The Seventh Circuit reversed and remanded a lower court’s decision dismissing a qui tam case alleging healthcare fraud. The relator alleged that Molina Healthcare submitted claims for capitation payments for skilled nursing facility services, even though Molina ceased providing these services after a subcontractor walked away from its contract. The relator also alleged Molina fraudulently induced the state into entering into new services contracts, because it failed to inform the state that it could no longer provide these services. The district court found that the relator had shown that the provision of SNF services was material to the contract, but had failed to show that Molina knew these services were material. The Seventh Circuit disagreed, finding that the district court failed to consider Molina’s corporate knowledge of Medicare requirements and capitation payment arrangements. The court noted that the reimbursement rate for SNF services was significantly higher than the rate for lower service tiers, suggesting that the parties understand that these services were important to the government. Because capitation payments are based on risk, the court also reasoned that Molina would have carefully constructed its rates based on the services it was required to provide. The court disagreed that the relator was required to provide evidence of actual knowledge and instead found that the relator showed that Molina either had actual knowledge that the government would view skilled nursing services as material to the agreement, or that it was deliberately ignorant on this point.
Relator Thomas Prose appealed a lower court’s decision to dismiss his complaint alleging that Molina Healthcare defrauded government healthcare programs by billing for skilled nursing facility services that it never provided.
The case centered on capitation payments, in which the government pays a provider a fixed per-patient fee that covers all services governed by the agreement. Under these contracts, the parties periodically adjust the per-patient fee to account for the cost of services provided to beneficiaries.
Molina had entered into an agreement with Illinois Medicaid to provide services that included skilling nursing facility services. The defendants subcontracted these services to a company called GenMed. Molina received a general capitation payment from the state, out of which it was to pay GenMed for the SNF component. The relator alleged that Molina breached the contract, resulting in GenMed walking away from the agreement. According to the relator, Molina never informed the state that it had ceased to provide SNF services and continued to collect capitation fees from the state at the same level.
The district court agreed that Prose had demonstrated that the SNF services were material to the government’s decision to pay claims under Molina’s contract. However, the court found that the relator had not shown that Molina knew that this condition was material. Prose appealed.
First, the court examined the claims to determine if the allegations would support a claim for direct factual falsity. Prose alleged that after GenMed terminated its agreement with Molina for nonpayment and breach of contract, Molina could not and did not provide SNF services, despite its agreement with the state. Nonetheless, Molina continued to submit to the government materially fraudulent enrollment forms for each new enrollee in the Nursing Facility category of patients.
The appeals panel found this sufficient to show direct falsity, explaining that Rule 9(b) requires specificity, but does not require the relator to literally prove his case in the complaint. The court found that Prose provided numerous details indicating when, where, how, and to whom allegedly false representations were made. The court also found he provided information that allowed for a plausible inference that Molina included false information about the services provided to new enrollees, because this information was required for receipt of the capitation payments. The court found the complaint directly asserted that Molina had new enrollees who they categorized in the skilled nursing facility tier of payment and that Molina sought reimbursement for SNF services that it could not and did not provide. The court found this sufficient to defeat any challenge to the adequacy of the complaint.
The court also found Prose had adequately alleged fraud in the inducement. According to the complaint, Molina entered into new annual agreements with the state after the termination of the GenMed contract. During those negotiations, Molina allegedly represented that it would continue to provide SNF services in its package for NF-category enrollees while not intending to do so. The district court faulted Molina for not including sufficient detail about the parties’ contract negotiations, but the appeals panel questioned how Molina could have come by that information prior to discovery. The court held that the particularity standard does not require that level of granularity. Rather, it was sufficient that Prose made precise allegations about the beneficiaries, the time period, the mechanism for the fraud, and the financial consequences.
The court also found that Molina alleged that Molina’s COO knew that Molina staff did not have the ability or licensure to render SNF services. Taken in conjunction with the defunct contract, the court found the complaint reasonably alleged that any promise by Molina to provide SNF services was fraudulent on its face. In addition, the complaint concluded that Molina did not and never intended to find a replacement subcontractor. The court found this sufficient to allege intent.
Finally, even if the complaint fell short of the required specificity under Rule 9 for the first two approaches, the appeals panel found it was sufficient to state a claim for implied false certification. While Molina argued that liability for implied false certification requires express representations about the goods or services to be provide, the court disagreed, explaining that material omissions can suffice.
The court found that Prose’s complaint adequately alleged that the representations were material to the government’s decision to pay claims. For example, the complaint alleged that the parties negotiated specific per-patient payments based on the level of care a patient would receive. According to the court, the significantly higher fee attached to the tier that included SNF services suggested that the provision of those services was material. The court presumed that the government would not be willing to pay an additional $3,127 per patient in the SNF tier if it knew that these services would not and could not be provided.
Molina argued that the enrollment forms did not contain misleading omissions because it did not fraudulently manipulate the beneficiary pool to increase the number of people in the more expensive category. However, the court found that the complaint did not rely on Molina’s receipt of capitation payments for existing enrollees. Rather, he alleged that Molina submitted new enrollment forms for patients in the SNF tier, even though those services were no longer provided. According to Prose, by submitting those forms, Molina implicitly certified that nursing facility enrollees had access to SNF services, when in fact they did not. Construed in the relator’s favor, the court found the alleged facts described Molina’s noncompliance with a contractual requirement.
Next, Molina argued that the government continued to contract with Molina even after learning the defendant could no longer provide SNF services, and therefore the services could not be considered material. However, while the government’s continued payments might be evidence that the misrepresentations were not material, the appeals court concluded that this inquiry was better left for after discovery. The court reasoned that the government could have several reasons for continuing to contract with Molina, including the continued provision of other services to Molina’s existing patients.
Finally, the court turned to the district court’s reason for dismissal: knowledge. The district court found that the complaint failed adequately to allege that Molina knew that the government viewed SNF services as material. Even though the court agreed that Prose had shown that Molina had violated the contractual requirement, it found that the complaint only alleged knowledge in a conclusory manner. According to the district court, Prose’s complaint, at best, supported a conclusion that Molina’s actuarial consultants coordinated the payment scheme with the government, but did not allege that Molina was involved in calculating the capitation rates.
The appeals panel found this conclusion erroneous. First, the court held that the lower court failed to give proper weight to the complaint’s description of Molina as a highly sophisticated member of the medical-services industry. In contrast, the Seventh Circuit found that Molina was quite familiar with capitation rates, and it knew that they are designed to allow the provider to be reimbursed for services rendered. Further, the court noted that capitation payments are based on risk, and therefore Molina had a strong incentive to ensure that its rate was high enough to cover its costs plus a reasonable profit.
Further, the court explained that knowledge may be alleged generally, and therefore the district court was wrong to insist that the relator identify concrete evidence of actual knowledge. The court found ample evidence to support a finding that Molina either had actual knowledge that the government would view skilled nursing services as material to the agreement, or that it was deliberately ignorant on this point. Again, the court noted the significantly higher reimbursement rate for these services as evidence that their provision was material to the government.
The court also found that Molina’s subcontract with GenMed to provide SNF services was evidence that Molina was aware that the services were important to the contract and that it was unable to provide these services without a subcontractor. The court found the complaint plausibly alleged this knowledge. Finally, the court found that causation was evident. By submitting enrollment forms requesting payment for services Molina could not provide to Illinois Medicaid, Molina caused the government to pay significant sums that it would not have paid with full knowledge.
Having found the complaint sufficiently alleged materiality and Molina’s knowledge of the materiality of its certifications, the Seventh Circuit reversed and remanded the matter back to district court.
