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Date: 09-08-2019
Case Style:
Geraldine Godecke, Relator; ex rel. United States of America v. Kinetic Concepts, Inc.; KCI-USA, Inc.
Case Number: 18-55246
Judge: United States Court of Appeals for the Ninth Circuit on appeal from the Central District of California (Los Angeles County)
Court:
Plaintiff's Attorney:
Call Kent Morlan at 888-354-4529 if you need a whistleblower lawyer in Los Angeles, California.
Defendant's Attorney: Gregory M. Luce
Description:
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
4 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS
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
1 Godecke began this action in 2008 when she filed the original
complaint under seal. This case has been up to the Ninth Circuit before
on the issue of subject matter jurisdiction. See U.S. ex rel. Hartpence v.
Kinetic Concepts, Inc., 792 F.3d 1121 (9th Cir. 2015).
GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 5
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
6 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS
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
GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 7
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 allowed to
submit claims for costs that are presumptively nonreimbursable,
but must do so openly by using the proper
Medicare billing code modifier, describing the claims
accurately while challenging the presumption and seeking
reimbursement.
Godecke alleges that KCI delivered many VACs without
the required WOPD. Due to time constraints and business
pressures, KCI management would authorize “exceptions” to
KCI’s standard operating procedures, which were based on
Medicare’s requirements. These exceptions would allow KCI
employees to release the VAC and supplies for delivery to the
patient before receiving the written order. The exception
granted by management would make the claim appear to be
billable under KCI’s internal procedures, even though
Medicare’s WOPD requirements had not been satisfied. KCI
was not required to disclose the actual date on which it
received the written order, and there was a 30-day window
after a patient’s treatment started before KCI had to bill
Medicare. During this 30-day window, KCI could get a
detailed written order from a physician for the VAC. In such
cases, of course, the order was not technically a WOPD
because it was not written prior to delivery. Based on
2 The KX billing code replaced the ZX billing code in 2002. The only
difference between the codes is that ZX was a temporary designation and
KX is a permanent designation. For the sake of simplicity, we use “KX”
throughout this opinion.
8 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS
reviews of reports and conversations with customer service
representatives and KCI management, Godecke learned that
KCI management granted these exceptions and allowed
customer service representatives to deliver VACs to patients
before all the WOPD requirements had been satisfied. She
also knew that KCI management understood the Medicare
requirements and the rules for reimbursement, and she also
helped KCI management set up tracking systems specifically
for following up on orders for VACs that had been delivered
but did not satisfy the WOPD requirements.
Godecke next alleges that KCI knowingly used the wrong
billing code modifiers to conceal from Medicare that these
VACs were delivered before receiving a WOPD. KCI would
routinely submit claims for payment when KCI either did not
have any WOPD in its possession or had some form of a
WOPD, but the order was defective. KCI would bill
Medicare using the KX modifier as long as it was able to
obtain a detailed written order before the 30-day window to
submit bills had closed. KCI would submit these claims
without including the EY modifier, even though it was
required to do so. Because of the 30-day window and the fact
that KCI was not required to submit the actual date the
WOPD was received, KCI’s alleged scheme avoided
detection by Medicare, unless Medicare chose to audit a
claim and knew exactly what to look for and where to look.
Godecke provides fifteen representative examples of false
claims that were submitted for reimbursement without the EY
code. These claims are identified by Rental Order Entry
(“ROE”) numbers, a unique identifying number assigned to
each VAC delivery request. Godecke used an internal KCI
report to identify ROEs for a group of VACs delivered
without a WOPD (or with an incomplete WOPD). By crossGODECKE
EX REL. UNITED STATES V. KINETIC CONCEPTS 9
referencing this group with another internal report, Godecke
was able to identify the ROEs in this group for which KCI
management granted an exception in order to approve the
delivery and billing of these VACs without a WOPD. Then,
Godecke generated a report through KCI’s billing and appeals
databases to confirm that these ROEs had been either paid or
appealed. Therefore, because claims with the EY modifier
would not be paid and could not be appealed, these ROEs not
only were delivered despite noncompliance, but also were
billed by KCI without the required EY modifier.
After gathering evidence and customized reports,
Godecke brought her concerns about the billing noncompliance
issues to the attention of KCI’s management.
Godecke presented her findings at a meeting with her boss
Rich Brinkley, KCI Senior Vice President Steve Hartpence,
and with Godecke’s former supervisor Deb Smith on the
phone. Smith disputed Godecke’s interpretation of the
Medicare rules, but Hartpence requested that Godecke
continue her research on the issue. Within hours of the
meeting, Hartpence was fired and escorted out of KCI’s
building. About a month later, Brinkley was also fired, and
he called Godecke to say that she was going to be fired
“because senior management told him she was going to be a
whistleblower.” Godecke was fired a few weeks later on
October 1, 2007.3
3 The district court stayed Godecke’s retaliation claim and KCI’s
breach of contract and conversion counterclaims pending the outcome of
this appeal.
10 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS
JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction pursuant to 28 U.S.C. § 1291. We
review the dismissal of claims under the FCA de novo. U.S.
ex rel. Hendow v. Univ. of Phx., 461 F.3d 1166, 1170 (9th
Cir. 2006). We assume that the facts as alleged are true and
examine only whether the relator’s allegations support a
cause of action under the FCA, under the theories presented.
Id. A Rule 12(b)(6) dismissal “can be based on the lack of a
cognizable legal theory or the absence of sufficient facts
alleged under a cognizable legal theory.” Balistreri v.
Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). A
complaint must plead “sufficient factual matter, accepted as
true, to ‘state a claim to relief that is plausible on its face.’ ”
Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570).
A claim under the FCA must not only be plausible, Fed. R.
Civ. P. 8(a), but pled with particularity under Rule 9(b), U.S.
ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d
1047, 1054–55 (9th Cir. 2011). Rule 9(b) requires that the
circumstances alleged to constitute fraud be specific enough
to give the defendant notice of the particular misconduct so
that it can defend against the charge. Kearns v. Ford Motor
Co., 567 F.3d 1120, 1124 (9th Cir. 2009). The party must
allege the “who, what, when, where, and how” of the
misconduct. Id.
DISCUSSION
I. Godecke sufficiently alleged that KCI violated the
FCA.
The FCA makes liable anyone who “knowingly presents,
or causes to be presented, a false or fraudulent claim for
payment or approval,” or “knowingly makes, uses, or causes
GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 11
to be made or used, a false record or statement material to a
false or fraudulent claim.” 31 U.S.C. § 3729(a)(1)(A), (B).
A claim under the FCA requires a showing of: “(1) a false
statement or fraudulent course of conduct, (2) made with
scienter, (3) that was material, causing (4) the government to
pay out money or forfeit moneys due.” U.S. ex rel. Campie
v. Gilead Sci., Inc., 862 F.3d 890, 899 (9th Cir. 2017), cert.
denied, 139 S. Ct. 783 (2019).
The district court dismissed the FAC on the ground that
it failed to plead a violation of the FCA. Godecke challenges
the district court’s determination that she failed sufficiently
to allege that, either (1) KCI actually submitted any claim
without the EY modifier when it was required, or (2) there
were “reliable indicia” leading to “a strong inference” that
KCI actually submitted claims without an EY modifier.
Godecke also challenges the district court’s determination
that her claims failed to meet the FCA’s scienter
requirements. KCI, on the other hand, argues that Godecke
failed to allege sufficient facts to meet the FCA’s materiality
requirement. The district court denied KCI’s motion to
dismiss on materiality grounds in an earlier ruling on the
Second Amended Complaint.
A. Godecke adequately alleges a fraudulent scheme to
submit false claims and reliable indicia that lead to
a strong inference that false claims were actually
submitted.
To state an FCA claim, a relator is not required to identify
actual examples of submitted false claims; instead, “it is
sufficient to allege ‘particular details of a scheme to submit
false claims paired with reliable indicia that lead to a strong
inference that claims were actually submitted.’” Ebeid ex rel.
12 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS
U.S. v. Lungwitz, 616 F.3d 993, 998–99 (9th Cir. 2010)
(quoting U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180,
190 (5th Cir. 2009)). A relator is not required to identify
representative examples of false claims to support every
allegation, although the use of representative examples is one
means of meeting the pleading obligation. Id. at 998.
Godecke sufficiently alleged particular details of a
scheme to submit false claims paired with reliable indicia that
lead to a strong inference that the claims were actually
submitted. Godecke alleges that she learned about KCI’s
scheme to submit false claims through her role as KCI’s
Director of Medicare Cash and Collections. Even though
Godecke never personally was directed not to include an EY
modifier or directly observed other employees omitting the
EY modifier, her complaint alleges particular details of a KCI
management scheme to submit claims omitting the EY
modifier when it should have been included. Based on
knowledge gained from talking with sales representatives,
Godecke learned that KCI often delivered VAC devices
without receiving a prior written order at the urging of sales
executives. She alleges that she “knew from management
explanations” that KCI management knew that Medicare
would not pay for the VAC devices delivered under these
“exceptions” to the rules, and KCI management “set up
tracking systems to expedite [the] effort . . . to mask the fact
that VACs were delivered without all of the required
elements in hand.” Godecke has alleged personal knowledge
that KCI management was actively and knowingly looking
for ways to conceal the fact that certain VAC devices would
not be reimbursable.
Godecke’s ROEs analysis shows reliable indicia that raise
a strong inference that KCI actually submitted false claims.
GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 13
The district court found that Godecke’s analysis did not
sufficiently support the theory that KCI actually submitted
false claims because Godecke’s analysis of ROEs in KCI’s
appeals database was entirely consistent with an equally
plausible interpretation that the ROEs instead represented
claims that were submitted with an EY modifier and were
consequently denied. But Godecke shows that her system of
cross-referencing ROEs in different databases allowed her to
rule out that interpretation. In paragraphs 157 through 160 of
the FAC, Godecke specifically alleges that she could pinpoint
those ROEs for claims without a WOPD where the claim was
either paid or appealed, which would have been impossible
had the claim included the EY modifier as it should have had.
Furthermore, the FAC includes detailed allegations from
Theresa Duffy, a former colleague of Godecke, who
personally reviewed KCI’s claims denied by Medicare to
determine whether KCI should appeal the denials. Starting in
2002, “Duffy complained to Godecke about the inadequate
documentary support for submitted claims,” and Duffy and
Godecke “discussed that numerous claims lacked required
documentation.” Less than two weeks before Godecke filed
the FAC (in 2017), Duffy confirmed to Godecke “that KCI’s
claims submitted to Medicare that Duffy had personally
reviewed lacked appropriate documentation, including claims
which required an EY modifier because KCI did not have a
valid WOPD before delivery of a VAC.” In 2017, Duffy also
confirmed to Godecke that she “personally saw that claims
for first cycle treatment had routinely been billed to
Medicare, and paid by Medicare, even though the VAC had
been delivered before KCI had obtained a valid WOPD.”4
Duffy also stated that she “did not recall ever seeing an EY
4 First cycle treatment refers to the first month of VAC therapy.
14 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS
modifier placed on any first cycle claims, even when
Medicare required that an EY modifier be included.” Duffy
also confirmed that when she “reported to KCI management,
including Deb Smith, that she had not found any WOPD for
claims submitted, Smith directed Duffy not to appeal the
claim . . . because Smith was worried that Medicare would
notice the lack of a WOPD.”
Duffy’s allegations provided the necessary reliable indicia
that give a strong inference that KCI actually submitted false
claims to Medicare, and the district court incorrectly
disregarded the information provided by Duffy. The district
court recognized that, “[w]hile it is certainly suspect that
Plaintiff is on her Fourth Amended Complaint, and Plaintiff
now, for the first time, alleges facts pertaining to
conversations that occurred starting in 2002, the Court must
accept Plaintiff’s allegations as true when deciding a motion
to dismiss.” In spite of that acknowledgement, however, the
district court did not accept the allegations as true, stating that
the “allegations regarding [Godecke’s] conversations with
Duffy are not particularly reliable, given that Duffy was
allegedly recounting what she recalled from fifteen years
prior.” The district court ultimately held that “Plaintiff’s
allegations regarding her 2002 conversations with Duffy and
Duffy’s recollections that Plaintiff ‘confirmed’ in 2017 do not
provide the necessary “reliable indicia” that KCI actually
submitted false claims to Medicare.”
The district court imposed too high of a hurdle to test the
sufficiency of these allegations. The only unreliable aspect
of Duffy’s allegations is the fact that Duffy’s recollection is
based on events that happened fifteen years prior. Although
it is true that a fifteen year old memory is less reliable than a
more recent one, Duffy’s memories clearly allege a false
GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 15
claim: she “personally saw that claims for first cycle
treatment had routinely been billed to Medicare, and paid by
Medicare, even though the VAC had been delivered before
KCI had obtained a valid WOPD.” Duffy’s recollections can
be more closely examined in a deposition, and it is possible
that they would not hold up under cross-examination. But a
motion to dismiss is too early a stage to render a judgment on
the reliability of Duffy’s recollections when the only
indication that they might be less than reliable is the length of
time that has elapsed since she witnessed the events at issue.
Godecke alleges details of a scheme to submit claims that
were fraudulent because they lacked the EY modifier when it
should have been included. And Duffy’s recollections and
Godecke’s cross-referencing of ROEs are enough reliable
indicia to lead to a strong inference that KCI actually
submitted false claims to Medicare.
B. Godecke sufficiently alleges that KCI acted with
the requisite scienter under the FCA.
Liability under the FCA is established only when the
defendant “knowingly” presents a false or fraudulent claim
for payment. 31 U.S.C. § 3729(a)(1)(A). “Knowingly” is
defined as having: (1) actual knowledge of the information;
(2) deliberate ignorance of the truth or falsity of the
information; or (3) reckless disregard of the truth or falsity of
the information. 31 U.S.C. § 3729(b)(1)(A). The FCA’s
“knowingly” requirement “require[s] no proof of specific
intent to defraud.” 31 U.S.C. § 3729(b)(1)(B). Instead of
pleading specific intent to defraud, it is sufficient to plead that
the defendant knowingly filed false claims, or that the
defendant submitted false claims with reckless disregard or
deliberate ignorance as to the truth or falsity of its
16 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS
representations. United States v. Bourseau, 531 F.3d 1159,
1167 (9th Cir. 2008). The deliberate ignorance standard can
cover “the ostrich type situation where an individual has
buried his head in the sand and failed to make simple
inquiries which would alert him that false claims are being
submitted.” United States v. United Healthcare Ins. Co., 848
F.3d 1161, 1174 (9th Cir. 2016) (internal quotation marks
omitted). “Congress adopted the concept that individuals and
contractors receiving public funds have some duty to make a
limited inquiry so as to be reasonably certain they are entitled
to the money they seek.” Id. (internal quotation marks
omitted).
The district court erred in holding that Godecke failed to
plead the requisite scienter under the FCA.5 The district court
indicated that Godecke and Duffy’s knowledge of the appeals
process would only support an inference that KCI found out
during the appeals process that it was submitting false claims
5 The district court misstated the standard for scienter at the
conclusion of its scienter analysis, stating that Godecke had not
sufficiently alleged that KCI “knowingly submitted false claims with an
intent to deceive the government.” (Emphasis added.) But this incorrect
legal standard was only mentioned once, and it is clear from the rest of the
district court’s analysis that the district court understood that the proper
standard only required KCI knowingly to submit false claims. As the
district court stated, “[t]he more appropriate inquiry is whether Plaintiff
has pleaded facts indicating that KCI knowingly submitted claims without
a completed WOPD to Medicare without the requisite EY modifier.”
Therefore, reversal would not be warranted solely on the ground that the
district court misstated once the proper legal standard for scienter. See
Hooper v. Lockheed Martin Corp., 688 F.3d 1037, 1049–50 (9th Cir.
2012) (holding that when the district court applies the wrong legal
standard by requiring the relator to prove that the defendant acted “with
the intent to deceive,” reversal may be warranted).
GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 17
to the government, not that it knew they were false at the time
of submission.
But Godecke sufficiently alleges that KCI knowingly
submitted claims without the requisite EY modifier when
KCI had not gotten a written order prior to delivery. First,
Godecke alleges that KCI knowingly delivered VAC devices
without receiving a prior written order, as evidenced by the
“exceptions” authorized by managers. Although this
allegation by itself would not be sufficient to allege that KCI
knowingly submitted false claims, it is an important building
block in the overall allegations sufficiently to plead FCA
violations. Building on the allegations that KCI knowingly
delivered VAC devices without a WOPD, Godecke
sufficiently alleges that KCI knowingly submitted these
claims without a WOPD to Medicare without the requisite
EY modifier. Godecke alleges that KCI management
explained they knew that Medicare would not pay for the
VAC devices delivered under the “exceptions” to the rules,
and KCI management “set up tracking systems to expedite
[the] effort . . . to mask the fact that VACs were delivered
without all of the required elements in hand.”
Godecke’s scienter allegations are bolstered by
information from her former co-worker Theresa Duffy.
Godecke alleges that Duffy recently confirmed to her “that
KCI’s claims submitted to Medicare that Duffy had
personally reviewed lacked appropriate documentation,
including claims which required an EY modifier because KCI
did not have a valid WOPD before delivery of a VAC.”
Duffy also confirmed to Godecke that KCI’s billing and
management head Deb Smith told her not to appeal denials of
certain claims “because Smith was worried that Medicare
would notice the lack of a WOPD.” Partially through Duffy’s
18 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS
recollection, the FAC alleged that false claims were
submitted without the proper WOPD documentation and KCI
management deliberately avoided appealing denials of claims
that lacked a WOPD. Combined, this is sufficient to allege
scienter. The district court explained away Godecke’s
conversations with Duffy as not alleging the requisite
scienter, saying “at most, Duffy ‘confirmed’ that KCI realized
after the fact, during the appeals process, that it had submitted
claims to Medicare without a WOPD or the required EY
modifier.” But at the very least, Duffy’s recollections are
sufficient to show the “ostrich type situation” of deliberate
ignorance on the part of KCI, where KCI “has buried his head
in the sand and failed to make simple inquiries which would
alert [it] that false claims are being submitted.” See United
Healthcare Ins. Co., 848 F.3d at 1174.
Furthermore, when Godecke raised concerns about
whether KCI was following proper rules for billing Medicare,
KCI quickly fired not only Godecke, but also her supervisor,
and the senior vice president to whom they both reported.
Godecke’s supervisor told her that KCI management was
afraid she was gathering information on false claims and was
going to be a whistleblower. While the circumstances of the
firings does not establish on its own that KCI knowingly
submitted false claims, KCI’s extraordinarily aggressive
reaction to these concerns suggest that KCI was at least trying
to remain willfully ignorant of the falsity of its VAC claims.
When combined with Duffy’s recollection and the tracking
systems, the firings are added support of the allegation that
KCI knowingly submitted false claims.
In sum, the allegations of scienter were sufficient, at least
under the “deliberate ignorance” standard, based on the
FAC’s discussion of the tracking systems set up by KCI
GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 19
management, Godecke’s colleague’s assertions that she
personally reviewed claims that lacked appropriate
documentation, KCI management’s instructions not to appeal
denials for fear that Medicare would notice the lack of a
written order prior to delivery, and the quick termination of
Godecke, her supervisor, and the senior vice president after
they raised concerns about false claims being submitted.
C. Godecke sufficiently alleges that KCI’s false claims
were material to the government’s payment
decision.
KCI argues that the FAC fails the FCA’s materiality
requirement because it does not allege with particularity that
the allegedly false submissions would have affected
Medicare’s ultimate payment decision. In an earlier order,
the district court denied KCI’s motion to dismiss the Second
Amended Complaint on the issue of materiality. “In
reviewing decisions of the district court, we may affirm on
any ground finding support in the record. If the decision
below is correct, it must be affirmed, even if the district court
relied on the wrong grounds or wrong reasoning.” Cigna
Prop. & Cas. Ins. Co. v. Polaris Pictures Corp., 159 F.3d
412, 418 (9th Cir. 1998).
The FCA defines the term “material” as “having a natural
tendency to influence, or be capable of influencing, the
payment or receipt of money or property.” 31 U.S.C.
§ 3729(b)(4). Although the requirement is “demanding,” the
Supreme Court has held that there is not a bright-line test for
determining whether the FCA’s materiality requirement has
been met. See Universal Health Servs., Inc. v. U S. ex rel.
Escobar, 136 S. Ct. 1989, 2003 (2016). Instead, the Supreme
Court has given a list of relevant, but not necessarily
20 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS
dispositive, factors in determining whether the false claims
were material, such as whether the government decided “to
expressly identify a provision as a condition of payment.” Id.
“Likewise, proof of materiality can include, but is not
necessarily limited to, evidence that the defendant knows that
the Government consistently refuses to pay claims in the
mine run of cases based on noncompliance with the particular
statutory, regulatory, or contractual requirement.” Id.
“Conversely, if the Government pays a particular claim in full
despite its actual knowledge that certain requirements were
violated, that is very strong evidence that those requirements
are not material.” Id. “Or, if the Government regularly pays
a particular type of claim in full despite actual knowledge that
certain requirements were violated, and has signaled no
change in position, that is strong evidence that the
requirements are not material.” Id. at 2003–04. “Materiality,
in addition, cannot be found where noncompliance is minor
or insubstantial.” Id. at 2003.
Filing for Medicare payment for a VAC and related
supplies without disclosing that no written order was received
prior to delivery is a material false claim. Godecke’s
allegations, taken together, sufficiently allege materiality to
survive a motion to dismiss. According to the FAC, the
LCDs explicitly provide that payment would not be made if
a VAC was delivered before the written order was received.
Although this express identification of a condition of payment
“may not be sufficient, without more, to prove materiality,
. . . it is certainly probative evidence of materiality.” See U.S.
ex rel. Rose v. Stephens Inst., 909 F.3d 1012, 1020 (9th Cir.
2018). Godecke further alleges that the prior written order
requirement was not just some “paperwork issue” but the
result of extensive negotiations KCI had with Medicare
representatives in order to prevent fraud and abuse. Although
GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 21
this is not an allegation based on how Medicare “has treated
similar violations,” the fact that the requirement was
“extensively negotiated” is also probative. See id. KCI
simply suggests that because the government “may reimburse
a particular claim in full despite its not meeting the LCD
guidelines (including the EY modifier requirement), those
guidelines cannot be said to be material to the government’s
payment determination.” (Emphasis added.) But KCI has
not shown that Medicare has paid a particular claim in full
despite its actual knowledge that there was no prior written
order. Nowhere in the record is there evidence that the
government actually has reimbursed a particular claim in full
despite knowing that it did not meet the LCD guidelines
related to the EY modifier requirement. Godecke’s
allegations also do not indicate that noncompliance would be
minor or insubstantial. Godecke alleges that Medicare would
not pay for the VAC at all if it knew that there was no prior
written order. Godecke therefore has sufficiently alleged
materiality.
* * *
6 Because we hold that the FAC’s allegations are sufficient under the
FCA, we do not reach Godecke’s alternate argument that the district court
erred in denying her leave to further amend her complaint.
Outcome: CONCLUSION
For the foregoing reasons, we reverse the district court’s
dismissal of the FAC.6
REVERSED and REMANDED.
Plaintiff's Experts:
Defendant's Experts:
Comments: