error.
12
I declare under penalty of perjury under the laws of the State of California that the above
13 is true and correct.

14 Executed on September 11, 2019, at Los Angeles, California.

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____________________________
17
Ann Kurke
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1
PROOF OF SERVICE