Daycare Fined Millions Has Case Against Jersey

(CN) - New Jersey officials must face fraud claims over its crackdown on a medical daycare center that saw its patient maximum cut by more than half to 27 slots, a federal judge ruled.

The dispute stems from a 2003 audit report released by the state's Office of Legislative Services, which found that the regulations governing Pediatric Medical Daycare Center program licenses were incompatible.

Mercer County Children's Medical Daycare says it received a program license for 70 to 72 slots based on the state Health Department's 30-square-feet-per-patient rule in June 2003.

The department allegedly doubled back months later, however, and told Mercer that the Department of Human Services barred it from serving more than 27 children per day.

Mercer claims that the Department of Health reminded it to comply with the 27-child limit in April 2005, but later allowed the center to keep serving up to 70 children a day.

After allegedly proposing two laws in 2008 that included a 27-patient-per-day limit, the department found on March 2, 2011, that Mercer was not complying with the limit. Mercer said it was put on admissions curtailment, ordered to hire a consultant administrator to oversee compliance and fined $1.5 million.

New Jersey Assemblyman Louis Greenwald had introduced the state budget, which included the medical regulations, and Mercer says this man had a suggestion for the consultant: Carlisle, a company with which he had a close relationship.

Carlisle allegedly "tricked" Mercer into agreeing to pay it $25,000 a month, though the company turned out not to be an independent administrative consultant.

Six days later, the New Jersey Medicaid Fraud Division allegedly issued Mercer a notice of claim for $12 million in excess payments and treble damages for serving ineligible children between March 22, 2004, and Dec. 8, 2010.

The Department of Health ultimately amended Mercer's 70-child license to 27 on Aug. 1, 2011, and later fined it $53,000 for serving an ineligible patient, Mercer claims.

Mercer nonetheless disregarded the order and began admitting new patients, leading the Department of Health to allegedly issue a penalty of $13,500 in June 2012.

The daycare center and 10 children who have been denied daycare services as a result of the new regulations sued Carlisle, four state agencies and 10 state officials, including Greenwald and Gov. Chris Christie.

They claim that the federal Medicaid law pre-empts the state regulations, which allegedly violated various constitutional protections, and that the defendants failed to lawfully administer Medicaid and committed state-law fraud.

Carlisle and certain state defendants led by Health Department Commissioner Mary O'Dowd separately moved to dismiss, but U.S. District Judge Anne Thompson largely shot them down on Feb. 10.

Though the state defendants are immune from suit under Section 1983, federal law may pre-empt the new regulations, according to the unpublished ruling.

"Here, Medicaid law does not direct states in the administration of [Early and Periodic Screening, Diagnosis and Treatment] EPSDT services to clinically eligible children," Thompson wrote. "However, plaintiffs show that plaintiff children had a difficult time accessing proper health care and were forced to wait long periods before receiving access to treatment."

Judge Thompson nevertheless tossed aside the equal protection claim.

"The state could have a legitimate state interest in limiting the number of child patients, such as enhancing the quality of care for 'medically complex children' and preventing the spread of disease," Thompson wrote. "The state could have rationally concluded that restrictions would promote the health of the children."

The state officials must face the fraud claims, as must Carlisle, according to the ruling, which says Mercer may be able to show that it was "tricked" into hiring the consultant.

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