S. Peninsula Hosp. v. Xerox State Healthcare LLC

• Decision Date: 30 September 2016
• Docket Number: Case No. 3:15–cv–00177–TMB
• Citation: 223 F.Supp.3d 929
• Parties: SOUTH PENINSULA HOSPITAL, Alaska Speech and Language Clinic, Inc. and Kenai Vision Center, LLC, on behalf of themselves and others similarly situated, Plaintiffs, v. XEROX STATE HEALTHCARE LLC, Defendant.
• Court: U.S. District Court — District of Alaska

223 F.Supp.3d 929

SOUTH PENINSULA HOSPITAL, Alaska Speech and Language Clinic, Inc. and Kenai Vision Center, LLC, on behalf of themselves and others similarly situated, Plaintiffs,

v.XEROX STATE HEALTHCARE LLC, Defendant.

Case No. 3:15–cv–00177–TMB

United States District Court, D. Alaska.

Signed September 30, 2016

Arthur Stock, Lane Lanier vines, Sherrie Raiken Savett, Peter R. Kahana, Yechiel M. Twersky, Berger & Montague, P.C., Philadelphia, PA, Peter Reed Ehrhardt, Law Office of Peter Ehrhardt, Kenai, AK, for Plaintiffs.

Jennifer Klein Ayers, Ravi S. Deol, Steven G. Schortgen, K & L Gates LLP, Dallas, TX, Jennifer M. Coughlin, K & L Gates LLP, Anchorage, AK, for Defendant.

ORDER RE: DEFENDANT'S MOTION TO DISMISS

TIMOTHY M. BURGESS, UNITED STATES DISTRICT JUDGE

I. INTRODUCTION

This matter is now before the Court on Defendant Xerox State Healthcare, LLC's ("Xerox") Motion to Dismiss Plaintiff's First Amended Complaint. The Court heard oral argument on Xerox's motion on June 29, 2016.¹ Based on the arguments presented in the parties' briefs and at oral argument, and for the reasons that follow, the Court DENIES Xerox's motion to dismiss at docket 35.

II. BACKGROUND

a. Procedural History

Plaintiffs South Peninsula Hospital ("South Peninsula"), Alaska Speech and Language Clinic, Inc. ("Alaska Speech"), and Kenai Vision Center, LLC ("Kenai Vision") initiated this action on September 24, 2015, on behalf of themselves and all others similarly situated.² On January 15, 2016, Plaintiffs filed their First Amended Complaint ("FAC"), alleging violations of the Alaska Unfair Trade Practice and Consumer Protection Act (Count One) and negligence and/or reckless indifference (Count Two).³ In relief, Plaintiffs seek monetary damages to compensate themselves and other Medicaid providers for financial injuries they suffered due to delayed reimbursements caused by defects in the State of Alaska's Medicaid payment system, which Xerox designed, developed, and implemented.⁴

Xerox moved to dismiss the FAC pursuant to Fed. R. Civ. P. 12(b)(1) and Fed. R. Civ. P. 12(b)(6) on February 8, 2016.⁵ Plaintiffs filed their opposition on March 3, 2016,⁶ and Xerox replied on March 21, 2016.⁷ In addition to their briefing, Xerox submitted several affidavits and exhibits in support of its position regarding the exhaustion of administrative remedies and this Court's subject matter jurisdiction over the claims in this action.

b. Factual Background

Among other things, the FAC alleges that:

The parties. Plaintiffs are all healthcare providers enrolled in Medicaid who submitted claims for reimbursement for Medicaid services from October 1, 2013 to present using the State of Alaska's Medicaid Management Information System ("MMIS").⁸ The current version of Alaska's MMIS is called "Healthcare Enterprise."⁹

Xerox is a limited liability company based in Atlanta, Georgia and with an office in Anchorage, Alaska.¹⁰ As the successor to Affiliated Computer Services State Healthcare, LLC ("ACS"), Xerox was responsible for the design, development, and implementation of Healthcare Enterprise.¹¹

Health Enterprise. Alaska's Medicaid program is administered by the Alaska Department of Health and Social Services ("DHSS").¹² The Alaska Medicaid system serves more than 140,000 low-income or disabled Alaskans.¹³ Through this system, DHSS pays out approximately $1.5 billion annually in state and federal money to Medicaid providers.¹⁴

Alaska's original MMIS was established in 1987 to process and pay Medicaid claims.¹⁵ In November 2006, DHSS issued a Request for Proposals ("RFP") to replace the original MMIS.¹⁶ Among other things, the RFP required that the new MMIS meet all federal Medicaid requirements and state healthcare mandates; permit timely processing of Medicaid claims from health care providers, whether those claims were submitted electronically or on federally approved paper forms; and provide prompt payment of authorized claims.¹⁷

DHSS' contract for the new MMIS contemplated three phases: (1) design, development, and implementation of the new MMIS; (2) operation of the MMIS, including its data warehouse and decision support system; and (3) turnover of the MMIS to DHSS or its contractor upon completion of performance.¹⁸ In 2007, DHSS awarded the MMIS contract to ACS.¹⁹ Section A.13 of the contract expressly states that ACS is an independent contractor for the State.²⁰ Section A.22 states that the contract "is for the sole benefit of the parties hereto and not for the benefit of any third party."²¹ Xerox became ACS' successor-in-interest to the contract when it acquired ACS.²²

"Go-live" crisis. After a series of delays, Health Enterprise went live on October 1, 2013.²³ As of the "go-live" date, electronic and paper claims could be submitted by Medicaid providers only through Health Enterprise and not through the old MMIS.²⁴ Plaintiffs allege that DHSS agreed to the "go-live" date based on its reasonable reliance on misrepresentations made by Xerox about the readiness of Health Enterprise to process healthcare providers' Medicaid claims, including that Xerox had performed extensive "system testing" on the MMIS to confirm that the system met the essential requirements necessary to "go live."²⁵

Almost immediately after Health Enterprise went live, it became clear that the system was not able to perform the functions required of it under the MMIS contract.²⁶ The system, for example, was unable to process many properly submitted claims, erroneously denied authorized claims, and failed to pay certain entire categories of claims.²⁷ Because of these and other material system defects about which Plaintiffs allege Xerox knew or should have known, Medicaid providers were prevented from receiving timely reimbursements on properly submitted, valid claims.²⁸

Those delayed reimbursements resulted in financial harms to Medicaid providers, including loss of the time value of money, increased operational costs expended to recover backlogged payments, business injury due to interruption of cash flow, and even going out of business.²⁹ Plaintiffs allege that these financial harms were a foreseeable consequence of Xerox's failure to produce a properly functioning MMIS by the "go-live" date and its misrepresentations to the State that the MMIS was ready to go live when it was not.³⁰

Because of the number and degree of delayed reimbursements caused by material defects with Health Enterprise, the State has issued advance payments to Medicaid providers for valid claims that were erroneously denied or suspended.³¹ These payments were made without first requiring Medicaid providers to resort to any administrative review process.³² After issuing advance payments to providers, the State brought suit against Xerox, seeking specific performance, declaratory relief, injunctive relief, and damages as a result of "Xerox's defective MMIS and its failure to remedy the defects."³³

Class action allegations. Plaintiffs bring this action for negligence and unfair trade practices on behalf of themselves and, pursuant to Fed. R. Civ. P. 23, on behalf of a putative class defined as "[a]ll Alaska-enrolled Medicaid healthcare providers who submitted a claim for reimbursement from October 1, 2013 to the present whose payment was identified by the State as having been suspended or denied in error by the State's [MMIS], and was subsequently paid by the State."³⁴

III. LEGAL STANDARD

Xerox seeks dismissal of Plaintiffs' claims pursuant to Rule 12(b)(1) and Rule 12(b)(6). When faced with a challenge to its subject matter jurisdiction under Rule 12(b)(1), a court must resolve that issue before determining whether a complaint states a cause of action under Rule 12(b)(6).³⁵

Rule 12(b)(1) allows a party to move to dismiss an action at any stage in the litigation for lack of subject matter jurisdiction. If a court determines at any time, whether by suggestion of the parties or otherwise, that it lacks subject matter jurisdiction, "the court must dismiss the action."³⁶ Under Alaska law, "[c]ourts are without jurisdiction over a case where statutory exhaustion requirements have not been complied with."^{37 ,38}

Under Rule 12(b)(6), dismissal is appropriate if a plaintiff's complaint fails to state a claim upon which relief can be granted. Under the "facial plausibility" pleading standard set forth by the Supreme Court in Ashcroft v. Iqbal , "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim for relief that is plausible on its face.' "³⁹ For purposes of Xerox's 12(b)(6) argument to dismiss the FAC, the Court accepts as true the material factual allegations contained in the FAC and draws all reasonable inferences in Plaintiffs' favor, as the non-moving parties.⁴⁰

While a court is limited in its review of a motion pursuant to Rule 12(b)(6) to the factual allegations contained in the complaint, no such limitation exists as to Rule 12(b)(1), and the Court will consider matters outside of the FAC.⁴¹

IV. DISCUSSION

In its motion to dismiss, Xerox argues that Plaintiffs' claims should be dismissed because Plaintiffs failed to exhaust administrative remedies; because Xerox, as the State's fiscal agent, is immune from suit; and because Plaintiffs' negligence and Alaska Unfair Trade Practices Act ("UTPA") claims fail as a matter of law. Xerox further argues that Plaintiffs' class action demand fails as a matter of law and should be stricken. The Court addresses each argument in turn, beginning, as it must, with Xerox's exhaustion challenge.

a. Exhaustion

Xerox argues, as a threshold matter, that the Court lacks subject matter jurisdiction to hear Plaintiffs' claims because Plaintiffs failed to exhaust administrative remedies, and must therefore dismiss this case. Plaintiffs contend that they were not required to submit their claims for administrative review because the State voluntarily authorized payment for the delayed reimbursements at issue in this case without first requiring administrative review.

Under...