1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10 UNITED STATES OF AMERICA, ex rel. No. 2:19-cv-00992-DJC-JDP TERRY GOLDBERG and STATE OF 11 CALIFORNIA, ex rel TERRY ORDER DENYING DEFENDANTS’ GOLDBERG, MOTION TO DISMISS 12 Plaintiff, 13 v. 14 SACRAMENTO HEART AND 15 VASCULAR MEDICAL ASSOCIATES, a California corporation; PHILIP M. 16 BACH, M.D., an individual; PHILIP M. BACH, M.D., INC., a California 17 corporation; and DOES 1–100, inclusive, 18 Defendants. 19 20 In her Complaint, Relator, who is a former employee of Defendant Sacramento 21 Health and Vascular Medical Associates (“SHVMA”), claims that SHVMA, as directed by 22 Dr. Philip Bach (together, “Defendants”), paid primary care physician employees of 23 SHVMA bonuses based on their referral of patients for various diagnostic services 24 provided by the Defendants in violation of federal and state law. Plaintiffs further 25 allege that the Defendants utilized a billing code that is not justified by the service 26 being performed, and that results in a higher amount being paid by Medicaid and 27 Medi-Cal. Because the relator was allegedly fired after bringing concerns about these 28 practices to the attention of Bach, she also claims that Defendants engaged in illegal 1 retaliation. 2 Defendants bring this Motion (ECF No. 36) to dismiss all the claims related to 3 the state and federal false claims act and related claims brought under the California 4 Insurance Code and the California Business and Professions Code. Broadly speaking, 5 Defendants argue that the alleged bonuses paid to the primary care physicians fall 6 within a safe harbor for payments to bona fide employees, taking them outside the 7 federal and state false claims acts, and that those payments are not otherwise 8 prohibited under California law. 9 For the reasons that follow, the Court DENIES the motion. 10 FACTUAL ALLEGATIONS 11 The following facts are taken from Realtor’s Complaint and are assumed to be 12 true for purposes of this motion. Relator Terry Goldberg was employed by Defendant 13 Sacramento Heart and Vascular Medical Associates from May 2016 to approximately 14 February 2018 as a practice administrator. (See Compl. (ECF No. 1) ¶¶ 65, 71.) 15 SHVMA is a “cardiovascular care center” that includes “all aspects of adult diagnostic 16 and therapeutic cardiology.” (Id. ¶ 24.) SHVMA is owned and managed by Defendant 17 Phillip Bach, M.D. (id. ¶ 14), and “employs three primary care physicians” along with 18 seven board-certified cardiologists. (Id. ¶ 24.) SHVMA accepts Medicare and Medi- 19 Cal patients, who are covered by a large number of insurance providers. (Id. ¶ 25.) In 20 addition to the services provided by the physicians who work there, SHVMA 21 “generates substantial revenue” from the diagnostic services it provides, such as x- 22 rays, CT scans, PET scans and the like. (Id. ¶ 29.) 23 According to the Complaint, SHVMA and Dr. Bach “knowingly and willfully 24 pay[ ] its primary care physicians . . . illegal bonuses based on the number of patients 25 they refer” for various procedures. (Compl. ¶ 26.) Specifically, Relator alleges that 26 SHVMA’s primary care physicians are paid $40 per referral, and that the bonuses are 27 paid on a quarterly basis. (Id. ¶ 27.) The Complaint further alleges that in exchange 28 for the bonus payments, the primary care physicians “have referred thousands of 1 Medicare, Medi-Cal, and private insurance patients to SHVMA-owned testing 2 equipment for which Medicare, Medi-Cal, and private insurers have paid 3 reimbursement (id. ¶ 28), resulting in millions of dollars in revenue (id. ¶ 29). Relator 4 asserts that after she raised concerns about this bonus structure, Dr. Bach called her 5 into his office and admonished her for using the word “kickback” in describing the 6 bonus structure (id. ¶ 36), but just a few weeks later Bach ordered SHVMA to stop 7 tracking the primary care physicians’ referrals (id. ¶ 37). 8 In addition to this bonus structure, Relator alleges that Defendants have 9 engaged in “upcoding”, which Relator describes as a “type of fraudulent billing where 10 healthcare providers submit inaccurate billing codes to insurance companies in order 11 to receive inflated reimbursements.” (Compl. ¶ 45.) Relator’s allegations focus on 12 Current Procedural Technology (“CPT”) code 99214, one of the 7,800 codes used by 13 healthcare providers. (Id. ¶¶ 46, 48.) According to Relator, 99214 is in a range of 14 Evaluation and Management Codes of 99211–99215, which are arranged in order of 15 complexity. (Id. ¶ 49.) In determining which code applies, a physician considers 16 “1. the extent of the history of the patient, 2. the extent of the examination, and 3. the 17 complexity of the medical decision making involved.” (Id. ¶ 51.) Although not 18 expressly stated, it appears from the Complaint that the higher code results in a 19 higher dollar amount that is billed to the insurance company. (See also Mem. of P. 20 and A. in Support of Defs.’ Mot. to Dismiss Counts 1 Through 10 of Pl.’s Compl. (ECF 21 No. 36-1) at 3 n.5 (“Motion” or “Mot.”).) 22 Relator alleges that Dr. Bach billed the 99214 code more than 3,400 times in a 23 11-month period in 2017, while a colleague who saw the same number of patients 24 and generally performed the same services used the code 500 times in that same 25 period. (Compl. ¶¶ 57–58.) A different physician, who treated a larger number of 26 patients with more complex issues, used the code 1,600 times in the same period. 27 (Id.) According to Relator, Dr. Bach utilized the 99214 code for nearly 90% of his 28 patients, far more than the national average of 36%. (Id. ¶¶ 63–64.) The Complaint 1 alleges that Dr. Bach would “’upcode’ CPT code 99214 to ‘pay back’1 Medicare/Medi- 2 Cal insurer, Molina Healthcare [ ] for the types of patients they referred to SHVMA.” 3 (Id. ¶ 59.) Relator further alleges that Dr. Bach “intentionally avoided referring patients 4 back to their primary care physician when he knew the patient no longer needed his 5 routine cardiology services . . . in order to, inter alia, fraudulently increase the number 6 of opportunities he had to improperly bill for code 99214.” (Id. ¶ 61.) 7 Finally, Relator alleges that after expressing concerns about these and other 8 allegedly improper practices, her employment was terminated, “despite her 9 exemplary performance as SHVMA’s practice administrator.” (Id. ¶¶ 65–71.) Relator 10 alleges that SHVMA had “no legitimate reason” to terminate her employment, and that 11 she was fired for raising these concerns in violation of state and federal law. (Id. ¶ 71.) 12 The Complaint includes 11 causes of action related to the bonus structure and 13 upcoding, each of which Defendants argue fails to state a claim upon which relief can 14 be granted. (See Mot. at 2). The Complaint further includes three causes of action 15 related to the termination of Relator’s appointment, although Defendants have not 16 challenged those claims in the instant Motion to Dismiss. (See Relator’s Opp’n to 17 Defs.’ Mot. (ECF No. 37) at 1 n.1 (“Opp’n”).) 18 LEGAL STANDARDS 19 A party may move to dismiss for “failure to state a claim upon which relief can 20 be granted.” Fed. R. Civ. P. 12(b)(6). The motion may be granted if the complaint 21 lacks a “cognizable legal theory” or if its factual allegations do not support a 22 cognizable legal theory. Godecke v. Kinetic Concepts, Inc., 937 F.3d 1201, 1208 (9th 23 Cir. 2019) (quoting Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988)). 24 The court assumes all factual allegations are true and construes “them in the light 25 most favorable to the nonmoving party.” Steinle v. City and Cnty. of San Francisco, 26 919 F.3d 1154, 1160 (9th Cir. 2019) (quoting Parks Sch. of Bus., Inc. v. Symington, 51
27 1 While it is somewhat unclear to the undersigned, in context it appears that this phrase is meant to allege that the use of the higher code was intended to punish Molina for sending less desirable patients 28 to SHVMA. 1 F.3d 1480, 1484 (9th Cir. 1995)). If the complaint’s allegations do not “plausibly give 2 rise to an entitlement to relief,” the motion must be granted. Ashcroft v. Iqbal, 556 3 U.S. 662, 679 (2009). 4 A complaint need contain only a “short and plain statement of the claim 5 showing that the pleader is entitled to relief,” Fed. R. Civ. P. 8(a)(2), not “detailed 6 factual allegations,” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). But this rule 7 demands more than unadorned accusations; “sufficient factual matter” must make the 8 claim at least plausible. Iqbal, 556 U.S. at 678. In the same vein, conclusory or 9 formulaic recitations of elements do not alone suffice. Id. (citing Twombly, 550 U.S. at 10 555). This evaluation of plausibility is a context-specific task drawing on “judicial 11 experience and common sense.” Id. at 679. 12 Regarding claims related to fraud, Federal Rule of Civil Procedure 9(b) requires 13 that they be pled with “particularity.” U.S. ex rel. Cafasso v. Gen. Dynamics C4 Sys., 14 Inc., 637 F3d 1047, 1054–55 (9th Cir. 2011). The circumstances alleged, to constitute 15 fraud, must be “specific enough to give the defendant notice of the particular 16 misconduct so that it can defend against the charge.” Godecke, 937 F.3d at 1208. 17 Specifically, the party must allege the “who, what, when, where, and how” of the 18 misconduct. Id. (quoting Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 19 2009). 20 DISCUSSION 21 I. Federal False Claims Act and Anti-Kickback Statute Claims 22 Each of Relator’s first three causes of action are, at bottom, based on a violation 23 of the Anti-Kickback Statute (“AKS”).2 Relator alleges that the bonus program violated 24 42 U.S.C. § 1320a-7b(2)(A), which she uses to form the basis for liability under the 25 False Claims Act in the first cause of action for presenting false claims in violation of 31 26 2 (See Mot. at 4–5; Opp’n at 5.) As Relator notes, 42 U.S.C. § 1320a-7b(g) expressly provides that “a 27 claim that includes items or services resulting from a violation of this section constitutes a false or fraudulent claim for purposes of subchapter III of chapter 37 of title 31[, the False Claims Act].” (See 28 Opp’n at 5 n.2.) 1 U.S.C. § 3729(a)(1)(A); in the second cause of action for making or using false records 2 or statements that are material to payment or approval of false claims in violation of 31 3 U.S.C § 3729(a)(1)(B); and in the third cause of action for retention of proceeds to 4 which Defendants were not entitled in violation of 31 U.S.C. § 3729(a)(1)(G). 5 Defendants make two arguments as to why each of these claims should fail. 6 First, Defendants argue that a safe harbor for amounts paid to an employee take the 7 bonus program out of the purview of the AKS, and, as a result, there is no liability 8 under the False Claims Act as alleged by the first three causes of action. Relatedly, 9 Defendants argue that since the safe harbor applies, Relator cannot have pled that any 10 violations of the False Claims Act were “knowing and willful.” Second, Defendants 11 argue that the Complaint fails to properly allege that the bonuses were paid in 12 relation to a “federal healthcare program.” The Court takes each argument in turn. 13 A. The Complaint Establishes No Affirmative Defense On Its Face. 14 The Anti-Kickback Statute prohibits an individual from: 15 knowingly and willfully solicit[ing] or receiv[ing] any remuneration (including any kickback, bribe, or rebate) 16 directly or indirectly, overtly or covertly, in cash or in kind — (A) in return for referring an individual to a person for the 17 furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part 18 under a Federal health care program. 19 42 U.S.C. § 1320a-7b(b)(1). However, the AKS provides that this prohibition does not 20 apply to “any amount paid by an employer to an employee (who has a bona fide 21 employment relationship with such employer) for employment in the provision of 22 covered items or services[.]” 42 U.S.C. § 1320a-7b(b)(3)(B). Defendants argue that 23 this safe harbor provision applies, and prohibits liability under the AKS and, 24 accordingly, the federal False Claims Act. (See Mot at 5–6.) 25 Typically, affirmative defenses may not be raised in a motion to dismiss under 26 Rule 12(b)(6). See Scott v. Kuhlmann, 746 F.2d 1377, 1378 (9th Cir. 1984) (per curiam). 27 While an affirmative defense that “clearly appears on the face of the pleading” is 28 grounds for dismissal, that is the case “only if the plaintiff pleads itself out of court — 1 that is, admits all the ingredients of an impenetrable defense[.]” Boquist v. Courtney, 2 32 F.4th 764, 774 (9th Cir. 2022) (citation and internal quotation marks omitted). The 3 safe harbor provision is an affirmative defense. See U.S. v. Turner, 561 Fed. Appx. 4 312, 319 (5th Cir. 2014) (“The safe harbor provision is an affirmative defense which the 5 defendant must prove.”); U.S. v. Yielding, 657 F.3d 688, 700 (8th Cir. 2011) (same). 6 Relator argues that there is no allegation that the primary care physicians are 7 “bona fide employees.” (Opp’n at 6.) Defendants, by contrast, point to paragraph 24 8 of the Complaint, which alleges that “SHVMA also employs three primary care 9 physicians . . . .” (Mot. at 6.) 10 Reference to “employees,” however, is insufficient to establish the “bona fide 11 employment relationship” that is required for the safe harbor provision to apply. See 12 42 U.S.C. § 1320a-7b(b)(3)(B). The accompanying regulations, 42 C.F.R. § 1001.952(i), 13 provides that the applicable definition for a “bona fide employee” is that provided in 14 26 U.S.C. § 3121(d)(2). Section 3121(d)(2), in turn, includes “any individual who, under 15 the usual common law rules applicable in determining the employer-employee 16 relationship, has the status of an employee.” In making this determination, the Ninth 17 Circuit has looked to factors including “(1) whether the business has the right to 18 discharge the worker; (2) whether the business furnishes tools to the person rendering 19 the service; (3) whether the business provides the worker with a place to work; and (4) 20 whether the work is performed in the course of the individual's business rather than in 21 some ancillary capacity.” Gen. Inv. Corp. v. U.S., 823 F.2d 337, 342 (9th Cir. 1987) 22 (citations omitted). None of these factors are alleged in the Complaint, which 23 therefore fails to admit “all the ingredients of an impenetrable defense[.]” Boquist, 32 24 F.4th at 774 (citation and internal quotation marks omitted). 25 For this reason, courts have uniformly rejected requests to dismiss AKS and 26 False Claims Act cases on the basis of the safe harbor provision where the complaint 27 includes bare allegations regarding “employment” generally. For instance, in United 28 States ex rel. Parikh v. Citizens Medical Center, 977 F. Supp. 2d 654, 668–69 (S.D. Tex. 1 2013), the defendant likewise argued that the AKS claims should be dismissed on a 2 12(b)(6) motion under the safe harbor provision. The court denied the motion to 3 dismiss on the grounds that “[t]he facts alleged in the complaint do not satisfy 4 [Defendant’s] requisite burden of proof for its affirmative defenses,” holding that 5 “whether the ER physicians count as bona fide employees under the AKS depends on 6 Citizens meeting its burden of showing that the common law factors—which include 7 whether Citizens had the right to control the manner and means of the physicians' 8 work, the method of payment, and Citizens' control over the physicians' work hours— 9 support such a conclusion.” Id. at 669. Similarly, in United States v. Novak, No. 13-cr- 10 312, 2014 WL 2937062 (N.D. Ill. June 30, 2014), the court rejected the argument 11 asserted by Defendants here, concluding that while “the indictment refers to 12 Employee A—and the corresponding individuals cited in the other charges in 13 question—as ‘employees,’ the indictment does not allege they were bona fide 14 employees of Sacred Heart Hospital, which is the predicate for the safe harbor 15 provision on which the defendants rely.” Id. at *2. In line with the above, in United 16 States v. Crinel, cited by Relator, the court rejected a motion to dismiss an indictment 17 on similar grounds, noting that, “although Paragraph 49 uses the word “employee,” it 18 does not explicitly state that any of the individuals listed are “bona fide” employees— 19 the term used in the statute.” No. 15-61, 2015 WL 3755896, at *4 (E.D. La. June 16, 20 2015). 21 The case cited by Defendants, United States ex rel. Beck v. St. Joseph Health 22 Systems, is inapposite. See No 5:17-cv-052-C, 2021 WL 7084164 (N.D. Tex. Nov. 30, 23 2021). In Beck, the Court granted summary judgment in favor of the defendant based 24 in part on the safe harbor. In that case, however, the relator did not “dispute that the 25 physicians at issue in this case are bona fide employees of [the defendant]. . . .” Id. at 26 *7. Unsurprisingly, the court held that, in the absence of a dispute, a defendant is not 27 required to provide additional evidence to establish an affirmative defense. See id. 28 (citation omitted). In this case, however, the case is still at the pleading stage, and 1 Relator does not concede that the primary care physicians are bona fide employees. 2 The Complaint does not on its face establish the elements of the affirmative defense in 3 42 U.S.C. §1320a-7b(b)(3)(B). The Motion to Dismiss is therefore DENIED on that 4 basis. 5 B. The Complaint Adequately Alleges Scienter. 6 Defendants’ argument that Relator has adequately pled scienter largely relies 7 on application of the safe harbor for payments to bona fide employees and must thus 8 be rejected. Defendants argue that “[a] claim cannot be knowingly false under the 9 FCA, or reflect a ‘knowing and willful’ violation of the AKS, if that statute protects the 10 underlying payment.” (Mot at 7.) At this stage of the proceedings, Relator has pled 11 facts sufficient to show that the payments were an unlawful kickback. 12 Moreover, the Complaint alleges specific facts that show scienter. In the Ninth 13 Circuit, while “’circumstances constituting fraud or mistake’ must be stated with 14 particularity, [ ] ‘malice, intent, knowledge, and other conditions of a persons mind,’ 15 including scienter, can be alleged generally.” United States v. Corinthian Colleges, 16 655 F.3d 984, 996 (2011) (internal citations and quotations omitted). Here, Relator 17 has alleged scienter (see Compl. ¶ 40 (alleging scienter for SHVMA and Dr. Bach); also 18 id. ¶ 28 (alleging that Bach explained the allegedly illegal referral program to the 19 primary care physicians)), including facts supporting that assertion (id. ¶¶ 33–37 20 (explaining that another primary care physician and their assistants were aware of the 21 “kickback” scheme)). 22 Defendants cite to Corinthian Colleges, 655 F.3d at 997 and Sams v. Yahoo! 23 Inc., 713 F.3d 1175, 1179–81 (9th Cir. 2013) for the proposition that “if the statute itself 24 or a regulatory safe harbor implicates such protections, a claim fails for lack of 25 scienter, unless a relator pleads particularized facts that ‘support an inference’ that 26 defendants ‘did not, in good faith, rely upon the Safe Harbor Provision.” (Mot. at 7.) In 27 those cases where the defendant was successful, however, the complaint, or materials 28 incorporated by reference in the complaint, established the affirmative defense. As 1 discussed above, supra Part I.A, that is not the case here. In Corinthian Colleges, the 2 Ninth Circuit reversed because the plaintiff could easily amend the complaint to plead 3 that the defendant knew that their conduct fell outside the scope of the safe harbor. 4 See Corinthian Colleges, 655 F.3d at 997. So too here as the Relator alleged that 5 SHVMA, Bach, and the other doctors were aware of the upcoding and “kickback” 6 program. (See Compl. ¶¶ 18–21, 24–28, 33–37.) In Sams, the plaintiff “pled no facts 7 sufficient to lead to a plausible inference that Yahoo! actually knew that these 8 subpoenas were invalid[,]” and therefore fell outside the scope of the safe harbor. 9 Sams, 713 F.3d at 1181. But here, Relator alleges that Defendants, including Doe 10 defendants, conspired to upcode patients and make false referrals to create larger 11 reimbursements and defraud the government. That is, Relator alleges that each of the 12 Defendants knew about the fraudulent conspiracy and participated in it, which is 13 sufficient to allege scienter at this stage. Compare with Novak, 2014 WL 2937062, at 14 *1 (alleging conspiracy); Parikh, 977 F. Supp. 2d at 677–78 (same); Crinel, 2015 WL 15 3755896, at *6 (same); and contrast with Sams, 713 F.3d at 1181 (“For even assuming, 16 arguendo, that these subpoenas were ultimately invalid, they bore all of the indicia of 17 lawful authority.”). 18 The Motion to Dismiss on this ground is DENIED. 19 C. The Complaint Alleges Payments Made Under a Covered Program. 20 Seizing on a statement in the Complaint that when Relator “began working at 21 SHVMA, Relator’s predecessor, Karen Gergen, told her to exclude referrals to patients 22 insured directly through Medicare,” (Compl. ¶ 35), Defendants argue that the 23 Complaint does not allege that the bonus payments were paid “under a Federal 24 healthcare program,” and thus does not implicate the AKS or the Federal False Claims 25 Act. (Mot. at 7–8.) The Court disagrees. 26 As an initial matter, the Court will not consider the materials attached to 27 Defendants’ Opposition. As a general matter, when ruling on a motion to dismiss 28 under Rule 12(b)(6), “a court may generally consider only allegations contained in the 1 pleadings, exhibits attached to the complaint, and matters properly subject to judicial 2 notice.” Swartz v. KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007). “However, in order to 3 prevent plaintiffs from surviving a Rule 12(b)(6) motion by deliberately omitting 4 documents upon which their claims are based, a court may consider a writing 5 referenced in a complaint but not explicitly incorporated therein if the complaint relies 6 on the document and its authenticity is unquestioned.” Id. (internal citations and 7 quotation marks omitted). Defendants request that this Court consider, as Exhibit A, a 8 “Sample Talley Sheet” and, as Exhibit B, a “Sample Bonus Calculation.” Procedurally, 9 Defendants’ request is insufficient, as Defendants cite no authority for the Court to 10 consider a portion of a document referenced in a Complaint. See Fed. R. Evid. 11 201(c)(2) (stating that the court “must take judicial notice if a party requests it and the 12 court is supplied with the necessary information[]”). More substantively, however, the 13 doctrine of incorporation by reference applies only “if the plaintiff refers extensively to 14 the document or the document forms the basis of the plaintiff's claim.” U.S. v. Ritchie, 15 342 F.3d 903, 908 (9th Cir. 2003). Here, Relator only references the spreadsheet in 16 one paragraph, and unlike a contract or a deed of trust, the spreadsheet does not 17 form the basis of Relator’s claims. As the Ninth Circuit has recognized, “the mere 18 mention of the existence of a document is insufficient to incorporate the contents of a 19 document” under existing precedent. Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 20 988, 1002 (9th Cir. 2018) (quoting Coto Settlement v. Eisenberg, 593 F.3d 1031, 1038 21 (9th Cir. 2010)). Accordingly, the Court need not — and does not — consider Exhibits A 22 and B. 23 Turning to the merits of Defendants’ argument, though it is true that one 24 paragraph of the Complaint suggests that the bonus payments were not applied 25 where the patients were insured directly through Medicare, many other paragraphs 26 directly allege that the payments were made for patients who were covered by a 27 federal health care program. (See, e.g., Compl. ¶¶ 25, 28, 30–34, 39–40, 43–44.) In its 28 entirety, paragraph 35, on which Defendants rely, states: 1 Until her conversation with Tasha, Relator did not suspect the patient referral reports were used to general illegal 2 kickbacks. When she began working at SHVMA, Relator’s predecessor, Karen Gergen, told her to exclude referrals to 3 patients insured directly though Medicare, and that doing so rendered the bonus payments legal. Ms. Gergen 4 worked as SHVMA’s administrator for twenty-five years. Relator became suspicious of the bonus program after 5 Tasha used the word “kickback.” 6 Other portions of the Complaint, however, expressly state that the bonus program 7 was tied to patients who were insured by Medi-Cal and Medicaid. The immediately 8 preceding paragraph, 34, alleges that “[t]he referral reports included patients insured 9 by Medicare and Medi-Cal through, among others, Molina Healthcare and River City 10 Medical Group.” While those patients would not have been “insured directly through 11 Medicare,” Defendants do not appear to contest Relator’s assertion in her opposition 12 that although the patients referenced in Paragraph 35 “may not have been insured 13 directly through Medicare (i.e., Medicare Part B, a/k/a ‘traditional’ Medicare), the 14 allegations are clear that Medicare and other government funds were implicated by 15 the kickback scheme.” (Opp’n at 9–10.) In any event, several other paragraphs allege 16 that federal funds were implicated. (See Compl. ¶ 30 (“In an effort to increase revenue 17 for SHVMA by performing unnecessary tests of Medicare, Medi-Cal, and privately 18 insured patients . . . .”); id. ¶ 31 (“These large bonus payments induced and 19 incentivized the PC physicians to further increase the number of Medicare, Medi-Cal, 20 and privately insured patients they referred to SHVMA owned testing 21 equipment. . . . SHVMA and BACH have knowingly induced and continue to induce 22 referrals of Medicare, Medi-Cal, and privately insured patients to SHVMA owned 23 tested equipment by offering the PC physicians these illegal bonuses.”); id. ¶ 39 24 (“SHVMA, at BACH’s direction, intentionally and knowingly paid the bonuses to the PC 25 physicians in exchange for patient referrals covered by the Medicare, Medi-Cal, and 26 private insurers.”).) 27 Accordingly, the Motion to Dismiss is DENIED as to the first, second, and third 28 1 causes of action. 2 II. California False Claims Act 3 Defendants also move to dismiss the fourth, fifth, and sixth causes of action, all 4 related to the California False Claims Act, California Government Code section 12651. 5 Each of these claims are based on allegations that the bonus program violates 6 California Welfare and Institutions Code section 14107.2 and California Business and 7 Professions Code section 650. The Court need not address whether the bonus 8 programs violate Business and Professions Code section 650, however, because, for 9 the reasons identified in supra Part I.A, Relator has pled a violation of the Insurance 10 Code sufficient to support her allegations under the California False Claims Act. 11 As Defendants themselves note, Welfare and Institutions Code section 14107.2 12 is “California’s Medi-Cal antikickback statute,” which is “specifically ‘based on’ the 13 federal AKS.” (Mot. at 8 (citations omitted).) Indeed, the text of section 14107.2 is 14 virtually identical to the federal AKS. Compare Cal. Welf. and Inst. Code § 14107.2 15 with 42 U.S.C.§ 1320a-7b. That includes the safe harbor for “[a]ny amount paid by an 16 employer to an employee, who has a bona fide employment relationship with that 17 employer, for employment with provision of covered items or services.” Cal. Welf. and 18 Inst. Code § 14107.2(c)(1). As with the AKS safe harbor, the Complaint does not plead 19 each of the elements of the affirmative defense — specifically, that the primary care 20 physicians are “bona fide employees.” Accordingly, the Court DENIES the Motion to 21 Dismiss related to the fourth, fifth and sixth causes of action. 22 III. California Insurance Fraud Prevention Act 23 Defendants also seek dismissal of Relator’s seventh cause of action for violation 24 of California Insurance Code section 1871.7(a). That section provides that it is 25 “unlawful to knowingly employ runners, cappers, steerers, or other persons to procure 26 clients or patients to perform or obtain services or benefits pursuant to Division 4 27 (commencing with Section 3200) of the Labor Code . . . .” Defendants argue first that 28 since the bonuses were paid when existing patients were internally referred for 1 diagnostic services provided by SHVMA, the bonuses could not have been “to 2 procure clients or patients.” (Mot. at 10.) Second, Defendants argue that since the 3 primary care physicians were principally engaged in treating patients, they were not 4 hired for the “prohibited objective” of procuring patients. (Id. at 11 (citing State ex rel 5 Wilson v. Super. Ct., 227 Cal. App. 4th 579, 593 (2014)).) 6 There are very few cases interpreting section 1871.7. The foundational case of 7 Wilson, cited by both parties, is instructive. In Wilson, the Court of Appeal focused on 8 the text of section 1871.7(a), noting that: 9 The conduct made unlawful by subdivision (a) is identified by a single verb: To employ. Subdivision (a)'s single verb 10 makes a single act unlawful: Employment. What kind of employment is unlawful? Employment of a person or 11 persons (“runners, cappers, steerers or other persons”), for a specified purpose: “to procure clients or patients to 12 perform or obtain services or benefits . . . that will be the basis for” an insurance claim. Subdivision (a) is violated by 13 the employment of others with that objective; it does not make proof of that result a prerequisite to its violation. 14 Id. at 593 (footnote omitted). Unfortunately, Wilson expressly declined to address 15 whether a physician may be a runner or a capper. Id. at 609. 16 While Defendants appear to argue that the employment of a person must be 17 for the sole purpose of procuring clients, nothing in Wilson suggests that to be the 18 case, and one of the few cases to interpret section 1871.7(a) suggests otherwise. In 19 People ex rel. Government Employees Insurance Company v. Cruz, 224 Cal. App. 4th 20 1184 (2016), the relator alleged that Dr. Cruz paid another physician, Dr. Tomassetti, 21 referral fees disguised as rent, when in fact the moneys paid were “disproportionate 22 to any alleged rent, services, or other overhead Dr. Tomassetti may have been 23 providing.” Id. at 1190. Of course, the rent and any other services provided by Dr. 24 Tomassetti must have had some value, thus suggesting that “employment” can be for 25 multiple purposes. So too here. Defendants are alleged to have “employed” the 26 primary care physicians for lawful and unlawful objectives. 27 Moreover, the Court concludes that the procurement of patients is not limited 28 1 to “new” patients. The statute is intended to prevent the use of runners to procure 2 clients or patients “to perform or obtain services or benefits.” Cal. Ins. Code. 3 § 1871.7(a) (emphasis added). The entire point of the scheme, as alleged by Relator, 4 was to encourage primary care physicians to perform new and additional services. To 5 interpret section 1871.7 to be inapplicable where one physician refers a patient to 6 another provider within the same practice — a common occurrence — would severely 7 undercut the applicability of section 1871.7, despite no indication this was the 8 Legislature’s intent. 9 This result is consistent with the intent behind section 1871.7(a) as found by the 10 court of appeal in Wilson, which noted that running and capping activities are unlawful 11 in part because they “may often result in services that are excessive or 12 unnecessary . . . .” Wilson, 227 Cal. App. 4th at 601. Paying physicians bonuses 13 whenever they order a diagnostic test, as was alleged to have happened here, can 14 clearly result in utilizing services that are excessive or unnecessary. Indeed, Relator 15 expressly alleges that occurred in this case. (See Compl. ¶ 30.) Accordingly, the 16 Court DENIES the Motion to Dismiss the eighth cause of action. 17 IV. Relator’s Upcoding Claims 18 Several of Relator’s causes of action are based on the alleged practices of 19 Defendants in upcoding certain procedures, which Relator alleges are false claims for 20 purposes of state and federal law since they result in higher payments for the 21 underlying procedure than Defendants would have otherwise been entitled. 22 Defendants’ arguments that the allegations are “implausible” in various ways is, at 23 bottom, an argument that Relator has failed to meet the pleading standards described 24 by the Supreme Court in Twombly and Iqbal. This argument is devoid of merit. 25 In Twombly, the Supreme Court held that to state a claim under Federal Rule of 26 Civil Procedure 8(a), the complaint must contain “enough facts to state a claim to relief 27 that is plausible on its face.” 550 U.S. at 570. “The plausibility standard is not akin to a 28 ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant 1 has acted unlawfully.” Iqbal, 556 U.S. at 678. These standards apply in this case, in 2 addition to the requirement in Rule 9(b) that “in alleging fraud or mistake, a party must 3 state with particularly the circumstances constituting fraud or mistake.” Cafasso, 637 4 F.3d at 1055. 5 The Court has no trouble concluding that both Rule 9(b) and the Twombly 6 formulation of Rule 8’s requirements are met here. In the Complaint, Relator alleges 7 the specific individual who engaged in the alleged fraud, that is Dr. Bach (the who); 8 the specific code being misused, that is, code 99214 (the what); the time period 9 during which the alleged fraud occurred, that is January 2017 through November 10 2017 (the when); the particular practice area in which the alleged fraud occurred, that 11 is, at SHVMA (the where); and the specific way in which the code was used without 12 justification (the how). Accordingly, Relator has pled fraud with sufficient particularity 13 to meet the requirements of Rule 9(b). 14 The allegations in the Complaint are also sufficiently plausible to state a claim 15 under Rule 8. In addition to specifying the who, what, where, when, and how of the 16 alleged fraud, Relator presents detailed factual allegations that show that the use of 17 the 99214 codes is plausibly fraudulent. According to Relator, while Defendant Bach 18 used the 99214 code 3,400 times over an 11-month period, a doctor with a similar 19 caseload used that code only 500 times. (Compl. ¶¶ 57–58.) Relator also alleges that 20 a doctor with a more complex caseload utilized the 99214 code at less than half the 21 rate of Defendant Bach, which is particularly probative of potential fraud because 22 these codes are justified by order of complexity, with the 99214 code requiring the 23 second most complex procedures and examinations. (See id.; also id. ¶¶ 49–56.) 24 These comparisons were supported by national data that suggest Defendant Bach 25 was utilizing the 99214 code at a higher-than-normal rate. (See id. ¶ 63.) Relator 26 further alleges that she was told to stop investigating this phenomenon (see Compl. 27 ¶ 60), suggesting the requisite scienter that Defendants knew or should have known 28 that they were engaging in a fraud. See United States ex rel. Schutte v. Supervalu, Inc., 1 | 143 S. Ct. 1391, 1404 (2023). And, in any event, the alleged fraud is a plausible 2 | explanation for this discrepancy. (See Opp’n at 15.) Finally, Relator alleges that when 3 | the use of this code came to light, Molina stopped accepting the 99214 code from 4 | SHVMA (see Compl. 4 62), which likewise supports the allegations that these codes 5 || were being used in an improper way. 6 At this stage of the proceedings, Relator has sufficiently pled causes of action 7 | related to upcoding. Accordingly, Defendant's Motion to Dismiss these claims is 8 | DENIED. 9 CONCLUSION 10 For the reasons set forth above, Defendant's Motion to Dismiss (ECF No. 36-1) 11 is DENIED. 12 13 14 IT IS SO ORDERED. 15 | Dated: _ August 18, 2023 Bek | Cbabeatin.. Hon. Daniel labretta 16 UNITED STATES DISTRICT JUDGE 17 18 19 20 21 22 23 24 25 26 27 28 17