Osinek v. Kaiser Permanente

— 1 — — 2 — — 3 — 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA — 6 — 7 UNITED STATES OF AMERICA ex rel. Case No. 13-cv-03891-EMC RONDA OSINEK, 8 CONSOLIDATED MEMBER CASES Plaintiff, — 9 — v. Case No. 16-cv-01558-EMC 10 Case No. 16-cv-05337-EMC PERMANENTE MEDICAL GROUP, INC, Case No. 18-cv-01347-EMC 11 et al., Case No. 21-cv-03124-EMC Case No. 21-cv-03894-EMC 12 Defendants. ORDER GRANTING IN PART AND 13 DENYING IN PART DEFENDANTS’ MOTION TO DISMISS UNITED 14 STATES’ COMPLAINT IN INTERVENTION — 15 — Docket No. 178 — 16 — — 17 — 18 The above-referenced case consists of several consolidated cases that charge Kaiser 19 entities with making false claims for payment to the federal government. The main claims 20 asserted against the Kaiser entities are violations of the federal False Claims Act (“FCA”). 21 Following the Court’s order of May 5, 2022, see Docket No. 171 (order), the following cases 22 remain: 23 (1) The United States’ complaint in intervention (Docket No. 110); 24 (2) The first amended complaint in Osinek (Docket No. 87); 25 (3) Parts of the second amended complaint in Taylor (Docket No. 118); and 26 (4) Parts of the first amended complaint in Bryant (Docket No. 117).1 — 27 — 1 Currently pending before the Court are four motions to dismiss filed by the relevant Kaiser 2 entities. The motions are targeted at all of the cases that remain. This order addresses only the 3 motion to dismiss the United States’ complaint in intervention. Having considered the parties’ 4 briefs, the Court hereby GRANTS in part and DENIES in part the motion to dismiss. 5 I. FACTUAL & PROCEDURAL BACKGROUND 6 In its complaint, the United States alleges as follows. 7 “Medicare is a federally operated health insurance program.” U.S. Compl. ¶ 52. It has 8 four parts: 9 • Part A, which covers inpatient and institutional care. 10 • Part B, which covers outpatient care. 11 • Part C, which is the Medicare Advantage program at issue in this case. 12 • Part D, which covers prescription drugs. 13 See U.S. Compl. ¶ 52. 14 Parts A and B are “traditional” Medicare. 15 [T]he Government reimburses healthcare providers using a fee-forservice system, in which providers submit claims to CMS [Centers 16 for Medicare and Medicaid Services] for healthcare services actually rendered, such as a provider officer visit or hospital stay. CMS then 17 pays the providers directly for each service based on payment rates predetermined by the Government. — 18 — 19 U.S. Compl. ¶ 53. 20 A Medicare beneficiary can opt out of traditional Medicare and enroll instead in a 21 Medicare Advantage plan (“MA plan”) managed by a Medicare Advantage organization (“MA 22 organization” or “MAO”). See U.S. Compl. ¶ 54. “CMS reimburses MA plans differently than 23 traditional Medicare.” U.S. Compl. ¶ 57. Specifically, Medicare Advantage uses a “‘capitation’ 24 payment system.” United States ex rel. Silingo v. Wellpoint, Inc., 904 F.3d 667, 672 (9th Cir. 25 2018). Under that system, “private health insurance organizations provide Medicare benefits in — 26 — Claims Act. See Docket No. 171 (Order at 46). However, prior to the Court’s order, the plaintiff — 27 — in Bicocca had dismissed those state law claims. See Docket No. 159 (notice of voluntary partial 1 exchange for a fixed monthly fee per person enrolled in the program – regardless of actual 2 healthcare usage.” Id. The fixed monthly fee for an enrollee is set as follows. First, there is a 3 predetermined base payment for each enrollee in a Medicare Advantage plan. See U.S. Compl. ¶ 4 57. Second, the base payment is then adjusted “to account for (1) demographic factors such as age 5 and gender (among others) and (2) health status. This is known as risk adjustment.” U.S. Compl. 6 ¶ 58. 7 Risk adjustment is accomplished by assigning each beneficiary a risk score, which “acts as 8 a multiplier that is applied to the MA plan’s base rate to determine the overall monthly payment 9 for the beneficiary.” U.S. Compl. ¶ 58. A beneficiary’s risk score is determined through a model 10 called the CMS Hierarchical Conditions Category (“HCC”) model, which, as indicated above, is 11 based on the patient’s demographic factors and health status. See U.S. Compl. ¶ 59. “The CMS12 HCC model is prospective in the sense that it uses diagnoses made in a base year (the ‘service 13 year’), along with demographic information (such as age and gender, among others), to predict 14 costs for Medicare benefits and adjust payments for the following year (the ‘payment year’).” U.S. 15 Compl. ¶ 60. 16 With respect to health status, the model relies on diagnosis codes from the International 17 Classification of Diseases (“ICD”). See U.S. Compl. ¶ 60. “ICD diagnosis codes are 18 alphanumeric codes used by healthcare providers, insurance companies, and public health 19 agencies to represent medical conditions; every disease, injury, infection, and symptom has its 20 own code.” U.S. Compl. ¶ 62. In general, the more severe an enrollee’s medical diagnoses are, 21 the greater the risk adjustment is, and the more a MA organization is paid. See U.S. Compl. ¶ 2 22 (alleging that “CMS adjusts these payments for various ‘risk’ factors that affect expected 23 healthcare expenditures, to ensure that MA Organizations are paid more for sicker enrollees 24 expected to incur higher healthcare costs and less for healthier enrollees expected to incur lower 25 costs”); U.S. Compl. ¶ 3 (alleging that “the amount of payment that CMS made to [a MA 26 organization] for a Medicare Advantage patient depended directly on the diagnoses that [the MA 27 organization] submitted to CMS for that patient”). 1 written contract with CMS for the MA plans [it] operate[s].” U.S. Compl. ¶ 74. According to the 2 government, both under its contract with CMS and under federal regulations, a MA organization is 3 required to provide CMS with risk adjustment data for its enrollees conforms with not just the ICD 4 diagnosis codes but also the ICD Guidelines. See, e.g., U.S. Compl. ¶¶ 61, 81. “The ICD 5 Guidelines impose numerous requirements and limitations on what diagnoses may be coded in a 6 particular visit and in a particular setting.” U.S. Compl. ¶ 82. For example, “[f]or an outpatient 7 visit . . . , the ICD Guidelines only permit the coding of documented conditions that [1] both exist 8 at the visit and that [2] ‘require or affect patient care treatment or management.”“ U.S. Compl. ¶ 9 83 (emphasis in original; quoting ICD Guidelines). 10 In its complaint, the United States has sued several Kaiser entities. As alleged, “Kaiser 11 Permanente” is “an integrated health-care consortium comprised of three components: [1] health 12 plans (‘Health Plans’); [2] physician medical group practices (referred to as ‘Permanente Medical 13 Groups’); and [3] hospitals.” U.S. Compl. ¶ 19. The Health Plans are MA organizations, and they 14 contract with the federal government to provide MA plans. In turn, the Permanente Medical 15 Groups contract with the Health Plans to provide medical services to patients who enroll in the 16 plans. See U.S. Compl. ¶¶ 20-26. The United States has sued those Health Plans and the 17 Permanente Medical Groups affiliated with California and Colorado (collectively, “Kaiser”). 18 According to the United States, 19 Kaiser engaged in a coordinated scheme to unlawfully obtain payments from the Medicare Part C program . . . . Kaiser obtained 20 these payments by systematically altering patient medical records to add diagnoses that either [1] did not exist or [2] were unrelated to 21 the patient’s visit with the Kaiser physician. Kaiser altered the patients’ medical records to add these diagnoses retrospectively – 22 after the patient medical visit – using a mechanism called an addendum. Often, these addenda were added months or even a year 23 or more after the visit. In many cases, patients were not even told that they supposedly had the diagnoses that Kaiser had added to 24 their medical records. Kaiser knew that it could not lawfully submit diagnoses that were unrelated to the patient’s visit, but it 25 nevertheless routinely used these diagnoses to obtain additional payments from Medicare. Between 2009 and 2018, Kaiser added 26 roughly half a million diagnoses using addenda. Kaiser submitted the diagnoses from these addenda to the Centers for Medicare and 27 Medicaid Services (“CMS”) and received additional Medicare 1 U.S. Compl. ¶ 1; see also U.S. Compl. ¶ 7 (referring to practices such as “data mining,” “chart 2 review,” and “refreshing” that Kaiser used to find diagnoses to add); Opp’n at 7 (discussing the 3 above practices of data mining, chart review, and refreshing). 4 Based on, inter alia, the above allegations, the government has asserted the following 5 causes of action: 6 (1) Violation of the federal False Claims Act (“FCA”) by presenting or causing to be 7 presented false claims for “risk-adjustment payments in the form of improper 8 diagnoses codes for Defendants’ Medicare patients, in violation of CMS 9 regulations and policies, which Defendants agreed to and were obligated to comply 10 with.” U.S. Compl. ¶ 349; see also 31 U.S.C. § 3729 (a)(1);\. 11 (2) Violation of the FCA by “making, using, and causing to be made or used, false 12 records or statements material to false or fraudulent claims resulting in 13 [Defendants’] receiving inflated Medicare payments from CMS to which they were 14 not entitled.” U.S. Compl. ¶ 352; see also 31 U.S.C. § 3729 (a)(1)(B). 15 (3) Violation of the FCA by conspiring “to submit and cause the submission of false 16 claims and to make, use, and cause to make or use, false records and statements 17 material to false or fraudulent claims to the United States and use false records and 18 statements material to false or fraudulent claims.” U.S. Compl. ¶ 357; see also 31 19 U.S.C. § 3729 (a)(1)(C). 20 (4) Payment by mistake. 21 (5) Unjust enrichment. 22 II. DISCUSSION 23 A. Legal Standard 24 Federal Rule of Civil Procedure 8(a)(2) requires a complaint to include “a short and plain 25 statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). A 26 complaint that fails to meet this standard may be dismissed pursuant to Federal Rule of Civil 27 Procedure 12(b)(6). See Fed. R. Civ. P. 12(b)(6). To overcome a Rule 12(b)(6) motion to dismiss 1 Corp. v. Twombly, 550 U.S. 544 (2007), a plaintiff’s “factual allegations [in the complaint] ‘must 2 . . . suggest that the claim has at least a plausible chance of success.’” Levitt v. Yelp! Inc., 765 3 F.3d 1123, 1135 (9th Cir. 2014). The court “accept[s] factual allegations in the complaint as true 4 and construe[s] the pleadings in the light most favorable to the nonmoving party.” Manzarek v. St. 5 Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). But “allegations in a 6 complaint . . . may not simply recite the elements of a cause of action [and] must contain sufficient 7 allegations of underlying facts to give fair notice and to enable the opposing party to defend itself 8 effectively.” Levitt, 765 F.3d at 1135 (internal quotation marks omitted). “A claim has facial 9 plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable 10 inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. “The 11 plausibility standard is not akin to a probability requirement, but it asks for more than a sheer 12 possibility that a defendant has acted unlawfully.” Id. (internal quotation marks omitted). 13 B. FCA Claims 14 1. General Law 15 “[T]he essential elements of False Claims Act liability are: (1) a false statement or 16 fraudulent course of conduct, (2) made with scienter, (3) that was material, causing (4) the 17 government to pay out money or forfeit moneys due.” United States ex rel. Campie v. Gilead 18 Scis., 862 F.3d 890, 902 (9th Cir. 2017); see also United States v. Corinthian Colls., 655 F.3d 984 , 19 992 (9th Cir. 2011). 20 With respect to the first element, a claim for payment can be factually false or legally false. 21 “A factually false claim is one in which ‘the claim for payment is itself literally false or 22 fraudulent,’ such as when the claim ‘involves an incorrect description of goods or services 23 provided or a request for reimbursement for goods or services never provided.’” United States ex 24 rel. Silingo v. Wellpoint, Inc., 904 F.3d 667, 675 (9th Cir. 2018); see also United States ex rel. 25 Druding v. Druding, 952 F.3d 89, 96 (3d Cir. 2020) (noting that there is factual falsity “when the 26 facts contained within the claim are untrue”). 27 A legally false claim generally involves a “‘knowingly false certification of compliance 1 Polukoff v. St. Mark’s Hosp., 895 F.3d 730, 741 (10th Cir. 2018); see also United States ex rel. 2 Greenfield v. Medco Health Sols., Inc., 880 F.3d 89, 94 (3d Cir. 2018) (stating that a claim “is 3 legally false when the claimant lies about its compliance with a statutory, regulatory, or 4 contractual requirement”). “[L]egal falsity can be express, such as a false affirmative statement of 5 compliance with a statutory, regulatory, or contractual prerequisite, or it can be implied – for 6 instance, the absence of a material disclosure that would have prevented compliance with a 7 statutory, regulatory, or contractual prerequisite.” Druding, 952 F.3d at 96 ; see also Silingo, 904 8 F.3d at 675-76 (stating that “[e]xpress false certification involves an entity’s representation of 9 compliance with the law as part of the process for submitting a claim when it is actually not 10 compliant,” while “‘[i]mplied false certification occurs when an entity has previously undertaken 11 to expressly comply with a law, rule, or regulation, and that obligation is implicated by submitting 12 a claim for payment even though a certification of compliance is not required in the process of 13 submitting the claim’”). 14 The Supreme Court addressed the theory of implied false certification in Universal Health 15 Services v. United States ex rel. Escobar, 579 U.S. 176 (2016) (hereinafter “Escobar”). In 16 Escobar, a teenager was a beneficiary of Massachusetts’s Medicaid program and was receiving 17 counseling services at a mental health facility in Massachusetts. The teens’ parents filed suit after 18 learning that few employees at the facility were actually licensed to provide mental health 19 counseling and that supervision of them was minimal. See id. at 183-84 . They asserted “an 20 implied false certification theory of liability” – i.e., the defendant “submitted reimbursement 21 claims that made representations about the specific services provided by specific types of 22 professionals, but that failed to disclose serious violations of regulations pertaining to staff 23 qualifications and licensing requirements for these services.” Id. at 184-85 . 24 The Supreme Court took note that there is a 25 rule that half-truths – representations that state the truth only so far as it goes, while omitting critical qualifying information – can be 26 actionable misrepresentations. . . . 27 So too here, by submitting claims for payment using payment codes preventive medication counseling, and other types of treatment. 1 Moreover, [facility] staff members allegedly made further representations in submitting Medicaid reimbursement claims by 2 using National Provider Identification numbers corresponding to specific job titles. And these representations were clearly 3 misleading in context. Anyone informed that a social worker at a Massachusetts mental health clinic provided a teenage patient with 4 individual counseling services would probably – but wrongly – conclude that the clinic had complied with core Massachusetts 5 Medicaid requirements (1) that a counselor “treating children [is] required to have specialized training and experience in children’s 6 services,” and also (2) that, at a minimum, the social worker possesses the prescribed qualifications for the job. By using 7 payment and other codes that conveyed this information without disclosing [the facility’s] many violations of basic staff and 8 licensing requirements for mental health facilities, [the defendant’s] claims constituted misrepresentations. By using payment and other 9 codes that conveyed this information without disclosing [the facility’s] many violations of basic staff and licensing requirements 10 for mental health facilities, [the defendant’s] claims constituted misrepresentations. — 11 — Accordingly, we hold that the implied certification theory can be a 12 basis for liability, at least where two conditions are satisfied: First, the claim does not merely request payment, but also makes specific 13 representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material 14 statutory, regulatory, or contractual requirements makes those representations misleading half-truths. — 15 — — 16 — Id. at 189-90 . 17 For the second element, i.e., scienter, a person “knowingly” submits false information if he 18 or she “(i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or 19 falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the 20 information.” 31 U.S.C. § 3729 (b)(1)(A). A defendant cannot be held liable for an “[i]nnocent 21 mistake” or “mere negligence,” U.S. ex rel. Hagood v. Sonoma Cnty. Water Agency, 929 F.2d 22 1416, 1421 (9th Cir. 1991), but “no proof of specific intent to defraud” is required. 31 U.S.C. § 23 3729(b)(1)(B). 24 Regarding the third element of an FCA claim, i.e., materiality, “the term ‘material’ means 25 having a natural tendency to influence, or be capable of influencing, the payment or receipt of 26 money or property.” Id. § 3729(b)(4). “[The] materiality requirement descends from ‘common27 law antecedents.’” Escobar, 579 U.S. at 193 . effect on the likely or actual behavior of the recipient of the alleged 1 misrepresentation.” In tort law, for instance, a “matter is material” in only two circumstances: (1) “[if ] a reasonable man would attach 2 importance to [it] in determining his choice of action in the transaction”; or (2) if the defendant knew or had reason to know that 3 the recipient of the representation attaches importance to the specific matter “in determining his choice of action,” even though a 4 reasonable person would not. Materiality in contract law is substantially similar — 5 — The materiality standard is demanding. The False Claims Act is not 6 “an all-purpose antifraud statute,” or a vehicle for punishing gardenvariety breaches of contract or regulatory violations. A 7 misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, 8 regulatory, or contractual requirement as a condition of payment. Nor is it sufficient for a finding of materiality that the Government 9 would have the option to decline to pay if it knew of the defendant’s noncompliance. Materiality, in addition, cannot be found where 10 noncompliance is minor or insubstantial. 11 In sum, when evaluating materiality under the False Claims Act, the Government’s decision to expressly identify a provision as a 12 condition of payment is relevant, but not automatically dispositive. Likewise, proof of materiality can include, but is not necessarily 13 limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on 14 noncompliance with the particular statutory, regulatory, or contractual requirement. Conversely, if the Government pays a 15 particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those 16 requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that 17 certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not 18 material. — 19 — Id. at 193 . 20 Thus, under Escobar, factors that should be considered on materiality include the 21 following: 22 (1) “the Government’s decision to expressly identify a provision as a condition of payment”; (2) whether “the Government consistently 23 refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or 24 contractual requirement” or if, with actual knowledge of the noncompliance, it consistently pays such claims and there is no 25 indication that its practice will change; and (3) whether the “noncompliance is minor or insubstantial” or if it goes “to the very 26 essence of the bargain.” 27 United States ex rel. Prather v. Brookdale Senior Living Cmtys., Inc., 892 F.3d 822, 831 (6th Cir. 1 Dist. LEXIS 136589, at *36 (C.D. Cal. July 25, 2018) (identifying the same basic considerations). 2 2. Government’s Liability Theories 3 As a preliminary matter, the Court considers what the government’s theories of liability are 4 and whether those theories are predicated on factual falsity, legal falsity, or both. 5 As noted above, the gist of the government’s complaint is that Kaiser submitted false 6 claims for payment because it “alter[ed] patient medical records to add diagnoses that either [1] 7 did not exist or [2] were unrelated to the patient’s visit with the Kaiser physician.” U.S. Compl. ¶ 8 1. 9 With respect to (1), only factual falsity is implicated. If a diagnosis of a medical condition 10 was claimed but that medical condition did not exist (i.e., the diagnosis was “clinically 11 inaccurate,” Reply at 1), then a claim for payment based on that diagnosis is literally false. See 12 Silingo, 904 F.3d at 675 (“A factually false claim is one in which ‘the claim for payment is itself 13 literally false or fraudulent,’ such as when the claim ‘involves an incorrect description of goods or 14 services provided or a request for reimbursement for goods or services never provided.’”); 15 Druding, 952 F.3d at 96 (noting that there is factual falsity “when the facts contained within the 16 claim are untrue”). 17 With respect to (2), there is both factual falsity and legal falsity.2 There is factual falsity 18 because a claim for payment was based on a diagnosis of a medical condition that did exist, but 19 the condition did not “require[] or affect][] patient care, treatment, or management for the visit.” 20 U.S. Compl. ¶ 87; see also Opp’n at 16-17 (noting that, “when Kaiser submitted for payment 21 inaccurate ICD codes in contravention of the ICD Guidelines, those were factually false claims 22 because they incorrectly described the valid ICD codes for the patient visit”). There is legal falsity 23 because – as claimed by the government – both the CMS/Kaiser contract and federal regulations 24 required Kaiser to comply with the ICD Guidelines, and “the ICD Guidelines only permit the — 25 — — 26 — 2 There does not appear to be anything that would prevent a claim for payment from being both factually false and legally false (in the appropriate circumstances). The Third Circuit has noted — 27 — that “legal falsity necessarily encompasses situations of factual falsity, for instance, where a 1 coding of documented conditions that [1] both exist at the visit and that [2] ‘require or affect 2 patient care treatment or management.”“ U.S. Compl. ¶ 83 (emphasis in original; quoting ICD 3 Guidelines); see also Polukoff, 895 F.3d at 741 (stating that a legally false claim involves a 4 “‘knowingly false certification of compliance with a regulation or contractual provision as a 5 condition of payment’”). 6 The government’s complaint largely seems to focus on the second theory of liability. See 7 also Opp’n at 16 (suggesting that “the Court need not [even] reach Kaiser’s argument that the 8 Complaint fails to allege Kaiser submitted ‘factually false’ claims for non-existent diagnoses” 9 because the second theory of liability – i.e., “Kaiser’s submission of diagnoses that did not require 10 or affect patient care, treatment, or management, in violation of the [ICD] Guidelines” – is viable). 11 However, the Court begins with an evaluation of the first theory of liability because, as Kaiser 12 argues, if that theory is indeed viable, it significantly expands the scope of the case. See Reply at 13 1-2 (“It is imperative for the Court to decide now whether the United States can prosecute 14 allegations of clinical falsity because discovery regarding such allegations will be broad and 15 voluminous. To support such a fraud theory, the United States will need to prove that each 16 Medicare Advantage member at issue did not have the diagnosed condition and Defendants will be 17 entitled to documentary and testimonial discovery to rebut that proof.”). 18 3. Diagnoses That Did Not Exist/Clinically Inaccurate Diagnoses 19 For the government’s first theory of liability – that Kaiser had patient medical records 20 amended to add diagnoses that did not exist (i.e., were clinically inaccurate) – Kaiser makes two 21 arguments: (1) the government has failed to plead factual falsity and (2) the government has failed 22 to plead knowledge of falsity on the part of Kaiser. 23 a. Falsity 24 As an initial matter, the Court notes that the government has sufficiently pled three specific 25 instances of clinically inaccurate diagnoses in paragraphs 338, 339, and 210-11 of its complaint. 26 • In paragraph 338, the government describes an incident relating to “Patient #2.” 27 Patient #2 was seen by a Kaiser doctor on 5/30/2012 “for a blood pressure check 1 Kaiser coder contacted the doctor, informing the doctor that Patient #2 had 2 “‘several uncoded diagnoses the region thinks should be picked up’” – including 3 prostate cancer. U.S. Compl. ¶ 338(c). The medical record from the original visit 4 indicated that “Patient #2 had a history of prostate cancer (identified with a 5 different ICD history code) and did not have active prostate cancer.” U.S. Compl. 6 ¶ 338(d) (emphasis in original). Nevertheless, the doctor responded to the query by 7 creating an addendum to add, inter alia, a diagnosis of prostate cancer. See U.S. 8 Compl. ¶ 338(e). 9 • In paragraph 339, the government describes an incident relating to “Patient #3.” 10 Patient #3 was seen by a Kaiser doctor on 1/17/2013 for shortness of breath. He 11 was diagnosed with exacerbation of chronic obstructive pulmonary disease 12 (“COPD”). The doctor ordered a chest x-ray to rule out pneumonia. The results of 13 the x-ray showed that Patient #3 did not have pneumonia. See U.S. Compl. ¶ 14 339(a). Approximately eight months later, a Kaiser data quality trainer contacted 15 the doctor, informing him that “‘the imaging you ordered showed Positive Aortic 16 Atheroschlerosis’” and asking him to amend his medical notes to “‘capture’” AA. 17 U.S. Compl. ¶ 339(c). The doctor responded to the query by adding a diagnosis of 18 AA via an addendum. See U.S. Compl. ¶ 339(d). The doctor later created two 19 more addenda, ultimately adding “twelve more diagnoses to Patient #3’s medical 20 record.” U.S. Compl. ¶ 339(h). One of these diagnoses was for severe obesity 21 equivalent; however, this diagnosis was not justified because it “requires a BMI of 22 at least 35” and Patient #3’s BMI at the time of the visit was only 31. U.S. Compl. 23 ¶ 339(i). 24 • In paragraphs 210-11, the government alleges that, in Colorado, Kaiser used to data 25 mine and query doctors to add hypoxia for patients receiving oxygen; however, 26 after CMS removed hypoxia as a condition from the HCC model, Kaiser queried 27 doctors to add different diagnoses – acute and/or chronic respiratory failure and 1 doctor in Colorado “created an addendum to add the diagnosis of obesity 2 hypoventilation syndrome – a breathing disorder found in some obese individuals – 3 to a patient who was clearly not obese (she was 5’9” and weighed 108 pounds).” 4 U.S. Compl. ¶ 211 (emphasis in original). 5 However, presumably, the government has not filed suit to seek relief for these three 6 specific instances alone – i.e., it is essentially claiming that Kaiser had a scheme to include to 7 include nonexistent diagnoses in patients’ medical records. These three specific examples, 8 however, are not enough to make out a plausible case for such a systemic scheme. The complaint 9 does not contain specific allegations which plausibly establish these three instances were 10 emblematic of a wider pattern of similar practices. 11 On the other hand, the Court concludes that the government has alleged a plausible scheme 12 with respect to one specific disease in particular – i.e., cachexia. In its pleading, the government 13 has alleged as follows: “Cachexia is a complex metabolic syndrome associated with physical 14 wasting, weight loss and muscle atrophy.” U.S. Compl. ¶ 207. A diagnosis of cachexia “is based 15 on clinical judgment rather than clinical indicators,” U.S. Compl. ¶ 295 – which implicitly makes 16 it more vulnerable to exploitation. According to the government, in 2009, as part of a training, 17 “the N. California Medical Group identified cachexia as one of a few diagnoses that would help 18 them ‘Find $100 million dollars in NCal.’”; then, in or about 2011, “the N. California Medical 19 Group created a data-mining algorithm to identify potential cachexia diagnoses,” and the results of 20 the algorithm were “sent to physicians with queries for them to addend their patient medical 21 records to add cachexia diagnoses.” U.S. Compl. ¶ 295. Queries were “routinely” sent to doctors 22 to add diagnoses of cachexia even “for patients who were merely thin.” U.S. Compl. ¶ 296; cf. 23 U.S. Compl. ¶ 296 (noting that cachexia “is not simply low body weight”). As a result, 24 “physicians in Northern California added cachexia via addenda over 120 times more than 25 physicians in Southern California and Colorado, regions that did not have a cachexia initiative.” 26 U.S. Compl. ¶ 300 (emphasis in original). Furthermore, audits revealed that “many of these 27 diagnoses were invalid[] because the patient did not . . . have cachexia.” U.S. Compl. ¶ 300. 1 Operations office]) found that over 90% of the time a physician added the cachexia diagnosis 2 based on a Kaiser query, the documentation is ‘either lacking or contradict[s] the definition of 3 Cachexia.’” U.S. Compl. ¶ 321 (emphasis added); see also U.S. Compl. ¶ 346(f) (discussing 4 Patient #10, whose doctor created an addendum to add cachexia as a diagnosis even though the 5 doctor stated “‘patient has no general debility’” and only “‘lost some lbs of weight’”). Based on 6 the above allegations, the government has sufficiently alleged that Kaiser had a scheme to include 7 to include nonexistent diagnoses of cachexia in patients’ medical records. 8 Kaiser protests that the fact that “the medical-record documentation was ‘lacking’ or 9 inconsistent say[s] nothing about the member’s actual health status’” – especially since cachexia is 10 (as alleged) based on clinical judgment rather than clinical indicators. Reply at 7-8. Although 11 Kaiser’s argument is not without some merit, at this juncture all reasonable inferences are to be 12 made in the government’s favor. If documentation was lacking or if documentation contradicted 13 the definition of cachexia, then it can reasonably be inferred that a diagnosis of cachexia was not 14 justified. Thus, based on the government’s allegations, it can reasonably be inferred that a large 15 number of cachexia diagnoses, which were made through addenda, were literally false. 16 Hence, thus far, the only systemic scheme sufficiently alleged by the government relates to 17 cachexia only. Admittedly, if Kaiser (as alleged) was willing to make clinically false diagnoses 18 for cachexia, one could imagine that Kaiser could easily have had a scheme far broader in scope, 19 reaching any number of medical conditions as well. But at this point, given the allegations in the 20 complaint, it cannot reasonably be inferred that Kaiser’s scheme was broader in scope. The 21 government has leave to amend its complaint if it wishes to expand the scope of its allegations on 22 clinically false diagnoses. Identifying scattered anecdotes alone will not suffice. 23 b. Knowledge 24 The next issue raised by Kaiser is whether the government has sufficiently pled the 25 element of knowledge. The Court considers this issue only with respect to the allegedly false 26 cachexia diagnoses. As noted above, under the FCA, a person “knowingly” submits false 27 information if he or she “(i) has actual knowledge of the information; (ii) acts in deliberate 1 falsity of the information.” 31 U.S.C. § 3729 (b)(1)(A). A defendant cannot be held liable for an 2 “[i]nnocent mistake” or “mere negligence,” U.S. ex rel. Hagood v. Sonoma Cnty. Water Agency, — 3 — 929 F.2d 1416, 1421 (9th Cir. 1991), but “no proof of specific intent to defraud” is required. 31 4 U.S.C. § 3729 (b)(1)(B). 5 Given that reckless disregard can satisfy the knowledge requirement and that all reasonable 6 inferences are to be made in the government’s favor at this early stage, the government has alleged 7 enough with respect to scienter. According to the government, Kaiser higher-ups were warned 8 about sending queries to doctors prompting them to add diagnoses for cachexia. See, e.g., U.S. 9 Compl. ¶ 297 (“After noting that physicians were protesting that naturally thin patients did not 10 have cachexia, Dr. Inna Ravkin (an internal medicine physician in Northern California) warned 11 Karen Graham[3] and Dr. David Bliss[4] in 2011 that the prompting would result in ‘inappropriate 12 assignment of this diagnosis.”); U.S. Compl. ¶ 298 (“Also in 2011, Dr. Patrick Kan (a CMS Lead) 13 reported to Dr. David Bliss and Karen Graham that ‘they [the treating physicians] do not see any 14 physical signs of cachexia.’”); U.S. Compl. ¶ 299 (“And in 2013, Norma Gonzalez (a Senior 15 Consultant for CMS matters) wrote to Danielle Sheetenhelm (Clinical Review Manager) that 16 because she had ‘a couple of thousand datamining diagnoses in my area,’ it would be ‘impossible’ 17 to review them all. She further stated that the feedback from the physicians was that the queries 18 were ‘garbage.’”). If responsible persons at Kaiser were warned, then Kaiser was on notice and a 19 failure to act in response to indications of inaccurate diagnoses could reasonably be deemed 20 reckless disregard of the falsity of cachexia diagnoses. 21 Reckless disregard could also be inferred based on allegations that queries were being sent 22 to doctors about cachexia diagnoses simply because the patients at issue were thin. That a 23 cachexia diagnoses is based on a clinical judgment does not mean that Kaiser was justified in 24 prompting doctors about diagnosing cachexia simply because of an underweight patient. It may — 25 — — 26 — 3 As alleged, Ms. Graham was the Managing Director of the N. California Medical Group’s Encounter Information Operations office. See U.S. Compl. ¶ 119. — 27 — 1 be inferred that Kaiser officials were looking for the results Kaiser allegedly obtained. 2 Finally, the government has alleged that an audit revealed a high error rate with respect to 3 cachexia diagnoses made through addenda but that Kaiser failed to respond. See U.S. Compl. ¶ 4 322 (“Despite this knowledge [about the audit], the N. California Medical Group did not modify 5 its cachexia data-mining algorithm or stop-prompt program for several years.”). This further 6 supports a finding of scienter. For false cachexia diagnoses thereafter, one could reasonably infer 7 reckless disregard on the part of Kaiser. 8 4. Diagnoses Unrelated to Doctors’ Visits 9 As noted above, the government’s second theory of liability – that Kaiser altered patient 10 medical records by adding diagnoses that were not related to the doctors’ visits – is its main one. 11 And as noted above, this theory of liability implicates both factual falsity and legal falsity. In its 12 papers, Kaiser argues that the government has failed to adequately plead falsity for the second 13 theory of liability. Kaiser further argues that, even if falsity were adequately pled, the government 14 still has not sufficiently pled materiality. 15 a. Falsity 16 As an initial matter, the Court notes that Kaiser seems to have ignored the fact that the 17 second theory of liability can be construed as being predicated on factual falsity. See Opp’n at 1618 17 (noting that, “when Kaiser submitted for payment inaccurate ICD codes in contravention of the 19 ICD Guidelines, those were factually false claims because they incorrectly described the valid ICD 20 codes for the patient visit”). Because the Court agrees with the government that factual falsity is 21 implicated, then that alone is a sufficient basis for the Court to reject Kaiser’s argument that falsity 22 has not been sufficiently alleged. 23 Even if the Court were to consider only legal falsity, Kaiser would fare no better. A 24 legally false claim for payment involves an assertion (either express or implied) that there is 25 compliance with a statute, regulation, or contract. See, e.g., Escobar, 579 U.S. at 181 (“[L]iability 26 can attach when the defendant submits a claim for payment that makes specific representations 27 about the goods or services provided, but knowingly fails to disclose the defendant’s 1 liability may attach if the omission renders those representations misleading.”). In the case at bar, 2 the government argues that both the CMS/Kaiser contract and federal regulations required Kaiser 3 to comply with ICD Guidelines – and under the ICD Guidelines, a diagnosis can be made on a 4 medical record only if it required or affected patient care treatment or management at the doctor’s 5 visit. In response, Kaiser contends that the neither the contract nor regulations required Kaiser to 6 comply with the ICD Guidelines – and therefore the ICD Guidelines are at best “subregulatory” 7 documents that lack the force of law.5 Kaiser underscores that the Medicare Act contains the 8 following provision: 9 No rule, requirement, or other statement of policy (other than a national coverage determination) that establishes or changes a 10 substantive legal standard governing the scope of benefits, the payment for services, or the eligibility of individuals, entities, or 11 organizations to furnish or receive services or benefits under this subchapter shall take effect unless it is promulgated by the Secretary 12 by regulation under paragraph (1). 13 42 U.S.C. § 1395hh(a)(2).6 In Azar v. Allina Health Services, the Supreme Court noted that, under 14 § 1395hh(a)(2), “Congress has told the government that, when it wishes to establish or change a 15 ‘substantive legal standard’ affecting Medicare benefits, it must first afford the public notice and a 16 chance to comment.” Allina, 139 S. Ct. at 1808. 17 i. Contract 18 As noted above, the government contends as an initial matter that Kaiser is bound by the 19 ICD Guidelines because the CMS/Kaiser contract requires compliance with the Guidelines. 20 A copy of the CMS/Kaiser contract can be found at Exhibit I to Kaiser’s RJN. Article II.A — 21 — 5 To the extent Kaiser has argued that there is no contractual provision or regulation cited by the — 22 — government that expressly applies to addenda of medical records (i.e., the means by which Kaiser allegedly achieved its upcoding), the government correctly contends that this is a red herring. See — 23 — Opp’n at 15 (“[A]n addendum is merely a change to the medical record for a patient visit made after the close of that visit record. Nothing in Kaiser’s contracts, the relevant regulations, or the — 24 — ICD Guidelines indicates that diagnoses added after patient visits are subject to different standards.”). Notably, Kaiser somewhat backtracked from this argument in its reply brief. See — 25 — Reply at 10 n.7 (“Defendants agree [that there is no ‘addenda exception’], but because the United States’ case rests entirely on coding from addenda, the Motion focuses on the standards that apply — 26 — to such coding. And the Court’s decision can be similarly narrow.”). — 27 — 6 “While the APA requires many other agencies to offer public notice and a comment period 1 of the contract provides as follows: “The MA Organization agrees to operate one or more 2 coordinated care plans . . . and in compliance with the requirements of this contract and applicable 3 Federal statutes, regulations, and policies (e.g., policies as described in the Call Letter, Medicare 4 Managed Care Manual, etc.).” Def.’s RJN, Ex. I (CMS/Kaiser Contract, art. II.A) (emphasis 5 added). The Medicare Managed Care Manual contains a chapter – Chapter 7 – on “Risk 6 Adjustment.” See Def.’s RJN, Ex. C (CMS/Kaiser Contract Ch. 7). There are twelve sections in 7 Chapter 7. The fourth section (§ 40) covers the “Role and Responsibilities of Plan Sponsors,” 8 which include MA organizations. With respect to risk adjustment data submission requirements, § 9 40 states in relevant part as follows: 10 Medicare Advantage Organizations (MAOs) . . . must . . . [e]nsure the accuracy and integrity of risk adjustment data submitted to CMS. 11 All diagnosis codes submitted must be documented in the medical record and must be documented as a result of a face-to-face visit. 12 The diagnosis must be coded according to [the ICD Guidelines]. 13 Def.’s RJN, Ex. C (CMS Medicare Managed Care Manual, Ch. 7, § 40) (emphasis added); see 14 also U.S. Compl. ¶ 81. 15 Accordingly, based on the Article II.A of the CMS/Kaiser Contract, its incorporation of the 16 CMS Medicare Managed Care Manual, and the Manual’s incorporation of the ICD Guidelines, the 17 government argues that a MA organization must comply with the ICD Guidelines in providing 18 risk adjustment data to CMS. 19 In response, Kaiser makes several arguments, none of which is convincing. 20 First, Kaiser contends that the government’s reliance on Article II.A is flawed: 21 The location of [this] clause . . . confirms that the contract does not require MAOs to comply with nonbinding guidance in order to 22 receive payment from CMS. The clause appears in Article II of the contract, which describes the network and benefit structures of a 23 coordinated care plan. But the section that addresses payment is Article IV, which does not reference subregulatory guidance at all 24 and cites only statutes and regulations. 25 Mot. at 17 (emphasis in original); see also Reply at 10-11 (arguing that Article II “concerns plan 26 design” or “plan structure”). But this argument is questionable if only because Kaiser’s 27 characterization of Article II is not on point. Article II is titled “Coordinated Care Plan.” The 1 agrees to operate a coordinated care plan(s) and in compliance with federal law and policies; 2 Article II.B provides that the contract incorporates changes required by statute to be implemented 3 during the term of the contract; Article III.C provides that, other than at the beginning of a 4 calendar year, CMS will not implement regulatory requirements that impose new significant costs 5 or burdens on the MA organization; etc. Nothing about the article is limited or targeted to plan 6 design or plan structure, as Kaiser claims. Indeed, it is notable that Article II.A refers to now a 7 coordinated care plan is to be operated. 8 In any event, just because the reference to compliance with CMS policies (including the 9 Manual which then incorporates the ICD Guidelines) is in Article II and not in Article IV does not 10 mean that compliance with ICD Guidelines is not required for risk adjustment data. As the 11 government correctly contends, although “Kaiser argues that it is not bound by this term because it 12 appears at the beginning of the contract[] rather than in the payment section, . . . there is no such 13 rule of contract law.” Opp’n at 11. 14 Second, Kaiser argues that it would be improper for it to be bound by the ICD Guidelines 15 as a result of two general incorporations by reference (i.e., incorporation of the Manual which then 16 incorporates the Guidelines): 17 [T]he government cannot seriously contend that the broad, nonspecific language of the contract provision means that the Health 18 Plan Defendants must adhere to every word of the ICD Guidelines simply because they are generally referenced in the [Manual], which 19 itself is referenced in a parenthetical in a single sentence of a CMS contract. — 20 — 21 Mot. at 17; see also Reply at 11. This argument is unpersuasive, especially in the context of this 22 instant case. Kaiser is a sophisticated entity and incorporation by reference is a common 23 contractual tool. It defies reality to suggest a contract is too complicated for an entity like Kaiser 24 to understand. In any event, ICD Guidelines and their importance to medical procedure is not 25 some obscure bit of minutiae. Further, the government has alleged here that Kaiser was in fact 26 well aware of the ICD Guideline requirement at issue. See, e.g., U.S. Compl. ¶¶ 88-96 (alleging 27 that, “[a]s far back as 2008,” Kaiser had issued to all regions a “Program Advisory” which was 1 diagnoses submitted to [CMS] as Medicare Advantage risk adjustment data’”; the Program 2 Advisory specified, inter alia, that documentation must comply with the ICD Guidelines). 3 Finally, it is worth noting that, as a practical matter, Kaiser’s concerns are essentially addressed 4 through the FCA requirement of materiality (i.e., that the false statement must have been material, 5 causing the government to pay out money). See Campie, 862 F.3d at 902 . 6 Third, Kaiser points out that the CMS/Kaiser contract specifies that federal 7 statutes/regulations should prevail if there is a conflict between such and the contract. See Def.’s 8 RJN, Ex. I (CMS/Kaiser Contract, art. IX.D) (“In the event that any provision of this contract 9 conflicts with the provisions of any statute or regulation applicable to an MA Organization, the 10 provisions of the statute or regulation shall have full force and effect.”). Kaiser then argues that 11 “[a]llowing CMS to create contractual obligations that are not reflected in the Medicare Act or any 12 regulations guts Congress’s intent to require notice-and-comment rulemaking for gap-filling 13 guidance.” Mot. at 18 (referring to § 1395hh(a)(2) of the Medicare Act and the Supreme Court’s 14 decision in Allina). See, e.g., Allina, 139 S. Ct. at 1808 (noting that, under § 1395hh(a)(2) of the 15 Medicare Act, “Congress has told the government that, when it wishes to establish or change a 16 ‘substantive legal standard’ affecting Medicare benefits, it must first afford the public notice and a 17 chance to comment”). 18 The government, however, has provided a strong counter-argument – i.e., that “§ 19 1395hh(a)(2) does not address the government’s ability to contract, nor suggest that contractual 20 terms must first go through notice and comment. The statute applies to the Secretary’s rulemaking 21 authority, not his contracting authority.” Opp’n at 11. The government also fairly points out that 22 Congress “mandated that the Secretary execute contracts with MAOs.” Opp’n at 12 (emphasis in 23 original). In fact, Congress even gave some discretion to the Secretary as to contract terms – 24 specifying that “[t]he contract shall contain such other terms and conditions not inconsistent with 25 this part [42 U.S.C. § 1395w-21 et seq.] . . . as the Secretary may find necessary and appropriate.” 26 42 U.S.C. § 1395w-27(e)(1). Although there is a statutory limitation that contract terms may not 27 be “inconsistent with this part,” the government correctly notes that “§ 13955hh(a)(2) is not . . . in 1 Guidelines. 2 Accordingly, the Court rejects Kaiser’s argument that the terms of the CMS/Kaiser 3 contract cannot be read to require compliance with the ICD Guidelines. 4 ii. Federal Regulations 5 Because the Court concludes that the CMS/Kaiser contract requires Kaiser to comply with 6 the ICD Guidelines, it need not address the government’s contention that compliance is also 7 required by federal regulations. However, out of an abundance of caution, the Court has 8 considered the regulatory scheme and concludes it does, in fact, require compliance. 9 The main regulation that supports the government’s position is 42 C.F.R. § 422.310 (d)(1). 10 That regulation (which addresses risk adjustment data) provides in relevant part as follows: “MA 11 organizations must submit data that conform to [1] CMS’ requirements for data equivalent to 12 Medicare fee-for-service data, when appropriate, and to [2] all relevant national standards.” 42 13 C.F.R. § 422.310 (d)(1) (emphasis added). As the government notes, CMS has adopted the ICD 14 code sets for diseases, including the ICD Guidelines, as a national standard – pointing to 45 C.F.R. 15 § 162.1002. See, e.g., 45 C.F.R. § 162.1002 (c)(2)(i) (“The Secretary adopts the following 16 maintaining organization’s code sets as the standard medical data code sets: . . . (c) For the period 17 on and after October 1, 2015: . . . (2) International Classification of Diseases, 10th Revision, 18 Clinical Modification (ICD-10-CM) (including The Official ICD-10-CM Guidelines for Coding 19 and Reporting), as maintained and distributed by HHS, for the following conditions: (i) 20 Diseases.”)7; see also 42 C.F.R. § 422.504 (h)(2) (“The MA organization agrees to comply with – 21 . . . (2) HIPAA administrative simplification rules at 45 C.F.R. part[] . . . 162 . . . .”).8 22 In response, Kaiser argues that § 422.310(d)(1) just addresses “the form of data submitted — 23 — — 24 — 7 In 45 C.F.R. § 1002 (a)(1)(i) and § 1002(b)(1), the Secretary essentially adopts the ICD code sets (including the ICD Guidelines) for earlier periods of time. — 25 — 8 The government points out that the ICD code sets for diseases and the related ICD guidelines are — 26 — also used in the Medicare fee-for-service context, and therefore there is a fair argument that they should be applied in the MA context as well. See Opp’n at 13 (adding that “[a]dherence to the — 27 — same ICD standard in both traditional Medicare fee-for-service and Medicare Advantage is 1 to CMS, not the content.’” Mot. at 16; see also Reply at 14. But nothing about § 422.310(d)(1) 2 suggests it is limited to the format of data. Moreover, to the extent Kaiser relies on United States 3 ex rel. Rasmussen, No. 17-3273-CV-S-BP, 2020 U.S. Dist. LEXIS 137953 (W.D. Mo. Apr. 29, 4 2020), that case does little, if anything, to support its position. Rasmussen addressed an entirely 5 different subsection of § 422.310 – specifically, § 422.310(g). Furthermore, Kaiser’s attempt to 6 make an analogy between the § 422.310(g) and § 422.310(d)(1) falls flat. The text of § 7 422.310(g) is markedly different from that in § 422.310(d)(1), providing as follows: “Deadlines 8 for submission of risk adjustment data. Risk adjustment factors for each payment year are based 9 on risk adjustment data submitted for items and services furnished during the 12-month period 10 before the payment year that is specified by CMS.” 42 C.F.R. § 422.310 (g). Based on, inter alia, 11 this language, the Rasmussen court rejected the relator’s argument that “a diagnosis can be coded 12 only if the patient received treatment for that condition within the past year.” Rasmussen, 2020 13 U.S. Dist. LEXIS 137953 , at *17. The court noted: “§ 422.310(g) appears to address the deadline 14 for submitting risk adjustment data. It is not directed toward specifying the procedure for properly 15 coding patients’ medical conditions, so it seems to be a poor source for ascertaining such details.” 16 Id. at *19 n.10. 17 Finally, the Court should takes into account that it is not just § 422.310(d)(1) that is 18 relevant here. Section 422.310(d)(1) should be read in conjunction with § 422.504(l), i.e., the 19 regulation that requires a MA organization to provide accurate risk adjustment data to CMS. See — 20 — 42 C.F.R. § 422.504 (l) (“As a condition for receiving a monthly payment under subpart G of this 21 part, the MA organization agrees that its chief executive officer (CEO), [etc.] must request 22 payment under the contract on a document that certifies (based on best knowledge, information, 23 and belief) the accuracy, completeness, and truthfulness of relevant data that CMS requests.”). 24 While § 422.504(l) requires accuracy from a MA organization, § 422.310(d)(1) essentially 25 provides a benchmark to assess the accuracy of the information provided. Kaiser does not dispute 26 that adherence to the ICD Guidelines facilitates the accuracy of medical information provided. 27 The Ninth Circuit’s decision in United States ex rel. Swoben v. United Healthcare Insurance Co., 1 422.310(d)[(1)] speaks to a Medicare Advantage organization’s obligations to ensure the accuracy 2 of risk adjustment data, [and therefore] it does not modify a Medicare Advantage organization’s 3 obligations under [§] . . . 422.504(l)”). 4 b. Materiality 5 For the reasons stated above, the Court agrees with the government that Kaiser is required 6 to comply with the ICD Guidelines, both as a matter of contract and under the applicable 7 regulations – and thus it has a plausible case of legal falsity (i.e., Kaiser implicitly certified that it 8 had complied with the ICD Guidelines in making a claim for payment). Kaiser argues that, even if 9 this is true, the legal falsity claim must still be dismissed because the government has not 10 adequately alleged that the false statement regarding compliance with the ICD Guidelines was 11 material. 12 As noted above, under the FCA, “the term ‘material’ means having a natural tendency to 13 influence, or be capable of influencing, the payment or receipt of money or property.” 31 U.S.C. § 14 3729(b)(4). The Supreme Court in turn has noted that the FCA is not 15 a vehicle for punishing garden-variety breaches of contract or regulatory violations. A misrepresentation cannot be deemed 16 material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as 17 a condition of payment. Nor is it sufficient for a finding of materiality that the Government would have the option to decline to 18 pay if it knew of the defendant’s noncompliance. Materiality, in addition, cannot be found where noncompliance is minor or 19 insubstantial. 20 Escobar, 579 U.S. at 193 . 21 In the case at bar, the government has adequately alleged materiality – particularly when 22 the considerations below are taken collectively. First, as the government explains, 23 submitting accurate ICD diagnosis codes is material because CMS makes risk-adjustment payments based directly on the codes 24 submitted by MAOs. . . . An ICD code that violates the ICD Guidelines because the condition had nothing to do with a patient 25 visit is not an accurate ICD code . . . . 26 Opp’n at 21. Under MA, risk adjustment payments in the aggregate are obviously substantial. 27 Misrepresentations which affect those payments can undoubtedly have a substantial financial 1 Second, the CMS Medicare Managed Care Manual makes explicit the importance of 2 complying with the ICD Guidelines, including the ones that are the focus of the government’s 3 case. The Manual notes as follows: 4 Medicare Advantage Organizations (MAOs) . . . must . . . [e]nsure the accuracy and integrity of risk adjustment data submitted to CMS. 5 All diagnosis codes submitted must be documented in the medical record and must be documented as a result of a face-to-face visit. 6 The diagnosis must be coded according to [the ICD Guidelines]. 7 Def.’s RJN, Ex. C (CMS Medicare Managed Care Manual, Ch. 7, § 40); see also U.S. Compl. ¶ 8 81. And notably, Kaiser’s own internal documents (e.g., its Program Advisories on risk 9 adjustment) recognized the need to comply with the ICD Guidelines, including the ones that are 10 the focus of the government’s case here. See, e.g., U.S. Compl. ¶ 90 (noting that Kaiser’s 2008 11 Program Advisory specified, inter alia, that risk adjustment data must be obtained as a result of a 12 face-to-face visit and that the doctor must have considered or addressed the coded diagnosis 13 during the encounter); see also Escobar, 579 U.S. at 193 (noting that “[w]hat matters is not the 14 label the Government attaches to a requirement, but whether the defendant knowingly violated a 15 requirement that the defendant knows is material to the Government’s payment decision.”). 16 Finally, as indicated above, the magnitude of the noncompliance weighs in favor of 17 materiality, as the government has asserted that Kaiser has “reap[ed] thousands of dollars for each 18 inaccurate diagnosis code and hundreds of millions of dollars for its scheme.” Opp’n at 23; see 19 also U.S. Compl. ¶ 335 (alleging that “false claims inflated CMS’s reimbursements to the Kaiser 20 Health Plans by hundreds of millions of dollars”). See, e.g., United States ex rel. Rose v. Stephens 21 Inst., 909 F.3d 1012, 1022 (9th Cir. 2018) (indicating that noncompliance can be deemed minor or 22 insubstantial where there is no real monetary impact – “[f]or instance, were a school to offer 23 admissions representatives cups of coffee or $10 gift cards for recruiting higher numbers of 24 students, there would be no viable claim under the False Claims Act”). 25 5. Statute of Repose/Statute of Limitations 26 Kaiser argues that, even if the government has adequately pled FCA causes of action, those 27 claims should still be trimmed because part of the claims are time barred. Below is the relevant 1 (b) A civil action under section 3730 [ 31 U.S.C. § 3730 ] may not be brought – — 2 — (1) more than 6 years after the date on which the violation 3 of section 3729 [ 31 U.S.C. § 3729 ] is committed, or 4 (2) more than 3 years after the date when facts material to the right of action are known or reasonably should 5 have been known by the official of the United States charged with responsibility to act in the 6 circumstances, but in no event more than 10 years after the date on which the violation is committed, — 7 — whichever occurs last. — 8 — (c) If the Government elects to intervene and proceed with an 9 action brought under [section] 3730(b) [ 31 U.S.C. § 3730 (b)], the Government may file its own complaint or 10 amend the complaint of a person who has brought an action under section 3730(b) [ 31 U.S.C. § 3730 (b)] to clarify or add 11 detail to the claims in which the Government is intervening and to add any additional claims with respect to which the 12 Government contends it is entitled to relief. For statute of limitations purposes, any such Government pleading shall 13 relate back to the filing date of the complaint of the person who originally brought the action, to the extent that the claim 14 of the Government arises out of the conduct, transactions, or occurrences set forth, or attempted to be set forth, in the prior 15 complaint of that person. — 16 — 31 U.S.C. § 3731 (b)-(c). 17 Kaiser contends that the provision above contains not just a statute of limitations but also a 18 statute of repose. 19 Statutes of limitations and statutes of repose both are mechanisms used to limit the temporal extent or duration of liability for tortious 20 acts. Both types of statute can operate to bar a plaintiff’s suit, and in each instance time is the controlling factor. There is considerable 21 common ground in the policies underlying the two types of statute. But the time periods specified are measured from different points, 22 and the statutes seek to attain different purposes and objectives. . . . 23 In the ordinary course, a statute of limitations creates “a time limit for suing in a civil case, based on the date when the claim accrued.” 24 Measured by this standard, a claim accrues in a personal-injury or property-damage action “when the injury occurred or was 25 discovered.” . . . 26 A statute of repose, on the other hand, puts an outer limit on the right to bring a civil action. That limit is measured not from the date 27 on which the claim accrues but instead from the date of the last defendant acted (such as by designing or manufacturing a product), 1 even if this period ends before the plaintiff has suffered a resulting injury.” The statute of repose limit is “not related to the accrual of 2 any cause of action; the injury need not have occurred, much less have been discovered.” The repose provision is therefore equivalent 3 to “a cutoff,” in essence an “absolute . . . bar” on a defendant’s temporal liability, C. J. S. §7, at 24. — 4 — 5 CTS Corp. v. Waldburger, 573 U.S. 1 , 8 (2014). 6 Although the Supreme Court in CTS underscored the distinction between a statute of 7 limitations and a statute of repose, it also recognized that “general usage of the legal terms [statute 8 of limitations and statute of repose] has not always been precise” – e.g., “Congress has used the 9 term ‘statute of limitations’ when enacting statutes of repose,” and “petitioner does not point out 10 an example in which Congress has used the term ‘statute of repose.’” Id. at 13-14 ; see also Fed. 11 Hous. Fin. Agency v. Nomura Holding Am., Inc., 873 F.3d 85, 113 (2d Cir. 2017) (noting that, 12 “although Congress has indisputably created statutes of repose in the past, it ‘has never used the 13 expression “statute of repose” in a statute codified in the United States Code’”). Even after CTS, 14 the Supreme Court itself has not always been precise about the use of the terms, including in a 15 FCA case. In Cochise Consultancy, Inc. v. United States ex rel. Hunt, 139 S. Ct. 1507 (2019), the 16 Court stated as follows: 17 The False Claims Act contains two limitations periods that apply to a “civil action under section 3730” – that is, an action asserting that 18 a person presented false claims to the United States Government. The first period requires that the action be brought within 6 years 19 after the statutory violation occurred. The second period requires that the action be brought within 3 years after the United States 20 official charged with the responsibility to act knew or should have known the relevant facts, but not more than 10 years after the 21 violation. Whichever period provides the later date serves as the limitations period. — 22 — — 23 — Id. at 1510 (emphasis added). 24 In the instant case, Kaiser maintains that, although § 3731(b) of the FCA contains a statute 25 of limitations, it also contains a statute of repose – specifically in (b)(2) – due to the following 26 language: “but in no event more than 10 years after the date on which the violation is committed.” — 27 — 31 U.S.C. § 3731 (b)(2). 1 2021, the statute of repose dictates that the government’s claims are valid only to the extent they 2 are based on conduct occurring on or after October 25, 2011. Thus, according to Kaiser, the 3 government’s attempt to implicate conduct as far back as 2009 should be rejected. See U.S. 4 Compl. ¶ 1 (“Beginning sometime prior to 2009 and continuing through at least 2018, Kaiser 5 engaged in a coordinated scheme to unlawfully obtain payments from the Medicare Part C 6 program, also called Medicare Advantage.”). 7 Kaiser acknowledges that the FCA contains a relation back provision in § 3731(c). It also 8 recognizes – implicitly – the government’s contention that, under § 3731(c), it can claim relation 9 back to the Osinek complaint (filed in 2013) or the Taylor complaint (filed in 2014), and then, 10 because Osinek was filed in 2013 and Taylor in 2014, § 3731(b)(1) would allow the government to 11 wrap in conduct six years earlier – i.e., from 2007 and 2008. But Kaiser contends that the 12 government rely on § 3731(c) because that provision in the FCA only mentions relation back and 13 the statute of limitations, not the statute of repose. In support of this argument, Kaiser relies on 14 United States v. Scan Health Plan, No. CV 09-5013-JFW (JEMx), 2017 U.S. Dist. LEXIS 174308 15 (C.D. Cal. Oct. 5, 2017) [hereinafter Swoben II]. There, the court held as follows: 16 [T]he Government[] cannot rely on the relation back doctrine contained in Section 3731(c) because Section 3731(c) is specifically 17 limited to “statute of limitations purposes.” In fact, Congress added the relation-back provision [to the FCA] in 2009, as part of the same 18 legislation in which it considered consolidating the separate statutes of limitations and repose into a single ten-year statute of limitations 19 before rejecting that consolidation as insufficiently protective of defendants’ interests in repose. As one False Claims Act expert 20 testified during the Senate’s consideration of those changes, without a repose period, the relation-back provision would have forced 21 defendants “to defend themselves for actions that occurred 12, 15 or even 20 years ago, depending on how long a qui tam case remains 22 under seal.” — 23 — Id. at *27-28 . 24 But at least one court has expressly disagreed with the analysis in Swoben II. Its reasoning 25 was that “subsection (c)’s relation-back provision does not distinguish between ‘statutes of 26 limitation’ and the ‘statute of repose,’” and so “ the Court concludes that subsection (c) refers to 27 the various timing restrictions contained in subsection (b), the statute of repose included.” United 1 *70-71 (C.D. Cal. July 25, 2018). 2 Arguably, both the analysis in Ling and that in Swoben II are problematic in that they rely 3 on terminology used in § 3731(c) but neither Congress nor the Supreme Court has been precise in 4 their use of the term “statute of limitations” or “statute of repose.” Given the ambiguity of the 5 terms as they appear in this statute, the more fundamental question is whether as a matter of 6 principle it would be improper to apply relation back where there is a statute of repose (as opposed 7 to a statute of limitations). On this question, the government correctly argues that it would not 8 because relation back does not alter a limitations period or repose period, nor does it even toll one. 9 Rather relation back simply pinpoints when a claim is filed. See Opp’n at 25. This was the basic 10 point that the Third Circuit made when considering whether the FCA’s statute of repose prevented 11 relation back under Federal Rule of Civil Procedure 15(c) (i.e., instead of relation back under § 12 3731(c) of the FCA): “[T]olling extends the repose period, while relation back keeps the repose 13 period intact.” SEPTA v. Orrstown Fin. Servs., 12 F.4th 337, 351 (3d Cir. 2021) (emphasis 14 added). The Third Circuit’s analysis is convincing. 15 Accordingly, the Court reject Kaiser’s argument that the government’s claims cannot reach 16 back to conduct from 2009 given the application of relation back. 17 6. Summary 18 For the foregoing reasons, the government’s FCA claims largely survive Kaiser’s 12(b)(6) 19 challenge. The FCA claims are not viable only to the extent the government has argued factual 20 falsity on a systemic basis because diagnoses were made for nonexistent conditions. The 21 government has not pled enough to support this factual falsity claim with one exception – i.e., that 22 there was a scheme to amend patient records to add a clinically inaccurate diagnosis of cachexia. 23 The government has leave to amend its complaint for this factual falsity theory. Any amended 24 complaint shall be filed by December 12, 2022. Kaiser shall then have until January 3, 2023 to 25 file a response, whether an answer or a motion. 26 C. Claims for Payment by Mistake and Unjust Enrichment 27 Aside from the FCA claims, the government has also asserted the following causes of 1 claims that should be dismissed for two reasons: (1) the claims are “derivative of the flawed FCA 2 claims”9 and (2) with respect to the Health Plans (who contracted with CMS to provide the MA 3 plans), “quasi-contractual claims are unavailable” because of the express contract between the 4 Health Plans and CMS. Mot. at 24. Kaiser adds that, even as to the Permanente Medical Groups 5 (who contracted with the Health Plans to provide services to patients), “it is not clear how the 6 government could have quasi-contract claims” because the government alleges that the 7 Permanente Medical Groups “must ‘comply with’ the Health Plan Defendants’ ‘contractual 8 obligations to CMS.’” Mot. at 25. 9 The Court rejects Kaiser’s first argument because, as discussed above, the FCA claims 10 largely survive. 11 Kaiser’s second argument presents a closer call. Kaiser does have authority to support its 12 position. For example, in United States v. First Choice Armor & Equipment, 808 F. Supp. 2d 68, 13 (D.D.C. 2011), the district court noted as follows: 14 The defendants argue that the government cannot simultaneously proceed on its FCA claims and its claims of payment by mistake and 15 unjust enrichment. Rule 8(d)(2) allows a plaintiff to plead alternative theories of liability. Accordingly, “at the motion-to16 dismiss stage, courts in this district . . . have permitted the government to proceed with claims alleging FCA violations as well 17 as claims for unjust enrichment or payment by mistake.” However, “it does not appear that the D.C. Circuit has [wavered] from the rule 18 that ‘there can be no claim for unjust enrichment when an express contract exists between the parties.’” Allegations in a complaint that 19 an express contract existed between the parties, therefore, preclude a plaintiff from proceeding on alternative theories of FCA liability and 20 unjust enrichment or payment by mistake. — 21 — Id. at 77-78 ; see also United States ex rel. Doughty v. Or. Health & Scis. Univ., No. 3:13-CV22 01306-BR, 2017 U.S. Dist. LEXIS 55083 , at *18 (D. Or. Apr. 11, 2017) (“[T]he basis for — 23 — Plaintiff-Relators’ claims for payment by mistake and unjust enrichment arise from the express — 24 — contracts the government alleged in its Complaint. In fact, Defendant could only have been — 25 — — 26 — 9 In its reply, Kaiser acknowledges that a FCA claim requires a knowing false representation, — 27 — while payment by mistake and unjust enrichment do not. However, it argues that, if there is no 1 enriched unjustly and payments to Defendant could only have been mistaken if the express 2 contracts did not set out specific rates and methods for charging costs. . . . The Court, therefore, 3 concludes Plaintiff-Relators have not stated claims for unjust enrichment or payment by 4 mistake.”). 5 Nevertheless, Kaiser’s position is problematic given that the government has not simply 6 alleged the violation of the CMS/Kaiser contract but also the violation of federal regulations. In 7 other words, if the Court or the trier of fact were to find that Kaiser’s failure to comply with the 8 ICD Guidelines was not a violation of the CMS/Kaiser contract, then why should the government 9 not be able to proceed with a quasi-contractual theory at that point? Cf. United States ex rel. 10 Costa v. Baker & Taylor, Inc., No C-95-1825-VRW, 1998 U.S. Dist. LEXIS 23509 , at *36 (N.D. 11 Cal. Mar. 20, 1998) (“In the present case, plaintiffs believe that their contracts with defendants are 12 valid. In the unlikely event that the court should find these contracts invalid, however, plaintiffs 13 have included claims for unjust enrichment and payment by mistake.”). 14 More important, the government persuasively argues that, even if a quasi-contract claim 15 might ordinarily be barred where an express contract exists, its claim is unique precisely because 16 the government is involved. 17 When a payment is erroneously or illegally made, as is alleged here, “it is in direct violation of . . . the Constitution.” To correct for this 18 violation, the United States may exercise its “[well]-established right to sue for money wrongfully or erroneously paid from the public 19 treasury,” a right arising separate and apart from statute, regulation, or contract. — 20 — 21 Agility Public Warehousing Co. K.S.C.P. v. United States, 969 F.3d 1355 , 1365 (Fed. Cir. 2020); 22 see also United States v. Wurts, 303 U.S. 414, 415 (1938) (“The Government by appropriate 23 action can recover funds which its agents have wrongfully, erroneously, or illegally paid. ‘No 24 statute is necessary to authorize the United States to sue in such a case. The right to sue is 25 independent of statute, . . . .”); id. at 416 (“The Government’s right to recover funds, from a 26 person who received them by mistake and without right, is not barred unless Congress has ‘clearly 27 manifested its intention’ to raise a statutory barrier.”); United States ex rel. Robinson-Hill v. 1 (E.D. Ky. May 27, 2015) (“The United States’ common law claims for fraud, unjust enrichment, 2 and payment by mistake also survive Mr. House’s death. ‘The Government by appropriate action 3 can recover funds which its agents have wrongfully, erroneously, or illegally paid.’”). 4 III. CONCLUSION 5 For the foregoing reasons, the Court grants in part and denies in part Kaiser’s motion to 6 dismiss the government’s complaint. The Court grants the motion only to the extent that the 7 government has failed to plead a FCA claim based on a scheme by Kaiser to alter patient medical 8 records by adding clinically inaccurate diagnoses on a general or systemic basis. The government, 9 however, has adequately alleged a general scheme to add clinically inaccurate diagnoses for 10 cachexia (specifically). It has also adequately alleged a FCA violation based on Kaiser adding 11 clinically accurate diagnoses but for which no treatment was provided at the time of the doctors’ 12 visits. The FCA claims are not time barred. As for the claims for payment by mistake and unjust 13 enrichment, they are allowed to proceed. 14 The government has leave to file an amended complaint by December 12, 2022. If the 15 government files an amended complaint, then Kaiser shall file a response by January 3, 2023. If 16 no amended complaint is filed by December 12, 2022, then Kaiser shall answer the original 17 complaint in intervention by January 3, 2023. 18 This order disposes of Docket No. 178. — 19 — 20 IT IS SO ORDERED. — 21 — 22 Dated: November 14, 2022 — 23 — 24 ______________________________________ EDWARD M. CHEN 25 United States District Judge — 26 — — 27 —