United States v. United Healthcare Insurance Co ( 2016 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
UNITED STATES OF No. 13-56746
AMERICA,
Plaintiff, D.C. No.
2:09-cv-05013-JFW-JEM
and
JAMES M. SWOBEN, Qui ORDER AND
Tam Relator, AMENDED OPINION
Plaintiff-Appellant,
v.
UNITED HEALTHCARE
INSURANCE COMPANY, a
Connecticut corporation;
UNITED HEALTHCARE
SERVICES, INC., Minnesota
corporation; UHIC;
UNITEDHEALTH GROUP;
UNITEDHEALTHCARE;
UNITEDHEALTH;
PACIFICARE HEALTH PLAN
ADMINISTRATORS, INC.;
UHC OF CALIFORNIA, FKA
PacifiCare of California;
PACIFICARE LIFE &
HEALTH INSURANCE CO.;
PACIFICARE HEALTH
SYSTEMS; HEALTH NET;
2 SWOBEN V. UNITED HEALTHCARE
WELLPOINT; AETNA;
HEALTHCARE PARTNERS,
LLC; HEALTHCARE
PARTNERS MEDICAL
GROUP, INC.; HEALTHCARE
PARTNERS INDEPENDENT
PHYSICIAN ASSOCIATION,
Defendants-Appellees.
Appeal from the United States District Court
for the Central District of California
John F. Walter, District Judge, Presiding
Argued and Submitted December 9, 2015
Pasadena, California
Filed August 10, 2016
Amended December 16, 2016
Before: Stephen Reinhardt, Raymond C. Fisher
and Jacqueline H. Nguyen, Circuit Judges.
Order;
Opinion by Judge Fisher
SWOBEN V. UNITED HEALTHCARE 3
SUMMARY*
Medicare
The panel amended the opinion, filed August 10, 2016,
and vacated the district court’s judgment dismissing qui tam
relator James Swoben’s third amended complaint, which
alleged that defendant Medicare Advantage organizations
submitted false certifications in violation of the False Claims
Act, and remanded with instructions to afford Swoben leave
to file a proposed fourth amended complaint.
The Centers for Medicare & Medicaid Services (“CMS”)
pays Medicare Advantage organizations fixed monthly
amounts for each enrollee, and CMS calculates the payment
for each enrollee based on various “risk adjustment data” as
reflected in submitted diagnoses codes. Medicare regulations
require a Medicare Advantage organization to certify that the
data it submits are “accurate, complete, and truthful.” 42
C.F.R. § 422.504(l), (l)(2). Swoben alleged that the
defendant organizations submitted false certifications by
performing biased retrospective medical record reviews
designed not to identify erroneously reported diagnosis codes.
The panel held that the district court abused its discretion
by denying leave to amend on the ground of futility of
amendment. The panel held that the theory alleged here –
that the defendants designed their retrospective review
procedures to not reveal erroneously reported diagnosis
codes – adequately alleged that the defendants’ § 422.504(l)
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
4 SWOBEN V. UNITED HEALTHCARE
certifications were false and stated a cognizable legal theory
under the False Claims Act.
The panel held that the proposed fourth amended
complaint alleged sufficient factual matter to satisfy Fed. R.
Civ. P. 8, 9(b) and 12(b)(6), or may be amended to do so.
The panel held that with respect to defendants United
Healthcare and HealthCare Partners, the allegations
adequately identified the details of the misconduct charged,
and afforded each defendant notice of its alleged role in a
fraudulent scheme; and therefore, satisfied Rule 9(b). The
panel further held that with respect to defendants Aetna,
WellPoint and Health Net, the allegations lacked sufficient
detail to satisfy Rule 9(b), but Swoben should be afforded
leave to amend to cure this deficiency.
The panel held that the district court also abused its
discretion by denying leave to amend based on undue delay.
The panel held that leave to amend was proper in this case
where the litigation against the defendants was at an early
stage, Swoben did not seek to assert a new legal theory, and
this was Swoben’s first attempt to cure deficiencies in his
pleadings.
COUNSEL
William K. Hanagami (argued), The Hanagami Law Firm,
A.P.C., Woodland Hills, California; Abram J. Zinberg, The
Zinberg Law Firm, A.P.C., Huntington Beach, California; for
Plaintiff-Appellant James M. Swoben.
David J. Schindler (argued), Latham & Watkins LLP, Los
Angeles, California; Roger S. Goldman, Daniel Meron,
SWOBEN V. UNITED HEALTHCARE 5
Jonathan Y. Ellis, and Matthew J. Glover, Latham & Watkins
LLP, Washington, D.C.; for Defendants-Appellees
UnitedHealthcare Insurance Company, UnitedHealthCare
Services Inc., UHIC, UnitedHealth Group, UnitedHealthCare,
UnitedHealth, Pacificare Health Plan Administrators, UHC of
California (FKA PacifiCare of California), PacifiCare Life
and Health Insurance Company, PacifiCare Health Systems,
and Health Net.
David W. Skaar, Hogan Lovells US LLP, Los Angeles,
California; Michael C. Theis, Hogan Lovells US LLP,
Denver, Colorado; for Defendants-Appellees HealthCare
Partners LLC, HealthCare Partners Medical Group, Inc. and
HealthCare Partners Independent Physician Association.
Geoffrey M. Sigler, Thomas M. Johnson, Jr., and Miguel A.
Estrada, Gibson, Dunn & Crutcher LLP, Washington, D.C.;
Richard J. Doren, Gibson, Dunn & Crutcher LLP, Los
Angeles, California; for Appellee Aetna.
David Deaton, O’Melveny & Myers LLP, Newport Beach,
California; David J. Leviss, O’Melveny & Myers LLP,
Washington, D.C.; Stephen Sullivan, O’Melveny & Myers
LLP, Los Angeles, California; for Appellee WellPoint, Inc.
Charles W. Scarborough and Karen Schoen, Attorneys,
Appellate Staff; Eileen M. Decker, United States Attorney;
Benjamin C. Mizer, Principal Deputy Assistant Attorney
General; Civil Division, United States Department of Justice,
Washington, D.C.; for Amicus Curiae United States.
6 SWOBEN V. UNITED HEALTHCARE
ORDER
Judges Reinhardt and Nguyen have voted to deny
appellees’ petition for rehearing en banc, and Judge Fisher
has so recommended.
The full court has been advised of the petition for
rehearing en banc and no judge has requested a vote on
whether to rehear the matter en banc. See Fed. R. App. P. 35.
The petition for rehearing en banc is DENIED.
The opinion, filed August 10, 2016 and published at
832 F.3d 1084, is AMENDED. An amended opinion is filed
concurrently with this order.
Further petitions for rehearing may be filed.
OPINION
FISHER, Circuit Judge:
The Centers for Medicare & Medicaid Services (CMS),
administrator of the federal Medicare program, pays
Medicare Advantage organizations fixed monthly amounts
for each enrollee. CMS calculates the payment for each
enrollee based on various “risk adjustment data,” such as an
enrollee’s demographic profile and the enrollee’s health
status, as reflected in the medical diagnosis codes associated
with healthcare the enrollee receives. These diagnosis codes
(also known as encounter data) are reported by Medicare
Advantage organizations to CMS. Because Medicare
SWOBEN V. UNITED HEALTHCARE 7
Advantage organizations have a financial incentive to
exaggerate an enrollee’s health risks by reporting diagnosis
codes that may not be supported by the enrollee’s medical
records, Medicare regulations require a Medicare Advantage
organization, as an express condition of receiving payment,
to “certify (based on best knowledge, information, and belief)
that the [risk adjustment] data it submits . . . are accurate,
complete, and truthful.” 42 C.F.R. § 422.504(l), (l)(2).
Qui tam relator James Swoben alleges Medicare
Advantage organizations United Healthcare, Aetna,
WellPoint and Health Net, and physician group HealthCare
Partners, submitted false certifications under this provision,
in violation of the False Claims Act, by conducting
retrospective reviews of medical records designed to identify
and report only under-reported diagnosis codes (diagnosis
codes erroneously not submitted to CMS despite adequate
support in an enrollee’s medical records), not over-reported
codes (codes erroneously submitted to CMS despite the
absence of adequate record support). The district court
denied Swoben leave to file a proposed fourth amended
complaint, citing futility of amendment and undue delay. We
hold the district court abused its discretion.
First, the court erred by concluding amendment would be
futile. Swoben’s proposed fourth amended complaint asserts
a cognizable legal theory. CMS has long made clear that,
under § 422.504(l), Medicare Advantage organizations have
“an obligation to undertake ‘due diligence’ to ensure the
accuracy, completeness, and truthfulness” of the risk
adjustment data they submit to CMS and “will be held
responsible for making good faith efforts to certify the
accuracy, completeness, and truthfulness” of these data.
Medicare+Choice Program, 65 Fed. Reg. 40,170, 40,268
8 SWOBEN V. UNITED HEALTHCARE
(June 29, 2000). When, as alleged here, Medicare Advantage
organizations design retrospective reviews of enrollees’
medical records deliberately to avoid identifying erroneously
submitted diagnosis codes that might otherwise have been
identified with reasonable diligence, they can no longer
certify, based on best knowledge, information and belief, the
accuracy, completeness and truthfulness of the data submitted
to CMS. This is especially true when, as alleged here, they
were on notice – based on audits conducted by CMS – that
their data likely included a significant number of erroneously
reported diagnosis codes. The allegations in Swoben’s
proposed fourth amended complaint also partly satisfy Rules
8 and 9(b) of the Federal Rules of Civil Procedure. With
respect to defendants United Healthcare and HealthCare
Partners, the allegations adequately identify “the who, what,
when, where, and how of the misconduct charged,” Ebeid ex
rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir.
2010) (quoting Vess v. Ciba-Geigy Corp. USA, 317 F.3d
1097, 1106 (9th Cir. 2003)) (internal quotation marks
omitted), and afford each defendant notice of its alleged role
in a fraudulent scheme. With respect to defendants Aetna,
WellPoint and Health Net, the allegations lack sufficient
detail to satisfy Rule 9(b), but Swoben should be afforded
leave to amend to cure this deficiency.
Second, the district court abused its discretion by denying
leave to amend based on undue delay. Undue delay by itself
is insufficient to justify denying leave to amend, and the
record here does not support any additional ground – such as
prejudice or bad faith – that would justify the denial. See
Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708,
712–13 (9th Cir. 2001). Leave to amend is proper here given
the litigation against these defendants is at an early stage,
SWOBEN V. UNITED HEALTHCARE 9
Swoben does not seek to assert a new legal theory and this is
Swoben’s first attempt to cure deficiencies in his pleadings.
BACKGROUND
I. The Medicare Advantage Program
Medicare beneficiaries have the option of receiving
benefits through private health plans as an alternative to the
traditional fee-for-service Medicare program. Under this
option, known as Medicare Advantage or Medicare Part C,
the government pays Medicare Advantage organizations a
capitated (per enrollee) amount to provide medical benefits.
The capitated amount is a fixed monthly payment regardless
of the volume of services an enrollee uses.
The government adjusts the monthly payments to
Medicare Advantage organizations to reflect the health status
of their enrollees. See 42 U.S.C. § 1395w-23(a)(1)(C)(i),
(a)(3); 42 C.F.R. § 422.308(c)(2). This ensures Medicare
Advantage “organizations are paid appropriately for their
plan enrollees (that is, less for healthier enrollees and more
for less healthy enrollees).” Establishment of the Medicare
Advantage Program, 70 Fed. Reg. 4588, 4657 (Jan. 28, 2005).
The risk adjustment methodology relies on enrollee
diagnoses. See Policy and Technical Changes to the
Medicare Advantage and the Medicare Prescription Drug
Benefit Programs, 74 Fed. Reg. 54,634, 54,673 (Oct. 22,
2009). Physicians and other health care providers submit
diagnosis codes to the Medicare Advantage organizations,
which in turn submit them to CMS. See id. at 54,674. These
diagnosis codes contribute to an enrollee’s risk score, which
is used to adjust a base payment rate. See id. Each diagnosis
code submitted must be supported by a properly documented
10 SWOBEN V. UNITED HEALTHCARE
medical record. See 42 U.S.C. §§ 1395l(e), 1395y(a)(1)(A);
42 C.F.R. § 422.310(d); Contract Year 2015 Policy and
Technical Changes to the Medicare Advantage and the
Medicare Prescription Drug Benefit Programs, 79 Fed. Reg.
29,844, 29,923 (May 23, 2014) (“CMS has required for many
years that diagnoses that [Medicare Advantage] organizations
submit for payment be supported by medical record
documentation.”).
“Since there is an incentive for [Medicare Advantage]
organizations to potentially over-report diagnoses so that they
can increase their payment, [CMS] audits plan-submitted
diagnosis data a few years later to ensure they are supported
by medical record documentation.” Contract Year 2015
Policy and Technical Changes to the Medicare Advantage
and the Medicare Prescription Drug Benefit Programs,
79 Fed. Reg. 1918, 2001 (Jan. 10, 2014). These risk
adjustment data validation (RADV) audits review selected
medical records to determine whether they support the
diagnoses reported by Medicare Advantage organizations.
See id.1
As a further bulwark against fraud, Medicare Advantage
organizations must certify the accuracy, completeness and
1
Initially, when conducting RADV audits, CMS recouped overpayments
solely with respect to the sampled beneficiaries. More recently, CMS has
implemented a procedure through which the payment error rate calculated
for the sampled beneficiaries in the audits is extrapolated to the contract
population as a whole. See CMS, Medicare Advantage Risk Adjustment
Data Validation Audits Fact Sheet 1, 3 (updated Dec. 11, 2015),
http s://www.cms. g o v / M e d i c a r e / M e d i c a r e - Ad vantage/P lan-
Payment/Downloads/MA_RADV_Audit_Fact_Sheet.pdf; see also 74 Fed.
Reg. at 54,673–74.
SWOBEN V. UNITED HEALTHCARE 11
truthfulness of the data they provide to CMS, including risk
adjustment data, as a condition to receiving payment:
As a condition for receiving a monthly
payment under subpart G of this part, the
[Medicare Advantage] organization agrees
that its chief executive officer (CEO), chief
financial officer (CFO), or an individual
delegated the authority to sign on behalf of
one of these officers, and who reports directly
to such officer, must request payment under
the contract on a document that certifies
(based on best knowledge, information, and
belief) the accuracy, completeness, and
truthfulness of relevant data that CMS
requests. Such data include specified
enrollment information, encounter data and
other information that CMS may specify.
42 C.F.R. § 422.504(l) (emphasis added).2 Specifically, a
Medicare Advantage organization “must certify (based on
best knowledge, information, and belief) that the [risk
adjustment] data it submits under § 422.310 are accurate,
complete, and truthful.” Id. § 422.504(l)(2).
A Medicare Advantage organization is also required to
“[a]dopt and implement an effective compliance program,
which must include measures that prevent, detect, and correct
non-compliance with CMS’ program requirements.” Id.
2
This regulation has been in force, in substantially the same form, since
2000. See 42 C.F.R. § 422.502(l) (2000).
12 SWOBEN V. UNITED HEALTHCARE
§ 422.503(b)(4)(vi).3 In addition, although Medicare
Advantage organizations generally submit data to CMS
shortly after services are provided, the regulations also allow
for data submissions after the payment year. See id.
§ 422.310(g). CMS uses these data to “recalculate[] the risk
factors for affected individuals to determine if adjustments to
payments are necessary.” Id. § 422.310(g)(2)
In light of these provisions, Medicare Advantage
organizations may, but are not required to, conduct
retrospective reviews of their enrollees’ medical records to
ensure the accuracy of the diagnosis codes they have
provided to CMS. See CMS, 2008 Risk Adjustment Data
Technical Assistance For Medicare Advantage Organizations
Participant Guide § 7.7.
Certification under § 422.504(l) has always required due
diligence and good faith. When CMS adopted the “best
knowledge, information, and belief” standard in 2000, it
explained in the preamble to the regulation that Medicare
Advantage organizations “cannot reasonably be expected to
know that every piece of data is correct,” so “simple mistakes
will not result in sanctions.” Medicare+Choice Program,
65 Fed. Reg. 40,170, 40,268 (June 29, 2000). But
§ 422.504(l) does not require actual knowledge that the data
supplied to CMS are false. Rather, as under the False Claims
Act, a certification is false under § 422.504(l) when the
Medicare Advantage organization has actual knowledge of
the falsity of the risk adjustment data or demonstrates either
“reckless disregard” or “deliberate ignorance” of the truth or
3
This requirement has been on the books, in similar form, since 2005.
See 42 C.F.R. § 422.503(b)(4)(vi)(F), (G) (2005); id. § 422.503(b)(4)(vi)
(2010).
SWOBEN V. UNITED HEALTHCARE 13
falsity of the data. Id. Thus, Medicare Advantage
organizations “have an obligation to undertake ‘due
diligence’ to ensure the accuracy, completeness, and
truthfulness of encounter data submitted to [CMS]” and “will
be held responsible for making good faith efforts to certify
the accuracy, completeness, and truthfulness of encounter
data submitted.” Id.
In 2014, CMS considered but ultimately decided not to
finalize a proposed rule that would have altogether prohibited
Medicare Advantage organizations from performing one-
sided retrospective reviews. Under the proposed regulation:
medical record reviews conducted by [a
Medicare Advantage] organization cannot be
designed only to identify diagnoses that would
trigger additional payments by CMS to the . . .
organization; and medical record review
methodologies must be designed to identify
errors in diagnoses submitted to CMS as risk
adjustment data, regardless of whether the
data errors would result in positive or negative
payment adjustments.
79 Fed. Reg. at 2000. Although CMS decided not to finalize
the proposed rule, see id. at 29,926, it reiterated that it has
“always expected that [a Medicare Advantage] organization
. . . implement, during the routine course of business,
appropriate payment evaluation procedures in order to meet
the requirement of certifying the data they submit to CMS for
purposes of payment,” id. at 29,923. CMS explained:
[Medicare Advantage] organizations . . . are
responsible for ensuring that payment data
14 SWOBEN V. UNITED HEALTHCARE
they submit to CMS are accurate, truthful, and
complete (based on best knowledge,
information, and belief), and are expected to
have effective and appropriate payment
evaluation procedures and effective
compliance programs as a way to avoid
receiving or retaining overpayments. Thus, at
a minimum, reasonable diligence would
include proactive compliance activities
conducted in good faith by qualified
individuals to monitor for the receipt of
overpayments.
Id. CMS added, “[i]f the requirement to report and return
overpayments applied only to situations where the [Medicare
Advantage] organization . . . has actual knowledge of the
existence of an overpayment, then these entities could easily
avoid returning improperly received payments.” Id. at
29,924.4 Although these 2014 events postdate the allegations
in Swoben’s pleadings, which cover the years between 2005
and 2012, they are consistent with the regulatory
requirements that have existed since 2000.
4
Also in 2014, CMS adopted a regulation stating that a Medicare
Advantage organization “has identified an overpayment when [it] has
determined, or should have determined through the exercise of reasonable
diligence, that [it] has received an overpayment,” 42 C.F.R. § 422.326(c),
and for this purpose an “overpayment” includes a previously submitted
medical diagnosis code that is not properly supported by a medical record,
see 79 Fed. Reg. at 29,921 (stating “a risk adjustment diagnosis that has
been submitted for payment but is found to be invalid because it does not
have supporting medical record documentation would result in an
overpayment”).
SWOBEN V. UNITED HEALTHCARE 15
II. Procedural History
Swoben filed an initial complaint in this action in 2009.
His first amended complaint added claims against United
Healthcare. He filed a second amended complaint in 2010.
In 2011, he filed a third amended complaint, adding claims
against HealthCare Partners, Aetna, WellPoint and Health
Net. In accordance with the False Claims Act, Swoben filed
each of these pleadings under seal. See 31 U.S.C.
§ 3730(b)(2).
The gist of Swoben’s complaint is that the defendants –
Medicare Advantage organizations United Healthcare, Aetna,
WellPoint and Health Net, and HealthCare Partners, a
physician group providing health care services to these
organizations’ enrollees in exchange for a percentage of the
organizations’ capitated payments – performed biased
retrospective medical record reviews. According to Swoben,
retrospective reviews by Medicare Advantage organizations
typically should identify (and report to CMS) two types of
errors in the risk adjustment data previously submitted:
(1) diagnosis codes supported by an enrollee’s medical
records but not previously submitted to CMS (under-
reporting errors); and (2) diagnosis codes previously
submitted to CMS but not supported by the enrollee’s
medical records (over-reporting errors). Identifying and
reporting the first type of error is favorable to the Medicare
Advantage organization; identifying and reporting the second
type of error is unfavorable. Swoben alleges the defendants
conducted one-sided retrospective reviews designed to
identify (and report to CMS) solely the first type of error. He
alleges these reviews were designed to exaggerate enrollees’
health risks and cause CMS to make inflated capitated
payments to the defendants. These actions, Swoben alleges,
16 SWOBEN V. UNITED HEALTHCARE
rendered the defendants’ periodic certifications under
§ 422.504(l) false, in violation of the False Claims Act,
31 U.S.C. § 3729(a)(1).
Specifically, Swoben alleges the defendants’ retrospective
reviews were biased in several respects. For instance, he
alleges each of the defendants retained coding companies or
purchased specialized software to perform retrospective
reviews of the medical charts of tens of thousands of their
patients with severe illnesses but “concealed from the coders
the diagnosis codes that had been previously submitted to the
Government.” Fourth Am. Compl. ¶¶ 12, 16–17. As a
consequence, “the results of the coders’ reviews did not
identify the diagnosis codes unsupported by proper
documentation of the reviewed medical charts that had been
previously submitted to the Government.” Fourth Am.
Compl. ¶¶ 13, 17. Swoben alleges the defendants engaged in
these activities beginning in 2005. Fourth Am. Compl. ¶¶ 12,
16.
Swoben also alleges United Healthcare instructed its
medical providers, including HealthCare Partners, to review
the medical charts of selected patients to determine whether
those charts supported specific diagnoses that had not
previously been reported to CMS. Fourth Am. Compl. ¶ 14.
The medical providers reported the additional diagnosis codes
supported by the records “but made no attempt to determine
or report those previously reported diagnosis codes that were
unsupported by properly documented medical charts that
were reviewed.” Fourth Am. Compl. ¶ 14. Swoben alleges
United Healthcare and HealthCare Partners engaged in this
activity from approximately 2005 to 2007. Fourth Am.
Compl. ¶ 14.
SWOBEN V. UNITED HEALTHCARE 17
Swoben further alleges the defendants used a template to
report the results of their retrospective reviews to CMS that
allowed coders to enter any additional diagnosis codes
identified by the reviews but “did not permit the entry of
information indicating what previously submitted [diagnosis]
codes should be withdrawn.” Fourth Am. Compl. ¶ 23.
Swoben alleges the defendants used the faulty template from
approximately 2006 to 2012. Fourth Am. Compl. ¶ 24. He
asserts the defendants were involved in the development of
the template and were aware of its shortcomings. Fourth Am.
Compl. ¶¶ 22, 27.
Swoben also alleges CMS conducted annual RADV
audits of sample medical charts for United Healthcare, Aetna,
WellPoint and Health Net. Fourth Am. Compl. ¶ 25. He
alleges each of these Medicare Advantage organizations “had
RADV audit error rates well in excess of 20%, reflecting that
more than 20% of [their] diagnosis codes submitted to CMS
were not supported by properly documented medical charts.”
Fourth Am. Compl. ¶ 25.5 Swoben alleges the over-reporting
error rate found in these audits of representative medical
records placed the defendants on notice that the risk
adjustment data they more broadly submitted to CMS also
contained significant over-reporting errors. Fourth Am.
Compl. ¶ 25.
Swoben alleges the defendants’ practices rendered their
§ 422.504(l) certifications false and fraudulent. He alleges
they submitted false claims by attesting to the accuracy of
their risk adjustment data even though they knowingly
5
Swoben alleges the RADV audits showed a high percentage of over-
reporting errors. His allegations do not address whether the RADV audits
also identified under-reporting errors.
18 SWOBEN V. UNITED HEALTHCARE
designed and performed retrospective reviews to conceal and
not withdraw previously submitted diagnosis codes that were
unsupported by retrospectively reviewed medical records.
Fourth Am. Compl. ¶ 27. He alleges, moreover, that the
defendants knew their certifications were false because they
(1) helped develop the reporting template and knew the
template would not capture over-reporting errors identified by
retrospective reviews; (2) had RADV audit over-reporting
error rates in excess of 20 percent, placing them on notice that
“a similar percentage of medical charts that were
retrospectively reviewed should have resulted in [diagnosis]
codes being withdrawn as unsupported by the medical
charts”; and (3) designed their retrospective reviews to avoid
identifying or reporting unsupported diagnosis codes that
should have been withdrawn. Fourth Am. Compl. ¶ 27.
In 2012, the United States intervened in the action as to
Swoben’s claims against certain defendants not relevant here.
In January 2013, the United States declined to intervene as to
the defendants who are parties to this appeal (collectively,
“the defendants”). The district court ordered the complaints
unsealed and served on the defendants. In June 2013, after
the district court issued an initial scheduling and case
management order, the newly served defendants moved to
dismiss Swoben’s claims, arguing his third amended
complaint failed to satisfy Rules 8, 9(b) and 12(b)(6) of the
Federal Rules of Civil Procedure.
In his opposition to the defendants’ motions, Swoben did
not defend the third amended complaint. Instead, he advised
the court he would voluntarily dismiss his claims under state
law and would seek leave to amend his complaint with
respect to his claims under the False Claims Act. The district
court ordered Swoben to file a declaration describing “in
SWOBEN V. UNITED HEALTHCARE 19
detail the proposed Fourth Amended Complaint and why such
an amendment would not be futile or denied due to evidence
of a lack of diligence or undue delay.” As directed, Swoben
filed a declaration of counsel setting out the additional
allegations he would include in a fourth amended complaint.
In a July 2013 order, the district court dismissed the third
amended complaint with prejudice, concluding Swoben failed
to allege a claim under the False Claims Act with
particularity as required by Rule 9(b). The court denied leave
to amend, citing both futility of amendment and undue delay.
The court entered final judgment, and Swoben timely
appealed. He does not challenge dismissal of the third
amended complaint but contends the district court abused its
discretion by denying leave to amend.
After hearing oral argument, we asked the parties to
submit supplemental briefing to address when conducting
retrospective medical record reviews designed to identify
only diagnoses that would trigger additional payments by
CMS, not errors that would result in negative payment
adjustments, would cause a certification to be false for
purposes of § 422.504(l) and the False Claims Act. The
parties filed briefs addressing this question, and the
Department of Justice, representing the United States as
amicus curiae, filed a brief supporting Swoben.
STANDARD OF REVIEW
We review the denial of leave to amend for an abuse of
discretion, see United States ex rel. Lee v. Corinthian Colls.,
655 F.3d 984, 995 (9th Cir. 2011), but we review the question
of futility of amendment de novo, see Carvalho v. Equifax
Info. Servs., LLC, 629 F.3d 876, 893 (9th Cir. 2010).
20 SWOBEN V. UNITED HEALTHCARE
DISCUSSION
The district court denied leave to amend on two
independent grounds – futility of amendment and undue
delay. We address these in turn.
I. Amendment Would Not Be Futile
The district court denied leave to amend in part on the
ground that amendment would have been futile. Accordingly,
we address whether Swoben’s proposed fourth amended
complaint, or a further amended pleading, would be adequate
to survive a motion to dismiss.
A. The Proposed Fourth Amended Complaint
Adequately States a Cognizable Legal Theory
The parties dispute whether Swoben’s proposed fourth
amended complaint alleges a cognizable legal theory.
1. The False Claims Act imposes liability in part on “any
person who . . . knowingly presents, or causes to be
presented, a false or fraudulent claim for payment or
approval,” 31 U.S.C. § 3729(a)(1)(A), or “knowingly makes,
uses, or causes to be made or used, a false record or statement
material to a false or fraudulent claim,” id. § 3729(a)(1)(B).6
“In an archetypal qui tam False Claims action, such as where
a private company overcharges under a government contract,
6
In addition to these False Claims Act provisions, the United States, as
amicus curiae, argues the defendants’ conduct violates § 3729(a)(1)(G),
known as the “reverse false claims” provision. Swoben, however, did not
rely on that provision in his opening and reply briefs. We therefore do not
address it here.
SWOBEN V. UNITED HEALTHCARE 21
the claim for payment is itself literally false or fraudulent.”
United States ex rel. Hendow v. Univ. of Phoenix, 461 F.3d
1166, 1170 (9th Cir. 2006). As relevant here, however, “a
claim under the False Claims Act can be false where a party
merely falsely certifies compliance with a statute or
regulation as a condition to government payment.” Id. at
1171. Under a false certification theory, “it is the false
certification of compliance which creates liability when
certification is a prerequisite to obtaining a government
benefit.” Id. (alteration omitted) (quoting United States ex
rel. Hopper v. Anton, 91 F.3d 1261, 1266 (9th Cir. 1996)).
The essential elements of a false certification claim are: “(1) a
false statement or fraudulent course of conduct, (2) made with
scienter, (3) that was material, causing (4) the government to
pay out money or forfeit moneys due.” Id. at 1174.7 Proof of
damage to the government is not required. See Bly-Magee v.
California, 236 F.3d 1014, 1017 (9th Cir. 2001); United
States ex rel. Hagood v. Sonoma Cty. Water Agency, 929 F.2d
1416, 1421 (9th Cir. 1991); Claire M. Sylvia, The False
Claims Act: Fraud Against the Government §§ 4:2, 4:3
(2015).
The defendants challenge Swoben’s theory that the
manner in which they designed and conducted their
retrospective reviews rendered their certifications under
§ 422.504(l) false. They contend:
During the time period alleged in the
complaint, no statute, regulation, or guidance
7
The defendants’ briefing challenges only the first and second of these
elements here. Accordingly, for purposes of our analysis, we assume
Swoben’s proposed fourth amended complaint satisfies the third and
fourth elements.
22 SWOBEN V. UNITED HEALTHCARE
from CMS indicated that a certification could
only be “accurate, complete, and truthful” if
[a Medicare Advantage] plan validated for
itself that the millions of diagnosis codes
submitted to it by third-party providers were
supported by the underlying medical charts –
i.e., that the plan was required to attest to the
accuracy of someone else’s work. Nor did
any authority indicate that a plan was obliged
to undertake affirmative steps to unearth
potentially unsupported codes before it could
certify the third-party risk adjustment data
based on its “best knowledge, information,
and belief.”
Joint Suppl. Br. 1. These arguments are unpersuasive for two
distinct reasons.
First, the defendants mischaracterize Swoben’s theory of
the case. Swoben does not allege the defendants’
certifications are false merely because they passively
forwarded to CMS unsupported diagnosis codes they received
from their medical providers. That type of conduct would not
necessarily result in false § 422.504(l) certifications. As
CMS made clear in the 2000 preamble, Medicare Advantage
organizations “cannot reasonably be expected to know that
every piece of data is correct, nor is that the standard that
[CMS and the Department of Justice] believe is reasonable to
enforce.” 65 Fed. Reg. at 40,268. “[S]imple mistakes will
not result in sanctions.” Id. Instead, Swoben alleges the
defendants took affirmative steps to generate and report
skewed data. Even in the face of “RADV audit error rates
well in excess of 20%” (Fourth Am. Compl. ¶ 25), they
“conceived, planned and conducted the retrospective reviews
SWOBEN V. UNITED HEALTHCARE 23
by not causing the previously submitted diagnosis codes that
were unsupported by the retrospective reviews to be corrected
and withdrawn from the Government,” doing so “with the
knowledge and intent that the retrospective reviews would
only increase, and not decrease, the number of diagnoses, and
thus their respective risk scores in order to increase capitated
payments paid by the Government” (Fourth Am. Compl.
¶ 19). The defendants’ attempts to portray themselves as the
passive victims of their providers’ errors wholly misstates
Swoben’s legal theory, which focuses on the defendants’ own
conduct in allegedly conceiving, directing and conducting
retrospective reviews designed to identify only favorable
reporting errors.
Second, the defendants’ contention that, during the
relevant time period between 2005 and 2012, there was no
“authority [to] indicate that a [Medicare Advantage] plan was
obliged to undertake affirmative steps to unearth potentially
unsupported codes before it could certify the third-party risk
adjustment data based on its ‘best knowledge, information,
and belief’” is unpersuasive. When it adopted the “best
knowledge, information, and belief” standard in 2000, CMS
made clear this was the same standard as the one establishing
liability under the False Claims Act – i.e., that it encompasses
not only actual knowledge of falsity but also reckless
disregard and deliberate ignorance. See 65 Fed. Reg. at
40,268; see also 31 U.S.C. § 3729(b)(1)(A) (False Claims
Act). As we have explained in describing this standard under
the False Claims Act:
In defining knowingly, Congress attempted
“to reach what has become known as the
‘ostrich’ type situation where an individual
has ‘buried his head in the sand’ and failed to
24 SWOBEN V. UNITED HEALTHCARE
make simple inquiries which would alert him
that false claims are being submitted.” S.
Rep. No. 99-345, at 21 (1986), as reprinted in
1986 U.S.C.C.A.N. 5266, 5286. Congress
adopted “the concept that individuals and
contractors receiving public funds have some
duty to make a limited inquiry so as to be
reasonably certain they are entitled to the
money they seek.” Id. at 20; see also id. at 7
(discussing the importance of individual
responsibility because the government has
limited resources to police fraud). “While the
Committee intends that at least some inquiry
be made, the inquiry need only be ‘reasonable
and prudent under the circumstances.’” Id. at
21.
United States v. Bourseau, 531 F.3d 1159, 1168 (9th Cir.
2008); see also Universal Health Servs., Inc. v. U.S. ex rel.
Escobar, 136 S. Ct. 1989, 2000 (2016) (holding “half-truths
– representations that state the truth only so far as it goes,
while omitting critical qualifying information – can be
actionable misrepresentations” under the False Claims Act).
Thus, as CMS made clear, Medicare Advantage
organizations have always had “an obligation to take steps to
ensure the accuracy, completeness, and truthfulness of the
encounter data” and “an obligation to undertake ‘due
diligence’ to ensure the accuracy, completeness, and
truthfulness of encounter data submitted to [CMS].” 65 Fed.
Reg. at 40,268. CMS made perfectly clear that Medicare
Advantage organizations would be “held responsible for
making good faith efforts to certify the accuracy,
completeness, and truthfulness of encounter data submitted.”
SWOBEN V. UNITED HEALTHCARE 25
Id. Indeed, CMS expressly rejected the argument that
Medicare Advantage organizations “should not be required to
certify the accuracy of the encounter data they receive from
third parties.” Id. The defendants’ contention that they were
under no obligation to take affirmative steps to address errors
also ignores § 422.503, which since 2005 has required
Medicare Advantage organizations to have effective
compliance programs in place, including “[p]rocedures for
internal monitoring and auditing” and for “ensuring
prompt response to detected offenses.” 42 C.F.R.
§ 422.503(b)(4)(vi), (vi)(F), (vi)(G) (2005).
In light of these authorities, we hold that when, as alleged
here, Medicare Advantage organizations design retrospective
reviews of enrollees’ medical records deliberately to avoid
identifying erroneously submitted diagnosis codes that might
otherwise have been identified with reasonable diligence,
they can no longer certify, based on best knowledge,
information and belief, the accuracy, completeness and
truthfulness of the data submitted to CMS. This is especially
true, when, as alleged here, they were on notice that their data
included a significant number of erroneously reported
diagnosis codes. We do not see how a Medicare Advantage
contractor who has engaged in such conduct can in good faith
certify that it believes the resulting risk adjustment data
reported to CMS are accurate, complete and truthful. As the
government argues in its amicus brief, when a Medicare
Advantage plan “has implemented record-review procedures
specifically designed not to reveal unsupported diagnosis
codes – the plan’s certification under § 422.504(l) is ‘false or
fraudulent’ under 31 U.S.C. § 3729(a)(1)(A) & (B).” Br.
United States as Amicus Curiae 4.
26 SWOBEN V. UNITED HEALTHCARE
By holding that one-sided retrospective reviews can result
in false certifications under § 422.504(l), we do not suggest
that they necessarily always do. The “best knowledge,
information, and belief” standard under § 422.504(l) prohibits
only a “reckless disregard” or “deliberate ignorance” of the
truth or falsity of the risk adjustment data submitted to CMS.
We do not in this opinion attempt to define the parameters of
these requirements. We hold only that the theory alleged here
– that the defendants designed their retrospective review
procedures to not reveal unsupported diagnosis codes,
allegedly for no other reason than to avoid reporting that
information to the government – states a cognizable legal
theory under the False Claims Act. That the defendants
allegedly did so in spite of RADV audit errors rates of 20
percent or more only strengthens Swoben’s claims.
We also do not intend to suggest that the practice of
concealing previously submitted diagnosis codes from coders
conducting retrospective reviews is necessarily a suspect
practice. On the contrary, blind coding may help ensure the
integrity of a retrospective review: if reviewers are told in
advance which codes were submitted to CMS, they may have
an especially strong incentive to find support for those codes
in the records under review.
But blind coding cannot be squared with the good faith
required by § 422.504(l) when it is employed as a means of
avoiding or concealing over-reporting errors. If Medicare
Advantage organizations acquire the codes identified by
retrospective coders, compare them to the codes previously
submitted to CMS, identifying both under- and over-reporting
errors, but withhold information about the over-reporting
errors from CMS, this would result in a false certification.
The same is true when a Medicare Advantage organization
SWOBEN V. UNITED HEALTHCARE 27
undertakes comprehensive blind coding but then runs a
unidirectional comparison with the previously submitted
codes to reveal only under-reporting errors. As the
government explains, the use of blind coding cannot excuse
failing to “check whether diagnosis codes previously
submitted to CMS were included on the list of diagnoses
found by the reviewers to be supported by the medical
records.” Br. United States as Amicus Curiae 15. In the first
example, in which a Medicare Advantage organization
withholds known over-reporting errors from CMS, the
organization has actual knowledge that the data are false. In
the second example, where the organization turns a blind eye
to the over-reporting errors, it exhibits reckless disregard and
deliberate ignorance toward the truth or falsity of the data
submitted to CMS. Both examples show a lack of diligence
and an absence of good faith. On the other hand, if through
reasonable diligence the comparison between the codes
identified by the retrospective reviewers and the codes
previously submitted to CMS is capable of identifying only
under-reporting errors, we assume this would not result in
false certifications under current CMS regulations. The due
diligence standard requires only reasonable efforts.
In sum, Swoben has alleged a cognizable legal theory.
2. The defendants’ arguments to the contrary are not
persuasive.
The defendants argue their certifications cannot have been
false because they did not know of any specific unsupported
diagnosis codes in the data they submitted to CMS. Joint
Suppl. Br. 4. As explained, however, neither the “best
knowledge, information, and belief” standard under
§ 422.504(l) nor the scienter element of the False Claims Act
28 SWOBEN V. UNITED HEALTHCARE
requires actual knowledge of falsity. Under the False Claims
Act,
the terms “knowing” and “knowingly” –
(A) mean that a person, with respect to
information – (i) has actual knowledge of the
information; (ii) acts in deliberate ignorance
of the truth or falsity of the information; or
(iii) acts in reckless disregard of the truth or
falsity of the information; and (B) require no
proof of specific intent to defraud.
31 U.S.C. § 3729(b)(1). Section 422.504(l) adopts precisely
the same standard. See 65 Fed. Reg. at 40,268. And this
standard reaches “what has become known as the ostrich type
situation where an individual has buried his head in the sand
and failed to make simple inquiries which would alert him
that false claims are being submitted.” Bourseau, 531 F.3d
at 1168 (quoting S. Rep. No. 99-345, at 21) (internal
quotation marks omitted). Although the False Claims Act’s
scienter requirement is “rigorous,” Universal Health Servs.,
136 S. Ct. at 2002, Swoben’s allegations satisfy it here.
The defendants also suggest they could not have
conducted their retrospective reviews in bad faith because
retrospective reviews of a portion of an enrollee’s medical
records are not a plausible means of identifying over-
reporting errors. They point out that “CMS regulations deem
a diagnosis code proper if it is supported by a single medical
record by a single provider.” Joint Answering Br. 36.
“Accordingly, the absence of documentation for a diagnosis
code in a single retrospective review of a single provider’s
charts does not establish that the submission of that code to
CMS was improper: the code may simply be located in charts
SWOBEN V. UNITED HEALTHCARE 29
not encompassed by the retrospective review.” Id. We are
not persuaded. First, if the retrospective reviews were
designed in bad faith, then it is no defense that the reviews, as
designed, could not readily identify over-reporting errors.
Second, the record at this early stage does not tell us how
easy or difficult it would have been for the defendants to
identify over-reporting errors, and Swoben alleges only that
the defendants intentionally prevented coders from doing so.
Whether the defendants had a good-faith reason to design the
reviews as they did is not a matter to decide at this stage of
the proceedings, particularly where the defendants’ factual
assertions are less than obvious. For instance, because CMS
requires medical diagnosis codes to be supported by a
medical record, it may be that each diagnosis code reported
to CMS is linked to a specifically identified supporting
medical record. In that event, if a reviewer finds a previously
reported diagnosis code is not supported by the very medical
record used to document the diagnosis code in the first place,
then the diagnosis code was reported in error, even if it is
possible that some other, unidentified record might support
the same diagnosis.8 As the government points out, “[e]ven
if it turns out that the diagnosis is supported by other medical
records, the failure of [the] plan to investigate to make that
determination – after it has been put on notice that the
diagnosis may not be supported – makes its broad
certification regarding the accuracy, completeness, and
8
In other words, if a Medicare Advantage organization relied on
medical record X to justify submitting a particular diagnosis code to CMS
initially, and the retrospective reviewer concludes X does not support that
diagnosis, then the code should be withdrawn. If it turns out the code can
be substantiated by a different medical record, then the code can be left in
place or resubmitted. But the Medicare Advantage organization cannot
simply ignore the reporting error because it speculates that some other
medical record might support the same diagnosis code.
30 SWOBEN V. UNITED HEALTHCARE
truthfulness of submitted data false.” Br. United States as
Amicus Curiae 17.
The defendants also argue the statements by CMS in 2000
regarding due diligence and good faith should not be given
weight because, at the time, risk adjustment was based
primarily on demographic factors rather than patient
encounter data. Joint Resp. to Amicus Br. 9–10 & n.3. We
disagree. First, the statements by CMS are authoritative not
because of what they say about encounter data or diagnosis
codes but because they provided clear guidance to Medicare
Advantage organizations (then known as Medicare+Choice
organizations) regarding their obligations under § 422.504(l)
(then codified at § 422.502(l)), including their obligations
under the “best knowledge, information, and belief” standard.
Second, the defendants’ representations to the contrary
notwithstanding, it is quite clear that the risk adjustment
methodology in place in 2000 focused on patient encounter
data, just as it does today. See 65 Fed. Reg. 40,246–51. The
defendants point out that at the time CMS collected encounter
data only for inpatient care. Joint Resp. to Amicus Br. at 9
n.3. But, as CMS made clear at the time, it was already
“developing a more comprehensive risk-adjustment
methodology that uses diagnosis data from physician services
and hospital outpatient department encounters” as well.
65 Fed. Reg. at 40,247–48. Thus, when CMS emphasized the
importance of due diligence and good faith in reporting
patient encounter data in 2000, it clearly had within its
contemplation the regime that was then in development and
which was in place at the time the allegedly false claims were
submitted in this case. Third, even if the defendants were
correct that the focus of the risk adjustment methodology in
2000 was on demographic factors rather than encounter data,
SWOBEN V. UNITED HEALTHCARE 31
there is no question that CMS’ statements about due diligence
and good faith were focused on the latter:
M+C organizations have an obligation to take
steps to ensure the accuracy, completeness,
and truthfulness of the encounter data. We
acknowledge that encounter data come into
M+C organizations in great volume and from
a number of sources, presenting significant
verification challenges for the organizations.
However, we believe that M+C organizations
have an obligation to undertake “due
diligence” to ensure the accuracy,
completeness, and truthfulness of encounter
data submitted to [CMS]. Therefore, they
will be held to a “best knowledge,
information, and belief” standard. Therefore,
M+C organizations will be held responsible
for making good faith efforts to certify the
accuracy, completeness, and truthfulness of
encounter data submitted.
Id. at 40,268 (emphasis added).9
9
The statements CMS made in the preamble to the certification
regulation merit deference. See, e.g., Christopher v. SmithKline Beecham
Corp., 132 S. Ct. 2156, 2163 (2012); Fid. Fed. Sav. & Loan Ass’n v. de la
Cuesta, 458 U.S. 141, 158 n.13 (1982) (“[W]e look to the preamble . . . for
the administrative construction of the regulation, to which ‘deference is
. . . clearly in order.’” (third alteration in original) (quoting Udall v.
Tallman, 380 U.S. 1, 16 (1965))). CMS’ statements regarding the
meaning of the “best knowledge, information, and belief” standard are
entitled to deference because they represent the agency’s interpretation of
its own regulation. The interpretation is also entitled to deference because
it represents the agency’s considered judgment after notice and comment,
32 SWOBEN V. UNITED HEALTHCARE
The defendants also contend their certifications could not
have been knowingly false because their conduct between
2005 and 2012 represented at least an objectively reasonable
interpretation of their obligations under § 422.504(l). Joint
Suppl. Br. 12. See Safeco Ins. Co. of Am. v. Burr, 551 U.S.
47, 70 n.20 (2007) (“Where, as here, the statutory text and
relevant court and agency guidance allow for more than one
reasonable interpretation, it would defy history and current
thinking to treat a defendant who merely adopts one such
interpretation as a knowing or reckless violator.”); Hagood,
929 F.2d at 1421 (“To take advantage of a disputed legal
question . . . is to be neither deliberately ignorant nor
recklessly disregardful.”). We again disagree. CMS’ clear
statements in the 2000 preamble – “[Medicare Advantage]
organizations have an obligation to undertake ‘due diligence’
to ensure the accuracy, completeness, and truthfulness of
encounter data submitted to [CMS and] will be held
responsible for making good faith efforts to certify the
accuracy, completeness, and truthfulness of encounter data
submitted,” 65 Fed. Reg. at 40,268 – resolved any ambiguity
about the meaning of § 422.504(l). See Fid. Fed. Sav. &
industry input and interagency consultation. See Establishment of the
Medicare+Choice Program, 63 Fed. Reg. 34968, 35017 (June 26, 1998)
(interim final rule with comment period); 65 Fed. Reg. at 40,176, 40,268,
40,299 (final rule with comment period). Indeed, the good faith standard
about which the defendants now complain appears to have been suggested
by the industry. See 65 Fed. Reg. at 40,268, 40,299. Compare 63 Fed.
Reg. at 35103 (interim rule), with 65 Fed. Reg. at 40,327–28 (final rule).
We also afford deference to CMS’ interpretation of the regulation because
it is consistent with the standard for liability under the False Claims Act,
and therefore presumably carries out congressional intent. Cf. Wyeth v.
Levine, 555 U.S. 555, 576–80 (2009) (declining to afford deference to
statements in an agency’s preamble where the agency failed to offer
interested parties notice or an opportunity for comment and the preamble
was at odds with evidence of Congress’ purposes).
SWOBEN V. UNITED HEALTHCARE 33
Loan Ass’n, 458 U.S. at 158 (“Any ambiguity in [the
regulation’s] language is dispelled by the preamble
accompanying and explaining the regulation.”).
Consequently, ignoring the good faith and due diligence
requirements would not have been objectively reasonable.
The defendants also contend their § 422.504(l)
certifications could not have been false because they offered
only a qualified certification of their risk adjustment data,
“based on best knowledge, information, and belief.” Joint
Suppl. Br. 5–6. They rely on United States v. Ekelman &
Associates, Inc., 532 F.2d 545, 550 (6th Cir. 1976) (“In
certifying the truth of the information in the application ‘to
the best of its knowledge and belief’ Franklin did no more
than assert that it had no knowledge of, nor intention to make,
misrepresentations.”). Ekelman is distinguishable on a
number of grounds. First, § 422.504(l)’s “best knowledge,
information, and belief” standard is informed by the 2000
preamble, which makes clear the standard encompasses due
diligence, good faith, reckless disregard and deliberate
ignorance. See 65 Fed. Reg. at 40,268. In this sense,
§ 422.504(l)’s “best knowledge, information, and belief”
standard is similar to the “best of the person’s knowledge,
information, and belief” standard under Federal Rule of Civil
Procedure 11, under which an attorney’s “signature certifies
to the court that the signer has read the document, has
conducted a reasonable inquiry into the facts and the law and
is satisfied that the document is well grounded in both, and is
acting without any improper motive.” Bus. Guides, Inc. v.
Chromatic Commc’ns Enters., Inc., 498 U.S. 533, 542 (1991).
Second, in contrast to Ekelman, this is not a case in which it
is clear the defendants lacked any “intention to make[]
misrepresentations.” Ekelman, 532 F.2d at 550. Swoben’s
allegations support the inference that the defendants certified
34 SWOBEN V. UNITED HEALTHCARE
that they believed the risk adjustment data were complete and
accurate even though they did not believe that to be the case.
Third, Ekelman was decided in 1976, a decade before
Congress amended the False Claims Act to include a
deliberate ignorance standard. See False Claims
Amendments Act of 1986, Pub. L. No. 99-562, § 2, 100 Stat.
3153 (1986) (codified as amended at 31 U.S.C. § 3729(b)(1)).
The deliberate ignorance standard does not allow a contractor
to deliberately turn a blind eye to reporting errors and then
attest that, to its knowledge, they do not exist.
Finally, notwithstanding the certification and compliance
regulations discussed in this opinion, the defendants invoke
a separate regulation, 42 C.F.R. § 422.310(d), to argue they
reasonably believed they were not required to take any
affirmative steps to find unsupported diagnosis codes. Joint
Suppl. Br. 6–7. In relevant part, § 422.310(d) states that
Medicare Advantage “organizations must submit data that
conform to CMS’ requirements for data equivalent to
Medicare fee-for-service data, when appropriate, and to all
relevant national standards.” 42 C.F.R. § 422.310(d).
According to the defendants, because CMS does not verify
diagnosis codes submitted to it by third-party medical
providers under the Medicare fee-for-service program, this
provision means Medicare Advantage organizations were not
required to verify diagnosis codes either. We reject the
defendants’ contention, again for multiple reasons. First,
because nothing in § 422.310(d) speaks to a Medicare
Advantage organization’s obligations to ensure the
accuracy of risk adjustment data, it does not modify a
Medicare Advantage organization’s obligations under
§§ 422.503(b)(4)(vi) and 422.504(l). Second, this is not a
case about whether Medicare Advantage organizations have
to take affirmative steps to verify risk adjustment data. The
SWOBEN V. UNITED HEALTHCARE 35
defendants indisputably took such steps by conducting
retrospective reviews. This is a case about whether such
organizations, having adopted affirmative verification
procedures, have to conduct them in good faith.
In sum, we conclude Swoben’s proposed fourth amended
complaint adequately pleads a cognizable legal theory.
B. The Proposed Fourth Amended Complaint Alleges
Sufficient Factual Matter to Satisfy Rules 8, 9(b)
and 12(b)(6) or May Be Amended to Do So
The parties also dispute whether Swoben’s proposed
fourth amended complaint satisfies Rule 8 and 9(b).
1. Under Rule 8, we assume the veracity of a complaint’s
factual allegations and then determine whether they plausibly
give rise to an entitlement to relief. See Corinthian Colls.,
655 F.3d at 991. “A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the
misconduct alleged.” Id. (quoting Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009)).
Claims under the False Claims Act are also subject to
Rule 9(b). See id. at 992; Cafasso, U.S. ex rel. v. Gen.
Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054 (9th Cir. 2011);
Bly-Magee, 236 F.3d at 1018. Under Rule 9(b), a plaintiff
“must state with particularity the circumstances constituting
fraud.” Fed. R. Civ. P. 9(b). This means the plaintiff must
allege “the who, what, when, where, and how of the
misconduct charged,” Ebeid ex rel. United States v. Lungwitz,
616 F.3d 993, 998 (9th Cir. 2010) (quoting Vess v. Ciba-
Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003)),
36 SWOBEN V. UNITED HEALTHCARE
including what is false or misleading about a statement, and
why it is false, see id. Knowledge, however, may be pled
generally. See Corinthian Colls., 655 F.3d at 996.
Under our case law, Rule 9(b) serves two principal
purposes. First, “allegations of fraud must be ‘specific
enough to give defendants notice of the particular misconduct
which is alleged to constitute the fraud charged so that they
can defend against the charge and not just deny that they have
done anything wrong.’” Bly-Magee, 236 F.3d at 1019
(quoting Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir.
1993)). Thus, “[p]erhaps the most basic consideration for a
federal court in making a judgment as to the sufficiency of a
pleading for purposes of Rule 9(b) . . . is the determination of
how much detail is necessary to give adequate notice to an
adverse party and enable that party to prepare a responsive
pleading.” 5A Charles Alan Wright & Arthur R. Miller,
Federal Practice and Procedure § 1298 (3d ed. 2016).
Second, the rule serves “to deter the filing of complaints
as a pretext for the discovery of unknown wrongs, to protect
defendants from the harm that comes from being subject to
fraud charges, and to prohibit plaintiffs from unilaterally
imposing upon the court, the parties and society enormous
social and economic costs absent some factual basis.” Bly-
Magee, 236 F.3d at 1018 (alteration omitted) (quoting In re
Stac Elec. Sec. Litig., 89 F.3d 1399, 1405 (9th Cir. 1996)).
By requiring some factual basis for the claims, the rule
protects against false or unsubstantiated charges. See id.
(citing Rolo v. City Investing Co. Liquidating Trust, 155 F.3d
644, 658 (3d Cir. 1998)).
Consistent with these requirements, “mere conclusory
allegations of fraud are insufficient.” Wool v. Tandem
SWOBEN V. UNITED HEALTHCARE 37
Computers Inc., 818 F.2d 1433, 1439 (9th Cir. 1987),
overruled on other grounds as stated in Flood v. Miller, 35 F.
App’x 701, 703 n.3 (9th Cir. 2002). Broad allegations that
include no particularized supporting detail do not suffice, see
Bly-Magee, 236 F.3d at 1018, but “statements of the time,
place and nature of the alleged fraudulent activities are
sufficient,” Wool, 818 F.2d at 1439. Because this standard
“does not require absolute particularity or a recital of the
evidence,” Wright & Miller, supra, § 1298, a complaint need
not allege “a precise time frame,” “describe in detail a single
specific transaction” or identify the “precise method” used to
carry out the fraud, Cooper v. Pickett, 137 F.3d 616, 627 (9th
Cir. 1997). The complaint also need not “identify
representative examples of false claims to support every
allegation.” Ebeid, 616 F.3d at 998. “[I]t is sufficient to
allege ‘particular details of a scheme to submit false claims
paired with reliable indicia that lead to a strong inference that
claims were actually submitted.’” Id. at 998–99 (quoting
United States ex rel. Grubbs v. Ravikumar Kanneganti,
565 F.3d 180, 190 (5th Cir. 2009)).10
Here, the proposed fourth amended complaint satisfies
Rule 9(b) with respect to some defendants but not others.
With respect to defendants United Healthcare and HealthCare
Partners, the complaint offers more than broad allegations
lacking supporting detail and provides a strong factual basis
for Swoben’s claims. For instance, concerning United
10
Although many courts require less particularity “when some matters
are beyond the knowledge of the pleader and can only be developed
through discovery,” Wright & Miller, supra, § 1298, we declined to apply
that principle to claims under the False Claims Act in Ebeid, 616 F.3d at
999.
38 SWOBEN V. UNITED HEALTHCARE
Healthcare, operating as Secure Horizons, the complaint
alleges:
Between and during about 2005 and about
2007, Secure Horizons used software, such as
Plan Data Management, to create lists of
patients whose medical charts were to be
reviewed. These lists showed the patients that
were susceptible of having . . . diagnoses that
had not been previously reported, and
identified the . . . diagnosis codes that were
believed to be unreported. Secure Horizons
provided these lists to its contracted medical
groups and [independent physician
associations (IPAs)], including but not limited
to HealthCare Partners, who in turn had the
lists used by coders to review the charts of the
listed patients to determine whether the
reviewed charts supported the . . . diagnosis
codes identified on the lists. Such medical
groups and IPAs, including but not limited to
HealthCare Partners, reported to Secure
Horizons the . . . diagnosis codes that were
supported by properly documented medical
charts that were reviewed, but made no
attempt to determine or report those
previously reported diagnosis codes that were
unsupported by properly documented medical
charts that were reviewed. HealthCare
Partners did so with the knowledge and intent
that the coders’ reviews would only increase,
and not decrease, the number of diagnoses,
and the respective risk scores in order to
increase capitated payments paid by the
SWOBEN V. UNITED HEALTHCARE 39
Government to Secure Horizons, of which
HealthCare Partners received a portion.
Fourth Am. Compl. ¶ 14. These allegations, in the context of
the complaint as a whole, adequately allege the who, what,
when, where and how of the alleged fraud. The complaint
further alleges:
During or after June 2008, HealthCare
Partners utilized software, HCC Manager, to
evaluate claims data and retrospectively
reviewed the medical charts of tens of
thousands of HealthCare Partners’ patients
with severe illnesses. HealthCare Partners did
so, even though the manufacturer of HCC
Manager advised HealthCare Partners that the
software should not be used for retrospective
reviews because such use would create
Medicare compliance violations. HealthCare
Partners used the data generated by HCC
Manager for prospective care, as well as
retrospective review, of its Medicare patients’
medical charts for previous years’
submissions.
Fourth Am. Compl. ¶ 16. These allegations too include the
level of particularity Rule 9(b) requires.
With respect to defendants Aetna, WellPoint and Health
Net, by contrast, the complaint offers only broad allegations
lacking particularized supporting details. As a typical
example, the complaint alleges that, “[b]eginning in or about
2005 and at least once per year thereafter,” these “Defendant
HMOs” “retained coding companies and/or purchased
40 SWOBEN V. UNITED HEALTHCARE
specialized software to perform retrospective reviews of the
medical charts of tens of thousands of their patients with
severe illnesses.” Fourth Am. Compl. ¶ 12.
The coders conducted their review of the
medical charts of tens of thousands of
defendants’ patients, determined the diagnosis
codes that were supported by proper
documentation of the reviewed medical
charts, and provided their results to the
defendant HMOs. The coders’ reviews
resulted in (a) diagnosis codes that were
supported by proper documentation . . . that
had been previously submitted to the
Government, and (b) new diagnosis codes that
were supported by proper documentation . . .
that had not been previously submitted to the
Government. However, a large number of the
reviewed medical charts did not contain
proper documentation supporting the
previously submitted diagnosis codes.
Fourth Am. Compl. ¶ 13. These allegations may be sufficient
to “give defendants notice of the particular misconduct which
is alleged to constitute the fraud charged so that they can
defend against the charge,” but they are insufficient to show
the allegations against these defendants have a “factual
basis.” Bly-Magee, 236 F.3d at 1018–19. The allegations
describe some details of a generalized scheme, but they
provide no details linking these defendants to the scheme.
Such allegations are insufficient under Rule 9(b).
There is a significant gap between Swoben’s relatively
detailed allegations involving United Healthcare and
SWOBEN V. UNITED HEALTHCARE 41
HealthCare Partners on the one hand and his comparatively
conclusory allegations regarding Aetna, WellPoint and Health
Net on the other. Swoben alleges, for example, that United
Healthcare “paid its contracted medical groups and IPAs,
including but not limited to HealthCare Partners, between $40
and $45 for every medical chart reviewed by them in 2005.”
Fourth Am. Compl. ¶ 12. He alleges Pam Leal, a United
Healthcare employee, was involved in the development of
the allegedly faulty template used to report diagnosis codes
to CMS. Fourth Am. Compl. ¶ 22. With respect to Aetna,
WellPoint and Health Net, by contrast, the complaint offers
only general allegations, lacking in similar details. Although
the complaint broadly alleges these defendants engaged in
biased retrospective reviews designed to identify only under-
reporting errors, the absence of any details regarding these
particular defendants prevents us from concluding the claims
are sufficiently substantial to satisfy Rule 9(b). We have
consistently rejected False Claims Act claims based on
similarly broad and conclusory allegations. See Ebeid,
616 F.3d at 1000 (holding the complaint’s “general
allegations – lacking any details or facts setting out the who,
what, when, where, and how of the [alleged fraud]” – were
insufficient to satisfy Rule 9(b) (internal quotation marks
omitted)); Cafasso, 637 F.3d at 1057 (holding the complaint
failed to satisfy Rule 9(b) where the allegations were lacking
in detail); United States ex rel. Lee v. SmithKline Beecham,
Inc., 245 F.3d 1048, 1051 (9th Cir. 2001) (holding a “broad
claim” with “no factual support” was insufficient to satisfy
Rule 9(b)). Without these details, the complaint does not
“supply reasonable indicia that false claims were actually
submitted.” Ebeid, 616 F.3d at 999.
In sum, we hold the proposed fourth amended complaint
satisfies Rule 9(b) with respect to United Healthcare and
42 SWOBEN V. UNITED HEALTHCARE
HealthCare Partners, but not with respect to Aetna, WellPoint
and Health Net.
2. Swoben, however, may be able to cure these
deficiencies by further amendment. Dismissals under Rule
9(b) are functionally equivalent to dismissals under Rule
12(b)(6). See Swartz v. KPMG LLP, 476 F.3d 756, 765 (9th
Cir. 2007). Leave to amend, therefore, should be granted
unless the pleading “could not possibly be cured” by the
allegation of other facts. Bly-Magee, 236 F.3d at 1019. On
the record before us, we cannot say Swoben would be unable
to plead with particularity the details missing from the fourth
amended complaint with respect to Aetna, WellPoint and
Health Net. See, e.g., Corinthian Colls., 655 F.3d at 995–96;
SmithKline, 245 F.3d at 1054; Bly-Magee, 236 F.3d at 1019.
We recognize Swoben has previously amended his
pleadings three times. As a general rule, leave to amend may
be denied when a plaintiff has demonstrated a “repeated
failure to cure deficiencies by amendments previously
allowed.” Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d
1048, 1052 (9th Cir. 2003) (quoting Foman v. Davis,
371 U.S. 178, 182 (1962)). This is not a case, however, in
which Swoben “took ‘three bites at the apple’ by alleging and
re-alleging the same theories in an attempt to cure pre-
existing deficiencies.” Id. at 1053. The defendants’ motions
to dismiss were the first pleadings to attack the sufficiency of
Swoben’s allegations, the current decisions by the district
court and this court are the first to address the sufficiency of
those allegations, and Swoben is seeking his first opportunity
to cure those deficiencies. Swoben also alleges a novel legal
claim, and this opinion substantially clarifies what allegations
would be sufficient to assert such a claim. Swoben should be
SWOBEN V. UNITED HEALTHCARE 43
afforded an additional opportunity to present an adequate
pleading.
3. The defendants’ remaining arguments regarding Rule
9(b) are not persuasive.
The defendants argue Swoben’s pleadings are insufficient
because they “do not describe any specific instances of
falsity, let alone any such instances with particularity by
identifying the time, place, and manner of the alleged falsity,
the person making the false representation, or what they
obtained thereby.” Joint Answering Br. 35; see also id. at
40–41. As noted, however, the plaintiff need not “identify
representative examples of false claims to support every
allegation.” Ebeid, 616 F.3d at 998. “[I]t is sufficient to
allege ‘particular details of a scheme to submit false claims
paired with reliable indicia that lead to a strong inference that
claims were actually submitted.’” Id. at 998–99 (quoting
Grubbs, 565 F.3d at 190). Swoben, therefore, need not
identify specific false § 422.504(l) certifications.11
The defendants also argue Swoben’s pleadings “fail[] to
identify a single instance where previously submitted codes
11
The defendants’ argument in their petition for rehearing en banc that
a plaintiff can satisfy Rule 9(b) only by alleging representative examples
of false claims is undercut by the Supreme Court’s recent decision in
United Health Services, 136 S. Ct. at 1996, rebuffing a similar attempt to
cabin False Claims Act liability through artificial limits. The Court
rejected the contention that liability attaches only to express false
certifications rather than implied false certifications, reasoning that what
matters is the substance of the claim. Similarly, what matters here is
whether the complaint adequately pleads the circumstances of fraud to
satisfy the dual purposes of Rule 9(b), not whether the complaint employs
a particular means of doing so.
44 SWOBEN V. UNITED HEALTHCARE
were inconsistent with those identified during the
retrospective reviews, or to explain why any such
inconsistencies would necessarily lead to false claims.” Joint
Answering Br. 35. Under Swoben’s theory, however, the
false claims are the allegedly false § 422.504(l) certifications,
not the erroneously reported diagnosis codes. See Hendow,
461 F.3d at 1171 (explaining that it “is the false certification
of compliance which creates liability when certification is a
prerequisite to obtaining a government benefit”). Swoben
need not identify specific diagnosis codes that should have
been withdrawn.
The defendants next fault the proposed fourth amended
complaint for using (often, though not exclusively) collective
allegations to refer to the defendants rather than
differentiating among them. Joint Answering Br. 38. The
defendants are correct that “Rule 9(b) does not allow a
complaint to merely lump multiple defendants together but
requires plaintiffs to differentiate their allegations when suing
more than one defendant and inform each defendant
separately of the allegations surrounding his alleged
participation in the fraud.” Corinthian Colls., 655 F.3d at
997–98 (quoting Swartz, 476 F.3d at 764–65). A plaintiff
must “identify the role of each defendant in the alleged
fraudulent scheme.” Id. (quoting Swartz, 476 F.3d at 765).
There is no flaw in a pleading, however, where collective
allegations are used to describe the actions of multiple
defendants who are alleged to have engaged in precisely the
same conduct. The flaw in Swoben’s allegations is not the
use of collective allegations, but the failure to allege
particular details of the scheme as applied to defendants
Aetna, WellPoint and Health Net.
SWOBEN V. UNITED HEALTHCARE 45
Finally, the defendants argue with respect to the RADV
audits that “Swoben fails to provide any of the particular
details required by Rule 9(b), . . . which would be necessary
for these allegations to have any relevance to the Defendants’
knowledge or intent.” Joint Answering Br. 42. As noted,
however, knowledge need not be pled with particularity. See
Fed. R. Civ. P. 9(b); Odom v. Microsoft Corp., 486 F.3d 541,
554 (9th Cir. 2007). The defendants’ argument therefore falls
short.
In sum, we hold Swoben’s pleadings either satisfy Rules
8, 9(b) and 12(b)(6) or might be able to do so through further
amendment. Because the complaint also alleges a cognizable
legal theory, amendment would not be futile. The district
court abused its discretion by denying leave to amend on this
ground.
II. The District Court Abused its Discretion By Denying
Leave to Amend Based on Undue Delay
The district court alternatively denied leave to amend
“based on undue delay” because “Swoben was aware of the
purportedly ‘new’ allegations he proposes to add to the
Fourth Amended Complaint since at least 2005.”
We conclude the district court abused its discretion by
relying on undue delay. Undue delay by itself is insufficient
to justify denying leave to amend, see Owens v. Kaiser
Found. Health Plan, Inc., 244 F.3d 708, 712–13 (9th Cir.
2001), and the record here does not support any additional
ground – such as prejudice or bad faith, see Johnson v.
Mammoth Recreations, Inc., 975 F.2d 604, 607 (9th Cir.
1992) – that would justify the denial of leave to amend in
combination with undue delay.
46 SWOBEN V. UNITED HEALTHCARE
The defendants’ argument they would be prejudiced by
affording Swoben leave to amend is unpersuasive. They fault
Swoben for failing to announce his intention to seek leave to
amend during the meet-and-confer conferences preceding the
filing of their motions to dismiss. See C.D. Cal. R. 7-3. They
argue that, if Swoben had announced his intention to seek
amendment at that time, they could have avoided the expense
of preparing their motions to dismiss. In the absence of bad
faith, however, litigation expenses incurred before a motion
to amend is filed do not establish prejudice. See Owens,
244 F.3d at 712. More broadly, the defendants have not
shown prejudice here. The litigation against these defendants
is at a very early stage, Swoben does not seek to assert a new
legal theory and this is Swoben’s first attempt to cure
deficiencies in his complaint. The circumstances of this case
stand in stark contrast to those in the cases on which the
defendants rely. See AmerisourceBergen Corp. v. Dialysist
W., Inc., 465 F.3d 946, 953–54 (9th Cir. 2006) (the plaintiff
sought leave to amend a reply to a counterclaim to assert a
new legal theory, which “would have unfairly imposed
potentially high, additional litigation costs . . . that could have
easily been avoided”); Ascon Props., Inc. v. Mobil Oil Co.,
866 F.2d 1149, 1160–61 (9th Cir. 1989) (the defendant had
filed several motions to dismiss over several years of active
litigation, the plaintiff had been given several opportunities
to cure the deficiencies in the complaint, the plaintiff had
prosecuted the action in a dilatory fashion and the plaintiff
sought to amend the complaint to assert a new legal theory).
CONCLUSION
The district court abused its discretion by dismissing
Swoben’s third amended complaint without leave to amend
based on futility of amendment and undue delay. The
SWOBEN V. UNITED HEALTHCARE 47
judgment is vacated and the case is remanded for further
proceedings.
VACATED AND REMANDED. Costs on appeal are
awarded to Swoben.