United States District Court, D. Colorado
PEACE OFFICERS' ANNUITY AND BENEFIT FUND OF GEORGIA, Individually and on Behalf of All Others Similarly Situated, and JACKSONVILLE POLICE AND FIRE PENSION FUND, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,
v.
DAVITA INC., KENT J. THIRY, JAMES K. HILGER, and JAVIER J. RODRIGUEZ, Defendants.
ORDER DENYING MOTION TO DISMISS
WILLIAM J. MARTÍNEZ UNITED STATES DISTRICT JUDGE.
This
case arises out of Defendant DaVita Inc.'s
(“DaVita”) relationship to the American Kidney
Fund (“AKF”) and statements made by DaVita
executives Kent Thiry, James Hilger, and Javier Rodriguez
(together with DaVita, “Defendants”) about
DaVita's financial performance and its relationship to
AKF. Plaintiffs Peace Officers' Annuity and Benefit Fund
of Georgia (“POA”) and Jacksonville Police and
Fire Pension Fund (“Jacksonville Fund”)
(together, “Plaintiffs”) bring this action
pursuant to Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 (the “Exchange Act”) on
behalf of themselves and others who purchased or otherwise
acquired common stock of DaVita between February 26, 2015,
and October 6, 2017 (the “Class Period”). They
allege that Defendants made a variety of fraudulent
statements or omissions in connection with the sale of DaVita
stock, which caused Plaintiffs to purchase DaVita stock at
artificially inflated prices.
Now
before the Court is Defendants' Motion to Dismiss (the
“Motion”) in which Defendants argue that
Plaintiffs lack standing to assert claims for statements made
after October 14, 2016, and that Plaintiffs have failed to
sufficiently plead fraudulent statements, scienter, and loss
causation. (ECF No. 43.) For the reasons discussed below, the
Court denies Defendants' Motion.
I.
BACKGROUND
The
following factual summary is drawn from Plaintiffs'
Amended Complaint.
A.
Healthcare for End-Stage Renal Disease Patients
At the
center of this action is DaVita's business of providing
dialysis to end-stage renal disease (“ESRD”)
patients. Because of the expensive and time-consuming nature
of dialysis, ESRD patients often have difficulty finding or
maintaining employment. (ECF No. 36 ¶ 38.) In 1972,
Congress recognized the challenge faced by ESRD patients and
made all ESRD patients eligible for Medicare at any age and
regardless of financial circumstance. (Id.) Medicare
covers 80% of ESRD patients' dialysis treatments as well
as kidney transplant and aftercare. (Id. ¶ 39.)
Patients are liable for the remainder of dialysis costs, and
may be eligible for state-run Medicaid programs for those
remaining costs not covered by Medicare. (Id. ¶
39.)
Some
ESRD patients are insured by private group plans through an
employer or other private insurance. When the Affordable Care
Act (“ACA”) went into effect in January 2014,
ESRD patients' insurance options expanded because
commercial insurers could no longer exclude coverage for
preexisting conditions. (Id. ¶ 41.) Private
insurance plans typically reimburse dialysis providers at
much greater rates than Medicare or Medicaid,
“i.e., up to $4, 000 per treatment, as opposed
to only $300 per treatment.” (Id. ¶ 42.)
Pursuant
to a rule issued by the Centers for Medicare & Medicaid
Services (“CMS”), private plans serve as the
patients' primary insurer for a 30-month
“coordination period, ” during which Medicare is
a secondary insurer. (Id. ¶ 40.) After that
period, Medicare becomes the primary insurer, and private
insurance becomes secondary. (Id.)
B.
AKF Commercial Premium Assistance
AKF
provides charitable premium assistance (“CPA”) to
ESRD patients who would otherwise have difficulty affording
insurance premiums and cost of care. (Id. ¶
50.) AKF is the largest provider of third-party CPA for ESRD
patients in the country, and is funded almost entirely by
dialysis providers. (Id.) In 2015, AKF reported over
$260 million in donations, 80% of which, according to press
reports, was provided by DaVita and its competitor Fresenius.
(Id. ¶ 51.) Plaintiffs allege that DaVita
donated in excess of $100 million to AKF in 2015, and imply
that DaVita increased its annual donation in 2016.
(Id.)
The
federal government has been aware of the AKF's CPA
program for at least twenty years. In 1997, AKF sought an
advisory opinion from the Department of Health and Human
Services' Office of Inspector General (“OIG”)
regarding funding of CPA for ESRD patients for Medicare Part
B or Medigap premiums. OIG Ad. Op. 97-1, 1997 WL 34684549.
Under the arrangement proposed by AKF, it would assess
applicants' eligibility and financial need, and award CPA
solely based on those factors; AKF would not take into
account the identify of the referring facility or amount of
any donor's contribution. Id. Donor companies
certified that they would not track the amount that AKF pays
on behalf of patients at their facilities, but could consider
what they would have otherwise paid on behalf of financially
needed patients. Id. In addition, donor companies
agreed not to disclose the amount of their donations or
method of calculating contributions, nor place restrictions
or conditions on donations. Id. Based on the
information provided, the OIG stated that the proposed
arrangement would not constitute grounds for the imposition
of civil monetary penalties under Section 231(h) of the
Health Insurance Portability and Accountability Act of 1996.
Id.
C.
DaVita's Business Practices
DaVita's
profits are primarily driven by private insurance, due to the
much greater reimbursement rates of private insurers. While
commercially insured patients comprise approximately 10% of
DaVita's patient population, those patients drive nearly
100% of its profits and 33-36% of its revenues. (Id.
¶¶ 4, 43-44.)
Plaintiffs
allege that DaVita “intentionally and illegally
‘steered' as many ESRD patients as it could,
” including Medicare- and Medicaid-eligible patients,
“into commercial plans by paying their premiums for
them through AKF.” (Id. ¶ 53.) Plaintiffs
set forth in great detail, with reference to internal DaVita
documents and confidential witness statements, how DaVita
tracked the acquisition of “private pay” patients
at its facilities, incentivized patient steering by offering
bonuses to employees, prepared training and instructional
materials for employees that disparaged Medicare and
Medicaid, and designed materials to convince patients that
Medicare and Medicaid were worse options than private
insurance. (Id. ¶¶ 54-103.)
Specifically,
Plaintiffs allege that DaVita tracked the acquisition of
“private pay” patients, including patients who
switched from Medicaid to Medicare to commercial plans
(described in one instance as “private insurance
wins” and a “leading indicator” of
performance for one of DaVita's divisions). (Id.
¶¶ 55-59.) They also claim that DaVita insurance
counselors were required to regularly circulate internal
DaVita spreadsheets that listed patients with commercial
insurance as their primary insurer, reimbursement rates for
dialysis treatments under each plan, and how much money was
collected by DaVita for each patient. (Id.
¶¶ 61, 100.) According to Plaintiffs, DaVita
implemented formal incentive programs for employees, regions,
and divisions that acquired the most privately insured
patients (id. ¶¶ 62-67, 97-99), and, by
2015, had developed a “Medicaid Opportunity”
initiative, which formalized a company-wide plan to direct
all current patients to private insurance with AKF CPA
helping patients afford otherwise unaffordable private
insurance premiums (id. ¶¶ 81-82, 89).
Confidential Witness 3 (“CW 3”), a former
insurance counselor for DaVita clinics in and around Austin,
Texas, explains that DaVita conducted training for insurance
counselors that emphasized the benefits to DaVita of having
patients with private insurance, rather than Medicaid or
Medicare. (Id. ¶¶ 85, 91, 92.)
Plaintiffs
also allege that DaVita's educational materials pushed
all ESRD patients toward private insurance, regardless of
individualized medical or financial need, by “telling
patients that Medicaid and Medicare would not meet their
medical needs, and was much worse than private
insurance.” (ECF No. 36 ¶¶ 68, 72, 76;
see also id. ¶¶ 69-80, 92.) Plaintiffs
cite an example of DaVita counseling a patient, who had
obtained private insurance prior to becoming a DaVita patient
but struggled to pay premiums, on the “benefits of
having private insurance as primary as opposed to
Medicare.” (Id. ¶ 78.) They also cite an
example of Confidential Witness 5's (“CW 5”)
husband being told by DaVita staff not to enroll in Medicare,
and a DaVita social worker not allowing CW 5's husband to
fill out paperwork to enroll in Medicare, which CW 5 and her
husband wanted as a safety net. (Id. ¶ 95.)
According
to Plaintiffs, DaVita also instructed employees to assure
ESRD patients concerned about monthly premiums for private
insurance that they may qualify for CPA through AKF, and
employees assisted patients in applying for CPA through AKF.
(Id. ¶¶ 70, 79.) Confidential Witness 1
(“CW 1”), a former DaVita insurance counselor who
worked at several facilities in the New York City area,
explained that signing up patients for the AKF CPA program
was “a way to force exchange plans on people.”
(Id. ¶ 82.)
Plaintiffs
also reference public comments filed in response to CMS's
August 18, 2016 Request for Information (“RFI”)
regarding dialysis companies' steering patients to
commercial insurance plans with AKF would paying patient
premiums. (Id. ¶¶ 106-112.) They cite the
comments of a former DaVita social worker who stated that
DaVita insurance counselors would assure ESRD patients that
they would “preapprove them for AKF” CPA.
(Id. ¶ 111.) Another former insurance counselor
stated that DaVita closely tracked “their AKF enrolles
and how much money goes for each person that receives
assistance.” (Id. ¶ 112.)
In
response, DaVita contends that it has a statutory obligation
to “educate ESRD patients about any financial
resources-such as CPA-that may be available to help pay for
their care.” (ECF No. 43 at 15.)
D.
Public Scrutiny of and Reaction to the AKF CPA
Program
In July
2016, UnitedHealth sued the American Renal Association for
fraud, alleging that the organization targeted Medicaid- and
Medicare-eligible patients, and convinced them to enroll in
UnitedHealth commercial plans using financial assistance from
the AKF. (ECF No. 36 ¶ 104.)
On
August 18, 2016, CMS issued the RFI seeking information about
dialysis companies steering Medicare- and Medicaid-eligible
ESRD patients on to commercial health plans through the ACA
and use of the AKF CPA program. (Id. ¶ 106.)
CMS expressed concern that “some organizations may be
engaging in enrollment activities that put their profit
margins ahead of their patients' needs.”
(Id.) DaVita responded to the RFI on September 22,
2016, stating that it “does not steer patients toward
any particular insurance option or plan. DaVita educates its
patients so that they are able to make informed decisions
that are in their best interest.” (Id. ¶
117.)
On
October 23, 2016, the St. Louis Post-Dispatch
published an investigative report, based on internal DaVita
e-mails and interviews with former DaVita employees, which
suggested that DaVita systematically steered patients toward
commercial plans and AKF CPA. (Id. ¶¶
118-21.) After publication of the article, DaVita's stock
price dropped by $2.86 per share. (Id. ¶ 122.)
On
October 31, 2016, DaVita issued a press release stating that
it would “suspend support for applications to the . . .
charitable premium assistance by patients enrolled in minimum
essential Medicaid coverage who are seeking additional
coverage on a 2017 ACA Plan.” (Id. ¶
123.) DaVita stated that this change would impact only 1% of
its patient population. (Id. ¶ 124.) The press
release included only the financial impact for the ESRD
patients with ACA plans receiving CPA from AKF, not the total
number of its ESRD patients with commercial plans receiving
assistance. (Id. ¶ 127.)
On
December 14, 2016, CMS published an interim final rule
requiring dialysis providers to disclose to commercial
insurers which patients received AKF CPA assistance.
(Id. ¶ 133.)[1] In the summary of comments received in
response to the RFI, CMS observed that “all commenters
on the topic-including insurance companies, dialysis
facilities, patients, and non-profit organizations-stated
that they believe many dialysis facilities are paying for or
arranging payment for individual market health care premiums
for the patients they serve.” (Id.) In
addition, “[c]omments also described that, even though
it is financially beneficial to suppliers, enrollment in
individual market coverage paid for by dialysis facilities or
organizations affiliated with dialysis facilities can lead to
. . . harm to patients.” (Id.)
On
December 25, 2016, the New York Times published an
article that described the relationship between AKF and its
largest donors, including DaVita, and suggested that AKF
denied CPA to patients of dialysis companies who did not
donate to AKF. (Id. ¶¶ 134-35.) It also
discussed AKF's guidelines, which allegedly
“instruct[ed] dialysis providers to track the amount of
money their patients received from the AKF and donate an
equivalent amount back to the program in order for patients
to receive premium assistance.” (Id. ¶
135.)
On
Friday, January 6, 2017, the federal government opened an
investigation and served a subpoena on DaVita related to AKF
and CPA. (Id. ¶ 136.) DaVita stock fell from
$65.79 on that day to $63.38 per share on Monday, January 9,
2017. (Id.)
On
January 12, 2017, a shareholder activist group wrote a letter
to DaVita's board questioning DaVita's increase in
commercial patients after the ACA went into effect and its
relationship with AKF. (Id. ¶ 138.) In
DaVita's Form 10-K filed with the SEC on February 24,
2017, DaVita noted that insurance companies had started to
include provisions to refuse to accept CPA, which could
impact the number of patients able to afford commercial
plans. (Id. ¶ 141.) On May 2, 2017, DaVita
noted “lower enrollment of patients on the ACA
plans” and that its commercial mix dropped
significantly. (Id. ¶ 142.)
DaVita
subsequently confirmed that over 4, 000 patients also
received AKF CPA for employer group and COBRA plans, and
estimated that its loss in operating income if patients no
longer received AKF assistance for commercial non-ACA plans
would amount to $450 million in financial exposure.
(Id. ¶ 152.) These numbers were in addition to
the “2, 000 Medicaid patients who were enrolled in ACA
plans with AKF assistance, ” with a potential financial
impact of $140 million. (Id. ¶ 142.)
In
September and October 2017, third-party reports estimated
that “as much as 60-80% of [DaVita's] earning power
is derived from its AKF relationship” and described the
AKF relationship as “DaVita's sole moat, or a
sustainable economic advantage separating it from
competitors.” (Id. ¶¶ 148-49.)
Plaintiffs contend that DaVita's stock dropped over 6%,
from $61.26 to $57.49 in reaction to the September 22, 2017
report, and nearly 10%, from $59.82 to $53.89 in reaction to
the October 9, 2017 report. (Id. ¶¶ 148,
151.)
E.
DaVita's Public Statements
Plaintiffs
allege that DaVita made false and misleading statements and
material omissions during the Class Period in its annual 10-K
filings, quarterly 10-Q filings, statements made in
conjunction with those filings and during earnings calls,
press releases, a response to the CMS RFI, and during the
2017 Capital Markets Day. (Id. ΒΆΒΆ
153-225.) In detailed allegations, ...