United States v. United Healthcare Ins. Co., 13-56746

• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)
• Writing for the Court: FISHER, Circuit Judge
• Citation: 848 F.3d 1161
• Parties: UNITED STATES of America, Plaintiff, and James M. Swoben, Qui Tam Relator, Plaintiff–Appellant, 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.
• Docket Number: No. 13-56746,13-56746
• Decision Date: 10 August 2016

848 F.3d 1161

UNITED STATES of America, Plaintiff,
and
James M. Swoben, Qui Tam Relator, Plaintiff–Appellant,
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.

No. 13-56746

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 9, 2015 Pasadena, California
Filed August 10, 2016
Amended December 16, 2016

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 US LLP, Los Angeles, California; Michael C. Theis, Hogan Lovells US LLP, Denver, Colorado; for Defendants–Appellees HealthCare Partners LLC, HealthCare Partners Medical Group, Inc. and HealthCare Partners Independent Physician Association.

Geoffrey M. Sigler, Thomas M. Johnson, Jr., and Miguel A. Estrada, Gibson, Dunn & Crutcher LLP, Washington, D.C.; Richard J. Doren, Gibson, Dunn & Crutcher LLP, Los Angeles, California; for Appellee Aetna.

848 F.3d 1166

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.

ORDER

Judges Reinhardt and Nguyen have voted to deny appellees' petition for rehearing en banc, and Judge Fisher has so recommended.

The full court has been advised of the petition for rehearing en banc and no judge has requested a vote on whether to rehear the matter en banc. See Fed. R. App. P. 35.

The petition for rehearing en banc is DENIED .

The opinion, filed August 10, 2016 and published at 832 F.3d 1084, is AMENDED . An amended opinion is filed concurrently with this order.

Further petitions for rehearing may be filed.

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 (also known as encounter data) 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 despite the absence of 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,

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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. Medicare+Choice 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 partly satisfy Rules 8 and 9(b) of the Federal Rules of Civil Procedure. With respect to defendants United Healthcare and HealthCare Partners, the allegations 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. With respect to defendants Aetna, WellPoint and Health Net, the allegations lack sufficient detail to satisfy Rule 9(b), but Swoben should be afforded leave to amend to cure this deficiency.

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). 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

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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),...