On November 14, Judge Edward Chen in the Northern District of California issued rulings on the pending motions to dismiss in U.S. ex rel. Osinek v. Kaiser Permanente, granting in part and denying in part Kaiser’s motion to dismiss. United States ex rel. Osinek v. Kaiser Permanente, No. 3:13-cv-03891-EMC, Dkt. No. 223 (N.D. Cal. Nov. 25, 2022). These rulings offer insight into the evolving landscape and permissibility of legal falsity claims predicated on sub-regulatory guidelines.
The United States previously intervened in six qui tam complaints alleging that Kaiser violated the False Claims Act (FCA) by submitting inaccurate diagnosis codes for its Medicare Advantage beneficiaries, resulting in higher reimbursements. Specifically, the government had alleged two different theories of liability: (1) the addition of diagnosis codes to medical records via addenda that did not exist at the time of the visit were factually false; and (2) the addition of diagnosis codes that were unrelated to the patient visit via addenda were factually and legally false, even if clinically accurate.
Kaiser moved to dismiss the government’s complaint, largely arguing that the government (1) had not pleaded sufficient evidence to demonstrate a systemic scheme of submitting clinically inaccurate diagnosis codes for reimbursement; and (2) that the government had not adequately pleaded scienter and that FCA liability cannot be predicated on a failure to satisfy sub-regulatory guidelines. With regard to the latter, Kaiser argued that any diagnosis codes added via addenda and in contravention to the International Classification of Diseases (ICD) Guidelines were not legally false because those guidelines were neither binding nor material to the government’s reimbursement decisions. We have previously written about the Kaiser cases, government intervention, and the motion to dismiss briefing here.
Clinically Inaccurate Diagnoses (Factual Falsity)
With regard to the category of alleged diagnoses that did not exist, the motion was granted “only to the extent that the government has failed to plead a FCA claim based on a scheme by Kaiser to alter patient medical records by adding clinically inaccurate diagnoses on a general or systemic basis.” To support this conclusion, Judge Chen stated that reference to three specific examples in the government’s complaint “are not enough to make out a plausible case for such a systemic scheme.”
However, Judge Chen highlighted that the government’s allegations regarding cachexia had been sufficiently pleaded to allege a scheme as they had shown that the diagnosis code was improperly added when the condition did not exist. To support the conclusion, Judge Chen pointed to the government’s allegations regarding a Kaiser training identifying cachexia as a diagnosis that could help them find “100 million dollars in NCal.,” a data-mining algorithm written to identify potential cachexia diagnoses, and physician queries related to cachexia. As a result, the government alleged that Northern California physicians added cachexia via addenda over 120 times more than physicians in other regions without the alleged cachexia initiative and an audit that found that over 90% of the time that the cachexia diagnosis added were not properly documented or supported.
Judge Chen also noted that Kaiser’s alleged failure to respond to the high error rate could speak to scienter, and that the ability and willingness of Kaiser to do this with respect to one diagnosis might imply that the schemes were much broader. As such, Judge Chen gave the government leave to amend.
Clinically Accurate Diagnoses Unrelated to Doctors’ Visits (Legal & Factual Falsity)
The court rejected Kaiser’s motion to dismiss the government’s claims regarding clinically accurate diagnoses that were non-compliant. First, Judge Chen agreed that allegations of clinically accurate diagnoses that did not affect the care of the patient at the time of the visit implicated factual falsity.
The court then stated that on the question of legal falsity, Kaiser faired “no better.” Here, Judge Chen reasoned there was legal falsity because – as the government claimed– both the CMS/Kaiser contract and federal regulations required Kaiser to comply with the ICD Guidelines, and “the ICD Guidelines only permit the coding of documented conditions that  both exist at the visit and that  ‘require or affect patient care treatment or management.’”
Kaiser argued they were not required to comply with ICD Guidelines because (1) the guidelines were not part of the contract between the parties where they were twice removed in an incorporation by reference, and (2) that this would cut against notice and rulemaking requirements under the Administrative Procedure Act (APA). Judge Chen disagreed, noting both the sophistication of the party and clarifying that notice and comment rulemaking under the APA does not apply to a public benefit program like Medicare.
The court further emphasized that the government had met the pleading standards for materiality for these clinically accurate diagnoses given both the magnitude of the issue and defendant’s own knowledge of the importance of the ICD Guidelines, as evidenced by its communication in its program advisories on risk adjustment regarding compliance with the same.
Finally, the court stated that although not necessary for survival, federal regulations also require compliance with ICD Guidelines highlighting that (1) 42 C.F.R. § 422.504(1) requires a Medicare Advantage (MA) organization to provide accurate risk adjustment data to CMS; (2) 42 C.F.R. § 422.310(d) requires MA organizations to submit data that conform to CMS’ requirements for data and all relevant national standards; and (3) CMS had adopted the ICD Guidelines as a nation standard under 42 C.F.R. § 162.1002. The court rejected Kaiser’s argument that 42 C.F.R. § 422.310(d) deals with only the format of data and not the substance.
The court also rejected Kaiser’s argument that the government’s claims cannot reach back to conduct from 2009 where the court found that relation would not alter a limitations period or a repose period, but merely pinpoints back to when a claim is filed and that for these purposes, “statute of limitations” and “statute of repose” can be used interchangeably. The claims for payment by mistake and unjust enrichment were also allowed to proceed.
Judge Chen’s ruling signals that the government may be able to predicate an FCA violation on a lack of adherence to sub-regulatory guidance, such as the ICD Guidelines. Notably, Judge Chen’s reliance on Kaiser’s own internal communications about the importance of those guidelines is a signal to MA providers that they can’t tell a story internally about compliance that they aren’t willing to bind themselves to more broadly. However, the case is still in early stages, and we will continue to monitor the court’s treatment of this argument and its success moving forward.
(The court also dismissed with prejudice the complaint by Ms. Osinek, dismissed with leave to amend the complaint by Dr. Taylor, and dismissed with leave to amend the FCA claims in the Bryant first amended complaint.)
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