The Ninth Circuit recently dismissed a relator’s False Claims Act (“FCA”) case for failing to satisfy its pleading requirements under Rule 8(a) of the Federal Rules of Civil Procedure, holding that the relator failed to state a plausible claim for relief because its allegations did not eliminate an obvious alternative. The Court found that the relator’s “possible” explanation that the defendants lied about underlying medical conditions clearly ignored the more plausible explanation that the defendants were more effective at properly coding for better Medicare reimbursement than others in the health care industry.
The defendant hospital, one of the largest health systems in the country, contracted with the defendant company to assist its “clinical documentation improvement” (“CDI”) program. The CDI program translates clinical language used by medical-treatment providers to Medicare codes to optimize a hospital’s Medicare reimbursements.
Medicare reimburses on a per-discharge basis, and the payment depends largely on the patient’s “diagnosis related group” (“DRG”). Three codes contribute to the DRG: (1) principal-diagnosis code; (2) surgical-procedure codes; and (3) secondary-diagnosis codes.
The secondary-diagnosis codes are at issue in this case. These codes represent “all conditions that co-exist at the time of admission, that develop subsequently, or that affect the treatment received [or] length of stay.” These secondary-diagnosis codes can modify the base DRG’s severity level to one of three levels: (1) without complication or major complication; (2) complication or comorbidity (“CC”); and (3) major complication or comorbidity (“MCC”). The inclusion of a CC or MCC code can significantly increase the amount of reimbursement that hospitals receive from Medicare.
Using publicly available data it received from the Centers for Medicare & Medicaid Services (“CMS”), the relator concluded that the defendants submitted claims coded with a higher rate of MCCs than other comparable institutions. The relator did not rely on any insider information such as confidential patient medical records. Rather, the relator relied upon “proprietary statistical analysis” of CMS data and found that the defendants submitted claims coded with a higher rate of MCCs than other comparable institutions.
Without any information outside of the publicly available CMS data, the relator concluded that the defendants lied about underlying medical conditions to obtain a higher rate of MCCs.
The court began its analysis with the essential elements of an FCA claim:
- A false statement or fraudulent course of conduct,
- Made with the scienter,
- That was material, causing
- The government to pay out money or forfeit moneys due.
The defendants’ appeal only contests the first element, whether the relator adequately pleaded false or fraudulent conduct.
Pleading Fraud Under the FCA
All fraud allegations under the FCA must comply with Rules 8(a) and 9(b) of the Federal Rules of Civil Procedure. Rule 8(a) requires a pleading contain a plausible claim for relief, while Rule 9(b) imposes a heightened requirement of particularity. Regarding the Rule 8(a) plausibility standard, courts must also consider other “obvious alternative explanations” for a defendant’s behavior. A plaintiff fails to meet its burden under Rule 8(a) if its allegations, without any factual enhancement, simply provide a “possible” explanation for the defendants’ behavior rather than a “plausible” claim.
The Court found that the relator’s complaint only offered a “possible” claim for relief and therefore failed to state a “plausible” claim. In particular, the relator’s reasoning for the defendants’ submitting claims coded with a higher rate of MCCs than other comparable institutions was that the doctors lied about underlying medical conditions. The relator had no basis for this conclusion outside of its own analysis using the publicly available CMS data. While that is a possible explanation, the relator failed to account for “an obvious alternative explanation,” specifically that the defendants were ahead of others within the industry. The hospital specifically hired consultants to improve its Medicare billing, which likely explains why the defendants were more efficient at Medicare reimbursements than others.
While the Court did not specifically address it, it is reasonable that the fact the relator relied on publicly available data rather than insider information prohibited the relator from being able to establish a plausible claim because it could not establish any fraudulent intent on behalf of the defendants. The relator’s conclusion based on proprietary statistical analysis was certainly possible, but it failed to account for the more plausible explanation that the hospital hired the CDI company to be more efficient at Medicare coding, which is an entirely legal and plausible explanation.
Relators must satisfy Rules 8(a) and 9(b) of the Federal Rules of Civil Procedure by pleading a plausible claim for relief with heightened particularity. A claim fails if it merely provides a “possible” claim for relief and fails to meet the Rule 8(a) “plausible” standard if there is another “obvious alternative explanation.” Finally, it is unclear whether a relator may submit a plausible claim by analyzing public data alone or whether it needs insider information to obtain more factual information to support the heightened particularity fraud standard.