In re Gentiva Sec. Litig., 10–cv–5064 (ADS)(WDW).

CourtUnited States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
Writing for the CourtSPATT
Citation971 F.Supp.2d 305
Docket NumberNo. 10–cv–5064 (ADS)(WDW).,10–cv–5064 (ADS)(WDW).
Decision Date10 December 2013

971 F.Supp.2d 305


No. 10–cv–5064 (ADS)(WDW).

United States District Court,
E.D. New York.

Sept. 19, 2013.
Order Denying Reconsideration in Part Dec. 10, 2013.

[971 F.Supp.2d 309]

Frederic S. Fox, Esq., Joel B. Strauss, Esq., Laurence D. King, Esq., Justin B. Farar, Esq., Jeffrey P. Campisi, Esq., Kaplan Fox & Kilsheimer LLP, New York, NY, for the Plaintiff Los Angeles City Employees' Retirement System.

Joshua S. Amsel, Esq., Stefania D. Venezia, Esq., Matthew E.K. Howatt, Esq., John A. Neuwirth, Esq., Weil, Gotshal & Manges LLP, New York, NY, for the Defendants Gentiva Health Services, Inc., Ronald A. Malone, H. Anthony Strange, John R. Potapchuk, Eric R. Slusser.

[971 F.Supp.2d 310]


SPATT, District Judge.

The present case is a consolidated securities fraud class action brought on behalf of a class consisting of all persons or entities that purchased the publicly traded securities of Gentiva Health Services, Inc. (“Gentiva”) between July 31, 2008 and October 4, 2011. The complaint was filed by the Lead Plaintiff the Los Angeles City Employees' Retirement System (the “Plaintiff” or “LACERS”).

On March 25, 3013, the Court dismissed the Plaintiff's original consolidated class action complaint in its entirety. See In re Gentiva Sec. Litig., 932 F.Supp.2d 352 (E.D.N.Y.2013) (Spatt, J.). In particular, the Court dismissed with prejudice the Plaintiff's claims under §§ 11 and 15 of the Securities Act of 1933 (the “1933 Act”). The Court also dismissed without prejudice the Plaintiff's claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “1934 Act”) and Rule 10b–5 promulgated thereunder. See15 U.S.C. §§ 78j(b), 78t(a); 17 C.F.R. § 240.10b–5.

On May 10, 2013, the Plaintiff filed an amended consolidated class action complaint. On June 24, 2013, the Defendants moved to dismiss the amended consolidated class action complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure (“Fed. R. Civ.P.”) and the Private Securities Litigation Reform Act (“PSLRA”) of 1995, 15 U.S.C. § 78u–4(b).

For the following reasons, the motion is granted in part and denied in part.

A. Factual Background

Familiarity with the facts of this case is presumed. However, by way of background, the following facts are drawn from the original consolidated class action complaint and construed in a light most favorable to the Plaintiff.

1. The Parties

The Defendant Gentiva is a home health care provider corporation with its principal headquarters in Atlanta, Georgia. The Individual Defendants are current and/or former directors and/or officers of the company. The Defendant Ronald A. Malone previously served as Gentiva's Chief Executive Officer from June 2002 until December 2008, and as Chairman of the Board of Directors until May 2011. The Defendant H. Anthony Strange served as Gentiva's President beginning in 2007, and served as its Chief Operating Officer from November 2007 through May 2009. Strange then became the company's Chief Executive Officer in January 2009, and its Chairman in May 2011. The Defendant John R. Potapchuck served as Gentiva's Chief Financial Officer and Treasurer until May 2010. He was succeeded in May 2010 by Eric R. Slusser, who currently serves as the company's Chief Financial Officer, Treasurer, and Executive Vice President.

2. The HH PPS

The Social Security Act requires that for patients to be eligible for home health benefits such as nursing care, the beneficiaries must be homebound and there must be a medical necessity for the services that are provided. Medicare pays for these home health services through a prospective payment system or “PPS.” Under this home health prospective payments system (the “HH PPS”), a home health service provider is paid in advance for a substantial portion of the total payment to which they are entitled to for a given patient. These payments are based on things such as “a predetermined rate schedule established

[971 F.Supp.2d 311]

by Medicare,” as well as “a pretreatment assessment of the given patient's condition and proposed plan of care during a 60–day time period.” (Compl. ¶ 28.) Gentiva is one such home health provider that receives payments from Medicare through the HH PPS.

According to the Defendants, both federal regulations and Medicare's Policy Manual make clear that independent physicians, as opposed to the home health provider itself, direct and oversee the billing process. In other words, a patient will only receive treatment after a physician prescribes a home health plan of care, which includes: the type of services to be provided; the professional who will provide the services; the nature of the individual services; and the frequency of the services. See42 C.F.R. § 409.43(b) ( “The physician's orders for services in the plan of care must specify the medical treatments to be furnished as well as the type of home health discipline that will furnish the ordered services and at what frequency the services will be furnished.”). In addition, any changes in the plan of care must be approved by a physician. See id. at § 409.43(c).

On the other hand, the Plaintiff claims that Gentiva had near absolute discretion to dictate the terms and frequency of patient care in order to achieve particular “bonus” thresholds. The Plaintiff alleges that Gentiva played a critical role in determining how much money Medicare would pay for its services after a physician prescribed a home health plan. In this regard, the Plaintiff alleges that after a physician prescribed a home health plan of care, a Gentiva nurse or therapist assessed the patient's condition and needs at the beginning of each episode of care. As part of this assessment, a form was completed entitled the Outcome and Assessment Information Set (“OASIS”), which detailed a patient's condition and expected therapy needs. This information was used to classify patients in accordance with a classification system known as the “case-mix adjustment” to adjust payments for home health services under the PPS. This system was developed by the Centers for Medicare and Medicaid Services (“CMS”). Accordingly, the OASIS was utilized to determine how much money Medicare ultimately paid Gentiva for its services. The Plaintiff alleges that the proper completion of the OASIS by Gentiva—not the physician—was a key and critical factor in determining how much Gentiva would be paid for its services by Medicare.

The above described system is prospective, hence it was a prospective payment system. Gentiva would generally receive an upfront payment from Medicare of approximately sixty percent of the estimated payment entitlement. However, the final payment was ultimately based on the actual number of visits provided to the patient. (Compl. ¶ 34.)

Prior to and through 2007, the HH PPS provided an additional payment or “bonus” of up to $2,200 if Gentiva provided a patient with ten therapy visits in connection with one individual's treatment cycle, otherwise known as an “episode.” However, in 2008, this “bonus” threshold was modified and the new thresholds became six, fourteen, and twenty therapy visits per treatment cycle. As a result, Gentiva could potentially obtain higher payments from Medicare if the number of patient visits reached these new thresholds.

Also relevant is that the thresholds needed to be reached within each sixty-day episode period, which is the time period covered by the physician's initial proposed plan of care. Gentiva would determine after the initial episode of care whether to “recertify” a patient for an additional episode of care. According to the Plaintiff,

[971 F.Supp.2d 312]

re-certifications increased the company's profits because less paperwork was associated with these patients.

In light of the HH PPS and the modified threshold levels for Medicare reimbursement, the Plaintiff alleges that in order to increase revenues and margins per episode, Gentiva's managers and clinicians were pressured by senior executives to provide patients with medically unnecessary visits and services in order to reach the enhanced payment thresholds from Medicare.

3. Former Gentiva Employees As Confidential Witnesses

The original consolidated class action complaint is largely based upon interviews with former Gentiva employees, including managers and clinicians. The allegations from most of these former employees appear in the complaint as those of confidential witnesses (“CWs”). According to the Plaintiff, these former employees describe how Gentiva executives knew of and themselves applied pressure on Gentiva managers and clinicians, through periodically scheduled and ad hoc meetings, emails, and conference calls, to violate Medicare rules in order to increase Medicare payments. Specifically, these executives are alleged to have urged employees (1) to provide medically unnecessary visits to patients in order to reach the thresholds required by Medicare to receive bonus payments (Compl. ¶¶ 52–61); (2) to wrongfully “upcode” in order to increase a patient's “case-mix weight”; (3) to recertify patients for added episodes of care even if additional visits were not medically necessary (Compl. ¶¶ 56–60); (4) to manipulate OASIS forms to increase reimbursement from Medicare (Compl. ¶¶ 53–61); (5) to wrongfully manipulate diagnostic codes in order to generate the greatest reimbursement from Medicare (Compl. ¶¶ 59–60); and (6) to provide medically unnecessary services to increase Medicare reimbursement revenues and margins (Compl. ¶¶ 52–61). The allegations by the CWs were as follows:

• CW1, a Physical Therapist, was an Orthopedics Director at Gentiva from April 2004 until May 2010, and played a supervisory role over certain branch offices. CW 1 stated that throughout the Class Period, either by way of periodic meetings and/or emails, he/she was subjected to pressure from supervisors—an “Area Vice President” (Area VP) and a “Regional Vice...

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