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In re UnitedHealth Group

Court of Chancery of Delaware

February 28, 2018

IN RE UNITEDHEALTH GROUP, INC. SECTION 220 LITIGATION

          Date Submitted: February 16, 2018

          Nathan A. Cook, GRANT & EISENHOFER P.A., Wilmington, Delaware; Jeroen van Kwawegen, Christopher J. Orrico, and David MacIsaac, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Norman Berman, Nathaniel L. Orenstein, and Mark A. Delaney, BERMAN TABACCO, Boston, Massachusetts; Jessica Zeldin and Bradford P. deLeeuw, ROSENTHAL, MONHAIT & GODDESS, P.A.; Attorneys for Plaintiffs.

          R. Judson Scaggs, Jr., Lauren Neal Bennett, and Jason Z. Miller, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Attorneys for Defendant UnitedHealth Group, Inc.

          MEMORANDUM OPINION

          MONTGOMERY-REEVES, Vice Chancellor.

         This case involves a demand to inspect the books and records of a health care company that allegedly overbilled Medicare. The plaintiffs seek to inspect numerous books and records of the company in order to investigate: (1) mismanagement or misconduct; (2) possible breaches of fiduciary duties; and (3) the independence and disinterest of the board. The demand draws from a complaint in a qui tam action that contains evidence obtained by the federal government after a five-year investigation, including depositions from twenty of the defendant's employees and the defendant's production of over 600, 000 documents. The defendant argues that the plaintiffs are not entitled to inspection because they do not have a credible basis to infer wrongdoing or mismanagement based solely on the allegations in the qui tam action. The defendant also avers that the challenged activities are not illegal. Finally, the defendant argues that even if there is a credible basis to infer wrongdoing or mismanagement occurred, the scope of the inspection demand is too broad.

         For the reasons stated in this memorandum opinion, I hold that the plaintiffs' demand states a proper purpose and a credible basis from which a court can infer that wrongdoing or mismanagement may have occurred, entitling them to inspect certain books and records. The plaintiffs have shown that some, but not all, of the books and records they request are necessary to investigate their proper purpose.

         I. BACKGROUND

         The facts in this opinion reflect my findings based on the parties' briefing, 104 documentary exhibits, and trial held on January 9, 2018. I grant the evidence the weight and credibility that I find it deserves.[1]

         A. The Parties and Relevant Non-Parties

         Plaintiffs Amalgamated Bank, [2] Coral Springs Police Officers' Retirement Plan ("Coral Springs"), and Central Laborers Pension Fund ("Central Laborers") (collectively, "Plaintiffs") have been stockholders of UnitedHealth Group Inc. ("UnitedHealth" or the "Company") since approximately May 27, 2005, January 1, 2006, and May 9, 2006, respectively.[3]

         Defendant UnitedHealth is a Delaware corporation headquartered in Minnetonka, Minnesota.[4] UnitedHealth is the largest Medicare Advantage Organization, or Medicare beneficiary, in the United States, providing health and well-being services to individuals age fifty and older in all fifty states.[5]

         Non-party Stephen Hemsley is the CEO and a member of UnitedHealth's board of directors.[6]

         Non-party WellMed Medical Management, Inc. ("WellMed") is a large physician-owned practice management company operating in Texas and Florida. In 2011, UnitedHealth acquired WellMed.[7]

         Non-party Ingenix, Inc. ("Ingenix") is a direct subsidiary of UnitedHealth and provides data services for the Company, including submitting claims to Medicare.[8]

         B. The Medicare Advantage Program

         The Center for Medicare & Medicaid Services ("Medicare") is the administrator of the federal Medicare program, which provides Medicare benefits to elderly and disabled individuals.[9] The Medicare Advantage Program includes a provision that allows Medicare beneficiaries to enroll in managed healthcare insurance plans that are owned and operated by private organizations.[10] These private organizations are called Medicare Advantage Organizations.[11] Medicare pays UnitedHealth and other Medicare Advantage Organizations fixed monthly amounts for each enrollee based on various "risk adjustment data."[12] These data are comprised of medical diagnosis codes that each enrollee receives, and the data fluctuate based on the severity of the diagnosis.[13] Medicare pays an additional fee for enrollees who receive specific and more serious diagnoses.[14] The adjustments are intended to ensure that Medicare Advantage Organizations such as UnitedHealth are paid more for those enrollees expected to incur higher healthcare costs and less for healthier enrollees expected to incur lower costs.[15]

         All Medicare Advantage Organizations, including UnitedHealth, submit diagnosis codes with the risk adjustment data of the beneficiaries to Medicare for payment.[16] These diagnosis codes are created from the beneficiaries' medical encounters, such as hospital stays and office visits.[17] In general, the more numerous and severe the conditions, the higher the risk score for the beneficiary, and the larger the payout to the Medicare Advantage Organization.[18] The Medicare Advantage Program requires each Medicare Advantage Organization to submit diagnosis codes that are "unambiguously" supported by information included in the beneficiaries' medical records.[19] Medicare requires Medicare Advantage Organizations to delete previously submitted codes that are either unsupported by the medical records or invalid diagnoses.[20]

         C. The Qui Tam Action

         In July 2017, Benjamin Poehling, former Director of Finance at UnitedHealthcare Medicare & Retirement UnitedHealth, a UnitedHealth subsidiary, filed a qui tam action (the "Poehling Complaint") against UnitedHealth.[21] He alleged that since at least 2006, the Company has violated the False Claims Act[22] by improperly "upcoding" risk adjustment data and failing to delete incorrect diagnosis codes, which resulted in overpayments from Medicare.[23] Shortly after, the Department of Justice (the "DOJ") intervened in that action, United States ex rel. Poehling v. UnitedHealth Group, Inc. (the "Qui Tam Action"), [24] alleging that since at least 2005, despite repeat warnings, UnitedHealth has violated both Medicare regulations[25] and the False Claims Act.[26] The DOJ based its allegations on a five-year investigation that included depositions of twenty UnitedHealth employees and UnitedHealth's production of over 600, 000 documents, including the Company's internal emails, letters, audit reports, charts, attestations, policies, presentation materials, and memoranda.[27] Based on this evidence collected, Plaintiffs allege that Defendant overbilled Medicare by "hundreds of millions - and likely billions of dollars."[28]

         Plaintiffs assert that Defendant engaged in upcoding risk adjustment data by deliberately leaving diagnosis codes regardless of whether an enrollee actually had or was treated for that diagnosis in order to receive additional payment from Medicare.[29] Plaintiffs claim UnitedHealth conducted upcoding primarily through its chart review program (the "Chart Review Program"), patient assessment forms (the "Patient Assessment Forms"), and doctor incentives.[30] For support, Plaintiffs point to the DOJ's allegations (the "DOJ Complaint") in the Qui Tam Action as well as the voluminous documents and testimony cited and attached to the DOJ Complaint.[31] A few examples include:

• Testimony from UnitedHealth's Vice President of Finance that in 2006, UnitedHealth implemented the Chart Review Program designed to determine if the physicians' medical records supported the diagnoses that they reported to UnitedHealth, which revealed inaccurate data.[32]
• Testimony, audit reports, presentations, training guides, and email communications that revealed provider-reported diagnoses were invalid; in some cases, approximately thirty percent of the codes were invalid.[33]
• Memoranda that showed the Chart Review Program was originally designed to "look both ways, "[34] but because UnitedHealth would recover upwards of $450 in revenue per every $30 spent on a specific chart review, the diagnoses coders tasked with finding and deleting false codes were told to "look one way" in order to increase these payments.[35]
• Evidence that UnitedHealth created the Patient Assessment Forms, a program created to identify chronic conditions coded less frequently than their prevalence rates would indicate.[36] The program was designed to encourage doctors to enter codes for patients that were at all eligible for the diagnosis code.[37] UnitedHealth only distributed the Patient Assessment Forms to providers who were eligible for Medicare payments.
• Evidence that UnitedHealth entered into "gainsharing" agreements, which gave doctors incentive payments based on the revenues that UnitedHealth received from Medicare for treating those doctors' patients.[38]
• Testimony that internal audit programs revealed "faulty coding." When UnitedHealth employees found codes unsupported by actual diagnoses, they were told that UnitedHealth "did not have the resources [to remove or delete them]" before the final submission deadline.[39]
• A presentation that showed thirty-two percent of diagnosis codes under review were not supported by the beneficiaries' medical records.[40]
• Testimony that in 2010, UnitedHealth implemented risk adjustment coding and compliance reviews (the "RACCR Program"), a program designed to meet Medicare requirements of submitting accurate risk adjustment data.[41] This program revealed that more than forty percent of diagnosis codes were invalid.[42]
• Evidence that UnitedHealth excluded certain providers from the RACCR Program in order to reduce the number of deleted codes.[43]
• Evidence that the RACCR Program found diagnoses codes not supported by the medical records, but UnitedHealth did not always delete them.[44]

         Plaintiffs' also allege that UnitedHealth, through its subsidiaries, WellMed and Ingenix, caused other Medicare Advantage Organizations to submit false risk adjustment claims.[45] In particular, WellMed and Ingenix allegedly pursued contracts with other Medicare Advantage Organizations that were designed to assist other Medicare Advantage Organizations in submitting false risk adjustment claims.[46]Examples of evidence supporting these allegations include:

• Testimony that UnitedHealth created WellMed's subsidiary, DataRap, a processing system that identified, processed, and submitted diagnosis codes for Medicare payment, in order to maximize its risk adjustment submissions without regard to their accuracy or eligibility.[47]
• Testimony that WellMed's practice was not to delete incorrect diagnosis codes from prior years.[48]
• Testimony that WellMed claimed Medicare payments for diagnoses codes it identified as fraudulent.[49]
• Evidence that WellMed set up at least two health plans to use DataRap for the purpose of submitting fraudulent diagnoses codes.[50]
• Evidence that a Medicare Advantage Organization in Dallas, Texas paid WellMed a fee based almost entirely on the increase in UnitedHealth's risk score year after year.[51]
• Evidence that, as a selling point to other Medicare Advantage Organizations for its risk adjustment services, Ingenix would emphasize that more than thirty percent of provider-reported diagnoses were unsupported by the beneficiaries' medical records.[52]
• Emails from compliance personnel at Ingenix that acknowledged UnitedHealth risked having to return Medicare payments if it alerted Medicare of payments it received based on diagnoses that were not validated by beneficiaries' medical records.[53]

         Further, Plaintiffs claim there is a credible basis to infer that at least ten senior executives and directors had actual knowledge of UnitedHealth's "widespread and systematic corporate misconduct."[54] Some evidentiary examples to support this claim include:

• Reports given in mid-2010 to executives that showed risk adjustment data was over forty percent inaccurate in California and Texas because the "diagnoses were not supported by the beneficiaries' medical records or were uncertain or unconfirmed diagnoses."[55]
• A report given in June 2010 to Hemsley, the CEO and a board member, and other members of the executive team that identified compliance as an important issue of immediate concern.[56] This report showed that UnitedHealth knew Medicare Advantage Organizations were liable under the False Claims Act for reporting and refunding overpayments in an untimely manner.
• A presentation given in November 2011 to Hemsley that noted, "the medical record is the 'source of truth' and that looking at this 'source of truth' had a negative revenue impact because comparing provider-reported diagnoses with the information in the providers' medical records resulted in having to delete some of their diagnoses."[57]
• A report given in October 2012 to executives, including the CFO of UnitedHealth, that showed over thirty-three percent of diagnoses reviewed were unsupported by the beneficiaries' medical records, even though the coded inputs received two separate reviews for accuracy.[58]
• Testimony that executives knew the Medicare advantage claims did not always match the medical record documentation.[59]
• A presentation to executives that indicated "' [p]rovider coding is highly inaccurate and incomplete' and that 'more than 30% of coded conditions are not supported by [Medicare] validation findings.'"[60]

         Plaintiffs argue that senior executives and members of the board either encouraged or deliberately failed to address the scheme to improperly increase Medicare payments.[61] Examples of evidence underlying this argument include:

• An email from the CFO of UnitedHealth's Medical Advantage that acknowledged "vasculatory disease opportunities, screening opportunities, etc with huge $ opportunities."[62] In that email, he encouraged employees to "turn on the gas!" in order to increase revenue opportunities.[63]
• Evidence that executives knew that UnitedHealth would not delete or otherwise report to Medicare at least 100, 000 invalid diagnoses in 2011 and 2012 encounters.[64]
• Evidence that UnitedHealth liberalized its coding policies to enable coders to identify more diagnoses when it did not achieve its expected return on investment from 2012 chart reviews.[65]
• A presentation given to executives that revealed UnitedHealthcare Medicare & Retirement would miss its 2014 target budget by half a billion dollars.[66] As a result, executives, including Hemsley, terminated audit programs that UnitedHealth had implemented in order to improve the accuracy of risk adjustment data. By terminating these programs, UnitedHealth could "cut the $500 million miss by $250 million by . . . not deleting the provider-reported diagnoses invalidated by its chart reviews."[67]
• A document that showed Hemsley and other executives knew that terminating these audit programs would enable UnitedHealth to achieve massive financial benefit in the second quarter 2014 earnings.[68]

         D. Procedural History

         On July 17, 2017, Plaintiff Amalgamated Bank sent a books and records inspection demand to UnitedHealth.[69] On July 27, 2017, Plaintiff Central Laborers sent a books and records inspection demand to UnitedHealth.[70] On August 7, 2017, Plaintiff Coral Springs sent a books and records inspection demand to UnitedHealth.[71] On August 3, 2017, UnitedHealth rejected Central Laborers' demand.[72] On August 8, 2017, UnitedHealth rejected Amalgamated Bank's demand.[73] On August 14, 2017, UnitedHealth rejected Coral Spring's demand.[74] On September 25, 2017, Amalgamated Bank filed a complaint pursuant to 8 Del. C. § 220 against UnitedHealth.[75] The next day, Plaintiffs Coral Springs and Central Laborers filed a complaint against UnitedHealth pursuant to 8 Del. C. § 220.[76] On October 11, 2017, this Court consolidated the Amalgamated Bank and the Coral Springs and Central Labors actions. This Court held trial on January 9, 2018. On January 31, 2018, Plaintiffs filed a letter to the Court attaching the federal district court's tentative ruling on UnitedHealth's motion to dismiss the Qui Tam Action. On February 2, 2018, Defendant also filed a letter urging the Court not to consider the tentative ruling in its decision. On February 13, 2018, Plaintiffs filed another letter attaching the federal court's final ruling, which denied UnitedHealth's motion to dismiss on three counts and granted the motion on three counts, with leave to amend. On February 16, 2018, Defendant filed a letter responding to Plaintiffs' letter and exhibit, urging the Court not to consider the final ruling in its decision.

         II. ANALYSIS

         Under Section 220 of Delaware General Corporation Law, stockholders of a Delaware Corporation have the right to inspect the books and records of a company for any proper purpose.[77] A proper purpose includes "a purpose reasonably related to such person's interest as a stockholder."[78] "[A] stockholder has the burden of proof to demonstrate a proper purpose by a preponderance of the evidence."[79]

         "It is well established that a stockholder's desire to investigate wrongdoing or mismanagement constitutes a 'proper purpose.'"[80] The stockholder is not, however, "required to prove by a preponderance of the evidence that waste and [mis]management are actually occurring."[81] Instead, a plaintiff who seeks to investigate wrongdoing or mismanagement must also show "'some evidence' to suggest a 'credible basis' from which a court can infer that mismanagement, waste or wrongdoing may have occurred."[82] The "'credible basis' standard sets the lowest possible burden of proof."[83] The credible basis standard can be satisfied through "documents, logic, testimony or otherwise."[84] "The trial court may rely on 'circumstantial evidence, '" and "[h]earsay statements may be considered, provided they are sufficiently reliable."[85]

         Plaintiffs seek to inspect books and records of the Company in order to investigate: (1) mismanagement by the directors and/or officers of UnitedHealth; (2) the possibility of breaches of fiduciary duty by directors and/or officers of UnitedHealth and its subsidiaries, including without limitation, Ingenix and WellMed; and (3) the independence and disinterest of the board of directors, including whether a pre-suit demand is necessary or would be excused before commencing any derivative action on behalf of the Company.[86]

         Defendant here does not identify any deficiencies in the form and manner of the demand or challenge that a desire to investigate corporate wrongdoing is a proper purpose. Instead, Defendant argues that Plaintiffs cannot rely solely on the allegations in the Qui Tam Action as evidence to suggest a credible basis from which a court can infer that wrongdoing or mismanagement may have occurred.[87]Defendant further argues that there is no credible basis for investigation because the alleged conduct is not illegal.[88] Defendant also avers the scope of the request is too broad.[89] I address each in turn.

         A. Plaintiffs Have Shown a Credible Basis to Infer Wrongdoing

         Defendant argues that Plaintiffs fail to state a credible basis to infer wrongdoing or mismanagement sufficient to warrant further investigation. In particular, Defendant asserts under Graulich v. Dell Inc.[90] that Plaintiffs cannot rely exclusively on a complaint that has not been found to state a viable claim as evidence of a credible basis of wrongdoing.[91] This challenge fails. While a complaint alone may not show a credible basis, the DOJ Complaint includes documents and testimony provided by Defendant and Defendant's employees.[92] The allegations in the Qui Tam Action are based on depositions from twenty of Defendant's employees and ...


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