-By Warner Todd Huston
When companies are found to have violated regulations that govern their industry, is it right that a jury of non-experts can award damages the amount of which will wipe the company off the face of the earth? That is a question that has been raised in a case recently decided against Skilled Healthcare LLC of California.
A class action lawsuit (lawsuit info here) brought by trial lawyers was filed late last year against Skilled Healthcare of California claiming that the company had violated state regulations that stipulates that nursing homes must maintain 3.2 nursing hours per patient, per day (ppd). The lawsuit claimed that the nursing homes operated by Skilled Healthcare often did not meet the requirement.
Interestingly, there was never any claim from any patient that there'd been harmed or put in danger. Not a single patient claimed personal injury before these lawyers began to file their class action lawsuit.
After a six-month trial the jury decided that the company did violate the rules and awarded the plaintiffs $613 million in statutory damages and $58 million in restitutionary damages.
There is a problem with this award, however. The company only has borrowing credit of $94 million. If the company were to be held to this outrageously high award it would go bankrupt and would be forced to close its doors.
Not only that but some 32,000 people -- patients/residents and healthcare workers alike -- would lose their heatlhcare facilities and jobs if this award were enforced.
Does this make sense?
Now, I've looked at many stories about this lawsuit and cannot find any claims by the State of California that Skilled Healthcare LLC was found wanting during any of the many surprise inspections of the company's 22 healthcare facilities. I have seen no evidence from state regulators that any citations were issued or that there has been any allegations that the nursing homes in question violated any statutes.
Skilled Healthcare has reported that it has passed all inspections. That's notable because the healthcare industry in California is almost as highly regulated as the state's nuclear power industry.
Yet six healthcare clients from Humbolt County, CA have been allowed the status for the levy of an award so great that it will wipe the corporation of the face of the earth?
The California Association of Health Facilities agrees that this lawsuit makes no sense. James Gomez, CEO and President of the CAHF, called the whole thing "outlandish."
The July 6, 2010 verdict against Skilled Healthcare Group Inc. and subsidiary Skilled Healthcare LLC is outlandish, excessive and extreme. The $671 million award of damages is disproportionate to the facts of the case. It's a by-product of a series of unprecedented and erroneous rulings of law by the trial judge, and a jury that applied the flawed rulings to the maximum extent. These maximum damages were applied over a six year period to every patient in the 22 skilled nursing facilities, regardless of whether they were named in the complaint. More importantly, the allegations specifically excluded any assertion of harm.
Gomez also laments that if the judgment stands the healthcare company will be forced to close its doors causing the loss of thousands of jobs and putting the healthcare of thousands of patients in jeopardy.
And Gomez also reports that Skilled Healthcare LLC is "widely regarded as a good provider of skilled nursing care in California and elsewhere."
The case, now concluded, is going into a mediation phase and the company hopes that the award will be lowered to one it could actually pay instead of the punitive one that they now face.
In the end this trial is evidence that this country needs some major tort reform. Here we had a company that was going about its business, and by all accounts has a good reputation in its industry yet found itself with a multi-million dollar award levied against it because of some trial lawyers that went ambulance chasing to float a class action lawsuit. And now thousands of people's healthcare and livelihood is in jeopardy.
What are all theses elderly patients supposed to do if the company is forced to fold? And what of all the jobs lost in this, one of the worst economies in decades?
If the company was violating state regulations on the required number of nursing staff to patient ratios, then, sure, the state should force it to comply with regulations. No one would deny that fines of some sort would legitimately be part of such a finding. But this $671 million award is not corrective, it is destructive.
And what unforeseen consequences might this award have in the healthcare industry throughout California and the rest of the country? Will it drive costs up? Will it cause smaller healthcare facilities to just close up shop for fear of giant, punitive awards for minor infractions? And what other industries might next be a target of this class action feeding frenzy?
Questions that we would not be faced with were it not for an out of control tort system.