Encompass Health Lawsuits: Fraud, Fiduciary Breach, and Penalties

Encompass Health Corporation and its predecessor HealthSouth have paid roughly $978 million in penalties across about 20 enforcement actions since 2000, and the lawsuits against Encompass Health span accounting fraud, Medicare billing fraud, a recent Delaware fiduciary breach ruling, and a growing set of patient safety and negligence claims. The company still faces open matters, including a Delaware constructive trust that entitles it and its former subsidiary Enhabit to a share of a competitor’s profits, a prospective securities class action investigation, and pending employment litigation.¹

The HealthSouth Accounting Fraud

The largest single chapter in the company’s legal history predates the Encompass Health name. In March 2003, the SEC sued HealthSouth and its founder and CEO Richard Scrushy, alleging the company had overstated earnings by at least $1.4 billion between 1999 and 2002 and inflated assets by roughly $800 million. The SEC alleged Scrushy had certified a 2001 annual report that overstated earnings by approximately 4,700%.²

Later that year, federal prosecutors indicted Scrushy on 85 counts, including conspiracy, securities fraud, false certifications, and money laundering, and sought forfeiture of nearly $279 million in property. Prosecutors alleged a $2.7 billion accounting fraud scheme going back to 1996. By the time of the indictment, 14 HealthSouth executives, including five former chief financial officers, had already pleaded guilty and were cooperating with the government.³

The company paid $100 million to the SEC and $445 million to resolve a state attorney general action tied to the accounting fraud.¹

The $325 Million Medicare Fraud Settlement

Separate from the accounting scandal, HealthSouth agreed in December 2004 to pay $325 million to resolve Department of Justice allegations of Medicare fraud. It remains the company’s largest False Claims Act resolution. The case grew out of whistleblower suits led by former employee James DeVage, and the allegations broke into three buckets: $169 million in improper therapy billing (including individual billing for group therapy and services delivered by unlicensed staff or never performed), $89 million in unallowable costs claimed as Medicare-reimbursable (including lavish entertainment and travel), and $65 million in inflated cost reports connected to the accounting fraud.⁴

DeVage received $8.2 million as the lead whistleblower. HealthSouth entered a five-year corporate integrity agreement with the HHS Office of Inspector General requiring independent review of its Medicare claims, and admitted no wrongdoing.⁴

The 2019 False Claims Act Settlement

After rebranding as Encompass Health, the company faced a new False Claims Act case. In June 2019, Encompass agreed to pay $48 million to resolve a seven-year DOJ investigation and three related whistleblower lawsuits. The government alleged that beginning in 2007, Encompass inpatient rehabilitation facilities had falsely diagnosed patients with “disuse myopathy,” without clinical evidence, to preserve their classification as inpatient rehabilitation facilities and secure higher Medicare reimbursement. The government also alleged some patients admitted to those facilities were too sick or disabled to benefit from the intensive therapy that justified the higher payments.⁵

The three whistleblowers were Dr. Emese Simon, a former contract physician in Sarasota, Florida who alleged retaliation for refusing to participate in fraudulent diagnosis and billing; Melissa Higgins, tied to the Northern District of Texas case; and Dr. Darius Clarke, who filed in the Eastern District of Virginia. They collectively received $12.4 million. Encompass denied wrongdoing and was not required to enter a corporate integrity agreement. The settlement released the company and its subsidiaries from liability for conduct between January 2006 and June 2019. DOJ had not intervened in any of the whistleblower cases.⁵

The Delaware Fiduciary Breach Ruling and VitalCaring

In 2022, Encompass Health spun off its home health and hospice division to form Enhabit, Inc. Both companies then sued former senior officers of that division in the Delaware Court of Chancery over a competing venture called VitalCaring Group.

In December 2024, the court found that April Anthony, who had founded Encompass Home Health and Hospice in 1998, along with Luke James and Chris Walker, committed what it called “egregious breaches of the duty of loyalty” while still employed at Encompass. According to the court, the three had stolen acquisition opportunities within Encompass’s line of business, misused confidential information, and recruited key employees to VitalCaring with promises of equity. Two private equity firms, Vistria Group and Nautic Partners, along with two of their principals, David Schuppan and Christopher Corey, were found to have aided and abetted the breaches. The court described VitalCaring as “the result of this deceit” and found bad-faith concealment, including deleted evidence and falsified records.⁶

The remedy was unusual. The court imposed a constructive trust entitling Encompass and Enhabit to 43% of VitalCaring’s ongoing profits, paid quarterly, and 43% of proceeds from any future sale of the company. The remaining 57% allows Vistria and Nautic to recover their capital contributions. The court also awarded attorneys’ fees and approximately $1.62 million in mitigation damages.⁷

In February 2025, Vice Chancellor Lori W. Will denied the defendants’ motion for reargument on the trust structure and granted only a narrow clarification on the scope of funds included.⁷ By February 2026, Encompass and Enhabit had collected $43.1 million from Walker, Schuppan, and Corey in full satisfaction of the attorneys’ fee and mitigation damages claims. The constructive trust remains in effect against Vistria Group, Nautic Partners, their affiliated funds, and VitalCaring’s holding company.⁸ The ruling also put VitalCaring’s planned acquisition of more than 100 home health and hospice locations connected to the UnitedHealth Group-Amedisys transaction on hold.⁹

Patient Safety Citations and Negligence Suits

A joint investigation by KFF Health News and the New York Times, published in July 2025, documented a pattern of serious patient safety incidents at Encompass rehabilitation hospitals. Between 2021 and 2024, ten Encompass hospitals received “immediate jeopardy” citations, a designation reserved for situations that put patients at risk of serious injury or death. Six other corporate-run for-profit rehab hospitals received such citations in that period; none of the 31 stand-alone nonprofit rehab hospitals did.¹⁰

Specific incidents documented in the investigation include:

Huntington, West Virginia: Elizabeth VanBibber, 73, died in 2021 from carbon monoxide poisoning caused by construction activity at the facility.
Sioux Falls, South Dakota: Frederick Roufs, 73, died in 2021 after a nurse administered the wrong medication. Inspectors documented 26 medication errors at that facility over a six-month span.
Jackson, Tennessee: A 68-year-old patient was found dead in a pool of blood after a bed alarm was turned off.
Texarkana, Texas: Inspectors issued an immediate jeopardy finding over the use of antipsychotic medications to sedate patients.
Erie, Pennsylvania: An immediate jeopardy violation was issued for failing to track medication orders, which allegedly contributed to a patient’s cardiac arrest.

The investigation also found Encompass owned 34 of the 41 rehab facilities that Medicare rated as having significantly worse rates of potentially preventable readmissions after discharge.¹⁰

Individual negligence suits have followed. The family of Paul Webb Jr. in Erie, Pennsylvania alleged an Encompass hospital left the stroke patient unattended in a wheelchair for hours at a time in 2021, despite medical records limiting his sitting tolerance to one hour, leading to a severe bedsore that contributed to his death. Encompass denied negligence and said Webb’s death, which occurred three months after discharge, was unrelated to his care at the facility. The company’s general counsel called inspection violations “rare occurrences” that “do not support an inference of widespread quality concerns” and said Encompass promptly addresses all findings.¹⁰

One note on regulatory reach: unlike nursing homes, rehabilitation hospitals are not subject to federal fines for safety violations, and CMS’s only tool is to terminate a hospital’s Medicare and Medicaid reimbursement, a step regulators have almost never taken. A Bakersfield, California facility paid a $75,000 fine after a patient died following cardiac arrest linked to poor blood sugar control, but that penalty came from the state health department, not CMS.¹⁰

Prospective Securities Class Action

The July 2025 New York Times article prompted an immediate market reaction. Encompass Health’s stock price fell 10.3% following publication, and the Rosen Law Firm opened an investigation into potential securities fraud claims, alleging Encompass may have issued “materially misleading business information to the investing public” in light of the patient safety findings. As of September 2025, the firm was preparing a prospective class action but had not yet filed a formal complaint.¹¹

Other Pending and Recent Matters

Puerto Rico Malpractice Appeal

In January 2025, the U.S. Court of Appeals for the First Circuit affirmed summary judgment for Encompass Health Rehabilitation Hospital of San Juan and attending physician Dr. José Báez Córdova. The family of Gloria Rodríguez González, who was admitted in October 2020 for rehabilitation following a COVID-19 diagnosis and died later that month from ventilator-acquired pneumonia, alleged the facility had failed to provide timely medication to prevent a fatal pulmonary embolism. The court ruled Dr. Báez was immune from suit under Puerto Rico law because he was acting in his capacity as a University of Puerto Rico faculty member, and Encompass could not be held vicariously liable for his actions. An alternative theory of liability against other hospital personnel was rejected because it had not been raised in the trial court.¹²

ERISA Retirement Plan Case

Miller Shah LLP has filed an ERISA class action against Encompass Health alleging retirement plan mismanagement. Specific allegations, the court, and case status have not been publicly detailed beyond the filing announcement.

Wage-and-Hour Investigation

Attorneys have been investigating Encompass Health over potential overtime miscalculations and failure to pay employees for time spent working through meal breaks. No formal FLSA complaint or class action had been filed as of the most recent available information; the matter remained at the investigation stage.¹³

The Cumulative Penalty Picture

According to Violation Tracker, maintained by Good Jobs First, Encompass Health and HealthSouth have accumulated approximately $978 million in penalties across 20 recorded enforcement actions since 2000. The largest categories are accounting fraud ($545 million across two actions), government contracting and False Claims Act violations ($404 million across seven actions), and employment-related offenses, including a $28.85 million benefit plan violation from a 2006 private federal lawsuit. Encompass reported $597 million in profit on $5.4 billion in revenue for 2024.¹¹⁰

1
Violation Tracker. Encompass Health Parent Company Summary
2
U.S. Securities and Exchange Commission. SEC v. HealthSouth Corporation and Richard M. Scrushy, Litigation Release
3
U.S. Department of Justice. Richard Scrushy Indictment
4
U.S. Department of Justice. HealthSouth Corporation Settlement
5
U.S. Department of Justice. Encompass Health Agrees to Pay $48 Million to Resolve False Claims Act Allegations
6
Encompass Health Corporation. Delaware Court of Chancery Awards Damages and Other Relief to Encompass Health and Enhabit
7
Delaware Court of Chancery. Enhabit, Inc. et al. v. Nautic Partners IX, L.P. et al., C.A. No. 2022-0837-LWW
8
BusinessWire. Enhabit and Encompass Health Collect $43.1 Million from Individual Defendants in Delaware Fiduciary Breach Case
9
Hospice News. Encompass Health, Enhabit Secure $43.1M Judgment in VitalCaring Case
10
KFF Health News. For-Profit Rehab Hospitals Errors Unpenalized, Undisclosed
11
PR Newswire. Rosen Law Firm Encourages Encompass Health Corporation Investors to Inquire About Securities Class Action Investigation
12
FindLaw. Rodriguez v. Encompass Health Rehabilitation Hospital of San Juan, Inc.
13
ClassAction.org. Employment and Overtime Investigations