Mazik v. Kaiser Permanente, Inc.

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JEFFREY MAZIK, Plaintiff-Relator, v. KAISER PERMANENTE, INC., et al. Defendants.

No. 19-cv-00559-DAD-KJN

United States District Court, E.D. California

February 13, 2024

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS RELATOR'S FIRST AMENDED COMPLAINT

(DOC. NO. 78)

DALE A. DROZD, UNITED STATES DISTRICT JUDGE

This matter is before the court on the motion to dismiss relator's first amended complaint filed on July 13, 2022 by defendants Kaiser Foundation Health Plan, Inc. (“KFHP”), Kaiser Foundation Hospitals (“KF Hospitals”), The Permanente Medical Group, Inc. Southern California Permanente Medical Group, and Colorado Permanente Medical Group, P.C. (the latter three defendants will be referred to herein collectively as “the PMG defendants”).^[1] (Doc. No. 78.) On October 4, 2022, the pending motion was taken under submission by the previously assigned district judge.^[2] (Doc. No. 92.) For the reasons explained below, defendants' motion to dismiss will be denied in part and granted in part, with leave to amend also being granted.

BACKGROUND

On April 2, 2021, relator Jeffrey Mazik filed his operative first amended complaint (“FAC”) under seal on behalf of the United States of America and the states of California, Colorado, Georgia, Hawai‘i, Maryland Virginia, and Washington (collectively, “the plaintiff states”) against defendants pursuant to the federal False Claims Act, 31 U.S.C. §§ 3279, et seq. (Doc. No. 48.) In his FAC, relator alleges the following.

“Kaiser Permanente” is an “integrated managed care consortium made up of three distinct but interdependent groups of entities:” defendant KFHP, defendant KF Hospitals, and several regional Permanente Medical Groups, including the PMG defendants. (Id. at ¶ 14.) The PMG defendants are groups of physicians that “contract with the other Kaiser entities” to provide medical services. (Id.) Each PMG defendant operates within its individual territory and is funded primarily by reimbursements from its respective regional Kaiser Foundation Health Plan entity. (Id.) Defendant KF Hospitals is a nonprofit corporation headquartered in California that operates hospitals and provides facilities for the benefit of the PMG defendants. (Id.) It also receives its funding from defendant KFHP. (Id.) Defendant KFHP is a nonprofit corporation headquartered in California that enrolls members in health plans and provides medical services for its members through contracts with defendant KF Hospitals and the PMG defendants. (Id.)

Medicare beneficiaries may opt to receive benefits through private health plans instead of the traditional fee-for-service Medicare program. (Id. at ¶ 18.) Under that option, known as Medicare Advantage, the federal government pays Medicare Advantage organizations such as defendants a “capitated” (i.e., per enrollee) amount for the purpose of providing medical benefits. (Id.) The capitated rates vary depending on the health status of the enrollees; less healthy enrollees require more medical care, which necessitates higher capitation reimbursement payments to the Medicare Advantage organizations. (Id. at ¶¶ 19, 20.) Health status in turn depends on the diagnosis codes generated by healthcare providers following encounters with enrollees. (Id. at ¶ 21.) In sum, enrollees see doctors such as those in the PMG defendants, who then provide diagnosis codes to defendant KFHP, which then submits the diagnosis codes to the Centers for Medicare & Medicaid Services (“CMS”). (Id. at ¶¶ 2, 21.) CMS uses the diagnosis codes to adjust the capitation rate for each enrollee, a process known as “risk adjustment” (Id. at ¶ 22.) More severe diagnosis codes lead to higher capitation rates, resulting in greater profits for all defendants-including defendant KF Hospitals and the PMG defendants. (Id. at ¶ 45.) Many government-funded plans other than Medicare Advantage also rely upon “substantially the same model” of risk adjustment for capitation rates, such as state-funded Special Needs Plans and “various state-administered Medicaid programs-such as Medi-Cal in California, and other similar plans of the State Plaintiffs.” (Id. at ¶¶ 33, 34, 36.)

Medicare regulations impose certain requirements on Medicare Advantage organizations such as defendants in an effort to curb the potential for organizations to submit unsupported diagnosis codes, which would lead to improperly high capitation rates and inflated revenues to providers. (Id. at ¶¶ 24, 26.) For instance, Medicare Advantage organizations must adopt and implement “an effective compliance program, which must include measures that prevent, detect, and correct non-compliance with CMS' program requirements as well as measures that prevent, detect, and correct fraud, waste, and abuse.” (Id. at ¶ 28) (quoting 42 C.F.R. § 422.503(b)(4)(vi)). Medicare Advantage organizations must also certify the accuracy, completeness, and truthfulness of the data provided to CMS as a condition of receiving payment. (Id. at ¶ 29) (citing 42 C.F.R. § 422.504). Similarly, the organization must submit an annual attestation signed by its Chief Executive Officer or Chief Financial Officer certifying that the risk adjustment data submitted to CMS is “accurate, complete, and truthful,” acknowledging that risk adjustment data “directly affects the calculation of CMS payments,” and recognizing that “misrepresentations to CMS about the accuracy of such information may result in Federal civil action and/or criminal prosecution.” (Id.) CMS also imposes strict requirements on Medicare Advantage organizations' contractual relationships with entities that provide medical services to the organization's members. (Id. at ¶ 30.) Finally, CMS requires organizations to take corrective actions where necessary to ensure compliance with applicable laws and regulations, including the requirement to perform a “root cause analysis” to identify the source of any potential errors or issues. (Id. at ¶ 31) (citing 42 C.F.R. § 422.504). State-funded Special Needs Plans are expected to follow Medicare Advantage compliance regulations such as those listed above.^[3] (Id. at ¶ 36.)

Relator, a resident of California, is the former “Senior Practice Leader for Kaiser's National Compliance Office” and has over 25 years of experience in fraud control, auditing, and compliance. (Id. at ¶ 10.) He was “employed by Kaiser” from 2008 to 2017, joining as an “Information Technology Audit Specialist” in May 2008 and transitioning to the role of “Senior Practice Leader in the Fraud Control Program” in March 2012. (Id. at ¶ 11.) Relator's duties included working with regional compliance leadership to implement compliance and fraud control initiatives, using data analytics to improve compliance and fraud-mitigation initiatives, investigating potential fraud, and developing corrective action plans to address fraud risks. (Id. at ¶ 12.)

Since 2008 at the latest, defendants have schemed to defraud the federal government by allowing external, i.e., “non-Kaiser,” healthcare providers to submit false diagnosis codes, which defendants in turn submit to CMS in order to inflate their capitation rates. (Id. at ¶¶ 40, 44.) In particular, defendants intentionally fail to properly use fraud-detection tools to monitor claims errors. (Id. at ¶ 46.) Defendants contract with data analytics vendors to review their external provider claims for each region. (Id. at ¶ 47.) The vendors provide software applications that perform various types of reviews. (Id.) For instance, some programs “detect claims that are incorrectly billed . . . [while] other programs identify intentionally manipulated claims that technically fall within plan rules . . . .” (Id.) However, defendants intentionally misused these programs and used them at minimum capacity, such as by disabling key features, in order to reduce the chances of detecting claims errors. (Id. at ¶¶ 48, 49.) In this way, defendants were actively working to avoid detecting and correcting fraudulent claims. (Id. at ¶ 50.)

In late 2015, relator was tasked with comparing the functionalities offered by two claims analytics vendors, McKesson and Verisk, with which defendants routinely contracted. (Id. at ¶¶ 55, 56.) McKesson offers auditing software called ClaimsXten that detects fraudulent billing practices using “a robust set of rules.” (Id. at ¶ 57.) However, defendants chose to deactivate 25 of the 54 rules used by ClaimsXten-“the principal software program that they were supposedly relying on [to] detect such billing fraud.” (Id.) When a group of employees including relator used a Verisk program to double-check data from “the Georgia region” produced by ClaimsXten, the group found $5.3 million in overpayments stemming from defendants' decision to deactivate nearly half the rules in ClaimsXten. (Id. at ¶ 59.) Defendants neither reactivated the disabled rules nor rectified the $5.3 million in overpayments. (Id. at ¶¶ 60, 61.) Relator presented the group's findings on the Georgia region to several Kaiser executives named in the FAC, but none of those executives took any action. (Id. at ¶¶ 61, 62.)

In February 2016, relator detected significant overpayments due to erroneous diagnosis codes in “all other regions.”^[4] (Id. at ¶ 63.) Relator prepared another presentation on the overpayments for his superiors and pointed out that defendants were required by the applicable regulations to review and investigate all identified overpayments within 60 days. (Id. at ¶¶ 63, 64.) His superiors did not request a root cause analysis, did not investigate further, and “even took overt steps to prevent Relator from investigating any further himself.” (Id. at ¶ 66.)

On June 30, 2016, relator participated in a call with Marita Janiga “Executive Director of...