Peace Officers' Annuity and Benefit Fund of Georgia v. Davita Inc.

          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. ¶¶ 153-225.) In detailed allegations, ...