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United States of America, Ex Rel. Digital Healthcare, Inc v. Affiliated Computer Services

April 20, 2011


The opinion of the court was delivered by: Reggie B. Walton United States District Judge

Memorandum Opinion

The plaintiff/relator, Digital Healthcare, Inc. ("Digital"), brings this qui tam action against defendant Affiliated Computer Services, Inc. ("Affiliated") under the False Claims Act, 31 U.S.C. §§ 3729-3732 (2006), as well as the false claims act statutes of several states and the District of Columbia. See First Amended Complaint ("Am. Compl.") ¶¶ 45-138. Digital alleges that by not implementing certain technology, Affiliated is failing to take reasonable measures to determine whether Medicaid claimants have third-party insurance, and is therefore facilitating the submission of false claims to the federal government for Medicaid payments. See id. ¶¶ 11-44. Currently before the Court is Affiliated's Motion to Dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), asserting that the Court lacks subject-matter jurisdiction over this case and that the plaintiff/relator has failed to plead fraud with the particularity required by Federal Rule of Civil Procedure 9(b). Upon reviewing the Amended Complaint, the defendant's motion, the plaintiff/relator's opposition, and the legal memoranda submitted in support of those filings,*fn1 the Court concludes for the reasons below that it has subject-matter jurisdiction over the plaintiff/relator's claims, but that the plaintiff/relator has failed to plead fraud with the required particularity. Affiliated's motion to dismiss will therefore be granted in part and denied in part.


A. Statutory Background

A brief overview of the Medicaid program will help elucidate the plaintiff/relator's allegations in this case. Medicaid is a joint federal-and-state-funded program that provides medical assistance to individuals whose income and financial resources are insufficient to pay the cost of necessary medical services. See Ark. Dep't of Health & Human Servs. v. Ahlborn, 547 U.S. 268, 275 (2006). All states and the District of Columbia have elected to participate in the Medicaid program, id.; see D.C. Hosp. Ass'n v. District of Columbia, 224 F.3d 776, 778 (D.C. Cir. 2000) (noting the District of Columbia's Medicaid plan), and pay qualified health providers for a broad range of covered services provided to eligible beneficiaries. "The federal government then reimburses states for a share of their expenditures. The federal share of each state's program expenditures ranges from 50 to 83 percent." Def.'s Mem., Declaration of Douglas W. Baruch ("Baruch Decl."), Exhibit ("Ex.") 1 (United States Government Accountability Office, GAO 06-862, Medicaid Third-Party Liability, Federal Guidance Needed to Help States Address Continuing Problems (2006)) ("2006 GAO Report") at 7.

"States have considerable flexibility in designing and operating their Medicaid programs, although they must comply with [certain] federal requirements." Id. at 2. Operating a state Medicaid program requires the states to engage in a number of activities such as determining the eligibility of individuals who apply for Medicaid assistance, determining what benefits Medicaid will cover, determining which providers are qualified to furnish benefits, processing claims, and maintaining control mechanisms to minimize improper payments and fraud. Def.'s Mem., Baruch Decl., Ex. 2 (Congressional Research Service, State Medicaid Program Administration: A Brief Overview (2005)) ("CRS Overview") at 2. To help fund these programs, state Medicaid agencies receive a quarterly advance from the federal government based on certain estimates, 42 U.S.C. § 1396b(d)(1) (2006), 42 C.F.R. § 430.30(a) (2010), and at the close of each quarter a state submits an accounting of its actual Medicaid expenditures, 42 C.F.R. § 430.30(c). The states submit this information on a Form CMS-64, entitled Quarterly Medicaid Statement of Expenditures for the Medical Assistance Program. Id.

Federal law requires each state to designate a single state agency to administer or supervise the administration of its Medicaid program. Def.'s Mem., Baruch Decl., Ex. 2 (CRS Overview) at 1. This agency, in turn, will often contract with other public or private entities to perform various Medicaid program functions. Id. For example, some states contract with private companies to operate Medicaid Management Information Systems, which are programs used for claims and other data processing purposes. Id.

Medicaid is intended be a "payer of last resort." Ahlborn, 547 U.S. at 291. Thus, "if a Medicaid beneficiary also has another source of payment for health services, that source is to pay instead of Medicaid." Def.'s Mem., Baruch Decl., Ex. 1 (2006 GAO Report) at 1. In general, state Medicaid agencies are required whenever possible to avoid paying for services for which the state agency has reason to believe another party is legally liable. Id. at 13; see 42 C.F.R. § 433.139(b). Therefore, a state Medicaid agency must "take reasonable measures to determine the legal liability of the third parties who are liable to pay for services furnished under the" state Medicaid plan. 42 C.F.R. § 433.138(a).

B. Factual and Procedural Background

The following information is alleged in the plaintiff/relator's Amended Complaint. The plaintiff/relator is an "information technology provider and a licensee of intellectual property involving the automated coordination of insurance information between payers and health care providers." Am. Compl. ¶ 1. The defendant is a corporation that "operates as a Medicaid fiscal agent in thirteen states . . . and offers [a] myriad [of] services to the government, including managed care enrollment, eligibility administration, Medicaid claims processing, provider relations[,] and third-party liability." Id. ¶ 9. The defendant processes "over 475 million Medicaid healthcare claims annually" and is "the nation's largest Medicaid pharmacy benefits manager."*fn2 Id. "Since December 17, 2002, [the] defendant has operated as a Medicaid fiscal agency and/or Medicaid pharmacy benefits manager in the District of Columbia, the Commonwealth of Massachusetts, and the states of Florida, Montana, Tennessee, Louisiana[,] and Texas, as well as other states." Id. ¶ 16.

At some point between September 2000 and December 2002, Digital conducted a national cost analysis to measure the magnitude of problems associated with "coordination of benefits," a term in the Medicaid context that refers to "determining which payer among multiple available payers is liable for a claim for health care services" or "whether a claimant has any other third[-]party insurance." Id. ¶¶ 22(a)-(b). Several health care organizations, including Affiliated, voluntarily participated in the study. Id. ¶ 22(b). Affiliated provided data for Digital to use in the study, which included Affiliated's Medicaid eligible patients from March, June, and September 2000, from six of the twenty-six states in which Affiliated processes pharmacy claims. Id. ¶¶ 22(b), (j). In conducting the study, Digital "compared the eligibility data submitted by [Affiliated] with a database containing over twenty million individuals that had private third[-]party insurance." Id. ¶ 22(c). A match between the two data sets "indicated a [coordination of benefits] error, i.e., the individual in [Affiliated's] Medicaid database had alternative third[-]party coverage." Id. Although some health plans do not cover all prescriptions, the study did "not account for the nuances of the insured patients' health plans," and therefore "assumed that no insured individuals should have submitted health care claims to Medicaid." Id. ¶ 22(d).

The results of the study "indicated that a large portion of the patients for whom [Affiliated] had processed payments, over one-third of all patients in some states, had private third[-]party insurance." Id. ¶ 22(e). The percentages differed across the states examined, ranging from 21.47% to 35.99% of Affiliated's patient population in each state. See id. ¶¶ 22(f)-(h). The study made assumptions regarding the number of claims each patient would submit each month as well as the average cost of each claim, id. ¶¶ 22(i)-(j), and the results of the study "provide[] an extremely conservative estimate of [Affiliated's] improper billing," id. ¶ 22(j). Based on these assumptions, Digital estimated that Affiliated "improperly submitted at least [$20 million] in claims to state Medicaid programs in the six states analyzed in the National [Coordination of Benefits] Cost Analysis, each month." Id. ¶ 22(l). Accounting for the average federal share of these costs, Digital alleges that "over half of the funds that were used to pay the claims that [Affiliated] improperly submitted to state Medicaid programs each month were provided by the federal government." Id. ¶ 22(m).

On December 17, 2002, Patrick Lawlor, W.K. Smith, and Tom Sharpley, representatives of Digital, presented the National Cost Analysis results to officers from Affiliated. Id. ¶ 23. The representatives from Digital explained the results of the study, "informed [Affiliated's officers] of the magnitude of their [coordination-of-benefits] problem," and "explained that [Affiliated] was not complying with applicable Medicaid laws and that it was submitting millions of dollars in Medicaid claims each month that were properly billable to private third[-]party insurers." Id. At this same meeting, Digital's representatives informed Affiliated "of available software that would remedy their [coordination-of-benefits] problem, prevent submission of illegal Medicaid claims, and bring [Affiliated] into compliance with the law." Id. ¶ 24. The Digital representatives stated that this automated coordination-of-benefits software would "completely eradicate[] [Affiliated's] improper Medicaid billing by identifying liable third[-]party insurers at the moment that claims were paid." Id. ¶ 27. Affiliated refused to implement the software. Id. ¶ 29.

On January 16, 2004, Joe Glorioso, a Digital representative, met with Affiliated representatives again and "offered to solve [Affiliated's coordination-of-benefits] problem and to bring [Affiliated] into compliance with Medicaid laws and regulations." Id. ¶ 31. Affiliated "again refused to resolve its [coordination-of-benefits] problem and become compliant with applicable Medicaid law." Id. Thereafter, Digital filed a Complaint in this Court on July 21, 2006, and filed an Amended Complaint on June 29, 2007. Both were filed under seal pursuant to 31 U.S.C. § 3730(b)(2).

There are eight counts set forth in the Amended Complaint, all based on the events outlined above. See Am. Compl. ¶¶ 45-138. In general, the Amended Complaint alleges that "[s]ince December 17, 2002, [Affiliated] has caused tens of thousands of improper claims to be submitted to Medicaid each month in its capacity as a Medicaid pharmacy benefits manager . . . and as a Medicaid fiscal agent." Id. ¶ 37. Count One asserts violations of the federal False Claims Act, id. ¶¶ 45-58, and alleges that Affiliated knowingly presented or caused to be presented false or fraudulent claims for payment or approval to an officer or employee of the United States, including claims for reimbursement for medication and services rendered to Medicaid patients whose third party insurance covered the medication and services, and which should have been presented to those third party insurers pursuant to applicable Medicaid laws, id. ¶ 51. Count One also alleges that Affiliated "conspired to defraud the United States by getting a false or fraudulent claim allowed or paid." Id. ¶ 53. Counts Two through Eight assert violations of the state false claims act laws of Florida, id. ¶¶ 59-69, Massachusetts, id. ¶¶ 70-81, Montana, id. ¶¶ 82-92, Tennessee, id. ¶¶ 93-104, Texas, id. ¶¶ 105-115, the District of Columbia, id. ¶¶ 116-126, and Louisiana, id. ¶¶ 127-138.

On April 14, 2009, the United States filed an Election to Decline Intervention in this case, ECF No. 35, and on April 21, 2009, the Court ordered that the case be unsealed, and that the plaintiff/relator serve a copy of the complaint on the defendant, ECF No. 36. On June 19, 2009, the defendant filed its motion to dismiss.


A. Motion To Dismiss Under Rule 12(b)(1)

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(1) "presents a threshold challenge to the Court's jurisdiction," and thus "the Court is obligated to determine whether it has subject-matter jurisdiction in the first instance." Curran v. Holder, 626 F. Supp. 2d 30, 32 (D.D.C. 2009) (internal citation and quotation marks omitted). When reviewing a motion to dismiss pursuant to Rule 12(b)(1), the Court must accept as true all of the factual allegations contained in the complaint. Leatherman v. Tarrant Cnty. Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 164 (1993). Under Rule 12(b)(1), "it is presumed that a cause lies outside [the federal courts'] limited jurisdiction," Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994), unless the plaintiff establishes by a preponderance of the evidence that the Court possesses jurisdiction, see, e.g., Hollingsworth v. Duff, 444 F. Supp. 2d 61, 63 (D.D.C. 2006). Therefore, the "plaintiff's factual allegations in the complaint . . . will bear closer scrutiny in resolving a 12(b)(1) motion than in resolving a 12(b)(6) motion for failure to state a claim." Grand Lodge of Fraternal Order of Police v. Ashcroft, 185 F. Supp. 2d 9, 13-14 (D.D.C. 2001) (internal citation and quotation marks omitted). Furthermore, in determining whether it has jurisdiction over the case, the Court "may consider materials outside of the pleadings." Jerome Stevens Pharm., Inc. v. FDA, 402 F.3d 1249, 1253 (D.C. Cir. 2005).

B. Motion To Dismiss Under Rule 12(b)(6)

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests whether the plaintiff has properly stated a claim upon which relief may be granted. Woodruff v. DiMario, 197 F.R.D. 191, 193 (D.D.C. 2000). For a complaint to survive a Rule 12(b)(6) motion, it need only provide "a short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), in order to "give the defendant fair notice of what the . . . claim is and the grounds on which it rests," Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citation omitted). "Although detailed factual allegations are not necessary to withstand a Rule 12(b)(6) motion to dismiss, to provide the grounds of entitlement to relief, a plaintiff must furnish more than labels and conclusions or a formulaic recitation of the elements of a cause of action." Hinson ex rel. N.H. v. Merritt Educ. Ctr., 521 F. Supp. 2d 22, 27 (D.D.C. 2007) (quoting Twombly, 550 U.S. at 555) (internal quotation marks and alterations omitted). As the Supreme Court recently ...

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