and Submitted December 9, 2015 Pasadena, California
from the United States District Court for the Central
District of California, D.C. No. 2:09-cv-05013-JFW-JEM John
F. Walter, District Judge, Presiding
William K. Hanagami (argued), The Hanagami Law Firm, A.P.C.,
Woodland Hills, California; Abram J. Zinberg, The Zinberg Law
Firm, A.P.C., Huntington Beach, California; for
Plaintiff-Appellant James M. Swoben.
J. Schindler (argued), Latham & Watkins LLP, Los Angeles,
California; Roger S. Goldman, Daniel Meron, Jonathan Y.
Ellis, and Matthew J. Glover, Latham & Watkins LLP,
Washington, D.C.; for Defendants-Appellees UnitedHealthcare
Insurance Company, UnitedHealthCare Services Inc., UHIC,
UnitedHealth Group, UnitedHealthCare, UnitedHealth,
Pacificare Health Plan Administrators, UHC of California (FKA
PacifiCare of California), PacifiCare Life and Health
Insurance Company, PacifiCare Health Systems, and Health Net.
W. Skaar, Hogan Lovells U.S. LLP, Los Angeles, California;
Michael C. Theis, Hogan Lovells U.S. LLP, Denver, Colorado;
for Defendants-Appellees HealthCare Partners LLC, HealthCare
Partners Medical Group, Inc. and HealthCare Partners
Independent Physician Association.
Geoffrey M. Sigler, and Thomas M. Johnson, Jr., Gibson, Dunn
& Crutcher LLP; Washington, D.C.; Richard J. Doren,
Gibson, Dunn & Crutcher LLP, Los Angeles, California, for
Deaton, O'Melveny & Myers LLP, Newport Beach,
California; David J. Leviss, O'Melveny & Myers LLP,
Washington, D.C.; Stephen Sullivan, O'Melveny & Myers
LLP, Los Angeles, California; for Appellee WellPoint, Inc.
Charles W. Scarborough and Karen Schoen, Attorneys, Appellate
Staff; Eileen M. Decker, United States Attorney; Benjamin C.
Mizer, Principal Deputy Assistant Attorney General; Civil
Division, United States Department of Justice, Washington,
D.C.; for Amicus Curiae United States.
Before: Stephen Reinhardt, Raymond C. Fisher and Jacqueline
H. Nguyen, Circuit Judges.
panel vacated the district court's judgment dismissing
without leave to amend qui tam relator James Swoben's
third amended complaint, which alleged that defendant
Medicare Advantage organizations submitted false
certifications in violation of the False Claims Act, and
remanded with instructions to afford Swoben leave to file a
proposed fourth amended complaint.
Centers for Medicare & Medicaid Services
("CMS") pays Medicare Advantage organizations fixed
monthly amounts for each enrollee, and CMS calculates the
payment for each enrollee based on various "risk
adjustment data" as reflected in submitted diagnoses
codes. Medicare regulations require a Medicare Advantage
organization to certify that the data it submits are
"accurate, complete, and truthful." 42 C.F.R.
§ 422.504(l), (l)(2). Swoben alleged
that the defendant organizations submitted false
certifications by performing biased retrospective medical
record reviews designed not to identify erroneously reported
panel held that the district court abused its discretion by
denying leave to amend on the ground of futility of
amendment. The panel held that the theory alleged here - that
the defendants designed their retrospective review procedures
to not reveal erroneously reported diagnosis codes -
adequately alleged that the defendants' §
422.504(l) certifications were false and stated a
cognizable legal theory under the False Claims Act. The panel
also held that the proposed fourth amended complaint alleged
sufficient factual matter to satisfy Fed.R.Civ.P. 8, 9(b) and
panel held that the district court also abused its discretion
by denying leave to amend based on undue delay. The panel
held that leave to amend was proper in this case where the
litigation against the defendants was at an early stage,
Swoben did not seek to assert a new legal theory, and this
was Swoben's first attempt to cure deficiencies in his
FISHER, Circuit Judge:
Centers for Medicare & Medicaid Services (CMS),
administrator of the federal Medicare program, pays Medicare
Advantage organizations fixed monthly amounts for each
enrollee. CMS calculates the payment for each enrollee based
on various "risk adjustment data, " such as an
enrollee's demographic profile and the enrollee's
health status, as reflected in the medical diagnosis codes
associated with healthcare the enrollee receives. These
diagnosis codes are reported by Medicare Advantage
organizations to CMS. Because Medicare Advantage
organizations have a financial incentive to exaggerate an
enrollee's health risks by reporting diagnosis codes that
may not be supported by the enrollee's medical records,
Medicare regulations require a Medicare Advantage
organization, as an express condition of receiving payment,
to "certify (based on best knowledge, information, and
belief) that the [risk adjustment] data it submits . . . are
accurate, complete, and truthful." 42 C.F.R. §
relator James Swoben alleges Medicare Advantage organizations
United Healthcare, Aetna, WellPoint and Health Net, and
physician group HealthCare Partners, submitted false
certifications under this provision, in violation of the
False Claims Act, by conducting retrospective reviews of
medical records designed to identify and report only
under-reported diagnosis codes (diagnosis codes erroneously
not submitted to CMS despite adequate support in an
enrollee's medical records), not over-reported codes
(codes erroneously submitted to CMS absent adequate record
support). The district court denied Swoben leave to file a
proposed fourth amended complaint, citing futility of
amendment and undue delay. We hold the district court abused
the court erred by concluding amendment would be futile.
Swoben's proposed fourth amended complaint asserts a
cognizable legal theory. CMS has long made clear that, under
§ 422.504(l), Medicare Advantage organizations
have "an obligation to undertake 'due diligence'
to ensure the accuracy, completeness, and truthfulness"
of the risk adjustment data they submit to CMS and "will
be held responsible for making good faith efforts to certify
the accuracy, completeness, and truthfulness" of these
data. Medicareਚ≱ Program, 65 Fed. Reg. 40, 170, 40, 268
(June 29, 2000). When, as alleged here, Medicare Advantage
organizations design retrospective reviews of enrollees'
medical records deliberately to avoid identifying erroneously
submitted diagnosis codes that might otherwise have been
identified with reasonable diligence, they can no longer
certify, based on best knowledge, information and belief, the
accuracy, completeness and truthfulness of the data submitted
to CMS. This is especially true when, as alleged here, they
were on notice - based on audits conducted by CMS - that
their data likely included a significant number of
erroneously reported diagnosis codes. The allegations in
Swoben's proposed fourth amended complaint also satisfy
Rules 8 and 9(b) of the Federal Rules of Civil Procedure.
Although the allegations are not as detailed as they might
be, they adequately identify "the who, what, when,
where, and how of the misconduct charged, " Ebeid ex
rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th
Cir. 2010) (quoting Vess v. Ciba-Geigy Corp. USA,
317 F.3d 1097, 1106 (9th Cir. 2003)) (internal quotation
marks omitted), and afford each defendant notice of its
alleged role in a fraudulent scheme.
the district court abused its discretion by denying leave to
amend based on undue delay. Undue delay by itself is
insufficient to justify denying leave to amend, and the
record here does not support any additional ground - such as
prejudice or bad faith - that would justify the denial.
See Owens v. Kaiser Found. Health Plan, Inc., 244
F.3d 708, 712-13 (9th Cir. 2001). On the contrary, leave to
amend is proper here given the litigation against these
defendants is at an early stage, Swoben does not seek to
assert a new legal theory and this is Swoben's first
attempt to cure deficiencies in his pleadings.
Medicare Advantage Program
beneficiaries have the option of receiving benefits through
private health plans as an alternative to the traditional
fee-for-service Medicare program. Under this option, known as
Medicare Advantage or Medicare Part C, the government pays
Medicare Advantage organizations a capitated (per enrollee)
amount to provide medical benefits. The capitated amount is a
fixed monthly payment regardless of the volume of services an
government adjusts the monthly payments to Medicare Advantage
organizations to reflect the health status of their
enrollees. See 42 U.S.C. §
1395w-23(a)(1)(C)(i), (a)(3); 42 C.F.R. § 422.308(c)(2).
This ensures Medicare Advantage "organizations are paid
appropriately for their plan enrollees (that is, less for
healthier enrollees and more for less healthy
enrollees)." Establishment of the Medicare Advantage
Program, 70 Fed. Reg. 4588, 4657 (Jan. 28, 2005). The risk
adjustment methodology relies on enrollee diagnoses.
See Policy and Technical Changes to the Medicare
Advantage and the Medicare Prescription Drug Benefit
Programs, 74 Fed. Reg. 54, 634, 54, 673 (Oct. 22, 2009).
Physicians and other health care providers submit diagnosis
codes to the Medicare Advantage organizations, which in turn
submit them to CMS. See id. at 54, 674. These
diagnosis codes contribute to an enrollee's risk score,
which is used to adjust a base payment rate. See id.
Each diagnosis code submitted must be supported by a properly
documented medical record. See 42 U.S.C.
§§ 1395l(e), 1395y(a)(1)(A); 42 C.F.R.
§ 422.310(d); Contract Year 2015 Policy and Technical
Changes to the Medicare Advantage and the Medicare
Prescription Drug Benefit Programs, 79 Fed. Reg. 29, 844, 29,
923 (May 23, 2014) ("CMS has required for many years
that diagnoses that [Medicare Advantage] organizations submit
for payment be supported by medical record
there is an incentive for [Medicare Advantage] organizations
to potentially over-report diagnoses so that they can
increase their payment, [CMS] audits plan-submitted diagnosis
data a few years later to ensure they are supported by
medical record documentation." Contract Year 2015 Policy
and Technical Changes to the Medicare Advantage and the
Medicare Prescription Drug Benefit Programs, 79 Fed. Reg.
1918, 2001 (Jan. 10, 2014). These risk adjustment data
validation (RADV) audits review selected medical records to
determine whether they support the diagnoses reported by
Medicare Advantage organizations. See
further bulwark against fraud, Medicare Advantage
organizations must certify the accuracy, completeness and
truthfulness of the data they provide to CMS, including risk
adjustment data, as a condition to receiving payment:
As a condition for receiving a monthly payment under
subpart G of this part, the [Medicare Advantage] organization
agrees that its chief executive officer (CEO), chief
financial officer (CFO), or an individual delegated the
authority to sign on behalf of one of these officers, and who
reports directly to such officer, must request payment
under the contract on a document that certifies (based on
best knowledge, information, and belief) the accuracy,
completeness, and truthfulness of relevant data that CMS
requests. Such data include specified enrollment
information, encounter data and other information that CMS
42 C.F.R. § 422.504(l) (emphasis
added). Specifically, a Medicare Advantage
organization "must certify (based on best knowledge,
information, and belief) that the [risk adjustment] data it
submits under § 422.310 are accurate, complete, and
truthful." Id. § 422.504(l)(2).
Medicare Advantage organization is also required to
"[a]dopt and implement an effective compliance program,
which must include measures that prevent, detect, and correct
non-compliance with CMS' program requirements." 42
C.F.R. § 422.503(b)(4)(vi). In addition, although
Medicare Advantage organizations generally submit data to CMS
shortly after services are provided, the regulations also
allow for data submissions after the payment year.
See 42 C.F.R. § 422.310(g). CMS uses these data
to "recalculate the risk factors for affected
individuals to determine if adjustments to payments are
necessary." Id. § 422.310(g)(2)
light of these provisions, Medicare Advantage organizations
may, but are not required to, conduct retrospective reviews
of their enrollees' medical records to ensure the
accuracy of the diagnosis codes they have provided to CMS.
See CMS, 2008 Risk Adjustment Data Technical
Assistance For Medicare Advantage Organizations Participant
Guide § 7.7.
under § 422.504(l) has always required due
diligence and good faith. When CMS adopted the "best
knowledge, information, and belief" standard in 2000, it
explained in the preamble to the regulation that Medicare
Advantage organizations "cannot reasonably be expected
to know that every piece of data is correct, " so
"simple mistakes will not result in sanctions."
Medicareਚ≱ Program, 65 Fed. Reg. 40, 170, 40, 268 (June
29, 2000). But § 422.504(l) does not require
actual knowledge that the data supplied to CMS are false.
Rather, as under the False Claims Act, a certification is
false under § 422.504(l) when the Medicare
Advantage organization has actual knowledge of the falsity of
the risk adjustment data or demonstrates either
"reckless disregard" or "deliberate
ignorance" of the truth or falsity of the data.
Id. Thus, Medicare Advantage organizations
"have an obligation to undertake 'due diligence'
to ensure the accuracy, completeness, and truthfulness of
encounter data submitted to [CMS]" and "will be
held responsible for making good faith efforts to certify the
accuracy, completeness, and truthfulness of encounter data
2014, CMS considered but ultimately decided not to finalize a
proposed rule that would have altogether prohibited Medicare
Advantage organizations from performing onesided
retrospective reviews. Under the proposed regulation:
medical record reviews conducted by [a Medicare Advantage]
organization cannot be designed only to identify diagnoses
that would trigger additional payments by CMS to the . . .
organization; and medical record review methodologies must be
designed to identify errors in diagnoses submitted to CMS as
risk adjustment data, regardless ...