Addressing a recent motion to dismiss, the Northern District of California predominantly denied Kaiser Permanente’s (“Kaiser”) motion to dismiss the government’s complaint in United States ex rel. Osinek v. Permanente Medical Group, Inc., and the court is allowing the government leave to amend to attempt to address any short-fallings within its complaint. No. 13-CV-03891-EMC, 2022 WL 16925963 (N.D. Cal. Nov. 14, 2022).  A motion to dismiss is not outcome determinative of the ultimate merits of a case, and for purposes of the court’s analysis the alleged facts and theories are construed by the court in the light most favorable to the party whose action would be dismissed, in this case the government’s complaint. 

As we discussed in Managed Care & The FCA: Are Courts Getting It Right?, this case is premised on whether Kaiser submitted false claims for payments when it allegedly augmented patient medical records to add diagnoses that either did not exist or were unrelated to the patient’s visit with the Kaiser physician. The court first considered whether the Government’s theories of liability were predicated on factual falsity, legal falsity, or both.

The court found that factual falsity could be implicated in two ways: (1) if a diagnosis of a medical condition was claimed but the medical condition did not exist (i.e., the diagnosis was clinically inaccurate) and (2) if a claim for payment was based on a diagnosis of a medical condition that did exist, but the condition did not “require or affect patient care, treatment, or management” for the visit (i.e., the codes were used in contravention of the ICD Guidelines.)

Similarly, the court stated legal falsity also could be found because, in the court’s view, contracts and federal regulations required Kaiser to comply with the ICD Guidelines – which only permit the coding of documented conditions that both exist at the visit and require or affect patient treatment or management.

Clinically Inaccurate Diagnoses Codes

In regards to the government’s first theory of liability that Kaiser allegedly had patient medical records amended to add diagnoses that did not exist, one of Kaiser’s arguments was the government failed to plead factual falsity. The Court found that even though the government sufficiently pled three instances of clinically inaccurate diagnoses within the medical record, the government could not claim that Kaiser had a scheme to include nonexistent diagnoses in patients’ medical records based on only three instances alone as “scattered anecdotes alone will not suffice.”

However, the court did find the government alleged a plausible scheme with respect to one specific disease – cachexia (a “wasting disorder” related to extreme weight loss and muscle wasting).  In the government’s complaint, the government cited to alleged internal communications at Kaiser discussing how cachexia “would help them ‘Find $100 million dollars in NCal.’; alleged the Northern California Medical Group created a data-mining algorithm to identify potential cachexia diagnosis, and asserted the majority of those patients did not actually have cachexia. In response, Kaiser argued cachexia is based on clinical judgment rather than clinical indicators. While the court agreed this argument has merit, as all reasonable inferences are to be made in the government’s favor at this motion to dismiss stage, the court has allowed the government’s allegations specific to cachexia to continue forward.

Diagnoses Unrelated to Doctors’ Visits

The government’s second theory of liability alleged Kaiser amended patient medical records by adding diagnoses that were not related to the doctors’ visits. Here, the government argued both the CMS/Kaiser contract and federal regulations required Kaiser to comply with ICD Guidelines, and the government argued that under the ICD Guidelines, a diagnosis can be made on a medical record only if it required or affected patient care treatment or management at the doctor’s visit.  Kaiser argued that neither the contract nor regulations required Kaiser to comply with the ICD Guidelines, considering the Guidelines at best “sub-regulatory” documents that lack the force of law. 

The court found notable the CMS/Kaiser Contract incorporated by reference the CMS Medicare Managed Care Manual, which in turn incorporated the ICD Guidelines. While Kaiser argued it would be improper to bind on Kaiser a reference that resulted from two general incorporations by reference, the Court took consideration of Kaiser being a sophisticated entity, and the court suggested that no contract “is too complicated for an entity like Kaiser to understand.”

Even if the contract did not require Kaiser to comply with the ICD Guidelines, the court also found the general regulatory scheme requires such compliance as well. The court noted 42 C.F.R. § 422.310(d)(1) (relating to risk adjustment data) states, “MA organizations must submit data that conform to [1] CMS’ requirements for data equivalent to Medicare fee-for-service data, when appropriate, and to [2] all relevant national standards.” The government then pointed to another regulation – 45 C.F.R. § 162.1002 – where the Secretary adopted the ICD Guidelines as one of the national standards.

Materiality

In regard to materiality, Kaiser argued, even if the government has made a plausible case for falsity, the court must still dismiss the case because “the government has not adequately alleged that the false statement regarding compliance with the ICD Guidelines was material.” But, the court quickly decided misrepresentations that impact risk adjustment payments “[c]an undoubtedly have a substantial financial effect on the MA program” as these are a core element of the managed care program, citing both the CMS Medicare Managed Care Manual and Kaiser’s internal documents.

Next Steps

The government amended its complaint on December 12, 2022 in attempt to add additional details to support its factual falsity claim (i.e., that there was a scheme to amend patient records to add a clinically inaccurate diagnosis for other diseases in addition to cachexia). Kaiser has until January 3, 2023 to file a response.

We are watching closely the developing case law in this area to see how courts square materiality and falsity elements of the FCA with enforcement overreach.