United States ex rel. Ormsby v. Sutter Health

• Decision Date: 16 March 2020
• Docket Number: Case No. 15-cv-01062-LB
• Citation: 444 F.Supp.3d 1010
• Parties: UNITED STATES of America EX REL. Kathy ORMSBY, Plaintiff, v. SUTTER HEALTH, et al., Defendants.
• Court: U.S. District Court — Northern District of California

444 F.Supp.3d 1010

UNITED STATES of America EX REL. Kathy ORMSBY, Plaintiff,

v.SUTTER HEALTH, et al., Defendants.

Case No. 15-cv-01062-LB

United States District Court, N.D. California, San Francisco Division.

Signed March 16, 2020

Olga Yevtukhova, Albert Thomas Morris, United States Department of Justice, Lyle Gruby, Washington, DC Benjamin Joseph Wolinsky, U.S. Attorney's Office Northern District of California, Kimberly Friday, U.S. Attorney's Office, Jeffrey Farley Keller, Kathleen R. Scanlan, Keller Grover LLP, Sarah Pascal Alexander, Constantine Cannon LLP, San Francisco, CA, Gordon Schnell Hamsa Mahendranathan, Constantine Cannon LLP, New York, NY, Mark Allen Kleiman, Pooja Rajaram, Santa Monica, CA, for Plaintiff.

Jason Masashi Ohta, Katherine Ann Lauer, Amy Elizabeth Hargreaves, Steven Mark Bauer, Latham & Watkins LLP, San Francisco, CA, Spencer Kohl Turnbull, Latham Watkins LLP, Los Angeles, CA, for Defendants.

ORDER DENYING DEFENDANTS' MOTIONS TO DISMISS

Re: ECF Nos. 66, 68, 81

LAUREL BEELER, United States Magistrate Judge

TABLE OF CONTENTS

INTRODUCTION...1019

STATEMENT...1021

1. Medicare Advantage Generally...1021

2. The Government's Allegations Regarding Diagnosis Codes...1025

3. The Government's Allegations Against Sutter and PAMF...1026

3.1 Sutter's and PAMF's "RAF Campaign"...1027

3.1.1 Characterizing conditions as "chronic"...1027

3.1.2 Using a "pit crew" to add diagnosis codes to patient medical records...1028

3.1.3 Pressuring physicians to add diagnosis codes to patient medical records...1028

3.1.4 Pre-populating patient medical records with diagnosis codes...1031 3.1.5 Adding diagnosis codes as addendums to patient medical records...1032

3.2 "Red Flags" Regarding Coding...1033

3.2.1 Audits by MA Organizations...1033

3.2.2 Lack of compliance and training programs...1034

3.2.3 Internal reviews and audits by Sutter and PAMF...1035

3.3 Knowingly Ignoring Red Flags and Actual Notice of False Claims...1040

3.4 Examples of False Diagnosis Codes and Estimate of Total Overpayments...1045

4. The Relator's Allegations Against Sutter Regarding Its Non-PAMF Affiliates...1048

THE FALSE CLAIMS ACT...1054

1. Direct-FCA Claims...1054

2. Reverse-FCA Claims...1055

STANDARD OF REVIEW...1057

ANALYSIS...1057

1. The "Actuarial Equivalence" Argument Is Not a Valid Defense...1058

1.1 The Premise — That CMS Is Violating "Actuarial Equivalence" — Is Not Sound...1060

1.1.1 CMS's Medicare Advantage audit process and the "2014 Overpayment Rule"...1060

1.1.1.1 Audits of MA Organizations...1060

1.1.1.2 The "2014 Overpayment Rule"...1061

1.1.2 UnitedHealthcare 's invalidation of the 2014 Overpayment Rule...1062

1.1.3 UnitedHealthcare does not compel the conclusion that there is no actuarial equivalence here...1064

1.2 "Actuarial Equivalence" Is Not a Defense to an FCA Claim...1067

1.2.1 MA Participants cannot retain payments predicated on false diagnosis codes...1067

1.2.2 The "actuarial equivalence" requirement does not vitiate scienter...1071

2. The Relator Can Pursue Her Sutter-Wide Claims...1073

3. The Plaintiffs Sufficiently Plead Their Claims...1077

3.1 Reverse-FCA Claims...1077

3.1.1 Concealing or avoiding an obligation to pay the government...1077

3.1.2 Scienter...1081

3.2 Direct-FCA Claims...1082

3.2.1 False claims, or false records and statements...1082

3.2.2 Scienter...1083

3.2.3 Materiality and causation...1085

3.3 Common-Law Claims...1086

CONCLUSION...1086

INTRODUCTION

The government and relator Kathy Ormsby sued Sutter Health and its affiliate Palo Alto Medical Foundation ("PAMF") for violations of the False Claims Act ("FCA"), 31 U.S.C. §§ 3729 – 3733, and for common-law claims of payment by mistake and unjust enrichment. Sutter and PAMF control hospitals and physician foundations throughout California. The plaintiffs allege that Sutter and PAMF knowingly submitted thousands of false claims relating to the Medicare Part C Program, known as Medicare Advantage, and knowingly concealed and avoided their obligations to return Medicare Advantage overpayments that they received.

Under the Medicare Advantage program, the federal agency that administers the Medicare program — the Centers for Medicare and Medicaid Services ("CMS") — contracts with private health-insurance companies (known as "Medicare Advantage Organizations" or "MA Organizations") that operate health-insurance plans (known as "Medicare Advantage Plans" or "MA Plans") that cover Medicare beneficiaries. MA Organizations in turn contract with medical providers such as Sutter and PAMF for healthcare services (e.g., doctor's visits, hospitalizations, etc.) for the beneficiaries enrolled in the MA Plan. CMS pays MA Organizations a capitated (fixed) amount for each beneficiary enrolled in their MA Plans. MA Organizations share those payments with their contracted medical providers.

The amount that CMS pays for a given beneficiary depends in large part on the beneficiary's health status. Broadly speaking, CMS pays higher rates for sicker beneficiaries and lower rates for healthier beneficiaries, out of a recognition that sicker beneficiaries likely will need more care.

CMS relies on "diagnosis codes" to calculate beneficiaries' health statuses. Every disease, injury, infection, and symptom has its own diagnosis code. Medical providers such as Sutter and PAMF enter diagnosis codes into beneficiaries' medical records after "physician-patient encounters" (a doctor's physical examination of a patient). Medical providers submit the diagnosis codes to MA Organizations, which submit them to CMS. CMS uses some of the diagnosis codes (such as codes for major, severe, or chronic illnesses ) — referred to as "risk-adjusting diagnosis codes" — in a risk-adjustment model to calculate a risk score for each beneficiary. The diagnosis codes that medical providers submit are the only factors that CMS uses to determine a beneficiary's health status to calculate the beneficiary's risk score and thus to calculate how much CMS will pay for that beneficiary.

As the Ninth Circuit has recognized, participants in the Medicare Advantage program (MA Organizations and medical providers) (collectively, "MA Participants") have an incentive to over-report diagnosis codes in order to raise beneficiary risk scores and, in turn, increase the amount that CMS pays them. United States ex rel. Silingo v. WellPoint, Inc. , 904 F.3d 667, 672 (9th Cir. 2018) ; United States v. United Healthcare Ins. Co. , 848 F.3d 1161, 1168 (9th Cir. 2016) ( Swoben ).

The government alleges that Sutter and PAMF maximized the number of risk-adjusting diagnosis codes that they reported (through MA Organizations to CMS) in order to increase the payments that CMS paid to the MA Organizations and, ultimately, to Sutter and PAMF. Among other things, Sutter and PAMF (1) pre-populated Medicare Advantage beneficiaries' medical records with diagnosis codes before physicians saw or diagnosed the beneficiaries, (2) had non-physician "coders" review Medicare Advantage beneficiaries' medical records and retroactively add codes that the physicians supposedly "missed" or change the physicians' codes to codes for more severe conditions, and (3) knowingly submitted unsupported diagnosis codes to CMS and prohibited their internal coders/auditors from deleting unsupported diagnosis codes. Relator Kathy Ormsby, who worked as PAMF's Risk-Adjustment Project Manager from 2013 to 2015, conducted internal reviews and audits, found that large percentages of the risk-adjusting diagnosis codes that Sutter and PAMF submitted were false, and reported her findings to Sutter and PAMF management. The government alleges Sutter and PAMF were deliberately ignorant or reckless about their submitting false diagnosis codes and retaining payments predicated on false diagnosis codes and did nothing to fix the problem. The government alleges that Sutter and PAMF violated the FCA by (1) submitting false risk-adjusting diagnosis codes to CMS and (2) failing to return payments predicated on false diagnosis codes. These allegations also are the predicates for the government's common-law claims for payment by mistake and unjust enrichment.

Ms. Ormsby's complaint is broader than the government's complaint. The government's complaint is limited to PAMF (and Sutter's actions in connection with PAMF). Ms. Ormsby alleges that Sutter committed similar violations of the FCA through its other affiliates.

Sutter and PAMF move to dismiss both complaints under Federal Rules of Civil Procedure 12(b)(6) and 9(b). Sutter's and PAMF's main argument is that the FCA claims fail because the plaintiffs have not alleged a sufficient threshold diagnosis-code error rate. The argument is predicated on a statute — 42 U.S.C. § 1395w-23(a)(1)(C)(i) — that provides that CMS must adjust Medicare Advantage payments to ensure "actuarial equivalence" with traditional Medicare. Sutter and PAMF maintain that (1) traditional Medicare providers also submit false or unsupported diagnosis codes and (2) under the principle of "actuarial equivalence," Medicare Advantage providers that submit false or unsupported diagnosis codes are not overpaid unless their diagnosis-code "error rate" exceeds the "error rate" of traditional Medicare providers. Sutter and PAMF contend that because the plaintiffs have not alleged that their "error rate" exceeds the traditional-Medicare "error rate," they have not sufficiently pleaded a claim. Sutter also argues that where, as here, the government has intervened in an FCA case, a relator like Ms. Ormsby cannot independently pursue claims that exceed the scope of the government's intervention and that the court therefore should dismiss her claims regarding Sutter's non-PAMF affiliates. Sutter and PAMF also move to dismiss the claims on the ground that the plaintiffs did not sufficiently allege facts establishing their knowing failure to return overpayments or their knowing submission of false claims.

The court denies the motions to dismiss. First, the "actuarial equivalence" provision in 42 U.S.C. § 1395w-23(a)(1)(C)(i) is...