Encompass Health and HealthSouth: Too Sick for the Therapy They Were Admitted to Receive

In the Encompass Health disuse myopathy settlement, the company agreed to pay $48 million to resolve hospital billing fraud allegations involving unsupported diagnoses and unnecessary rehabilitation admissions. Encompass, formerly HealthSouth, allegedly used diagnoses to preserve some facilities’ Medicare status while admitting patients too sick or disabled to benefit from intensive therapy. For a physician or therapy director, the tension is familiar: what the chart says qualifies, and what the patient can actually do.

The Justice Department described Encompass as the nation’s largest operator of inpatient rehabilitation facilities when it announced the settlement in June 2019. The alleged health care fraud put taxpayers on the hook for intensive therapy that patients could not use. The hospital’s payment depended on a diagnosis. The patient’s ability to benefit depended on more than a chart entry.

Disuse Myopathy Diagnoses and the Facilities’ Medicare Status

The government alleged that beginning in 2007, some Encompass inpatient rehabilitation facilities diagnosed patients with disuse myopathy without clinical evidence. According to the Justice Department, those diagnoses helped the facilities meet Medicare’s classification rules and obtain higher reimbursement.

The diagnosis served more than one financial purpose. Medicare and Medicaid use patients’ diagnoses both to determine whether a facility qualifies as an inpatient rehabilitation facility and to set payment for individual patients, the department explained. In the government’s account, a diagnosis entered into a patient’s chart helped protect the hospital’s status as well as its reimbursement. The clinical entry had a business job to do.

A physician who knows why that diagnosis appeared can explain whether the chart reflected a clinical finding or pressure to meet the facility’s needs. Here, the government’s allegation went directly to that missing clinical support. The label that helped the hospital qualify was supposed to describe the patient.

Patients Allegedly Too Sick for Intensive Rehabilitation

The second allegation concerned patients’ ability to participate in or benefit from intensive inpatient therapy. The government alleged that some Encompass facilities admitted people whose illness or disability made them ineligible for that care.

Intensive rehabilitation requires endurance. The Department of Health and Human Services Office of Inspector General explained that practical constraint in its spring 2017 report to Congress. Rehabilitation hospitals treat people recovering from illness, injury or surgery, but some patients lack the endurance the therapy demands. In a separate review of patients unsuited for intensive rehabilitation, the Inspector General found physical limitations, unresolved health problems and altered mental status among the obstacles to participation.

That puts the patient’s ability to take part in therapy at the center of the admission decision. For a therapy director, the treatment record can show the gap between the rehabilitation planned and what the patient could manage. An admission justified on paper can look very different to the staff working with that patient.

The Encompass allegation turns the familiar admission story around. In Prime Healthcare’s admission and upcoding settlement in 2018, the government alleged that hospitals admitted patients who needed only less costly outpatient care and billed for more expensive diagnoses than the patients had, as the Justice Department’s announcement describes. At Encompass, the admission allegation concerned patients too sick or disabled for intensive rehabilitation. Both cases put a clinical decision at the point where the hospital’s payment changes.

The Jobs Behind the Rehabilitation Cases

The settlement resolved three whistleblower cases brought from different jobs at different Encompass facilities. A former contract physician worked at the Sarasota, Florida facility. A former director of therapy operations worked in Arlington, Texas. A former medical director worked in Richmond, Virginia, and brought a case together with that physician’s company.

Those roles help explain why a hospital whistleblower’s job matters. A physician may know which clinical findings supported a diagnosis and which did not. A therapy director may see whether the treatment plan matches what patients can do across many admissions. A medical director may know how admission decisions were made and who had a say in them.

The Rehabilitation Chart and the Medicare Claim

The evidence in a hospital False Claims Act case connects the patient’s condition, the hospital’s decision and the claim for payment. Here, an insider may know whether the findings supported disuse myopathy, whether the patient could participate in intensive therapy, and what instructions shaped the diagnosis or admission. A documentation query, training message or internal warning can explain why the same decision kept recurring.

RAND’s 2024 report, Methodologies to Measure Upcoding in Provider Settings, found that nearly all the studies it reviewed measured upcoding indirectly, rather than identifying particular admissions or visits that were upcoded. The report describes medical-record review as one way to test coding against the patient’s actual condition.

For a rehabilitation insider, the practical value is the detail behind the trend: the findings, the admission decision and the therapy the patient could manage. A diagnosis-rate report shows a pattern. Someone who watched the decision being made can explain how the pattern arose.

When Billing Advice Becomes an Admission Instruction

A separate case against Kyphon shows how an instruction can sit behind an admission decision. The whistleblowers’ amended complaint alleged that the company’s sales force was told to present the procedure to hospitals as inpatient care, although in most cases no admission was medically needed.

The allegation places the instruction with the seller, before the hospital makes the admission decision. For a rehabilitation insider, the parallel is pressure to choose inpatient care when the patient’s condition does not support it. A standing instruction about admissions can explain why the same mismatch appears across patient records.

The Settlement and the Whistleblowers’ Share

The Justice Department announced the Encompass resolution on June 28, 2019. From that settlement, the department said the whistleblowers’ collective share would be $12.4 million. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

Your Knowledge of Rehabilitation Admissions

If you know why an unsupported diagnosis entered a rehabilitation chart, or why a patient unable to take part in intensive therapy was admitted, speak with our whistleblower experts about those decisions. We connect what you saw to the Medicare claims it produced and bring in whistleblower lawyers who understand rehabilitation billing to build your strongest healthcare whistleblower case. Our experts stay beside you from that first conversation through the case’s resolution.