Thomas v. Mercy Care

• Court: District Court, D. Arizona
• Decided: November 9, 2023
• Docket: 2:22-cv-00512
• Status: Unknown

Opinion

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA

9 United States of America ex rel. Craig No. CV-22-00512-PHX-JAT Thomas, 10 ORDER Plaintiff/Relator, 11 v. 12 Mercy Care, and Touchstone Behavioral 13 Health dba Touchstone Health Services,

14 Defendants. 15 16 Pending before the Court are Defendant Mercy Care and Defendant Touchstone’s 17 Motions to Dismiss the Second Amended Complaint (“SAC”). (Docs. 38, 39). Plaintiff 18 responded, (Docs. 41, 42), the Government filed a Statement of Interest, (Doc. 40), and the 19 Defendants replied, (Docs. 44, 45). The Court now rules on the Motions. 20 I. BACKGROUND 21 The following account treats the well-pleaded factual allegations of the SAC as true 22 for purposes of the motion to dismiss. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). 23 A. Parties and Regulatory Framework 24 Qui tam Plaintiff and Relator (“Relator”) is a resident of Arizona and was the Chief 25 Operating Officer of Defendant Touchstone Health Services (“Touchstone”) from 26 December 2016 through June 1, 2022. (Doc. 36 at 3). Relator brings this action on his own 27 behalf and on behalf of the United States pursuant to the False Claims Act (“FCA”), 31 28 U.S.C. §§ 3729 et seq. Defendant Mercy Care is a managed care organization (“MCO”) 1 that operates health plans offering integrated care to children, adults and seniors covered 2 by the Arizona Health Care Cost Containment System (“AHCCCS”) through a network of 3 providers. Defendant Touchstone is a provider and sub-contractor for Mercy Care that has 4 contracted to provide home and community-based health services for Arizonans. (Id. at 4). 5 Medicaid is a healthcare assistance program jointly financed by the federal 6 government and the states and administered by the states in accordance with federal 7 regulations. (Id. at 8). Arizona's Medicaid program is administered by AHCCCS, a state 8 agency. (Id. at 9). Each quarter, based on a state's estimate of anticipated Medicaid 9 expenditures, the Centers for Medicare & Medicaid Services (“CMS”)—a federal agency 10 that administers the Medicaid program—makes an advance payment of federal funds to 11 the state. 42 C.F.R. § 430.30(a)(2). The state, through agencies like AHCCCS, draws down 12 those funds to pay providers. Id. § 430.30(d)(3). Because Mercy Care is an MCO, 13 AHCCCS provides it with periodic payments calculated by an actuarily determined fixed 14 rate (“capitation payment”) for each of its eligible Medicaid beneficiaries. (Doc. 37 at 12). 15 The capitation payment is made for each enrollee regardless of whether they have received 16 any services during the period the payment covers. (Id.) Under the applicable contract, 17 “any savings remaining to [Mercy Care] as a result of favorable claims experience and 18 efficiencies in service delivery at the end of the Contract term may be kept by [Mercy 19 Care].” (Id. at 13). 20 Touchstone entered into a provider contract with Mercy Care initially in 2014 and 21 again in 2017. Id. at 14. Under the agreements, Touchstone provides medically necessary 22 health services to its members and submit claims certified as accurate, complete, and 23 truthful. (Id. at 14–15). Mercy Care pays Touchstone on a fee-for-service basis for covered 24 (non-Medicaid) services. (Id. at 15). According to Mercy Care-generated documents 25 providing information about deferred revenue and provided to Touchstone, Mercy Care 26 pays Touchstone a fixed amount per month in advance to provide Title XIX (“T19”) 27 (Medicaid) services, and then tracks the actual amounts Touchstone earned in that period 28 through T19 encounters. (Id.) 1 B. Relator’s Allegations 2 Relator states that three events led to the filing of this action against the Defendants. 3 First, in 2017, Relator met with the former CFO and CEO of Touchstone for the purpose 4 of reviewing the revisions to a monthly profit and loss statement. At that meeting the CEO 5 “jokingly” said that the CFO had “found $300,000 just sitting around” and $300,000 had 6 been added to revenue in the monthly statement. (Doc. 37 at 34–35). Relator was aware 7 that Touchstone had been carrying a deferred revenue amount of $300,000 from prior to 8 2014 that it originally owed to Magellan and then to MMIC, which merged into Mercy 9 Care. (Id. at 35). After the conversation with the CEO and CFO, Relator became aware that 10 a $300,000 amount characterized as deferred revenue disappeared from Touchstone’s 11 financial records and was added as deferred revenue. (Id.) Relator claims that the 12 Touchstone CFO became aware that the $300,000 was not being tracked by Mercy Care 13 by talking to Touchstone’s then-auditor who told the CFO that some agencies had received 14 formal letters telling them they owed money and Touchstone had not received one. (Id.) 15 Second, Relator became aware of additional overpayments in the form of deferred 16 revenue held by Touchstone in late 2019. (Id. at 36). He attended a meeting with 17 Touchstone executives on December 10 at which the finance director reported that 18 Touchstone had accrued about $2.8 million in deferred revenue funds throughout previous 19 fiscal years. (Id.) Relator made continuous efforts to resolve the deferred revenue issue and 20 reports that the CFO admitted he had “routinely sidestepped reimbursing revenue funds to 21 MMIC (now Mercy Care) when he worked from 2006 to 2010 at another provider, Terros 22 Health.” (Id. at 36–37). The new Touchstone CEO then made plans to enter into an 23 arrangement with the CEO of Mercy Care to “adjust off” Touchstone’s deferred revenue 24 from the company’s financials. (Id.) On February 5, 2020, Relator received a copy of an 25 email sent to Touchstone by Mercy Care’s finance department with Touchstone’s Fiscal 26 Year 2019 Deferred Revenue Analysis Report. (Id. at 37–38). The report stated “[the] 27 Arizona Department of Behavioral Services requires that all revenue be encountered for 28 appropriate, authorized Title 19 or Non-Title 19 expenditures or returned to Mercy Care of 1 Arizona.” (Id. at 38). Plaintiff believes the document confirms “deferred” revenue meant 2 “overpayments” because it identifies “Deferred Amt” as revenue that was received but not 3 supported by encounter data. (Id.) The Mercy Care report calculated deferred revenue to 4 be $1,759,768 for 2019 instead of the $2,800,000 reported by Touchstone. (Id.) 5 Over the course of 2020, Relator attended meetings with Touchstone executives 6 where he believes the CEO and CFO were attempting to avoid paying the $1 million 7 difference between Touchstone and Mercy Care calculations of deferred revenue and adjust 8 off some of the payments owed to Mercy Care. (Id.) In one such meeting, the CFO stated 9 that Mercy Care did not want the money back because it was a “black mark” with respect 10 to government funds. (Id.) Later, the CFO responded to the CEO’s request for 11 Touchstone’s deferred revenue by year with a spreadsheet that stated deferred revenue was 12 only $1,814,575 for 2019 instead of the originally reported $2.8 million. (Id. at 39). In 13 October 2020, Relator raised the overpayment issue with Touchstone’s CEO. (Id.) The 14 CEO had made a request for Mercy Care to waive the deferred payments owed and there 15 was an ongoing discussion that Mercy Care had underpaid Touchstone about $1 million in 16 claims. (Id.) 17 On November 11, 2020, Relator participated in a meeting with the Touchstone and 18 Mercy Care executives where the attendees addressed the underpayment issue and Mercy 19 Care proposed a resolution that would take care of the overpayment and underpayments 20 issues where Mercy Care would forgive about half of the $1.8 million as an “encounter 21 credit” to make up for the $1 million in underpayments. (Id.) During follow-up meetings, 22 Touchstone executives determined that they would not dispute the amount of deferred 23 revenue owed and accepted Mercy Care’s calculated $1.8 million; and decided that any 24 agreement made should state clearly that it resolves all overpayment amounts, thereby 25 wiping out the $1 million difference. (Id. at 40). Of note, at a meeting with Touchstone’s 26 board, Touchstone’s CFO remarked that Mercy Care “can believe that” Touchstone owed 27 less money than recorded on the Touchstone books. (Id.) On February 3, 2021, Touchstone 28 and Mercy Care entered into an agreement where Touchstone would pay Mercy Care 1 $900,000 over time and the remaining $900,000 would be recognized as a gain for 2 Touchstone for the year ending September 30, 2021. (Id.) 3 Finally, Relator became aware of additional retained deferred revenue in the amount 4 of $476,227 at a board meeting in December 2021. (Id. at 42). At that meeting, the current 5 CEO of Touchstone reviewed possible solutions to address the deferred revenue, which 6 included him saying “there’s kind of the Terros way of sitting on it, hiding it, and don’t, 7 [sic] not showing anything until you’re asked or the Jeff Jordy way which is let me write 8 you a check as soon as I can.” (Id.) The board discussed the options until a board member 9 stated, “I say the stick our heads in the sand until they come for it and drag it on and see if 10 we can’t cut some other deal.” At that point, that board member and Touchstone’s former 11 CFO confirmed that the former CFO (who was CFO during the $300,000 allegation) had 12 engaged in similar behavior in the past. (Id.) 13 Relator lists five counts of violations of the FCA in the SAC. However, in his 14 responses to Defendants’ motions to dismiss, (Docs. 41, 42), Relator states that he will not 15 pursue Counts I and II against either defendant. Accordingly, the Court grants Defendants’ 16 motions to dismiss Counts I and II. Additionally, Relator states that he will not pursue the 17 conversion or false claim allegations against Defendant Mercy Care for the alleged failure 18 to return a $300,000 overpayment in 2017. (Id.) The Court will therefore not discuss those 19 allegations in this order. 20 After the voluntary dismissal, Relator alleges Defendants’ conduct violated three 21 provisions of the FCA: Count III, a violation of 31 U.S.C § 3729(a)(1)(C) by conspiring to 22 commit violations of FCA provisions §§ 3729(a)(1)(D) and (G); Count IV, a violation of 23 § 3729(a)(1)(D) for conversion by failing to return money in their possession that rightfully 24 belongs to the government; and Count V, a violation of § 3729(a)(1)(G)—a reverse false 25 claim by knowingly avoiding or decreasing an obligation to return money to the 26 government. 27 28 1 II. LEGAL STANDARD 2 A. Pleading Requirements 3 A defendant may move to dismiss a complaint for “failure to state a claim upon 4 which relief can be granted.” Fed. R. Civ. P. 12(b)(6). When analyzing a complaint for 5 failure to state a claim to relief under Rule 12(b)(6), the well-pled factual allegations are 6 taken as true and construed in the light most favorable to the nonmoving party. Cousins v. 7 Lockyer, 568 F.3d 1063, 1067 (9th Cir. 2009). A successful motion to dismiss under Rule 8 12(b)(6) must show either that the complaint lacks a cognizable legal theory or fails to 9 allege facts sufficient to support its theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 10 696, 699 (9th Cir. 1990). A complaint that sets forth a cognizable legal theory will survive 11 a motion to dismiss if it contains “sufficient factual matter, accepted as true, to ‘state a 12 claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) 13 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). 14 FCA claims involve fraud, and accordingly they must comply with the heightened 15 pleading requirements of Federal Rule of Civil Procedure 9(b). Cafasso ex rel. United 16 States v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054–55 (9th Cir. 2011). Under the 17 rule, the party alleging fraud must “state with particularity the circumstances constituting 18 fraud[.]” Fed. R. Civ. P. 9(b). A “pleading must identify the who, what, when, where, and 19 how of the misconduct charged, as well as what is false or misleading about the purportedly 20 fraudulent statement, and why it is false.” Cafasso, 637 F.3d at 1055 (internal quotation 21 marks omitted). Rule 9(b) serves dual purposes: (1) to give defendants fair notice of the 22 allegations of fraud so they have an opportunity to rebut specific accusations, and (2) to 23 deter the harm caused by unsubstantiated fraud complaints. United States v. United 24 Healthcare Ins. Co., 848 F.3d 1161, 1180 (9th Cir. 2016). In some cases, a plaintiff may 25 allege that a defendant has engaged in fraudulent conduct that is the entire basis for the 26 claim despite fraud not being a necessary element in the claim. There, the Ninth Circuit 27 has said “the claim is said to be ‘grounded in fraud’ or ‘sound in fraud,’ and the pleading 28 of that claim as a whole must satisfy the particularity requirement of Rule 9(b).” Vess v. 1 Ciba-Geigy Corp. USA, 317 F.3d 1097, 1104–05 (9th Cir. 2003). 2 B. False Claims Act 3 The FCA, 31 U.S.C. §§ 3729 et seq., provides for “the recovery of civil penalties 4 from those who knowingly present a false or fraudulent claim to the federal government 5 for payment, or knowingly use a false record to avoid or decrease an obligation to pay the 6 federal government.” Hagood v. Sonoma Cnty. Water Agency, 81 F.3d 1465, 1467 n.1 (9th 7 Cir. 1996). The Supreme Court has held that the FCA is a “remedial statute [that] reaches 8 beyond ‘claims’ which might be legally enforced, to all fraudulent attempts to cause the 9 Government to pay out sums of money.” United States v. Neifert–White Co., 390 U.S. 228, 10 233 (1968); see also United States v. McLeod, 721 F.2d 282, 284–85 (9th Cir. 1983). 11 The FCA authorizes individuals (relators) to file civil suits known as “qui tam 12 actions” on behalf of the federal government against persons who violate the FCA. 31 13 U.S.C. § 3730. Violations of the FCA include but are not limited to when a person has 14 possession, custody, or control of property or money used, or to be used, by the 15 Government and knowingly delivers, or causes to be delivered, less than all of that money 16 or property; knowingly makes, uses, or causes to be made or used, a false record or 17 statement material to an obligation to pay or transmit money or property to the 18 Government, or knowingly conceals or knowingly and improperly avoids or decreases an 19 obligation to pay or transmit money or property to the Government; or conspires to commit 20 a violation of the previous two provisions. Id. § 3729(a)(1)(C), (D), and (G). The FCA 21 defines “knowing” as having actual knowledge of information or acting in either deliberate 22 ignorance or reckless disregard of the information's truth or falsity. 31 U.S.C. § 3729(b)(1). 23 III. ANALYSIS 24 Defendants have submitted separate motions to dismiss and the analysis for their 25 motions differs based on the factual allegations. However, Relator has alleged violations 26 of the same provisions of the FCA for each Defendant, so the Court will analyze each 27 motion’s merit by count. 28 1 A. Constitutionality 2 As a preliminary issue, both Defendants assert that the FCA violates “the Executive 3 Vesting Clause (U.S. Const. art. II, § 1), the Appointments Clause (U.S. Const. art. II, § 2), 4 the Take Care Clause (U.S. Const. art. II, § 3), the Due Process Clause (U.S. Const. amend. 5 V), and the doctrine of separation of powers.” (Doc. 38 at 22, Doc. 39 at 5 n.3). However, 6 neither Defendant develops this argument further than citing the concurrence and dissent 7 of the recent United States, ex rel. Polansky v. Executive Health Resources, Inc., 599 U.S. 8 419 (2023). Nonetheless, Mercy Care argues that “subsequent developments suggest that 9 the Kelly decision is incorrect and may be overruled” but fails to point out subsequent 10 developments beyond the nonbinding Polanksy concurrence and dissent. (Doc. 38 at 22). 11 Mercy Care also does not make any argument as to why the FCA is unconstitutional under 12 the above-referred constitutional provisions. Touchstone largely reiterates Mercy Care’s 13 conclusive argument. Because Defendants’ constitutionality arguments are conclusory and 14 undeveloped, this Court summarily rejects them. See Indep. Towers of Wash. v. 15 Washington, 350 F.3d 925, 929 (9th Cir. 2003) (“Our circuit has repeatedly admonished 16 that we cannot manufacture arguments [for a party] . . . . Rather, we ‘review only issues 17 which are argued specifically and distinctly . . . .’” (quoting Greenwood v. Fed. Aviation 18 Admin., 28 F.3d 971, 977 (9th Cir. 1994)). This Court will abide by the binding precedent 19 of the Ninth Circuit in United States ex el. Kelly v. Boeing Co., 9 F.3d 743 (9th Cir. 1993). 20 In Kelly, the Ninth Circuit held that the qui tam provisions in the FCA are constitutional 21 and do not violate the aspects of the Constitution referred to by Defendants. Id. 22 B. Count III - Conspiracy 23 Count III of the SAC asserts a conspiracy to violate provisions 31 U.S.C. 24 § 3729(a)(1)(D) and (G) of the FCA. Section 3729(a)(1)(C) creates liability for any person 25 who “conspires to commit a violation” of the FCA. General civil conspiracy principles 26 apply to conspiracy claims under the FCA. See U.S. ex rel. Durcholz v. FKW, Inc., 189 27 F.3d 542, 545 n. 3 (7th Cir. 1999); United States v. Murphy, 937 F.2d 1032, 1039 (6th Cir. 28 1991). Civil conspiracy is defined as “a combination of two or more persons who, by some 1 concerted action, intend to accomplish some unlawful objective for the purpose of harming 2 another which results in damage.” Lacey v. Maricopa County, 693 F.3d 896, 935 (9th Cir. 3 2012) (en banc) (quoting Gilbrook v. City of Westminster, 177 F.3d 839, 856–57 (9th Cir. 4 1999)). To state a claim of conspiracy under the FCA, Relator must allege “that the 5 conspiring parties ‘reached a unity of purpose or a common design and understanding, or 6 a meeting of the minds in an unlawful arrangement.’” Id. 7 Moving Defendants argue that Relator fails to allege facts sufficient to support a 8 conspiracy claim under the FCA. In response, Relator argues that Defendants engaged in 9 an “agreed-to plan to not report and return the overpayments to AHCCCS . . . and instead 10 retain them, with the spoils divided between MC and TS.” (Doc. 41 at 16). He alleges that 11 the multiple meetings between Mercy Care and Touchstone culminating in a signed 12 agreement where Mercy Care unlawfully “forgave” $900,000 in overpayments resulted in 13 decreasing an obligation owed to the government and unlawful conversion of government- 14 owned funds. (Id.) 15 The SAC contains multiple allegations that Touchstone executives purposely 16 deceived Mercy Care and concealed information in the course of their negotiations which 17 deeply cuts against an allegation that the two companies were in a conspiracy together. 18 (Doc. 36 at 47–48 (alleging Touchstone executives “delighted in sneakily getting Mercy 19 Care to release Touchstone’s obligation to repay a million dollars”); see also id. at 35, 40 20 ¶¶ 176–77, 199 (alleging other Touchstone deceptions on Mercy Care)). The SAC admits 21 that Touchstone contended Mercy Care had underpaid claims in the amount of $1 million. 22 (Id. at 39 ¶ 196). The SAC admits that Mercy Care forgave $900,000 in order to settle the 23 $1 million in underpaid claims, not to defraud the government. See in re Century Aluminum 24 Co. Sec. Litig., 729 F.3d 1104, 1108 (9th Cir. 2013) (“Something more is needed, such as 25 facts tending to exclude the possibility that the alternative explanation is true in order to 26 render plaintiffs’ allegations plausible within the meaning of Iqbal and Twombly. Here, 27 plaintiffs’ allegations remain stuck in ‘neutral territory’. . . .”). Moreover, Relator does not 28 plead any facts indicating Mercy Care did not return to AHCCCS the $900,000 paid by 1 Touchstone or that Mercy Care engaged in a scheme to allow Touchstone to retain 2 overpayments. To the contrary, the SAC alleges Touchstone defrauded Mercy Care by 3 hiding the $1 million discrepancy in deferred revenue. “[T]o adequately allege an FCA 4 conspiracy, it is not enough for [Relator] to show there was an agreement that made it likely 5 there would be a violation of the FCA; [he] must show an agreement was made in order to 6 violate the FCA.” United States ex rel. Ibanez v. Bristol-Myers Squibb Co., 874 F.3d 905, 7 917 (6th Cir. 2017) (citing United States ex rel. Ladas v. Exelis, Inc., 824 F.3d 16, 27 (2d 8 Cir. 2016)). Here, Relator has not sufficiently pleaded that the negotiations and agreement 9 between Mercy Care and Touchstone were made to avoid an obligation to the government 10 or convert government funds. The Court therefore dismisses Count III in its entirety. 11 C. Count IV – Conversion 12 Relator alleges both Mercy Care and Touchstone are liable under the FCA’s 13 conversion provision, which imposes civil liability on anyone who “has possession, 14 custody, or control of property or money used, or to be used, by the Government and 15 knowingly delivers, or causes to be delivered, less than all of that money or property.” 31 16 U.S.C. § 3729(a)(1)(D). As previously stated, “knowingly” is defined as having actual 17 knowledge of information or acting in either deliberate ignorance or reckless disregard of 18 the information’s truth or falsity. 31 U.S.C. § 3729(b)(1). 19 i. Mercy Care 20 Mercy Care argues that Relator’s conversion claim should be dismissed because 21 “the SAC does not allege that Mercy Care had possession, custody, or control of the funds. 22 It alleges Touchstone did.” (Doc. 38 at 16). It cites a number of common law cases that it 23 argues confirm that a contractual right of payment is not sufficient to sustain a claim for 24 conversion. It is clear that Mercy Care did not have possession or custody of the funds at 25 issue. The term “control” is not defined in the FCA, and little case law exists to help define 26 the term in the context of FCA claims. The fact that Mercy Care and Touchstone operate 27 as separate financial entities weighs towards treating the funds as a contractual obligation 28 that Mercy Care did not have control over. However, Mercy Care remains responsible for 1 compliance with all contract requirements and delegation of requirements (and federal 2 funds) does not absolve Mercy Care of its responsibilities, (Doc. 36 at 14). Thus, the Court 3 finds Mercy Care exercised the requisite control over the funds at issue sufficient to survive 4 a motion to dismiss on this prong of this claim. 5 However, Relator still must plead that Mercy Care knowingly delivered less than 6 all of the disputed funds to the government to survive a motion to dismiss. The SAC does 7 not provide any factual support for the notion that Mercy Care did not return funds it was 8 required to return to AHCCCS. There are no facts about the details of Mercy Care and 9 AHCCCS’s reconciliation process beyond conclusory conjecture that Mercy Care 10 exceeded the 60-day rule. See in re Century Aluminum Co. Sec. Litig., 729 F.3d 1104, 1108 11 (9th Cir. 2013) (“Something more is needed, such as facts tending to exclude the possibility 12 that the alternative explanation is true in order to render plaintiffs’ allegations plausible 13 within the meaning of Iqbal and Twombly. Here, plaintiffs’ allegations remain stuck in 14 ‘neutral territory’. . . .”). Additionally, Mercy Care and Touchstone engaged in 15 negotiations for Mercy Care to obtain the overpayments Mercy Care identified presumably 16 to return that money to AHCCCS. The fact that Touchstone concealed additional deferred 17 revenue from Mercy Care negates the idea that Mercy Care “knowingly” delivered less 18 than all of the money owed back to the government. If Mercy Care did deliver less than 19 what it should have delivered in both the $2.8 million and $476,227 instances, it did so as 20 a result of fraud perpetuated upon it, not of its own accord. Accordingly, the Court 21 dismisses Count IV against Defendant Mercy Care. 22 ii. Touchstone 23 Touchstone argues that Count IV should be dismissed against it because “Plaintiff 24 fails to plead that Mercy Care was required to return overpayments to AHCCCS . . . . At 25 most, Plaintiff only alleges that Touchstone retained overpayments that belonged to Mercy 26 Care.” (Doc. 39 at 9). Although fraud is not part of a conversion claim under the FCA, 27 Relator pleads a course of conduct by Touchstone that is grounded in fraud. He therefore 28 needs to satisfy the Rule 9(b) particularity requirement. Vess, 317 F.3d at 1104–05. Relator 1 has met this burden. He has stated with particularity that Touchstone retained government 2 funds in the amounts of $300,000, $1 million, and $476,227. He has provided specific dates 3 and specific meetings he attended where he learned about deferred revenue that was the 4 property of the government and should have been returned to Mercy Care. He has alleged 5 multiple conversations between Touchstone executives that made clear they were 6 attempting to hide deferred revenue from Mercy Care and make sure they did not have to 7 pay Mercy Care back despite knowing the funds needed to be returned. Relator has pleaded 8 facts sufficient to support Touchstone having possession of funds owned by the 9 government and knowingly delivering or causing to be delivered less than all of those 10 funds. These allegations are sufficient to state a claim against Touchstone. The Court 11 therefore denies Defendant Touchstone’s motion to dismiss Count IV for conversion. 12 D. Count V – Reverse False Claim 13 Relator alleges that both Mercy Care and Touchstone are liable under the FCA’s 14 reverse false claim provision which creates civil liability for a defendant who “knowingly 15 makes, uses, or causes to be made or used, a false record or statement material to an 16 obligation to pay or transmit money or property to the Government, or knowingly conceals 17 or knowingly and improperly avoids or decreases an obligation to pay or transmit money 18 or property to the Government.” 31 U.S.C. § 3729(a)(1)(G). As a threshold issue, 19 Touchstone asserts that “any alleged failure to return overpayments to Mercy Care is not 20 actionable under the FCA.” (Doc. 39 at 4). As pointed out by the Government in its 21 statement of interest, (Doc. 40 at 4), this is incorrect. The Court agrees with the Fifth 22 Circuit’s analysis in United States v. Caremark, Inc., 634 F.3d 808, 815 (5th Cir. 2011). In 23 that case, the government alleged that the defendant made false statements to state 24 Medicaid agencies that allowed the defendant to avoid making payments to the state 25 Medicaid agencies. Id. The court endorsed liability under section 3729(a)(7)1 and explained 26 “the statute does not require that the statement impair the defendant’s obligation; instead, 27 it requires that the statement impair ‘an obligation to pay or transmit money or property to 28 1 This has since been renumbered to 31 U.S.C. § 3729(a)(1)(G). 1 the Government.’” Id. at 817. 2 i. Mercy Care 3 Mercy Care argues that the reverse false claim should be dismissed because “the 4 SAC does not allege facts indicating that Mercy Care made any false statements or 5 omissions to AHCCCS about the funds.” (Doc. 44 at 8). Relator claims that Mercy Care 6 “allowed TS to continue retaining [deferred revenue] beyond a reasonable reconciliation 7 period.” However, as pleaded in the SAC, Mercy Care engaged in negotiations with 8 Touchstone to recover deferred revenue and settle unpaid claims. (Doc. 36 at 39–40). 9 Relator makes a conclusory statement that Mercy Care failed to return overpayments to 10 AHCCCS but fails to allege any facts to support this conclusion. Relator has failed to allege 11 facts sufficient to support his legal theory that Mercy Care knowingly avoided or decreased 12 an obligation to return money to the government. See Balistreri v. Pacifica Police Dep’t, 13 901 F.2d 696, 699 (9th Cir. 1990). Thus, the Court dismisses Count V against Defendant 14 Mercy Care. 15 ii. Touchstone 16 Touchstone argues that the reverse false claim should be dismissed because Relator 17 cannot adequately plead that the funds at issue had to be returned to AHCCCS and then 18 CMS. (Doc. 45 at 5). As it stands, it is unclear whether the funds at issue had to be returned 19 to AHCCCS or they could be retained by Mercy Care as part of the incentives they receive 20 for administering services efficiently. Regardless, this is not dispositive of Touchstone’s 21 liability. As stated in Caremark, “if the Government is able to prove that Caremark 22 knowingly made false statements to the States knowing that these statements could cause 23 the States to impair their obligation to the government, Caremark will be liable under 24 § 3729(a)(7).” 634 F.3d at 817 (emphasis added). The statements and actions of 25 Touchstone alleged by Relator could cause Mercy Care to impair its obligation to 26 AHCCCS and thereby impair Arizona’s obligation to the federal government. When 27 Touchstone allegedly knowingly concealed $1 million from its negotiations over deferred 28 revenue with Mercy Care, this would cause Mercy Care to deliver less than all of the federal 1 funds due back to the government and “keep federal funds to which they would not 2 otherwise be entitled.” Id.; see also United States ex rel. Hunt v. Merck–Medco Managed 3 Care, L.L.C., 336 F.Supp.2d 430, 444–45 (E.D. Pa. 2004); United States ex rel. Koch v. 4 Koch Indus., Inc., 57 F.Supp.2d 1122, 1128–29 (N.D. Okla. 1999). This is sufficient to 5 survive a motion to dismiss. Id. 6 Further, Relator alleges that he was present in meetings where Touchstone 7 executives agreed to not discuss deferred revenue they knew they owed to Mercy Care and 8 thereby AHCCCS. Touchstone executives “found” $300,000 in additional revenue that 9 Relator alleges was on the books as overpayments. The executives allegedly expressly 10 ventured to make sure all deferred revenue obligations were removed in settlement 11 negotiations in the $2.8 million instance with the knowledge there was a discrepancy 12 between the two companies’ books. The executives also allegedly discussed waiting for 13 Mercy Care to ask for the $476,227 deferred revenue or attempting to hide it. All of these 14 instances, taken as true, satisfy the particularity requirements of Rule 9(b) that Touchstone 15 knowingly made statements and took actions to conceal funds that could cause Mercy Care 16 and thus the state to impair its obligation to the federal government. Accordingly, the Court 17 denies Defendant Touchstone’s motion to dismiss Count V. 18 IV. CONCLUSION 19 Based on the foregoing 20 IT IS ORDERED that Defendant Mercy Care’s Motion to Dismiss (Doc. 38) is 21 GRANTED. Mercy Care is terminated from this action. Because another Defendant 22 remains, the Clerk of the Court shall not enter judgment at this time. 23 / / / 24 / / / 25 / / / 26 / / / 27 / / / 28 / / / 1 IT IS FURTHER ORDERED, for reasons stated above, that Defendant Touchstone’s Motion to Dismiss (Doc. 39) is GRANTED IN PART and DENIED IN PART. Counts I, I, and III only are dismissed. Touchstone shall answer the remaining counts within fourteen (14) days of the date of this Order. 5 Dated this 9th day of November, 2023. 6 7 '

James A. CO 9 Senior United States District Judge 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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