In re Envision Healthcare Corp. Sec. Litig.

In re ENVISION HEALTHCARE CORPORATION SECURITIES LITIGATION

This Document Relates To: ALL ACTIONS

NO. 3:17-cv-01112

C/w Case No. 3:17-cv-01323

C/w Case No. 3:17-cv-01397

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE NASHVILLE DIVISION

November 19, 2019

JUDGE CAMPBELL

MAGISTRATE JUDGE FRENSLEY

MEMORANDUM

Pending before the Court is Defendant Envision Healthcare Corporation and the Individual Defendants' Motion to Dismiss the Consolidated Amended Complaint (Doc. No. 125). Also pending before the Court is a motion to dismiss filed by Clayton, Dublier & Rice, LLC, CD&R Associations VIII Ltd., Clayton Dubilier & Rice Fund VIII, L.P., CD&R EMS Co-Investor, L.P., CD&R Advisor Fund VIII Co-Investor, L.P., and CD&R Friends and Family Fund VIII, L.P. (the "CD&R Defendants") (Doc. No. 122). Plaintiffs filed a consolidated response in opposition to both motions (Doc. No. 131). Defendant Envision Healthcare Corporation and the Individual Defendants filed a Reply (Doc. No. 133) and the CD&R Defendants filed a Reply (Doc. No. 132). For the following reasons, the motion to dismiss by the CD&R Defendants is GRANTED, and the motion to dismiss by Envision and the Individual Defendants is GRANTED in part, DENIED in part.

I. BACKGROUND

A. Procedural Background

On August 4, 2017, Plaintiff Terry W. Bettis filed an initial complaint against Envision Healthcare Corporation and four individual defendants: William A. Sanger, Randel G. Owen, Christopher A. Holden, and Claire M. Gulmi (Doc. No. 1). That initial complaint alleged violations of the Securities Act of 1933 (the "1933 Act") and the Securities Exchange Act of 1934 (the "1934 Act"). (Id. ¶¶ 63-78). The case brought by Beattis was consolidated with two related cases: Carpenters Pension Fund of Illinois v. Envision Healthcare Corporation, Case No. 3:17-cv-01323 (M.D. Tenn., Sept. 29, 2017); and Central Laborers' Pension Fund v. Envision Healthcare Corporation, Case No. 3:17-cv-01397 (M.D. Tenn., October 23, 2017). (See Doc. Nos. 58 and 60). The Plaintiffs filed a Consolidated Class Action Complaint on January 26, 2018 (Doc. No. 88), alleging violations of the 1933 Act and the 1934 Act against Envision Healthcare Corporation, the private equity firm, Clayton, Dubilier & Rice, LLP ("CD&R"), four CD&R-associated companies (together with CD&R, the "CD&R Defendants"), and twenty-three (23) individual defendants.

B. The Parties

Plaintiffs bring this action on behalf of all entities or individuals who purchased or acquired Envision's common stock between February 3, 2014, and October 31, 2017 (the "Class Period"). The Complaint identifies four institutional investors as lead/named Plaintiffs: Laborers' Pension Trust Fund for Northern California (lead Plaintiff); Laborers' International Union of North America National Industrial Fund (lead Plaintiff); Central Laborers' Pension Fund (named Plaintiff); and United Food and Commercial Workers Union Local 655 Food Employers Joint Pension Fund (named Plaintiff). (Id. ¶¶ 25-28).

Defendant Envision Healthcare Corporation ("Envision")¹ is headquartered in Nashville, Tennessee. EmCare is a subsidiary of Envision and its largest business unit - generatingapproximately 60% of Envision's net revenue (Id. ¶¶ 1-2). EmCare provides "facility-based physician services," which is essentially physician staffing for hospital emergency rooms. (Id.) On December 1, 2016, Envision merged with AMSURG Corp. ("AmSurg"). (Id. ¶ 257). The combined company continued to operate EmCare and other legacy Envision and AmSurg services. (Id. ¶¶ 1-2).

The Complaint identifies 23 Individual Defendants, which have been grouped by Plaintiffs as follows:

1. The Envision Officer Defendants served as officers of Envision prior to and at the time of the merger: William A. Sanger, Randel G. Owen, Craig A. Wilson, and Todd G. Zimmerman. William A. Sanger was President and CEO of Envision from May 2011 until the AmSurg Merger in December 2016. He served as Chairman of the Envision Board from November 2014 through the Merger, and as Executive Chairman of the Board from December 2016 through December 2017. (Id. ¶ 30). Randel G. Owen was CFO and Executive Vice President (May 2011-November 2016) and Chief Operating Officer (September 2012-November 2016) of Envision. (Id. ¶ 31). Following the merger with AmSurg on December 1, 2016, Owen was Executive Vice President and President of Envision's Ambulatory Service Group. (Id.) Plaintiffs allege Owen signed certifications accompanying each of the annual reports (Form 10-K) and quarterly reports (Form 10-Q) issued by Envision before the merger with AmSurg. (Id.) Craig A. Wilson is Senior Vice President, General Counsel, and Secretary of Envision. (Id. ¶ 32). Todd G. Zimmerman was Executive Vice President of Envision from May 2011until the AmSurg merger. (Id. ¶ 32). He also served EmCare as President (April 2010 - April 2015) and CEO (February 2013 - June 2017). (Id.)

2. The Envision Director Defendants, each of whom served as a member of Envision's Board of Directors prior to and at the time of the Merger: Carol J. Burt, Mark V. Mactas, Leonard M. Riggs, Jr., Richard J. Schnall, James D. Shelton, Michael L. Smith, Ronald A. Williams, and William A. Sanger (also an Envision Officer Defendant). (Id. ¶ 35). The following directors joined the new Envision Board after the AmSurg merger: Burt, Riggs, Schnall, Shelton, Smith, and Williams.

3. The AmSurg Officer Defendants, each of whom served as an officer of AmSurg at the time of the Merger and an officer of Envision post-Merger: Christopher A. Holden, Claire M. Gulmi, and Kevin D. Eastridge. (Id. ¶¶ 37-40). Christopher Holden has been President and CEO of Envision since the December 1, 2016, merger with AmSurg. (Id. ¶ 37). Following the merger, Holden signed certifications accompanying each of the annual reports (Form 10-K) and quarterly reports (Form 10-Q) issued by Envision. Claire M. Gulmi was Executive Vice President and CFO of Envision from December 1, 2016, to October 2, 2017. (Id. ¶ 38). During that time, she signed certifications accompanying each of the annual reports (Form 10-K) and quarterly reports (Form 10-Q) issued by Envision. (Id.) Kevin D. Eastridge was Senior Vice President, Finance and Chief Accounting Officer of Envision from December 1, 2016, to October 2, 2017, and Envision's CFO thereafter. (Id. ¶ 39).

4. The AmSurg Director Defendants, each of whom served as a member of AmSurg's Board of Directors at the time of the Merger: Christopher A. Holden, Claire M. Gulmi, Kevin D. Eastridge, Thomas G. Cigarran, James A. Deal, John T. Gawaluck, Steven I. Geringer, HenryD. Herr, Joey A. Jacobs, Kevin P. Lavender, Cynthia S. Miller, and John W. Popp, Jr. (Id. ¶ 41).

The Complaint also names as defendants four CD&R funds, the general partner of those funds, and an independent investment advisor, Clayton, Dubilier & Rice LLC and refers to them all as CD&R.² (Id. ¶ 43). CD&R includes CD&R LLC, CD&R Associated VIII Ltd., CD&R Fund VIII, L.P., CD&R EMS Co-Investor, L.P., CD&R Advisor Fund VIII Co-Investor L.P., and CD&R Friends and Family Fund VIII L.P. According to Plaintiffs, CD&R "formed Envision in May 2011 ... and owned over 97% of Envision at the time of [Envision's] IPO" in 2013. (Id.) CD&R had the right to designate the chairperson of Envision as long as they held 30% of the Envision stock, which was until March 2015, when CD&R sold all of its remaining Envision stock. (Id.) CD&R designated Envision Director Defendants Schnall, Giurico, and Williams. (Id.) Williams served as Chairman of the Board from May 2011 to November 2014, and Schnall and Williams remained on the Board until March and October 2017, respectively. (Id.)

C. Factual Background

1. The Alleged Fraudulent Scheme

The overarching allegations of the Complaint are that Envision artificially inflated its earnings through out-of-network billing, illegal upcoding, and inflated facility spending, and failed to disclose to investors that these business practices were substantially responsible for EmCare's revenue growth. Between 2013 and 2016, EmCare almost doubled its annual revenue from $2.3 billion to $4.2 billion. (Compl., Doc. No. 88, ¶ 3). Plaintiffs allege EmCare intentionally staffedits emergency rooms with out-of-network physicians, which allowed it to bill health insurers and patients at "vastly higher rates" and reap the associated profits. (Id. ¶ 5). Plaintiffs also allege EmCare engaged in illegal upcoding - billing for services using a billing code that is more expensive than the code associated with services the patient actually received or required. (Id. ¶ 6). In a similar vein, Plaintiffs allege EmCare increased facility spending for its hospital partners by increasing hospital admission and imaging rates without regard to medical necessity. (Id. ¶ 7). Increased facility spending had the dual benefit of increasing EmCare's revenue and increasing revenues for the hospitals with which it contracted. As a result, Plaintiffs allege, EmCare was able to parlay this increase in hospital revenue into more contracts and thereby increase its own revenue. (Id. ¶¶ 4, 7, 64-65).

According to Plaintiffs, EmCare's out-of-network billing, upcoding, and increased facility spending were uncovered by a study published by the National Bureau of Economic Research (the "NBER study") and brought to public attention by a New York Times article (the "Article") published on July 24 (online) and 25 (print), 2017.³ (Id. ¶¶ 15, 16).

The Article reported that the NBER study examined data provided by one insurance company for the time period 2011 to 2015 and found that many of the emergency rooms with the highest rate of out-of-network billing were run by EmCare. (Doc. No. 127-39). The NBER study focused on 16 hospitals that EmCare entered between 2011 and 2015 and found that in eight ofthose hospitals, out-of-network billing rose "quickly and precipitously." (Id. at 5). The NBER study also looked at a larger sample of EmCare...