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United States v. United Healthcare Insurance Co.

United States Court of Appeals, Ninth Circuit

August 10, 2016

United States of America, Plaintiff,
v.
United Healthcare Insurance Company, a Connecticut corporation; United HealthCare Services, Inc., Minnesota corporation; UHIC; UnitedHealth Group; UnitedHealthcare; UnitedHealth; PacifiCare Health Plan Administrators, Inc.; UHC of California, FKA PacifiCare of California; PacifiCare Life & Health Insurance Co.; PacifiCare Health Systems; Health Net; WellPoint; Aetna; HealthCare Partners, LLC; HealthCare Partners Medical Group, Inc.; HealthCare Partners Independent Physician Association, Defendants-Appellees. and James M. Swoben, Qui Tam Relator, Plaintiff-Appellant,

          Argued and Submitted December 9, 2015 Pasadena, California

         Appeal 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.

          David 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.

          David 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 Appellee Aetna.

          David 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.

         SUMMARY [*]

         Medicare

         The 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.

         The 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 diagnosis codes.

         The 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 12(b)(6).

         The 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 pleadings.

          OPINION

          FISHER, Circuit Judge:

         The 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. § 422.504(l), (l)(2).

         Qui tam 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 its discretion.

         First, 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.

         Second, 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.

         Background

         I. The Medicare Advantage Program

         Medicare 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 enrollee uses.

         The 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 documentation.").

         "Since 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 id.[1]

         As a 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 may specify.

42 C.F.R. § 422.504(l) (emphasis added).[2] 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).

         A 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).[3] 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)

         In 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.

         Certification 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 submitted." Id.

         In 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 ...

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