United States v. Molina Healthcare of Ill., Inc.

• Decision Date: 19 August 2021
• Docket Number: No. 20-2243,20-2243
• Citation: 10 F.4th 765
• Parties: UNITED STATES of America and the State of Illinois EX REL. Thomas PROSE, Plaintiff-Appellant, v. MOLINA HEALTHCARE OF ILLINOIS, INC., and Molina Healthcare, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

10 F.4th 765

UNITED STATES of America and the State of Illinois EX REL. Thomas PROSE, Plaintiff-Appellant,

v.MOLINA HEALTHCARE OF ILLINOIS, INC., and Molina Healthcare, Inc., Defendants-Appellees.

No. 20-2243

United States Court of Appeals, Seventh Circuit.

Argued January 15, 2021

Decided August 19, 2021

Neil M. Rosenbaum, Damon E. Dunn, Attorneys, Funkhouser Vegosen Liebman & Dunn, Bruce C. Howard, Attorney, Howard Law LLC, Paul M. King, Attorney, Pedersen & Houpt, P.C., Chicago, IL, Tejinder Singh, Attorney, Goldstein & Russell, P.C., Bethesda, MD, for Plaintiff-Appellant.

Albert Giang, Kelly Perigoe, Attorneys, King & Spalding LLP, Los Angeles, CA, Sulema Medrano Novak, Attorney, Faegre Drinker Biddle & Reath, LLP, Chicago, IL, Quyen Ta, Attorney, King & Spalding, San Francisco, CA, for Defendants-Appellees.

Before Sykes, Chief Judge, and Wood and Hamilton, Circuit Judges.

Wood, Circuit Judge.

Sophisticated players in the healthcare market know that services come at a cost; providers charge fees commensurate with the services rendered; and payors expect to receive value for their money. There are many options from which to choose when designing a payment scheme, including fee-for-service, prepaid services using the health-maintenance organization model (HMO), and capitation payments, to name just a few. Each of these models attempts to balance expected services against expected costs.

The present case involves a capitation system, which is similar to the traditional HMO approach in which parties agree to a fixed per-patient fee that covers all services within the scope of a governing plan. Molina Healthcare of Illinois (Molina) contracted with the state's Medicaid program (which in turn is largely funded by the federal government, see Illinois Medicaid, https://www.benefits.gov/benefit/1628) to provide multiple tiers of medical-service plans with scaled capitation rates. Among those, the Nursing Facility (NF) plan required Molina to provide Skilled Nursing Facility (SNF) services. Molina itself, however, did not deliver those services; instead, it subcontracted with GenMed to cover this obligation. Molina received a general capitation payment from the state, out of which it was to pay GenMed for the SNF component. But little time passed before Molina breached its contract with GenMed and GenMed terminated the contract. After GenMed quit, Molina continued to collect money from the state for the SNF services, but it was neither providing those services itself nor making them available through any third party. Molina never told the government about this breakdown, nor did it seek out a replacement service provider.

Thomas Prose, the founder of GenMed, brought this qui tam action under both the federal and the state False Claims Acts. See 31 U.S.C. § 3729 et seq. ; 740 ILCS 175/1 et seq. (Because the state law does not differ in any meaningful way from the federal law, we refer in this opinion only to the federal law for the sake of simplicity.) Prose alleged that Molina submitted fraudulent claims for payments to the Department (which was for the most part just a conduit for federal funds—a point we will not repeat) for skilled nursing facility services. Although the district court agreed with Prose that the SNF services were material to the contract, it dismissed the case at the pleading stage because it found that the complaint insufficiently alleged that Molina knew that this condition was material. But on our independent reading of the complaint, we conclude that it plausibly alleges that as a sophisticated player in the medical-services industry, Molina was aware that these kinds of services play a material role in the delivery of Medicaid benefits. We therefore reverse and remand for further proceedings.

I

We present the facts in the light most favorable to Prose, the party opposing dismissal for failure to state a claim. Molina, a subsidiary of Molina Healthcare, Inc. (Molina Healthcare), is a Managed Care Organization (MCO). It has contracted with the Illinois Department of Healthcare and Family Services to provide healthcare services for Illinois Medicaid beneficiaries. Molina's contract with the state was a "risk contract," in which the parties agree to an expected cost for services for a patient and Molina assumed the risk that the cost of those services might exceed the contracted payment amount. 42 C.F.R. § 438.2.

As part of this risk contract, Molina and the Department agreed to capitation payments—periodic contractual fees, calculated per enrollee. These fees must be "actuarily sound." Id . Each enrollment category had its own schedule of payments. A given category's capitation rate reflected the anticipated costs per person on an amortized basis. There was nothing unusual about this arrangement. In the late 1980s and 1990s, the capitation-payment model became common in the healthcare industry. It is similar to the more traditional health maintenance organization (HMO), in which a health insurance provider covers all care over a fixed annual fee, but it differs in some important ways. Capitation rates, in a word, are more flexible. They allow providers to establish distinct rate tiers, and the providers agree to delineate at the outset exactly what services they will furnish within each tier. Membership in each tier is correlated with factors such as age, health, and needed services. See, e.g., Nina Novak, Health Care Risk Contracting: The Capitation Alternative , 3 HEALTH LAW . 4, 4–5 (1987). A Managed Care Organization plays an active role in the creation of the plan, as it needs to understand the risk it is assuming through its guarantee of services. See Andrew Ruskin, Capitation: The Legal Implication of Using Capitation to Affect Physician Decision-Making Processes , 13 J. CONTEMP. HEALTH L. & POL ’ Y 391, 397, 409, 411 (1997).

Molina's contract created "rate cells" that were "stratified by age ..., geographic services area (Greater Chicago and Central Illinois), and setting-of-care." It defined five care settings: Nursing Facility, Waiver, Waiver Plus, Community, and Community Plus. The lowest cost and most populous of these cells was the Community group. For the Greater Chicago Community category during the contract period for February to December 2014, for example, the projected enrollee count was 261,108, and the monthly capitation rate the state paid to Molina was $53.51 for each person 65 years and older. By contrast, the highest-cost category—Nursing Facility—had 70,836 enrollees covered at a monthly rate of $3,180.30 per person 65 and older. Our case concerns this latter category.

Molina contracted to provide Skilled Nursing Facility (universally abbreviated as SNF) services for Nursing Facility enrollees. Under Illinois state law, SNF providers, known as "SNFists," are "medical professional[s] specializing in the care of individuals residing in nursing homes employed by or under contract with a MCO." 305 ILCS 5/5F-15. Molina's contract further specified that a SNFist's "entire professional focus is the general medical care of individuals residing in a Nursing Facility and whose activities include Enrollee care oversight, communication with families, significant others, PCPs, and Nursing Facility administration." SNFists perform valuable long-term care for sick, disabled, or elderly patients who need long-term medical and nursing care without hospitalization. Molina's contract with the Department emphasized that SNFist services were integral to improving the enrollee's quality of life and potentially to enabling her to be discharged from the nursing home.¹

In order to deliver these expensive services, in April 2014 Molina entered into an agreement with GenMed, because Molina did not have the necessary qualified personnel. This contract provided that GenMed would provide SNF services for Molina's Nursing Facility enrollees. The Department was not a party to the contract, and so it continued to pay Molina the full capitation payments for the SNF recipients. Molina then used those funds to pay GenMed the agreed amount. This arrangement, however, lasted only about nine months. In January 2015, Molina stopped reimbursing GenMed and sought to renegotiate the price terms of the service agreement. GenMed continued to provide SNF services through March 2015, but it terminated the contract on April 2, 2015, after Molina continued to refuse to pay it.

From April 2, 2015, until at least April 5, 2017, Molina was not delivering SNF services to anyone, either with its own personnel or through a subcontractor. Indeed, it was not even looking for a replacement for GenMed. It did not inform the Department or the federal authorities of this change, and so the Department continued to pay it the full capitation amount for SNF services—in essence, payments for nothing. Aware of the situation because of his association with GenMed, Thomas Prose filed this qui tam action on September 14, 2017, alleging that Molina violated the False Claims Act by seeking and obtaining compensation despite failing to provide material services under its contract with the Department.

II

Since we are evaluating the district court's decision to grant a motion to dismiss under Rule 12(b)(6), we accept all well-pleaded facts as true and draw all reasonable inferences in favor of the non-moving party. O'Brien v. Village of Lincolnshire , 955 F.3d 616, 621 (7th Cir. 2020). Critically, however, this is not a case that is governed by the usual notice-pleading standards of Federal Rule of Civil Procedure 8. See, e.g. , Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). A party bringing a case alleging fraud must satisfy the heightened pleading standards set forth in Rule 9(b), which says that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." FED. R. CIV. P. 9(b). At the same time, Rule 9(b) carves out several matters that may be alleged generally,...