Osinek v. Kaiser Permanente

Background

The United States sued five Kaiser entities under the False Claims Act, along with claims for payment by mistake and unjust enrichment. The entities were Kaiser Foundation Health Plan, Inc.; Kaiser Foundation Health Plan of Colorado; The Permanente Medical Group, Inc.; Southern California Permanente Medical Group; and Colorado Permanente Medical Group, P.C. The first two are health plans, and the remaining three are physician medical groups. The defendants filed amended answers asserting affirmative defenses, which are defenses that seek to avoid or reduce liability even if the plaintiff proves its claims.

The United States moved under Federal Rule of Civil Procedure 12(f) to strike certain defenses. Rule 12(f) permits a court to remove an insufficient, redundant, immaterial, impertinent, or scandalous matter from a pleading. The court explained that affirmative defenses must provide fair notice and must contain enough factual support to be plausible.

Equitable defenses

The United States argued that estoppel, ratification, and failure to mitigate damages should be stricken because they are equitable defenses and cannot be used against claims involving public funds. The court relied on the Supreme Court’s decision in Office of Personnel Management v. Richmond, which held that courts cannot use estoppel to authorize payments from the federal Treasury contrary to a congressional appropriation.

The Kaiser entities argued that Richmond should not apply because the defenses were being used defensively—to prevent or reduce the government’s recovery—rather than to obtain payment from the Treasury. The court rejected that distinction. It held that the same concern about control over public funds applies when a defendant seeks to keep money from returning to the Treasury. The court also concluded that the reasoning applied to ratification and failure to mitigate damages, and that it applied to the government’s statutory and common-law claims because the underlying Medicare Advantage payments came from appropriated funds.

The court further concluded that the False Claims Act’s civil penalties and treble damages did not make the equitable defenses available. It stated that the Kaiser entities had not shown that Congress intended to permit defenses such as estoppel against False Claims Act penalties or treble damages. The court therefore granted the motion to strike the defenses of estoppel, ratification, and failure to mitigate damages. It did not permit amendment because amendment would be futile under Richmond.

The court clarified that striking those defenses did not make the government’s alleged conduct irrelevant. The defendants could still argue, for example, that the government’s conduct affected whether they had the required intent to defraud or whether other elements of False Claims Act liability were met. The court did not decide whether such arguments would ultimately succeed.

Excessive-fines defense

The Kaiser entities asserted that the potential civil penalties and treble damages could violate the Eighth Amendment’s Excessive Fines Clause if they were grossly disproportionate to the gravity of the alleged offenses. The United States argued that the defense was not adequately pleaded because the defendants did not explain how the possible penalties would satisfy the proportionality test.

The court held that the defense was sufficiently pleaded at this stage. The government had not yet identified all of the diagnosis codes it claimed were false, making it impossible to calculate the potential damages and penalties. The court also found it plausible, based on the government’s allegations concerning hundreds of millions of dollars in risk-adjustment payments, that the penalties and treble damages could be extremely large. The court therefore denied the motion to strike the excessive-fines defense.

Voluntary-disclosure defense

KFHP Colorado separately asserted a statutory voluntary-disclosure defense under 31 U.S.C. § 3729(a)(2). That provision can permit reduced damages when a defendant timely gives the responsible federal officials all known information about a violation, cooperates with the investigation, and discloses the information before a covered action or investigation has begun or become known to the defendant.

KFHP Colorado alleged that it discovered potentially unsupported diagnosis codes during a 2015 internal review, disclosed the information to the Centers for Medicare and Medicaid Services within 30 days, and redacted the codes. The United States argued that the defense was inadequately pleaded, including because KFHP Colorado did not allege that it disclosed all known information, reported to the appropriate officials, cooperated with the investigation, or made the disclosure before a relevant action or investigation had begun.

The court rejected some of those objections at the pleading stage, drawing reasonable inferences in KFHP Colorado’s favor. It also noted that the record did not clearly establish whether reporting to the Centers for Medicare and Medicaid Services could satisfy the statutory requirement concerning officials responsible for investigating False Claims Act violations. But the court found a problem with the requirement that the disclosure occur before a relevant action or investigation. Two lawsuits involving Kaiser entities had already been filed before KFHP Colorado’s 2015 disclosure, and one specifically named KFHP Colorado. KFHP Colorado did not provide concrete examples showing that the diagnosis codes in its proposed defense were outside the scope of those lawsuits.

The court therefore granted the motion to strike KFHP Colorado’s voluntary-disclosure defense, but granted leave to amend it if KFHP Colorado could do so in good faith. The amended answer was due within four weeks of the decision.

Disposition

The court granted in part and denied in part the motion to strike. It granted the motion as to estoppel, ratification, and failure to mitigate damages, denied it as to the excessive-fines defense, and granted it as to the voluntary-disclosure defense with leave to amend. The order disposed of Docket No. 312.