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Godecke ex rel. United States v. Kinetic Concepts, Inc.

United States Court of Appeals, Ninth Circuit

September 6, 2019

Geraldine Godecke, Relator; ex rel. United States of America, Plaintiff-Appellant,
v.
Kinetic Concepts, Inc.; KCI-USA, Inc., Defendants-Appellees.

          Argued and Submitted April 12, 2019 Pasadena, California

          Appeal from the United States District Court, No. CV 08-6403 CAS for the Central District of California Christina A. Snyder, District Judge, Presiding

          Kurt Kuhn (argued), Kuhn Hobbes PLLC, Austin, Texas; Patrick J. O'Connell, Law Offices of Patrick J. O'Connell PLLC, Austin, Texas; Mark I. Labaton, Glancy Prongay & Murray LLP, Los Angeles, California; Michael A. Hirst, Hirst Law Group P.C., Davis, California; for Plaintiff-Appellant.

          Gregory M. Luce (argued), Skadden Arps Slate Meagher & Flom LLP, Washington, D.C.; Matthew E. Sloan and Kevin J. Minnick, Skadden Arps Slate Meagher & Flom LLP, Los Angeles, California; for Defendants-Appellees.

          Before: A. Wallace Tashima and Jay S. Bybee, Circuit Judges, and M. Douglas Harpool, [*] District Judge.

         SUMMARY [**]

         False Claims Act / Medicare

         The panel reversed the district court's dismissal of a relator's qui tam case against Kinetic Concepts, Inc. and KCI USA, Inc. (collectively "KCI"), brought under the federal False Claims Act, alleging that KCI submitted false claims to Medicare.

         The panel held that the relator sufficiently alleged that KCI violated the False Claims Act. Specifically, the panel held that the relator adequately alleged a fraudulent scheme to submit false claims and reliable data that led to a strong inference that false claims were actually submitted. The panel further held that the relator sufficiently alleged that KCI acted with the requisite scienter under the False Claims Act. The panel also held that the relator sufficiently alleged that KCI's false claims were material to the government's ultimate Medicare payment decision.

          OPINION

          TASHIMA, CIRCUIT JUDGE.

         Relator Geraldine Godecke appeals the district court's dismissal of her qui tam case against Defendants Kinetic Concepts, Inc. and KCI USA, Inc. (collectively, "KCI"), brought under the federal False Claims Act ("FCA"). Godecke alleges that KCI submitted false claims to Medicare. Specifically, Godecke alleges that KCI delivered durable medical equipment to Medicare patients before obtaining a detailed written order from a physician, which was a requirement for Medicare reimbursement. She alleges that if Medicare knew that this delivery requirement had not been satisfied prior to delivery, Medicare's policy would have been to refuse payment on KCI's claims. She alleges that KCI knew that it should not have been able to receive payment, but sought reimbursement regardless of this fact and chose not to alert Medicare to the issue. On this appeal, we must determine whether Godecke sufficiently alleges that (1) KCI submitted false claims, (2) KCI acted with scienter, and (3) the false claims were material to the government. We hold that she does so. Therefore, we reverse and remand for further proceedings.

         BACKGROUND

         The facts as presented here are taken from the allegations in the Fourth Amended Complaint ("FAC"). For the purposes of a motion to dismiss, we must take all of the factual allegations in the complaint as true, although we are not bound to accept as true a legal conclusion couched as a factual allegation. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009); Bell Atlantic Corp v. Twombley, 550 U.S. 544, 555 (2007).[1]

         In 2001, Godecke became an employee of MedClaim, Inc., a specialized billing company that was under contract with KCI to submit KCI's claims to Medicare and to provide evidentiary and other support for appeals of claims denied by Medicare. In 2003, KCI purchased MedClaim, and Godecke became an employee of KCI. She was the Director of Medicare Cash and Collections at MedClaim and then KCI from June 1, 2001 to October 1, 2007. Her position required her to work with KCI's information systems related to billing, and also required her to review communications regarding claim payments that were made or denied by Medicare. She was also responsible for the creation of a new department within KCI, informally known as the "back end" of the billing department, that dealt specifically with the appeal process for KCI's claims that had been denied by the Medicare billing and payment system. She and her staff evaluated whether KCI should appeal those denials and provided supporting information for challenging those denials in administrative hearings.

         KCI manufactures a piece of durable medical equipment known as a Vacuum Assisted Closure device ("VAC"), which is used to perform negative pressure wound therapy ("NPWT"). The VAC was added to the list of Medicare covered devices starting on October 1, 2000, and, at that time, no other NPWT pump was approved for Medicare reimbursement. Pursuant to Medicare Part B, the VAC device is rented on a monthly basis, and the supplies needed for VAC treatment, such as dressings and a canister, are purchased. In 2006, the total monthly cost for a VAC for a Medicare patient was about $2, 224 for the first 3 months and $1, 794 for each subsequent month; Medicare pays 80% of this cost and the patient is liable for the remaining 20%. Between 2001 and 2011, KCI's Medicare Part B revenue totalled $1.325 billion.

         Medicare administers the rules for use of the VAC and similar NPWT devices through private claims processing contractors known as Durable Medical Equipment Medicare Administrative Contractors ("DME MACs"). These DME MACs have issued Local Coverage Determinations ("LCDs") that govern reimbursement rules for VACs. DME MACs are also authorized to make payments on behalf of the government to Medicare claimants. Because Medicare is required to pay claims submitted within just a few weeks of receipt of the claim, the Medicare program has historically paid claims quickly without verifying the accuracy of the claims before payment. Medicare accepts claims as submitted by providers as being a true representation that the claim either qualifies for reimbursement or does not qualify and automatically pays those claims represented as qualifying. Medicare must then seek reimbursement or recoupment if it later determines that the claim should not have been paid. This payment system has become known as "pay and chase," and relies on the honesty of providers and the accuracy of the claims they submit.

         Under the LCD, KCI must receive, prior to delivery of the VAC to a patient, a detailed written order from a physician, also known as a written order prior to delivery ("WOPD"), referred to as a "prior written order" by KCI. If KCI does not receive a WOPD prior to delivery of the VAC, then KCI is not entitled to payment from Medicare. This requirement to obtain a WOPD before delivering the VAC has been in the Medicare Program Integrity Manual since KCI first started billing Medicare in 2000. Importantly, if KCI does not receive a detailed written order prior to delivery, payment will not be made for the device even if KCI was able subsequently to obtain a written order after delivery.

         When KCI submitted claims to Medicare, it used certain billing code modifiers on the claims to indicate whether all of the reimbursement requirements had been met. The KX billing code modifier specifically represents to Medicare that all requirements for payment have been satisfied. By adding the KX modifier to a claim, KCI attested that the specific required documentation is on file before submitting the claim to the DME MAC. As early as 1999, the Office of Inspector General of the U.S. Department of Health and Human Services warned that misuse of the KX modifier could result in false claims.[2] In contrast, there is a separate billing code modifier that must be used in order to represent to Medicare that not all requirements for payment have been satisfied. In 2003, the billing code modifier "EY" was adopted for use when a NPWT item was delivered before a signed written order had been received by the supplier. KCI is ...


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