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By Brendan Pierson

Oct 10 (Reuters) - Extendicare Health Services Inc has agreed to pay $38 million to the U.S. government and eight states to settle allegations that it billed Medicare and Medicaid for substandard nursing care and unnecessary rehabilitation therapy.

The settlement is the largest paid by a nursing home chain to the government over failure to provide care, the U.S. Department of Justice said Friday.

Extendicare, which operates more than 140 facilities in 11 states, denied any wrongdoing. Its parent company, Extendicare Inc, is Canadian and the U.S. head office is in Milwaukee.

A total of $28 million of the settlement will cover claims that Extendicare billed Medicare and Medicaid for substandard services from 2007 to 2013. Another $10 million will cover claims that the company billed them for unnecessary rehabilitation therapy through its subsidiary Progressive Step Corp.

Under the settlement, Extendicare will also have to maintain an internal audit program company-wide on quality of care, submit to annual independent reviews and retain an independent monitor chosen by the Department of Health and Human Services.

The settlement arises from an investigation by the Justice Department and HHS that revealed problems with care at 33 Extendicare facilities in eight states. The Medicaid programs of those states - Indiana, Kentucky, Michigan, Minnesota, Ohio, Pennsylvania, Washington and Wisconsin - will receive $5.7 million from the settlement.

The investigation found that the facilities employed too few skilled nurses and that patients suffered injuries from falls, malnutrition, dehydration and infections, which in some cases required amputations, Assistant Attorney General Joyce Branda said at a press conference Friday.

The investigation also revealed that the company provided medically unnecessary rehabilitation therapy to inflate its Medicare bills.

"Both of these schemes are forms of elder financial exploitation and neither will be tolerated by this department,"

Acting Associate Attorney General Stuart Delery said Friday.

The settlement also resolves two whistleblower lawsuits in Pennsylvania and Ohio. Between them, the whistleblowers will receive about $2 million of the settlement. (Reporting By Brendan Pierson; Editing by Ted Botha and Steve Orlofsky)

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