KND Kindred Healthcare, Inc. (delisted)

Kindred Healthcare Inc. agreed to pay $125 million to settle federal allegations it provided unnecessary therapy services to nursing-home patients as part of a scheme to overbill the federal Medicare program, according to the agreement finalized on Tuesday.

Several nursing homes that hired Kindred's therapy unit, RehabCare, to provide services to their residents separately agreed to pay the federal government about $8 million for their role in the alleged scheme.

Kindred said it agreed to the settlement to avoid costly and distracting litigation, but denied wrongdoing.

The Wall Street Journal in August reported on how Kindred and other nursing-home operators and contractors systematically increased the share of days they billed for giving patients' the highest therapy level Medicare will cover—so-called ultrahigh therapy. In 2013, Kindred's own nursing homes billed for ultrahigh therapy 58% of the time, compared with 7.6% of the time in 2002.

Nursing-home therapists had told the Journal at the time that Kindred and other nursing-home operators pressured them to provide intensive services, even when patients couldn't participate in the treatment and were unresponsive.

The civil suit Kindred settled on Tuesday was focused on services provided under contract to nursing homes by RehabCare, which Kindred acquired in 2011. The suit alleged the company overbilled Medicare between Jan. 1, 2009 and Sept. 30, 2013.

The Justice Department alleged Kindred presumptively placed patients in the ultrahigh category, which requires 720 minutes of therapy a week. They said Kindred reported therapy minutes had been provided when patients were sleeping or unable to benefit from the treatment, among other allegations.

Sometimes managers pressured therapists to provide more services, according to court records.

According to a therapist's note filed in the suit, the therapist wanted to discharge a patient on April 10, 2011. But, a RehabCare manager instructed the therapist to keep the patient an extra couple of days because the facility "needed to have the minutes so that they would get a 'bigger reimbursement,'" the note said.

In an email included in court documents, an outside auditor said her chief concern at one nursing home where Kindred provided therapy services was "the minute management as it relates to clinically appropriate care." The auditor said the company added minutes to reach high therapy categories "with not real documentation of reason for the swing in minutes."

Under the terms of the agreement, Kindred will also enter into a corporate integrity agreement with the federal Department of Health and Human Services' Office of the Inspector General, a Justice Department spokeswoman said. The agreement doesn't include any move to bar Kindred personnel from billing the Medicare program or working for entities that do so.

Carmen Ortiz, the U.S. Attorney for the District of Massachusetts, said in the announcement that Kindred's RehabCare unit was "engaged in a systematic and broad-ranging scheme to increase profits by delivering, or purporting to deliver, therapy in a manner that was focused on increasing Medicare reimbursement rather than on the clinical needs of patients."

Kindred said RehabCare expects to make its payment during the first quarter of 2016 and had already recorded loss reserves totaling about $127 million to cover the settlement and related costs. In recent trading on Tuesday, Kindred shares were down $0.79, or 7.8%, to $9.30.

Policy makers have in recent years begun re-evaluating the manner in which nursing homes are paid for giving therapy to Medicare patients. Some experts say the system encourages the facilities to add on minutes to get bigger payments.

A Medicare spokeswoman had said in an earlier statement to the Journal that Medicare had hired contractors to evaluate alternative payment systems. She said Medicare's goal is to "create a better health care system that spends dollars more wisely and creates healthier people."

Write to Christopher Weaver at christopher.weaver@wsj.com

(END) Dow Jones Newswires

January 12, 2016 15:15 ET (20:15 GMT)

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