Teamsters Local 456 Pension Fund v. Universal Health Servs.

396 F.Supp.3d 413

TEAMSTERS LOCAL 456 PENSION FUND, et al., Plaintiffs,

v.UNIVERSAL HEALTH SERVICES, et al., Defendants.

CIVIL ACTION NO. 17-2817

United States District Court, E.D. Pennsylvania.

Filed August 19, 2019

Dianne M. Anderson, Joseph E. White, III, Lester R. Hooker, Manuel Miranda, Maya Saxena, Saxena White PA, Boca Raton, FL, Kyla J. Grant, Steven B. Singer, Saxena White PA, White Plains, NY, David M. Promisloff, Promisloff Law, P.C., Malvern, PA, for Plaintiffs.

David Hunter Smith, Gary A. Orseck, Matthew M. Madden, Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, DC, Jason H. Wilson, Steven A. Reed, Morgan Lewis & Bockius LLP, Philadelphia, PA, for Defendants.

OPINION

Slomsky, District Judge.

TABLE OF CONTENTS

I. INTRODUCTION...420

II. BACKGROUND...422

A. Events Leading Up to March 2, 2015, the Start of the Class Period...424

1. Qui Tam Lawsuits and State Investigations...425

2. Letter from Change to Win ("CtW") About Use of Suicidal Ideation Code by Universal Health Services ("UHS") Behavioral Health Facilities...429

3. Coordinated Federal Investigation of UHS Behavioral Health Facilities...429

B. Defendants' Statements from March 2, 2015 to December 7, 2016...429

C. Buzzfeed News Publishes First UHS Article on December 7, 2016 with Several Claims of Improper Conduct...432

1. Alleged Improper Labelling of Patients as Suicidal to Justify Admissions...433

2. Alleged Improper Lengthening of Patient Stays...434

3. Alleged Understaffing at UHS Behavioral Health Facilities...435

D. Defendants' Statements and Representations from December 7, 2016 to July 25, 2017...436

E. Ten Anonymous UHS Employees Allege Misconduct...444

F. Lead Plaintiffs File the Amended Complaint in Federal Court...446

III. STANDARD OF REVIEW...448

IV. ANALYSIS...449

A. Lead Plaintiffs Have Failed to State a Claim Under Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5...450

1. Alleged Material Misrepresentations and Omissions...451

a. Pre-Article Statements...452

i. Statements About the Behavioral Health Division's Performance...454

ii. Chief Financial Officer Filton's Statement About the Behavioral Health Division's 2016 Second Quarter Results...459

b. Post-Article Statements...460

i. Statements Denying the Article's Conclusions...462

ii. Statements Denying the Effect of Buzzfeed I and the Federal Investigation...464

iii. Statements Regarding Updates in the Federal Investigation...464

2. Scienter Has Not Been Sufficiently Pled...465

a. Alan B. Miller, the Chairman of the Board and Chief Executive Officer, and Steve G. Filton, the Chief Financial Officer...466

b. Defendant UHS...474

B. Count II – Section 20(a) of the Securities and Exchange Act of 1934...477

V. CONCLUSION...477

I. INTRODUCTION

Defendant Universal Health Services ("UHS") is the largest provider of behavioral health services in the United States. On December 7, 2016, after a year-long investigation, Buzzfeed News ("Buzzfeed") published an article that alleged that UHS behavioral health facilities were committing insurance fraud by (1) admitting healthy patients not in need of inpatient treatment to UHS behavioral health facilities by falsely stating that they were suicidal; (2) improperly lengthening patients' stays in UHS behavioral health facilities; and (3) chronically understaffing those facilities to maximize profits. Prior to the publication of the article, UHS reported that its Behavioral Health Division was in strong financial shape and that demand for UHS behavioral health services was so high that UHS-owned facilities routinely turned away patients that met clinical admissions criteria. In the wake of the article, UHS stock plummeted 12% in a single trading day, wiping out $1.5 billion in market capitalization. The company immediately denied the allegations of widespread billing misconduct, and to date, UHS maintains that it did not engage in the illicit conduct profiled in the Buzzfeed article. (See Doc. No. 30.)

On December 23, 2016, Plaintiff David Heed, a UHS shareholder, filed the present federal securities class action in the United States District Court for the Central District of California. (See Doc. No. 1.) Named as Defendants are UHS, Alan B. Miller, the Chairman and Chief Executive Officer of UHS, and Steve G. Filton, the Chief Financial Officer of UHS (collectively, "Defendants"). The lawsuit alleges that Defendants knowingly or recklessly made materially false and misleading statements about UHS practices and procedures and failed to disclose that the Behavioral Health Division relied on revenue from illegal and unethical conduct.¹ On April 24, 2017, Teamsters Local 456 Pension Fund² and Teamsters Local 456 Annuity Fund³ ("Lead Plaintiffs") were appointed Co-Lead Plaintiffs to represent the interests of UHS shareholders in the suit.

On June 20, 2017, the district court in California granted Defendants' unopposed Motion to Transfer the case to the Eastern District of Pennsylvania, at which point the case was assigned to former Chief Judge Lawrence F. Stengel. On September 29, 2017, Lead Plaintiffs filed the Amended Complaint on behalf of all investors who purchased or otherwise acquired UHS publicly-traded common stock between March 2, 2015 and July 25, 2017 (the "Class Period"). (Doc. No. 30.) In Count I of the Amended Complaint, Lead Plaintiffs allege that Defendants knowingly disseminated false or misleading statements about UHS's finances, policies, and procedures in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5, which was promulgated under Section 10(b). (Id. ¶¶ 296-304.) In Count II, Lead Plaintiffs allege that the conduct of Defendants Miller and Filton, individuals in positions of control and authority over the company, violated Section 20(a) of the Exchange Act. (Id. ¶¶ 305-311.)

On December 6, 2017, Defendants filed the present Motion to Dismiss the Amended Complaint. (Doc. No. 34.) On February 7, 2018, Lead Plaintiffs filed a Response in Opposition (Doc. No. 35), and on March 26, 2018, Defendants filed a Reply in support of the Motion (Doc. No. 36). Then, on July 12, 2018, the case was reassigned from Judge Stengel to Judge Robert F. Kelly. (Doc. No. 37.) Two days later, the case was reassigned to this Court. (Doc. No. 38.) On September 12, 2018, the Court held a hearing on Defendants' Motion to Dismiss. On October 5, 2018, in accordance with the direction of the Court at the hearing, the parties filed supplemental memoranda on matters raised during the Motion to Dismiss hearing.⁴ (Doc. Nos. 50, 51.)

The Motion to Dismiss is now ripe for review. For reasons discussed below, Defendants' Motion to Dismiss (Doc. No. 34) will be granted.

II. BACKGROUND⁵

Defendant Universal Health Services ("UHS") was founded by Defendant Alan B. Miller in 1979. It is a publicly traded company⁶ that owns and operates hospitals throughout the United States, the United Kingdom, Puerto Rico, and the U.S. Virgin Islands. The company, which is headquartered in King of Prussia, Pennsylvania, is split into two divisions: (1) the Acute Care Division, which operates general hospitals, and (2) the Behavioral Health Division,⁷ which operates inpatient and outpatient psychiatric facilities. (Doc. No. 34-2 at 11.)

The Behavioral Health Division has over 200 behavioral health facilities across the country, making UHS the largest provider of behavioral health services in the United States. (Doc. No. 30 ¶ 4.) For context, in 2016, UHS behavioral health facilities admitted half-a-million patients, which resulted in six million patient-days and generated $4.43 billion in net revenue. (Id. ¶ 24.) One-third of that revenue was derived from government health insurance payers, such as Medicare, TRICARE, which is a military insurer, and Medicaid; two-thirds of the revenue came from commercial health insurance payers.⁸ (Id. )

According to Defendants' filings with the United States Securities and Exchange Commission ("SEC"), each UHS behavioral health facility operates under its own leadership team, including a chief executive officer, chief financial officer, and compliance staff. (Doc. No. 34-2 at 11.) Each facility also has its own governance board, which includes members of the facility's medical and professional staff, and is responsible for the facility's day-to-day medical, clinical, and ethical practices. (Id. )

Also named as Defendants are Alan B. Miller and Steve G. Filton.⁹ Mr. Miller has served as Chairman of the Board and the Chief Executive Officer of UHS since he founded the company in 1979. (Id. ¶ 26.) According to UHS's April 6, 2017 Schedule 14A filing,¹⁰ "the family of Alan B. Miller holds more than 95% of the shares of the Class A and C Common Stock, which is entitled to elect 80% of the entire Board of Directors and constitutes more than 50% of our aggregate voting power." (Id. ) In the Amended Complaint, Lead Plaintiffs cite to a 2017 Axios article that states that Mr. Miller, who made over $51.3 million in 2016, is the highest-paid CEO in the hospital industry.¹¹ (Id. ¶ 30.)

Mr. Filton has served as Executive Vice President and Chief Financial Officer of UHS since 2003. (Id. ¶ 32.) UHS's April 2017 Schedule 14A filing notes that Mr. Filton "beneficially owned over $50 million of the Company's Class B Common Stock during the Class Period." (Id. ) In 2016, he received $2,533,102 in compensation. (Id. ¶ 33.)

Lead Plaintiffs allege that during the Class Period, Mr. Miller and Mr. Filton reviewed, approved, and signed UHS's quarterly and annual filings with the SEC, which contained materially false and misleading statements and omissions. Additionally, Lead Plaintiffs claim that Mr. Miller and Mr. Filton made materially false and misleading statements and omissions at health care conferences and during investor earnings calls during the Class Period. (Id. ¶¶ 31, 35.)

More specifically, in the Amended Complaint, Lead Plaintiffs allege that "UHS mental health facilities across the country manipulated and...