The district court denied the defendants’ motion to dismiss a qui tam complaint of healthcare fraud, finding that the government had more than adequately demonstrated that the defendants encouraged their billing departments to up-code diagnoses to inflate their Medicare reimbursement rate and that they recklessly ignored internal complaints, external audits, and many warnings that this practice was a potential violation of the False Claims Act. The defendants argued that the government had not shown that their rate of billing errors was higher than that of other providers, but the court held the government did not need to do so. The court also ruled that the relator could proceed with her claims regarding an identical scheme carried out by the main defendant with other affiliates. The defendants argued that the relator was precluded from bringing her claims because the government’s complaint covered only one affiliate, but the court found no support for this argument.
The defendants in a healthcare fraud complaint moved to dismiss, arguing that the government and relator had failed to show that their submission of erroneous diagnostic codes were outside the normal range of billing errors and were therefore fraudulent.
The government and relator Kathy Ormsby sued Sutter Health and its affiliate, Palo Alto Medical Foundation, alleging they violated the False Claims Act by knowingly submitting thousands of false claims to the Medicare Part C Program, known as Medicare Advantage, and knowingly concealed and avoided their obligations to return Medicare Advantage overpayments. In April 2019, Sutter, including all of its affiliates with Medicare Advantage patients other than PAMF, signed a settlement agreement to refund $30 million to CMS to resolve allegations that it submitted improper payment data that inflated the payments it received. The settlement expressly reserved and did not release any liability arising under the FCA.
Under Medicare Advantage, CMS contracts with private health insurance companies to cover medical beneficiaries. In turn, those insurance firms contract with providers such as Sutter and PAMF for services under a payment sharing plan. In broad terms, CMS pays higher rates for sicker beneficiaries and lower rates for healthier beneficiaries, out of a recognition that sicker beneficiaries likely will need more care. Patient status is tracked using diagnosis codes. These codes are the only factors that CMS uses to determine a beneficiary’s health status to calculate the beneficiary’s risk score and thus to calculate how much CMS will pay for that beneficiary.
The government alleged that Sutter and PAMF gamed the diagnosis codes to inflate their receipts. Specifically, the government alleged that Sutter and PAMF (1) pre-populated patients’ medical records with diagnosis codes before physicians saw or diagnosed the beneficiaries, (2) had non-physician “coders” review beneficiaries’ medical records and retroactively add codes that the physicians supposedly missed or change the physicians’ codes to codes for more severe conditions, and (3) knowingly submitted unsupported diagnosis codes to CMS and prohibited their internal coders/auditors from deleting unsupported diagnosis codes.
Relator Kathy Ormsby worked as a risk adjustment project manager for PAMF. During her employment, she conducted internal reviews and audits, and found that large percentages of the risk-adjusting diagnosis codes that Sutter and PAMF submitted were false. She reported her findings to Sutter and PAMF, but the government alleged they were deliberately ignorant or reckless about the conduct and did nothing to fix the problem.
The government’s complaint alleged that the defendants submitted these false codes for payment and failed to return improperly gained payments. In her complaint, Ormsby alleged hat Sutter committed similar fraud through affiliates other than PAMF.
The defendants moved to dismiss, arguing that the plaintiffs had not alleged a threshold diagnostic code error rate and therefore could not show that any alleged mistakes in their billing were outside a normal range and therefore fraudulent. The defendants based their argument on a statute that provides that CMS must adjust Medicare Advantage payments to ensure “actuarial equivalence” with traditional Medicare. Sutter and PAMF argued that (1) traditional Medicare providers also submit false or unsupported diagnosis codes and (2) under the principle of “actuarial equivalence,” Medicare Advantage providers that submit false or unsupported diagnosis codes are not overpaid unless their diagnosis-code “error rate” exceeds the “error rate” of traditional Medicare providers. According to the defendants, because the government did not show that their “error rate” exceeded the traditional-Medicare “error rate,” they failed to sufficiently plead a claim. The defendants asserted the government had a statutory requirement to make this showing.
Sutter also argued that Ormsby could not pursue claims that exceeded the scope of the government’s intervention, and therefore the court should dismiss her complaint regarding affiliates other than PAMF. The defendants also argued the complaint did not sufficiently allege facts establishing their knowing failure to return overpayments or their knowing submission of false claims.
First, the court noted that the government and Ormsby had alleged not only the submission of incorrect diagnostic codes that resulted in inflated billings, but a concerted campaign by Sutter and PAMF to increase their revenues by purposefully changing diagnosis codes to higher risk codes in order to maximize reimbursement.
For example, the government alleged that Sutter executives complained that the company was “leaving money on the table” due to “sub-par coding,” and directed PAMF to take action to improve coding on Medicare Advantage patients. The campaign included hiring an analyst to track the diagnosis-coding performance of network physicians and the recruitment of physicians who would coach other physicians on which diagnosis codes to use for their records.
The government also alleged Sutter coached physicians to label more diagnoses as chronic to increase the risk-adjustment factor and increase billings. When the company’s director of coding, documentation, and data quality questioned this practice, Sutter pressured the director to accept their analyses. Physicians also were pressured to change or add codes to patient medical records, and to schedule additional appointments with patients who lacked any risk-adjusting diagnosis codes, to try to identify additional medical issues that could be added to their files.
The defendants also employed non-physician coders to audit the accuracy of PAMF’s diagnosis coding and medical-record documentation and to add risk-adjusting diagnosis codes to patient medical records that physicians missed during their patient visits. When physicians complained about data analysts changing their patient diagnoses, Sutter defended this approach. Further, some physicians received “cheat sheets” that identified risk-adjusting diagnosis codes that purportedly were common to many Medicare Advantage patients (such as diabetes), and were pressured to add these codes into the patient’s electronic medical records even during encounters focusing on other patient healthcare problems.
In some cases, electronic forms were pre-populated with lucrative diagnostic codes without regard of the health conditions that the physicians evaluated or treated during their actual patient encounters. Physicians also expressed concern that these diagnoses appeared in patient medical records before they saw their patients, and that they did not know how to delete either pre-populated codes or codes added by an analyst after the visit.
According to the government, this process yielded results, as billing for risk-adjusted codes increased. Sutter’s own data showed a $4.4 million increase in revenue from 2012 to 2013, which the company attributed to the campaign. The company reported a 20 percent increase in the risk scores of Medicare Advantage patients, resulting in an expected $4.173 million in additional Medicare reimbursements.
The government also asserted that Medicare Advantage contract holders, such as UnitedHealth, identified red flags after auditing Sutter’s billing practices. The health insurer found that Sutter and PAMF submitted certain risk-adjusting diagnosis codes much more frequently than did other providers and that 27 of 30 of the patient records audited contained heart-attack diagnosis codes were erroneous, invalid, unsupported, or otherwise false. Follow-up audits resulted in similar findings. According to the government, Sutter discussed these findings but concluded that addressing the issue would have a negative impact on revenues. No internal audits were conducted, even after UnitedHealth identified over 8,000 false diagnoses for MA plan patients.
The government also alleged that Sutter and PAMF lacked an effective compliance or training program for diagnostic coding for its MA program, and that some Sutter affiliates were never audited. After she was hired, relator Ormsby noted the lack of a compliance or training program and began her own audit of PAMF patient records. She found that 53 of 62 risk-adjustment diagnosis codes from these patient encounters were false. Ormsby also discovered that coders were being trained incorrectly.
When she received notice of UnitedHealth’s audit findings, Ormsby requested additional audit resources, noting the red flags and potential non-compliance, and created a corrective action plan which recommended additional audits and staff. Ormsby was also criticized for cooperating with UnitedHealth’s follow-up documentation request. Ove the course of her employment, Ormsby continued her audits and communicated her findings to Sutter and PAMF executives. In all, Ormsby estimated that tens of thousands of patient records had not been audited and that Sutter and PAMF had overbilled MA by millions of dollars.
The government alleged that Sutter and PAMF purposefully inflated their billings, knew about the ineffective compliance and training programs, and ignored multiple audits identifying their billing problems. The government asserted they acted with reckless disregard to the accuracy of their billings and were deliberately indifferent to the problems, ignoring the feedback of their physicians, internal auditors, and health insurance partners. Ormsby left her position in May 2015 and Sutter did not begin internal billing audits again until nearly one year later.
The court found the government’s and Ormsby’s evidence extensive and specific. The government alleged the defendants knowingly submitted thousands of unsupported or otherwise false diagnosis codes to CMS for tens of thousands of beneficiaries, and cited ten examples of specific false claims.
In addition, Ormsby’s complaint levied similar allegations about Sutter and other affiliates, all of which use the same electronic medical record system. During her employment, Ormsby inquired about compliance policies and procedures with other affiliates, but was unable to identify any. She also noted that individuals from other affiliates participated in meetings where Sutter discussed the campaign to improve billing by upcoding patient records. Ormsby asserted that Sutter’s other affiliates experience billing increases similar to what the government alleged occurred at PAMF. She also alleged that Sutter ignored her warnings that the problems with PAMF’s billing compliance extended to its affiliates.
The court found the plaintiffs adequately pled both the false claims and the reverse false claims allegations, as well as scienter. The defendants argued that the complaint did not show that they knew that certain diagnosis codes were erroneous at the time claims were submitted, and that post-payment audits did not give them retroactive knowledge. However, the court found this argument unavailing, as the plaintiffs did not allege actual knowledge but reckless disregard and willful ignorance.
The court also held that “actuarial equivalence” is not a defense to an FCA claim and that nothing in the statute imposes the pleading standard that Sutter and PAMF tried to assert. Further, the proposed pleading standard would not be possible for the government to meet at this stage, and the defendants offered no method for doing so.
The defendants argued that because CMS uses unaudited traditional Medicare data in its MA risk model, requiring MA participants to return payments based on false diagnostic codes would mean CMS would pay less for MA than traditional Medicare. However, even if CMS violated the actuarial equivalence requirement, that possibility did not entitle the defendants to submit false diagnosis codes or decline to return overpayments. The court found the argument that MA participants do not have to report or return overpayments based on false codes was patently unreasonable. The court examined at some length (1) CMS’s historical audit process and its promulgation of the 2014 overpayment rule; and (2) the UnitedHealthcare court’s invalidation of the rule.
The court also held the relator could pursue her Sutter-wide claims, first noting the government did not object to the complaint. Further, the government’s choice to limit of its case to PAMF does not bar the claims regarding Sutter’s non-PAMF affiliates.
