A district court in the Southern District of Florida recently denied motions to dismiss filed by a Medicare Advantage (“MA”) plan and MA providers in a case alleging upcoding through fraudulent diagnosing. See United States ex rel. Graves v. Plaza Med. Ctrs. Corp., No. 10-cv-23382 (S.D. Fla. July 6, 2015). The case is one of a growing number of qui tam cases in the Medicare Advantage sphere, mirroring heightened congressional pressure on CMS and DOJ to take steps to combat Medicare Advantage fraud (as previously reported here).

The relator, the former owner of a medical practice now operating as Plaza Medical Centers, filed a qui tam suit alleging that after she sold her practice to Dr. Michael Cavanaugh, he deliberately inflated his Medicare reimbursements by exaggerating the sickness of his patients. CMS reimburses MA plans on a capitated basis, risk-adjusted for the severity of illness in the plan’s patient population. This reimbursement model assumes that patients with certain chronic conditions will typically be more expensive to treat. To ensure that adequate funding flows to the sickest patients, certain ICD-9 codes are associated with a higher risk adjustment factor (“RAF”) score, which triggers additional funding. Providers in MA plan networks are generally compensated through a percentage of the capitated payments received by the plan. The relator alleged that Dr. Cavanaugh engaged in persistent upcoding by diagnosing chronic conditions that were not supported by the patients’ medical records, and similarly, the MA plan acted at least in reckless disregard as to the accuracy of the diagnoses being submitted.

In October 2014, the district court granted defendants’ motions to dismiss with leave to replead. The court ruled that the relator had provided “substantial detail of the alleged scheme to defraud,” but that the complaint nonetheless failed to meet the Rule 9(b) pleading standard because the relator had not brought forth either specific evidence of the submission of false claims, or “some indicia of reliability” to support the allegation that false claims were actually submitted. The relator filed a Second Amended Complaint, and on April 1, 2015, the magistrate judge recommended that defendants’ motions to dismiss that complaint be denied.

On July 6, the district court judge adopted that recommendation, agreeing that the relator’s complaint now satisfied Rule 9(b). The court explained that while the relator’s experience working at Plaza Medical Centers gave her “insider-like knowledge” that buttressed her allegations, the claims did not rest solely on blank assertions of personal knowledge, nor was she being afforded a relaxed pleading standard as an insider. The relator brought forth what the court deemed to be a “representative sample” of 28 patient records, which included information as to changes in these patients’ RAF scores across a three-year period. As a result, the court concluded that the relator “provides specific examples of allegedly fraudulent diagnoses for specific patients and provided allegations not only supporting the fraudulent characterization of those diagnoses and concomitant change in the risk adjustment factors, but also provides the payment amount and time-specific information regarding the claims made to the United States.” The court found this sufficient to meet the heightened Rule 9(b) pleading standard.

Plaza Medical Centers also argued that it should not be held vicariously liable for the conduct of Dr. Cavanaugh. The court rejected this argument, noting that the relator alleged that Cavanaugh was acting within the scope of his employment. The MA plan also argued that the complaint failed to allege that it had knowledge of the fraudulent conduct. However, the court ruled that the plan’s alleged knowledge of the conduct was plausible, “given the allegations and [the plan’s] admission that it was obligated to ‘have in place measures to “detect, correct, and prevent fraud” and that it ‘affirmatively reviewed and audited selected patient files.’”

A copy of the court’s opinion can be found here.