FOR PUBLICATION



### UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

U N I T E D S TA T E S O F A ME R I C A , Plaintiff

,

and

J AME S M. S W O B E

N , Qui Tam Relator, Plaintiff-Appellant
,

v.

U N I T E D H EAL T H C AR

E I N S UR A N C E C O MP A

N Y , a Connecticut corporation; U N I T E D H EAL T H C AR

E S E R VI C E S , I N C

. , Minnesota corporation; UHIC; U N I T E D H EAL T H G R

O UP ; U N I T E D H EAL T H C AR

E ; U N I T E D H EAL T H ; P A C I F I C A

R E H EAL T H P LA

N A D MI N I S T R A T O R S , IN C .; UHC O F C AL I F O R

NIA , FKA PacifiCare of California; P A C I F I C A

R E L I F E & H EAL T H I N S UR

A N C E C O .; P A C I F I C A

R E H EAL T H S Y S T E M S ; H EAL T H N E T ; No. 13-56746

D.C. No. 2 :09-cv-05013-JFW -JEM

OPINIONS W O B E N V

. U N I T E D H EAL T H C AR

E 2

W E L L P O I

N T ; A E T N A ; H EAL T H C AR

E P AR T NE R S , LLC; H EAL T H C AR

E P AR T NE R S M E D I C AL G RO U P , IN C .; H EAL T H C AR

E P AR T NE R S I ND E P E

ND E N T P HY S I C IA

N A S S O C I A T I ON , Defendants-Appellees.

Appeal from

the United States District Court for the Central District of California John F. W alter, District Judge, Presiding

Argued and Subm itted December 9, 2015

Pasadena, California

F iled August 10, 2016

Before: Stephen Reinhardt, Raym ond C. Fisher and Jacqueline H. Nguyen, Circuit Judges.

Opinion by Judge FisherS W O B E N V

. U N I T E D H EAL T H C AR

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SUMMARY *

Medicare

Th e p an el v acated th e d istrict co urt’s ju d g m ent dism issing without leave to am end qui tam relator Jam es Swoben’s third

am ended com

plaint, which a l leged that defendant Medicare Advantage org an izations subm itted false certifications in violation of the False C laim s Act, and rem ande d with instructions to afford Swoben leave to file a proposed fourth

am ended com

p laint.

The Centers for Medicare & Medicaid Services (“CMS”)
pays Me dicare Advantage organizations fixed m onthly

am ounts for each enrollee, and CMS calculates the paym ent for each enrollee based on various “risk adjustm ent data” as reflected in subm itted diagnoses codes. Medicare regulations require a Medicare Advantage organization to certify that the data it subm its are “accurate, com plete, and truthful.” 42 C.F.R. § 422.504( l), ( l)(2). Swoben alleged th at the defendant organizations subm itted false certifications by perform ing biased retrospective m edical record reviews d esign ed n o t to id e ntif

y erroneously reported diag n o s i s co d e s.

The panel held that the district court abused its discretion by d e n y ing leave to am end on the ground of futility o f

am endm ent. T he panel h eld that the theory alleged h ere – that th e d e f en d ants d esigned their retrospective rev iew p ro ced ures to not reveal erro n eo u sly reported diagnosis codes

– adequately alleged that the d efendants’ § 4 2 2.504( l)

* This summ ary c o n s ti tu tes no part of the o pinion of the court. It h as been prepared by court staff for the convenience of the reader.S W O B E N V

. U N I T E D H EAL T H C AR

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certifications were false and stated a cognizable legal theory under the False C laim s Act. The p anel also held that the proposed fourth am ended com plaint alleged sufficient factual

m atter to satisfy Fed. R. Civ. P. 8, 9(b) and 12(b)(6).

The panel held that th e district court also abused its discretion by denying leave to am end b ased on undue delay. The panel held that leave to am end was pr o per in this case where the litigation agai n s t the defendants was at an early stage, Swoben did not seek to assert a new legal theory, and this was Swoben’s first attem pt to cure deficiencies in his pleadings.

C OUNSEL

W illiam K. Hanagam i (argued), The Hanagam i Law F irm
, A.P.C., W oodland Hills, Californ i a; Abram J. Zinberg, The Zinberg Law F irm
, A.P.C., Huntington Beach, California; for Plaintiff-Appellant Jam es M. Swoben.

David J. S chindler (argued), Latham & W atk i n s LLP, Los Angeles, California; Ro ger S. Goldm an, Daniel Meron, Jonathan Y

. Ellis, and Matthew J. Glover, Latham & W atkins L L P
, W a s h i n g t o n , D

. C

. ; f o r D e f e n d a n t s

- A p p e l l e e s UnitedHealthcare Insurance Com pany , UnitedHealthCare S erv ices In c. , U H I C
, U

n i t e dH e a l t

h Gr o u p , Un ited H ealth C are, Un ited H ealth
, P acif

icare H ealth Plan Adm inistrato rs, U H C o f California (FKA PacifiCare of California), PacifiCare Life and Health Insurance C om pany, P acifiCare Health System s, and Health Net.

David W

. Skaar, Hogan Lovells US LLP, Los Angeles, California; Michael C. Theis, Hogan Lovell s US LLP,S W O B E N V

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Denver, Colorado; for Defendants-Appellees HealthCare Partners LLC, HealthCare P artners Medical Group, Inc. and HealthCare Partners Independent Physician Association.

Ge o ffrey M. Sigler, and Thom as M. Johnson, Jr., Gibso n , Dunn & Crutcher LLP; W ashington, D.C.; Richard J. Doren, Gibson, Dunn & Crutcher LLP, Los Angeles, California, for Appellee Aetna.

David Deaton, O’ Melveny & Myers LLP, Newport Beach, California; David J. Leviss, O’Melveny & M y ers LLP, W ashington, D.C.; S tephen Sullivan
, O ’Melveny & Myers LLP, Los Angeles, California; for Appellee W ellPoint, Inc.

Charles W

. Scarborough and Karen Schoen, Atto rneys, Appellate Staff; Eileen M

. Decker, United States Attorney; Benjam in C. M i z er, Principal Deputy Assistant Attorney General; Civil Division, United States Departm ent of Justice, W ashington, D.C.; for Am icus Curiae United States.

OPINION

FISHER, Circuit Judge:

The Centers for Medicare & Medicaid Se rv i ces (CMS), adm inistrator of the federal Medicare program , pays Medicare Advantage organizations fixed m onthly am ounts for each enrollee. CMS calculate s the paym ent for each enrollee based on various “risk adjustm ent data,” such as an enrollee’s dem ographic profile and the enrollee’s h e a lth status, as reflected in the m edical diagnosis codes associated with healthcare the enrollee receives. These diagnosis codes

are reported b y Medicare Advantage organizations to CMS.S W O B E N V

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Because Medicare Advantage organizations have a financial incentive to exaggerate an enrollee’s health risks by reporting di a g n osis codes that m ay not be supported b y the enrollee’s

m edical records, Medicare regulations requi r e a Medicare Advantage o rganization, as an express condition of receiving
paym ent, to “certify (based on b est knowledge, inform ation, and belief) that the [risk adjustm ent ] da ta it subm its

. . . are accurate, com

plete, and truthfu l.” 42 C.F.R. § 4 22.504( l), ( l)(2).

Qui tam relator Jam es Swoben alleges Medicare Adv an t a g e o r g a n i z a t i o n s U n i te d He a l th c ar e , Ae tna , W ellPoint and Health Net, and physician g ro up HealthCare Partners, subm itted f

alse cert ifications under this provision, in violation of the False C laim s A ct, by co n du c t ing retrospective reviews of m edical records designed to identify and report onl y under-reported diagnosis codes (diagnosis codes erroneously no t subm itted to CMS despite adequate support in an enrollee’s m edical r e c o rds), not o ver-reported codes (codes erroneously subm itted to CMS absent adequate record suppo rt). The d istrict court d enied Swoben leave to fil e a proposed fourth am ended com plaint, citing futility o f

am endm ent and undue delay. W e hold the d i s trict court abused its discretion.

First, the court erred by concluding am endm ent would be futile. Swoben’s proposed fourth am ended com plaint asserts

a cognizable legal theory. CMS has l o ng m ade clear that, under § 422.504( l), Medicare Advantage organizations have “an obligation to undertake ‘due d iligen ce’ to ensure the

accur a c y, com

pleteness, and truthfulness” of the risk

a djustm ent d ata they subm it to C MS and “will be h e l d responsible for m aking good faith efforts to cert i fy the
accuracy, com

pleteness, and truthfulness” of these data.S W O B E N V

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Medicare+Choice P rogram , 65 Fed. Reg. 40, 1 70, 40,268 (June 29, 2000). When, as alleged here, Medicare Advantage organizations design retrospective re views of enrollees’

m edical records deliberately to avoid identifying erroneously subm itted diagnosis codes that m ight otherwise ha v e b e en i d e n t ified with reasonable diligence, they can no longe r certify, b ased on b est knowledge, inform ation and b elief, the
accuracy, com

pleten ess an d trut

h f u ln ess of the data subm itted
to CMS. T his i s especially true when, as alleged h ere, they

were on notice – based o n audits conducted by CMS – that their data likely included a significant num ber of erroneously reported diagnosis codes. T h e allegations in Swo b en’s proposed fourth am ended com plaint also satisfy Rules 8 and 9 (b ) of the Federal Rules of Civil Procedure. Althoug h th e allegations are not as detailed as th e y m ight be, they adequately identify “the who, what, when, where, and how o f the m isc o nduct charged,” Ebeid ex rel. United States v. Lungwitz
, 616 F.3d 993, 998 (9th Cir. 2010) (quoting V ess v. Ciba-Geigy C

o rp. USA
, 317 F.3d 1097, 1106 (9th Cir. 2003)) (internal quotation m arks o m itted), and afford each defendant notice of its alleged role in a fraudulent schem e.

Second, the district court abused its discretion by denying leave to am end b ased on undue delay. Undue delay by itself is insu ffi c i en t to justify denying leave to am end, and the record here does not support any additional ground – such as prejudice o r b a d fa ith – that would justify the denial. See Owens v. Ka iser Found. Health Plan, Inc.
, 244 F.3d 708, 712–13 (9th Cir. 2001). On th e contrary, leave to am end is
proper here given the litigation against these defendants is at

an early stage, S woben does not seek to assert a new l e g al theory and this is Swoben’s first attem pt to cure deficiencies in his pleadings.S W O B E N V

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B A C K G RO UND

I. The Medicare Advantage Program

Medicare beneficiaries have the o ption of receiving benefits through private health plans as an alternative to the traditional fee-for-service Medicare program

. Under this option, known as Medicare A dvantage o r Medicare Part C, the gov e rnm ent pays Medicare Advantage organizations a capitated (per enrollee) am ount to provide m edical benefits. The capitated am ount is a fixed m onthly paym ent regardless of the volum e of services an enrollee uses.

The g overnm ent adjusts the m onthly paym en t s to Medicare Advantage organizations to reflect the health status of their enrollees. See 42 U.S.C. § 1395w-23(a)(1)(C)(i), (a)(3); 42 C.F. R. § 422.308(c)(2). This ensures Medicare Advantage “organizations are paid appropriately for their
p la n e n rollees (that is, less f o r h ealthier enrollees and m ore for less healthy enroll e e s).” Establishm ent of the Medicare Advantage Program
, 7 0 Fed. Reg. 4588, 4657 (Jan. 28, 2005). The risk adju s tm ent m ethodology relies on enrollee diagnoses. S

ee P o licy and Technical Changes to the Medicare Advantage and the Medicare Pr escription Drug Benefit Program s, 74 Fed. Reg. 54
, 6 34, 54,673 (Oct. 22, 2009). Physicians and other health care providers subm it diagnosis codes to the Medicare Advantage organizations, which in turn subm it them to CMS. See id. at 54,674. These diagnosis codes contribute to an enrollee’s risk score, which is used to adjust a base p aym ent rate. See id. Each diagnosis code subm itted m

ust be supported by a p roperly docum ented

m edical record. See 42 U .S.C. §§ 1395 l (e), 1395y(a)(1)(A); 42 C.F.R. § 4 22.310(d); C ontract Y ear 201 5 Policy and Technical Changes to the Me di c ar e Advantage and theS W O B E N V

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Medicare Prescription Drug Benefit Program s, 79 Fed. R eg. 29,844, 29,923 (May 23, 2014) (“CMS has required for m any years that diagn o ses th at [ Medicare A dv antag e] organizations subm it for p aym ent be supported by m e d ical record docum entation.”).

“Since there is an incentive for [Medicare Advantage] organizatio n s t o p o tent ially o v er-report diagnoses so that they

can increase their paym ent, [CMS] audi t s plan-subm itted diagnosis data a few years later to ensure they are supported by m edical recor d d ocum entation.” Contract Year 2015 Policy and Technical Changes to the Medicare Advant a g e and the Medicare Prescription Drug Benefit Pr o gr am s, 79 Fed. Reg. 19 1 8
, 2 00 1 (Jan. 1 0, 2014). T h ese risk adjustm ent data validation (RADV) audits review selec t e d

m edical records to determ ine whether they support the diagnose s reported by Medicare Advantage organizations. See id. 1

As a further bulwark against fraud, Medicare Advantage organizations m

u st cert i fy the accuracy, com pleteness and
tru th fu l n ess of the data they provide to CMS, including risk adjustm ent data, as a condition to receiving paym ent:

1 Initially, when conducting RADV audits, CMS recouped overpaym ents solely with respect to the sam pled beneficiaries. More r ecently, CMS h as im plem ented a procedure through which the paym ent error rate calculated for the sam

pled beneficiaries in the audits is extrapolated t o the contract population as a whole. See CMS, Medicare Advantage Risk Adjustment Data Validation Au dits Fact Sheet 1, 3 (updated Dec. 11, 2015), h t t p s : / / w w w

. c m s

. g o v / M e d i c a r e / M e d i c a r e

- A d v a n t a g e / P l a n

P a ym e nt / D o wn l o a d s /M A

_ RA D V

_ Au d i t

_F act

_ S h eet .p d f

; see a l s o 7 4 F e d

. Reg. at 54,673–74.S W O B E N V

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As a condition for receiving a monthly payment under subpart G o f this part, the [Medicare Advantage] organization agrees that its chief executive officer ( CEO), chief financial officer (CFO), o r an individual del e g ated the authority to sign on behalf o f

one of these officers, and who reports d irectly
t o such officer, must request payment unde r the contract on a document that cer tifies (based on best knowle d

ge, information, and belief) the accuracy, complet e ness, and truthfulness of relevant data that CMS requests

. S uch data include specified enrollm ent informa tion, encounter data and other inform ation that CMS m ay specify.

42 C .F.R. § 422.504( l) (em phasis added). 2 Specific al ly, a Medicare Advantage organization “m ust certify (based on best knowledge, inform ation, an d belief) that the [risk adjustm ent] data it s ub m its under § 422.310 are accurate,

com plete, and truthful.” Id. § 422.504( l)(2).

A Medicare Advantage organization is also required to “[a]dopt and im

plem ent an effective com pliance program , which m ust include m easures that prevent, detect, and correct

non-c o mp liance with CMS’ p rogram requirem ents.” 42 C.F.R. § 4 2 2 .5 03(b)(4)(vi). 3 In addition, although

2 T his regulation has been in force, in substantially the sam e f orm , since 2000. S ee 42 C.F.R. § 422.502( l) (2000).

3 This requirem ent has been on the b ooks, in sim ilar form
, since 2005. See 42 C.F.R. § 422.503(b)(4)(vi)(F), (G) (2005); 42 C.F.R. § 422.503(b)(4)(vi) (2010).S W O B E N V

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Medicare A dvantage organizations genera l l y subm it d ata to CMS shortly after services are provided, the regulations also allow for data subm issions after the paym ent year. See 42 C .F.R. § 422.310(g )

. CMS uses these data to “recalculate[] the risk factors for affected indi v iduals to determ ine if adjustm ents to paym ents are necessary

. ” Id. § 422.310(g)(2)

I n light of these provisions, Medicare Advantage organizations may , but are not required to, conduct retrospective reviews of their enrollees’ m edical rec o r ds to

ensure the accuracy o f th e diagnosis codes they have provided to CMS. See CMS, 2 008 Risk Adjustme n t Da ta T ech n ica l A ss ista n ce F

o r Med ica re A d va n ta ge O rg a n i za tio n s Participant Guide § 7.7.

Certification under § 422.504( l) has always required d ue diligence and good f

aith. Wh en CMS a d o p ted the “best knowledge, inform atio n , and belief” standard in 2000, it explained in the pre a mb le to the regulation that Medicare Advantage organizations “cannot reasonably be expected to know that every piece o f d ata is correct,” so “sim ple m istakes will not result in sanctions.” Medicare+Choi c e P rogram , 65 Fed. Reg. 40,170, 40,268 (J un e 29, 2000). B ut § 422.504( l) does not require actual knowledge that the data supplied to CMS are false. Rather, as under the False Claim s Act, a certification is f

alse unde r § 4 2 2.504( l) when the Medicare A dvantage organization h as actual knowledge o f the falsity of the risk adjustm ent d ata or dem onstrates either “reckless disregard” o r “deliberate ignorance” of the truth o r fa l s i ty of the data. Id. Thus, Medicare A dvantage organizations “have an obl igation to undertake ‘due diligence’ to ens ure the accuracy, com pleteness, and truthfulness of encounter data subm itted to [CMS]” and “willS W O B E N V

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be held responsible for m aking go o d faith efforts to certify the accuracy, com

pleteness, and truthfulness of encounter data subm itted.” Id.

In 2 014, C MS c o n sidered b ut ultim ately decided not to finalize a proposed rule that would have altogether prohibited M edicare Advantage o rganizations from perform ing o n e

sided retrospective reviews. Under the proposed regulation:

m edical record revi e ws conducted by [a Medicare Advantage] organization cannot be d esign ed o n ly to identify d iagnoses that wo u ld trigger additional paym ents by CMS to the

. . . organization; and medical record review

m ethodologies m

ust be designed to ide n t i f y

errors in diagnoses subm itted to CMS as risk adjustm ent data, regardless o f wheth e r the data errors would result in positive or negative
paym ent adjustm ents.

79 Fed. Reg. at 2000. Although CMS decided not to finalize the p roposed rule, s e e i d

. at 29,926, it reiterated that it has “always expected that [ a Medicare Advantage] organization

. . . im p lem ent, during the routine course of business,
appropr i a t e p aym ent evaluation procedures in order to m eet the requirem ent of certifying the data they subm it to C MS for purposes of paym ent,” id. at 29,923. CMS explained:

[Medicare Advantage] organiza t i ons

. . . are

r esponsible for ensuring that paym ent data they subm it to CMS are accurate, truthful, and

c o mp l e t e ( b a s e d o n b e s t kn o w l e d g e , inform ation, and belief), and are expected to have effective and appropriate p aym entS W O B E N V

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e v a l u a t i o n p r o c e d u r e s a n d e f f e c t i v e

com plia nce program s as a way to avoid receiving or retaining overpaym ents. Thus, at

a m inimum , reasonable di l igence would include proact i v e co mp l i anc e a ctivities conduct e d in good faith by qualified individuals to m onitor for th e receipt o f
overpaym ents.

Id. CMS added, “[i]f the requirem ent to report and return overpaym ents applied only to situations where the [Medicare Advant a g e] organization

. . . has actual knowledge of the existence o f an overpaym ent, then these entities could easily avoid returning im

p rope rly received paym ents.” Id. at 29,924. 4 Although these 2014 events postdate the allegations in S woben’s pleadings, which cover the years between 2005 and 2012, they are consistent w ith th e r e gulatory requirem ents that have existed since 2000.

II. Procedural History

Swoben filed an initial c o m plaint in this action in 2009. His first am e n d e d com

plaint added claim s against United Healthcare. He filed a seco n d a m ended com plaint in 2010.

4 Also in 2014, CMS ado pt e d a regulation stating that a Medicare Advantage organization “has identified an overpaym ent wh en [it] h as determ ined, or should have determ ined through the exercise of reasonable diligence, t

hat [it] has received an overpaym ent,” 42 C.F.R. § 4 22.326(c), and for t his purpose an “overpaym ent” i ncludes a previously subm itted

m edical diagnosis code t

hat is not properly supported by a m edical r ecord,

see 79 F ed. Reg. at 29,921 (s t a t in g “a risk adjustm ent diagnosis t hat h as been subm itted for paym ent but is found to be invalid because it does not have supporting m edi c a l record docum entation would result in an overpaym ent”).S W O B E N V

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I n 2 0 11, he filed a third am ended com plaint, adding cla ims against HealthCare Partners, Ae tna, W ellPoint and Health Net. In accordance with the F alse Claim s Act, Swoben filed each of these pleadings under seal. See 31 U.S.C. § 3730(b)(2).

The gist of Swoben ’s com plaint is that the defendants

– Medi care A dv antag e o rg an izatio n s United H ealth care, A etn a , W ellPoint an d Health Net, and H ealthCare P artners, a p hy sician g roup providing health care services to th e organizations’ enrollees in exchange for a percentage of the organizations’ capitate d p aym ents – perform ed biased retrospective m edical record reviews. According to Swoben, retrospective reviews b y Medicare Advantage organizations typically should identify ( an d report to CMS) two types o f

err o r s i n the risk adjustm ent data p reviously subm itted: (1) diagnos is codes supported by an enrollee’s m edical records but not pre v i o u s ly subm itted to C MS (underr e p orting errors); and (2) diagnosis codes previously subm itted to CMS but not supported by the e n r o ll ee’s

m edical records (over-reporting errors). Identifying and reporting th e fi rst type of error is favorable to the Medicare A dv antage o rganization; identifying and reporting the seco n d type of error is unfavorable. Swoben alleges the defendants

con ducted one-sided retrospective reviews designed to identify (and report to CMS) solely the first type of error. He alleges these reviews were designed to exaggerate enrollees’ heal th risks and cause C MS to m ake inflated capitated
paym ents to the defendants. These actions, Swoben alleges, rendered the defendants’ periodic certifications under § 422.504( l) false, in violation o f the Fa l s e Claim s Act, 31 U.S.C. § 3729(a)(1).S W O B E N V

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S p e c i f i c a l l y , S w o b e n alleg es th e d ef en d ants’ retro sp ecti v e reviews were biased in three respects. First, he alleges each of the defendants retained coding com panies or purchased specialized software to performretrospective reviews of the

m edical charts of tens of thousands of their pa t i e nt s with

severe illnesses b ut “concealed from the coders the diagnosis codes th at had been p reviously subm itted to the Governm ent.” Fo urth Am

. Com p l. ¶¶ 12, 16–17. As a consequence, “the re s ults of the coders’ reviews did not ide n t i fy the diagnosis codes unsupported b y proper docum entation of the reviewed m edical charts that had been previously subm itted to the Governm ent.” F ourth Am

. Com pl. ¶¶ 13, 17. Swoben alleges the defendants engaged in these activities beginning in 2005. F ourth Am

. Com pl. ¶¶ 12, 16.

Second, S woben alleges United Healthcare instructed its

m edical providers, including He a lthcare Partners, to review the m edical charts of selected patients to determ ine whether
those charts supported specific diagnoses that had no t previously been reported to CMS. Fourth Am

. Com pl. ¶ 14. The m ed ical p ro v id ers rep o rted th e ad d itio n a l d i agnosis codes supported by the records “but m ade no attem pt to determ ine

or report those previously reported d iagnosis codes that were unsupported by properly docum ented m edical charts that

were re viewed.” Fourth Am

. C o m pl. ¶ 1 4. Swoben alleges United Healthcare and Healthcare Pa rtn ers engaged in this acti v i ty from approxim ately 2005 to 2007. Fourth Am

. Com pl. ¶ 14.

Third, Swoben alleges the defendants used a tem plate to report the results of their retrospective revie ws to CMS that allowed coders to e n t e r any additional diagnosis codes identified by the reviews but “did n ot perm it th e entry o fS W O B E N V

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inform ation indicating what previo u sly su b m itted [ diagnosis] codes should be withdrawn.” Fourth Am

. C om pl. ¶ 23. Swoben alleges the defendants u sed the faulty tem plate from approxim ately 2006 to 2012. Fourth Am

. Comp l. ¶ 2 4. He further alleges the defendants w ere in v o lved in the develo p ment of the tem plate and were aware of its shortcom ings. Fourth Am . Com pl. ¶¶ 22, 27.

Swoben also alleges C MS conducted annual RADV audits of sam

ple m edical charts for United Healthcare, Aetna, W ellPoint and Health Net. Fourth Am. Co mp l. ¶ 25. He alleges that each of these Medicare Advantage organizations “had RADV audit error rates well in excess of 20%, reflecting that m ore than 20% of [ their] diagno s is codes subm itted to CM S were not supported by properly docum ented m edical charts.” Fourth Am

. Com pl. ¶ 25. 5 Swoben alleges the over-reporting err o r r a te found in these audits o f representativ e m ed ical reco rd s p laced th e d ef en d ants

on notice that the risk adjustm ent data they m ore broadly subm itted to C MS al so contained significant over-reporting errors. Fourth Am . Com

pl. ¶ 25.

Swoben allege s the defendants’ practices rendered their § 422.504( l) certifications f alse and fraudulent. He alleges they subm itted f

alse claim s by attesting to the a c curacy o f their risk adjustm ent data even though they knowingly designed and perform ed retrospective reviews to conceal and
not withdraw previously subm itted d iagnosis codes that were unsupported by retrospect ively reviewed m edical records. Fourth Am

. Com

pl. ¶ 27. He a lleges, m o reover, that the

5 Swoben alleges the RADV audits showed a high percentage of overreporting errors. His allegations do not address whether the RADV audits also identified under-reporting errors.S W O B E N V

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defendants knew their certifications were false because they (1) helped develo p the reporting tem plate and knew the
tem p late w o u ld n o t cap tu

re over-reporting erro rs id entif ied b y retrospective reviews; (2) had RADV audit over-reporting

error rates in excess o f 20 p ercent, placing them on notice that “a simi l ar percentage of m edical charts that were retrospectively reviewed should have resulted in [ diagnosis] codes being wi th drawn as unsupported by the m edical charts”; and (3) designed their retrospective reviews to avoid i d e n tifying or reporting unsupported diagnosis codes that should have been withdrawn. Fourth Am . Com pl. ¶ 27.

In 201 2
, the United States intervened in the action as to Swoben’s claim s against certain defendants not relevant here. In January 2013, the United States declined to intervene as to the d efe ndants who are parties to this appeal (collectively, “the defendants”). The district court ordered the com plaints unsealed and served on the defe nd ants. In June 2013, after the district court is s u e d an initial scheduling and case

m anagem ent order, the newly served defendants m o v ed t o dism iss Swoben’s claim s, arguing hi s third am ended

com p la i n t failed to satisfy Rules 8, 9(b) and 1 2(b)(6) o f the Federal Rules of Civil Procedure.

In h is opposition to the defendants’ m otions, S woben did
not defend the third am ended com plaint. Instead, he advised the court he w ould voluntarily dism iss his claim s under state law and wou ld seek leave to am end his com plaint with respect to his claim s under the False Claim s Act. The district
court ordered Swoben to file a declarati on describing “in d etail the p roposed Fourth Am ended Com plaint an d why s u ch

an am endm ent would not be futile or denied due to evidence of a lack o f diligence o r undue d elay.” As directed, S wobenS W O B E N V

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filed a d eclaration of counsel setting o ut the additional allegations he would include in a f ourth am ended com

plaint.

In a July 2013 order, the district court dism issed the third

am en d ed c o m

p lain t w ith p reju d i ce, c o n cluding Sw o b en f ailed
to all ege a claim under the False Claim s Act with particularity as required by Rule 9 (b). The court denied leave
to am end, citing both futility of am endm ent and undue delay. The court entered final judgm ent, and Swo b en tim ely appealed. He does not challenge d ism issal of th e th i rd

am ended com

plaint but contends the district court abused its discretion by denying leave to am end.

After hearing or a l argum ent, we asked the parties to subm it supplem ental briefing to address whe n conducting retrospectiv e m edical record reviews designed to identify only d iag n o s es that would trigger additional paym ents by CMS, not errors that would result in negative paym ent adjustm ents, would cau s e a certification to be false for
purposes of § 422.504( l) and the False Cl a i ms Act. The parties filed b riefs addressing this question, and the Departm ent o f Justice, representing the United States as

am icus curiae, filed a brief supporting Swoben.

S T AND AR

D O F RE VI E W

W e review the denial of leave to am end for an ab u se o f discretion, see United States ex rel. L ee v. Corinthian Colls.
, 655 F.3d 984, 995 (9th Cir. 2011), b ut we review the question of futility o f am endm ent de novo, see C a rvalho v. Equifax Info. Servs., LLC , 629 F.3d 876, 893 (9th Cir. 2010).S W O B E N V

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D I S C U S S I ON

The district court denied l eave to am end on two independent grounds – f utility of am endm ent and un du e delay. W e address these in turn.

I. Amendment Would Not Be Futile

The district court denied leave to am e nd in p art on the ground that am endm e nt w o u ld h av e b een f utile. Accordingly,

we address whether Swoben’s proposed fourth am ended

com p la i n t would have been adequate to survive a m otion to dism iss.

A. The Proposed Fourth Amended Complaint Adequately States a Cogniz able Legal Theory

Th e p arties dispute whether Swoben’s proposed fourth

am ended com

p laint alleges a cognizable legal theory.

1. The False C laim s Act im poses liability in part on “any
person who

. . . knowingly presents , o r causes to be presented, a false o r fraudulent claim for paym ent o r approval,” 31 U.S.C. § 3 729(a)(1)(A), or “knowingly m akes,
uses, o r causes to be m ade or used, a false record or statem ent

m aterial to a false or fraudulent claim ,” id. § 3729(a)(1)(B). 6 “In an archetypal qui tam False Claim s action, such as where

a private com

pany overcharges under a governm ent contract,

6 I n addition to these False Claim s Act provisions, the United S tates, as

am icus c uriae, argues the defendants’ conduct violates § 3729(a)(1)(G), known as the “reverse false claim s” provision. Swoben, however, did not rely on that provision in his opening and reply b riefs. W e t herefore do not address it here.S W O B E N V

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the claim for paym ent is itself literal ly false or fraudulent.” Un i ted S tates ex rel. Hendow v. U niv. of Phoenix
, 461 F. 3 d 1166, 1170 (9th Cir. 2 006). A s relevant here, howe ve r , “a claim under the F alse C laim s Act can be false where a party

m erely falsely c e rt ifies com pliance with a statute o r regulation as a condition to governm ent paym ent.” I d

. at 1171. Under a false certification th eo ry, “it is the false certificati o n of com

pliance which creates liability when

c e rtification is a prerequisite to obtaining a governm e n t benefit.” Id. (alteration o m itted) (quoting United States ex rel. Hopper v. Anton
, 91 F.3d 1261, 1 2 6 6 (9th Cir. 1996)). The essential elem ents of a false certification claim are: “(1) a false statem ent or fraudulent course of conduct, (2) m ade with scienter, (3) that was m aterial, causing (4) the governm ent to pay out m oney or forfeit m o neys d ue.” Id. at 1174. 7 Proof o f dam age to the governm ent is not required. See Bly-Magee v. Californ i a , 2 36 F.3d 1014, 1017 (9th Cir. 2001); United States ex rel. Hagood v. Sonoma Cty. Water Agency
, 929 F.2d 1416, 1421 (9th Cir. 1991); Cl a i r e M. Sylvia, The False Claims Act: Fraud Against the Government § § 4: 2
, 4:3 (2015).

The defendants challenge Swoben’s theory that th e

m anner in which they designed an d conducted their retrospective reviews rendered th eir certifications under § 422.504( l) false. They contend:

During the tim e period a l l eged in the

com plaint, no statute, regulation, or guidance

7 T he defendants’ briefing challenges only the first and second of these elem ents here. Accordingly, for purposes of our analysis, w e a s s u m e Swoben’s p roposed fourth am ended com p laint satisfies the third and fourth elem ents.S W O B E N V

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from CMS indicated that a certification could only be “accurate, com

p l e t e, and truthful” if [a Medic are Advantage] plan validated for itself that the m illions of diagnosis codes subm itted to it by third-party provide r s w ere supported by the underlying m edical charts

– i.e., that the plan was required to attest to the
accuracy o f som eone else’s work. Nor did
any authority indicate that a p lan was obliged
to undertake affirmat ive steps to unearth potentially unsupported codes before it could certify the third-p arty risk adjustm ent data based o n its “best knowledge, inform ation, and belief.”

Joint Suppl. Br. 1. These argum ents are unpersuasive f or two distinct reasons.

First, the defendants m ischaracterize Swoben’s theory o f the case. S woben does not allege the defe n dants’ certification s are false m erely because they p assively forwarded to C MS un su

p p o rted d iagn o sis co d es th ey received from their m edical providers. That type o f conduct would not necessarily result in false § 422.504( l) ce rt i fi cations. A s CMS m ade clear in the 2000 pream ble, Medicare Advantage organizations “cannot reasonably be expected to know that
every p iece of data is correct, nor is that the standard th at [CMS and the Departm ent of Justice] believe is reasonable to enforce.” 65 Fed. Reg. a t 40,268. “[S]im ple m istakes will
not result in san c t i o ns.” Id. Instead, Swoben alleges the defendants took affirm ative steps to g e n e rate and report skewed data. Even in the face o f “RADV audi t e rr o r r ates well in excess of 2 0%” (Fourth Am

. Com pl. ¶ 2 5 )
, they “conceived, planned and conducted the retrospective reviewsS W O B E N V

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by not causing the previously subm itted diagnosis codes that

were unsupported by the retrospective rev iew s to b e co rrected and w ithdrawn from the Governm e nt,” doing so “with the knowledge and intent that the retrospective r e views would only increase, and n ot decrease, the num ber of diagnoses, and thus their respective risk scores in order to increase capitated
paym ents paid by the G overnm ent” (Fourt h Am. Com pl. ¶ 19). The defendants’ attem pts to portray them selves as the passive victim s of their providers’ errors wholly m isstates Swoben’s theory o f the case, which focuses o n th e defendants’ own conduct in allegedl y conceiving, directing and c onducting retrospective reviews designed to identify only favorable reporting errors.

Second, the defendants’ contention that, d ur i ng the rel e v ant tim e period between 2005 and 2012, there was no “authority [to] indicate that a [ Medicare Advantage] plan was obliged to undertake affirm ative steps to unearth potentially unsupported codes before it could certify the third-party risk adjustm ent data b a s ed on its ‘best knowledge, inform ation, and b elief’” is unpersuasive. Whe n i t adopted the “best knowledge, inform ation, and belief” standard in 2000, CMS

m ade clear this was the sam e standard as the one establishing liability under the F alse Claim s Act – i.e., that it encom passes not only actual knowledge of falsity but also reckless disrega r d an d deliberate ignorance. See 65 Fed. Reg. at 40,268; see a l

s o 31 U .S.C. § 3729(b)(1)(A) (False Claim s Act). As we have explained in d escribing this standard under the False Claim s Act:

In defining knowingly, Con gress attem pted “to reach what ha s becom e known as the ‘ostrich’ type situation where an individual has ‘buried his h ead in the sand’ and failed toS W O B E N V

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m ake sim ple inquiries which w ould alert him that false claim s are being subm itted. ” S. Rep. No. 99-345, at 21 (1986), as reprinted in 1986 U.S.C.C.A.N. 5266, 5286. Congress adopted “the conc e p t that individuals and
contractors receiving public funds have som e duty to m ake a lim ited inquiry so as to be

r e as onably certain they are entitled to th e

m oney they seek.” Id. at 20; see also id. at 7 (discussing the im

porta n ce of individual

res p o nsibility because the governm ent has lim ited resources to police fraud). “While the Comm ittee intends that at lea s t som e inquiry be m ade, the inquiry n eed only be ‘reasonable and prudent under the circum stances.’” Id. at 21.

United States v

. Bo urseau , 531 F.3d 1159, 1168 (9th Cir. 2008); see also Universal Health Servs., Inc. v

. U. S

. ex rel. Escobar , 136 S. Ct. 1989, 2000 (2016) (holding “half-truths

– representations that stat e the truth only so far as it goes, whi le om itting critical qualifying inform ation – can be actionable m isrepresentations” under the False Claim s Act).

Th u s, as CMS m ade clear, Medicare A dvanta g e organizations have always had “an o b ligation to take steps to

ens ure the accuracy, com pleteness, and truthfulness of the
encounter d a ta” and “an obligation to undertake ‘due diligence’ to ensure the accuracy , com pleteness, and truthfulness of encounter data subm itted to [CMS].” 65 Fed. Reg. at 40,268. CMS m ade perfectly cl e ar that Medicare Advan t age organizations w ould be “held responsible for

m aking good faith efforts to certify the ac curacy,

com pleteness, and truthfulness of encounter data subm itted.”S W O B E N V

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Id. Indeed, CMS expressly rejected the argum ent that Medicare A dv antage organizations “should not be required to certify the a c c ura cy o f the encounter data they receive from third parties.” Id. The defendants’ contention that they were under no obligation to take affirm ative steps to address errors also ignores § 422.503, which si n ce 2005 has required Medicare Advan tage organizations to have effective

com pliance program s in place, including “[p]rocedures for internal m onitoring and auditing” and fo r “ensuring
prom pt response to detected offenses.” 4 2 C. F. R. § 422.503(b)(4)(vi), (vi)(F), (vi)(G) (2005).

In light of these authorities, we hold that when, as alleged h ere, Medicare Advantage o rganizations design retrospectiv e reviews of enrollees’ m edical records deliberate ly to avoid identifying erroneously subm itted diagnosis codes that m ight otherwise have been identified with reasonable diligence, they can no longer certify, based on best knowledge
, inform ation and belief, the accuracy, c o mpleteness and truthfulness of the data subm itted to CMS. This is especially true, when, as alleged here, they were on notice that their data in c l u d ed a significant num ber of erroneously reported diagnosis codes. W e do not see how a Medicare Advantage
contractor who has engaged in such conduct can in good faith certify that it believes the resulting risk adj u s tm ent data reported to C MS are accurate, com plete and truthful. As the
governm ent argues in its am icus brief, when a M e d icare Advantage plan “has im

plem ented record-review procedures specifically designed n ot to reveal un s up p orted diagnosis codes – the plan’s certification under § 422.504( l) is ‘false o r fraudulent’ under 31 U .S.C. § 3729(a) ( 1 )(A) & (B).” Br. United States as Am icus Curiae 4.S W O B E N V

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B y h o ld in g th at o n e-sid e d retrospective reviews can resu lt in f alse certifications under § 4 22.504( l)
, we do not suggest that they necessarily always do

. Th e “best knowledge, inform ation, and b elief

” stan d ard u

n d er § 4 2 2

. 5 0 4 ( l) prohibits only a “reckless disregard” or “deliberate ignorance” o f the truth or falsity of the risk adjustm ent data subm itted to CMS. W e do not in this opinion attem pt to define the param eters o f these requirem ents. W e hold only that the theory alleged here

– that the defendants designed their retrospective revi e w p rocedures to not reveal unsupported diagnosis code s , allegedly f

or n o other reason than t o avoid reporting that info rma t i o n to the g overnm ent – states a cognizable legal theory under the False Cl a i ms Act. That the defendants allegedly did so in spite of RADV audit errors rates of 20 percent or m ore only strengthens Swoben’s claim s.

W e also do not intend to suggest that the practice o f concealing previously subm itted d iagnosis codes from coders conducting retrosp ective reviews is necessarily a suspect practice. On the contrary, b lind coding m ay help ensure the integrity of a ret r ospective review: if reviewers are told in advance which codes were subm itted to C MS, they m ay have

an especially strong incentive to find support for those codes in the records under review.

But blind coding cannot be squared with the good faith
requ i re d b y § 422.504( l) when it is em ployed as a m eans o f

a voiding or concealing over-reporting errors. If Medicare Advantage organizations acquire the codes identified by retrospective coders, com pare them to the codes previou s ly

su b m itted to CMS, identifying both un d er- an d o v er-rep o rtin g errors, but withhold inform ation about the over-reporting

errors from CMS, this would result in a false certification. The sam e is tru e when a Medicare Advantage organizationS W O B E N V

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undertakes com

prehensive blind coding but then runs a unidirectional com

paris o n w ith the previously subm itted codes to reveal only under-report i n g errors. As the
governm ent explains, the use of blind coding cann o t e xcuse failing to “check whether d iagnosis codes previously subm itte d t o CMS were included on the list of diagnoses fo und by the reviewers to be supported by the m edi c al records.” Br. United States as Am icus Curiae 15. In the first

exam p le, in which a Medicare Advantage o r g an ization withholds known ov er-reporting errors from CMS, the organization has actual knowledge that the data are false. In the second exam

ple, where the organization turns a blind eye to the over-reporting errors, it exhibits reckless disregard and deliberate ignorance to wa r d the truth or falsity of the data subm itted to CMS. Both exam ples show a lack of diligence and an ab s ence of good faith. On the other hand, if through reasonable diligen c e the com parison between the codes identified by the r e tr o spective reviewers and the codes previously subm itted to C MS is capable of identifying only under-reporting e rr o rs, we assum e this would not result in false certifications under current C MS regulations. The d ue diligence standard requires only reasonable efforts.

In sum , Swoben has alleged a cognizable legal theory.

2. The defendants’ argum ents to the contrary are not persuasive.

T h e d ef en d ants argu e th eir c ertif

i catio n s cannot have been false b ecause they did not know of any specific unsupported diagnosis codes in the data they subm itted to CMS. Joint Suppl. Br. 4. As explained, however, n either th e “ b e st knowledge, inform ation, and belief” standar d under § 422.504( l) nor the scienter elem ent of the False Claim s A ctS W O B E N V

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requires actual knowledge of falsity. Under the False Claim s Act,

the term s “knowing” and “knowingly”

– (A) m ean that a person, with respect to inform ation

– (i) has actual knowledge of the inform ation; (ii) acts in deliberate ignorance

o f the truth or falsity of the inform ation; o r (iii) acts in reckless d i sregard o f the truth o r falsity of the inform ation; and (B) require no proof of specific intent to defraud.

31 U.S.C. § 3729(b)(1). Section 422.504( l) adopts precisely the sam e s t an d ar d

. See 65 Fed. Reg. at 40,268. And this standard reaches “what has becom e known as the ostrich type situation where an individual has b uried his head in the sand and failed to m ake sim

p le inquiries which would alert him that false claim s are b eing sub mi t t e d .” Bourseau
, 531 F.3d

a t 1 168 (quoting S. Rep. No. 99-345, at 21) (internal quotation m arks om itted). Although the False Claim s Act’s scienter requ ir e m ent is “rigorous,” Universal Health Servs.
, 136 S. Ct. at 2002, Swoben’s allegations satisfy it here.

The defendants also suggest they could not have conducted their retrospective reviews in bad faith because retrospective reviews of a portion of an e n r o llee’s m edical records are not a plausible m eans of identi fy i ng overreporting errors. They point out that “CMS regulations deem

a diagnosis code proper if it is supported by a single m edical record b y a single provider.” J o i nt Answering Br. 36. “Accordingly, the absence o f docum entation for a diagnosis code in a single retros pective review of a single provider’s charts d oes not establish that th e s ub mi s sion of that code to CMS was im

proper: the code m ay sim

ply be located in chartsS W O B E N V

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n ot encom

passed by the retrospective review.” Id. W e ar e not persuaded. First, if the r etrospective reviews were designed in b ad faith, then it is no d efense that the reviews, as designed, could n ot readily identify o ver-reporting err ors. Second, the record at this early stage does not t e ll u s h ow easy o r difficult it would have been for the d e fendants to identify over-reporting errors, and Swoben alleges only that the defendants intentionally p revented coders from doing so. Whether the defendants h ad a g ood-faith reason to design the reviews as they did is not a m atter to d e c i d e a t this stage o f the proceedin gs , particularly where the defendants’ factual assertions are less than obvious. F or instance, because CMS

r e qu ires m edical d iagnosis codes to be supported by a

m edical record, it m ay be that each diagnosis code rep o rt ed
t o C MS is linked to a specifically identified support i n g

m edical record. In that event, if a reviewer finds a previously reported diagnosis code is n ot supported by the very m edical record used to docum ent the diagnosis code in the first place, then the diagnosis code was report e d i n error, even if it is possible that som e o th e r, unidentified record m ight support the sam e diagnosis

. 8 As the governm ent points out, “[e]ven if it turns out that the diagnosis is supported by other m edical records, the failure of [the] plan to investigate to m ake that determ ination – after it has b een put on notice tha t the diagnosis m ay not be supported – m akes its broad certification regarding the accuracy, com pl e t e ness, and

8 In other words, if a Medicare Advantage organization relie d o n

m edical record X to justify subm itting a particular diagnosis code to CMS initially, and the retrospective reviewer concludes X does not support t hat diagnosis, then the code should be withdrawn. If it turns out the code can be substantiated by a different m edical record, then the code can be left in place or resubm itted. But t he Medicare Advantage organization cannot sim ply ignore the reporting error because it speculates that som e other

m edical record m ight support the sam e diagnosis code.S W O B E N V

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truthfulness of subm itted d ata fa l se .” Br. United States as Am icus Curiae 17.

The defendants also argue the statem ents by CMS in 2000 regarding d

ue diligence and g ood faith should n o t b e given weight because, at the t im e, risk adjustm ent was based prim arily o n dem o graphic f actors rather than patient
encounter data. Joint Resp. to Am icus B r

. 9 –10 & n.3. W e disagree. First, the statem ents by CMS are authoritative not because o f what they say about encoun t er data or diagnosis codes b ut because they provided clear guidance to Medicare Advantage organizations (then known as Medicare+Ch o ice organizations) regarding their obligations under § 4 2 2.504( l) (then codified at § 4 22

. 5 02( l)), including their obligations under the “best knowledge, inform ation, an d b elief” standard. Second, the defendants’ representations to the contra ry notwithstanding, it is quite clear that the risk adjustm ent

m ethodology in p l a c e in 2000 focused o n patient encounter data, just as it does today. See 65 Fed. Reg. 40,246–51. The defendants point out that at the tim e CMS collected encounter data o n ly f

or inpa t i e n t care. Joint Resp. to Am icus Br. at 9 n.3. But, as CMS m ade clear at the time
, i t was already

“ d e v e l o p i n g a mo r e c o mp r eh e n s iv e r i s k

- a d j u s t me n t

m ethodology that uses diagnosis data from p hy sician services and hospital outpatient departm en t encounters” as well. 65 Fed. Reg. at 40,247–48. Thus, when CMS em phasized the i m portance of due diligence and g o od faith in reporti n g patient encounter d ata in 2 000, it c l early had within its
contem plation the regim e that was then i n developm ent and which w as in place at the tim e the allegedly f alse claim s were subm itted i n this case. Third, even if the defendants were correct that the focus of the risk adjustm ent m ethodology in 2000 w as on dem ographic factors rather than encounter data,S W O B E N V

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there is no question that CMS’ statem ents about due diligence and good faith were focused on the latter:

M+C organizations h ave an obligation to take steps to ensure the accuracy, com pleteness, and truthful n ess of the encounter data

. W e acknowledge that encounter d ata com e into M+C organizations in g reat volum e and from

a num ber of so ur ces, p resenting significant verification challenges f

or the organizatio n s. However, we believe that M+C organizations have an obligation to undertake “due d i l i g e n c e ” t o e n s u r e t h e a c c u r a c y , comp leteness, and truthfulness o f encounter data subm itted to [CM S]. T h erefore, they will be held to a “best kn o wledge, inform ation, and belief” standard. Therefore, M+C organizat i ons will be held responsible fo r m aking good faith efforts to certify the

accurac y, com

pleteness, and truthfulness o f encounter data subm itted.

Id. at 40,268 (em

phasis added). 9

9 The statem ents CMS m ade in the pream ble t o the certification regulation m erit deference. See, e.g. , Christopher v. SmithKline Beecham Corp.
, 132 S. Ct. 2156, 2163 ( 2012); Fid. Fed. S av. & Loan Ass’n v. de la Cuesta
, 458 U.S. 141, 158 n.13 (1982) (“[W ]e look to the pream ble

. . . f o r the adm inistrative construction of the re gulation, to which ‘deference is

. . . clearly in order.’” (third a l t e ration in original) (quoting Udall v. Tallman
, 3 80 U.S. 1, 16 (1965))). CMS’ statem ents regarding the

m eaning of t

h e “best knowledge, inform ation, and belief” standard are entitled to deference because they represent the agency’s i nterpretation o f its own regulation. The interpretation i s also entitled to deference because it represents the agency’s considered judgm ent after notice and comm ent,S W O B E N V

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The defendants also contend their certifications could not have been knowingly fal s e because their conduct between 2005 and 2012 represented at least an objectively reasonable interpretation of their o bligations under § 422.504( l). Joint Sup pl. Br. 12. See S

afeco Ins. Co. of A m. v. Burr
, 5 5 1 U. S. 47, 70 n.20 (2007) (“Where, as here, the st a tu t o ry text and relevant court and agency guidance allow for m o re than o ne reasonable interpretati o n , it would defy history and current thinking to treat a d e fendant who m erely adopts one such int e rp r etation as a knowing or reckless violator.”); Hagood
, 929 F.2d at 1421 (“To take advant a ge of a disputed legal
ques t i on

. . . is to be neither deliberately ignorant nor

r e c klessly disregardful.”). W e again d isagree. CMS’ clear
statem ents in the 2000 pream ble

– “ [ Medicare Advantage] organizations h ave an obligation to undertake ‘due diligence’
to ensure th e a ccuracy, com pleteness, and truthfulness o f
encounter dat a subm itted to [CMS and] will b e held responsible for m aking good faith efforts to certify the
accuracy, com

pleten ess, and truthfulness of encounter data subm itted,” 65 Fed. R eg. at 4 0,268 – resolved any am b iguity about the m eaning of § 422.504( l)

. See Fid. Fed. S av. &

industry i nput and interagency consultation. See Es t ab lishm ent of the Medicare+Choice Pro gra m , 63 Fed. Reg. 34968, 35017 (June 26, 1998) (interim final rule with com m ent period); 65 Fed. Reg. at 40,176, 40,268, 40,299 (final rule with comm ent p eriod). Indeed, the good faith standard about which the defendants now com plain appears to h ave been suggested by the industry. See 65 F e d

. R e g

. at 40,268, 40,299. Compare 63 Fed. Reg. at 35103 (interim rule), with 65 Fed. Reg. at 40,327–28 (final rule). W e also afford deference to CMS’ interpretation of the regulation because it is consistent with the standard for liability under the False Claim s Act, and therefore presum ably carries out cong re s s i o n a l intent. Cf. Wyeth v. Le v i n e , 555 U.S. 555, 576–80 (2009) (declining to afford deference to

s ta t e m e n ts in an agency’s pream ble where the agency failed to offer interested p arties notice or an opportunity for com m ent and the p ream

ble was at odds with evidence of Congress’ purposes).S W O B E N V

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Loan Ass’n
, 458 U.S. at 1 58 (“Any amb i g u i ty in [the regulation’ s ] language is dispelled by the pream ble

a c c o m p a n y i n g a n d e x p l a i n i n g t h e r e g u l a t i o n

. ” )

. Consequently, ignoring the good faith and du e diligence requirem ents would not have been objectively reasonable.

The defendants also contend their § 4 22.5 0 4 ( l) certifications could not have been false because they offered only a q ualified certification of their risk adjustm ent data, “based on best knowledge, inform ation, and belief.” Joint Suppl. B r. 5 –6. They rely o n Un ited States v. Ekelman & Associates, Inc.
, 532 F.2d 545, 550 (6 th Cir. 1976) (“In certifying the truth o f the inform ation in the ap p l ication ‘to the best of its knowledge and belief’ F ranklin did no m ore than assert that it h ad n o k nowledge of, nor intention to m ake, misrepresentations.”). E kelman is distinguishable on a

num ber of g rounds. Fir s t , § 4 22.504( l)’s “best knowledge, inform ation, and b el i ef” standard is inform ed b y the 2000
pream ble, which m akes c lear the standard encom passes d ue diligence, good faith, reckless disregard and deliberate ignorance. S

ee 65 Fed. R eg. at 40,268. In this s e n s e, § 422.504( l)’s “best knowledge, inform a tion, and belief”

s ta n d ard is sim ilar to the “best of the person’s knowledge, inform ation, and belief” standard under Federal Rule of Civil Procedure 11, under which an attorney’s “signature certifies
to the court that the signer has read the d o c ume n t , has conducted a reasonable inquiry into the facts and the law and is satisfied that the docum ent is well grounded in both, and is

a c ting without any im

p roper m otive.” Bus. G uides, Inc. v. Chromatic Commc’n s E

n ters. , In c

. , 4 9 8 U .S. 533, 5 4 2 (1991). Second, in contrast to Ekelman , this is not a case in which it is clear the defendants lacked any “intention to m a k e[]

m isrepresentations.” Ekelman
, 532 F.2d at 550. Swoben’s allegations support the inference that the defendants certifiedS W O B E N V

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that they believed the risk adjustm ent data were com plete and
accurate even though they did not believe that to b e the case. Third, E kelman was decided in 1976, a d e cade before Congress am ended the False Claim s Act to include a d el i b e r a t e i g n o r ance standard. See False Cl a ims Am endm ents A ct of 1986, Pub. L. No. 99-562, § 2, 100 Stat. 3153 (1986) (codified as am ended at 31 U.S.C. § 3729(b)(1)). The deliberate ignorance standard does not allow a contractor to d eliberately turn a blind eye to reporting errors and then attest that, to its knowledge, they do not exist.

Finally, notwithstanding the certification and com pliance regulations discussed in this o pi n i o n , the defendants invoke

a separate regulation, 4 2 C. F.R. § 422.310(d), to argue they reasonably believed they were not required to take any affirm ative steps to f

ind unsupported diagnosis codes. Joint Suppl. B r. 6–7. In relevant p art, § 4 2 2

. 3 10(d) states that Medicare Advantage “organizations m ust subm it data that conform to CMS’ requirem ents f or data equival ent to Medicare f

ee-for-s e rv ice d ata, when appropriate, and to all relevant nati o n a l standards.” 42 C.F.R. § 422.310(d). According to the defendants, because CMS does n ot verify diagnosis codes subm itted to it by third- p arty m edical providers un d er the Medicare fee-for-service program , this provision m eans Medicare A dvantage organizations were not required to verify diagnosis cod es either. W e reject the defendants’ contention, again for m ultiple reasons. F irst, because noth i n g in § 422.310(d) speaks to a Medicare Advantage organization’ s obligations to ensure the
accuracy of risk adjustm ent d at a , i t does not m o dify a M edicare Advantage organization’s obligations under §§ 42 2 .503(b)(4)(vi) and 422.504( l). Second, this is not a

case about whether Medicare Advantage organizations have
to take affirm ative steps to verify risk a d justm ent data. TheS W O B E N V

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defendants indisputably took such steps b y condu c ting retrospective reviews. This is a case ab o u t wh e ther such organizations, having adopted a ffirm ative verification procedures, have to conduct them in good faith.

In sum , we conclude S woben’s proposed fourth am ended

com plaint adequately pleads a cognizable legal theory.

B. T h e P ro p o sed F o u rth A men d ed C o mplaint Alleg e s Suf f i ci ent Factual Matter to Satisfy Rules 8, 9(b) and 12(b)(6)

The parties also dispute whether Swoben’s p r oposed fourth am ended com

plaint satisfies Rule 8 and 9(b).

1. Under Rule 8, we assum e the veracity of a com plaint’s factual allegations and then d eterm ine whether they plausibly give rise to an entitlem ent to relief. See Corinthian Colls.
, 655 F.3d at 991. “A cla i m has facial plausibility when the plaintiff pleads factual content that allows th e court to draw the reasonable infe rence that the d efendant is liable f o r the

m isconduct alleged.” Id. (quoting Ashcroft v. Iqbal
, 5 5 6 U.S. 6 62
, 6 78 (2009)). Under Rule 9(b), a p laintiff “m ust state with particularity the circum stances constituting fraud.” Fed. R. Civ. P. 9(b). This m eans the plaintiff m ust a l le ge “the wh o, what, when, where, and how of the m isconduct charged.” Ebeid ex rel. United States v. Lungwitz , 616 F.3d 9 93
, 9 98 (9th Cir. 2 010) (quoting V ess v. Ciba-Geigy Corp. USA
, 317 F.3d 109 7
, 1106 (9th Cir. 2003)). Knowledge, however, m ay be pled general l y

. See Corinthian Colls.
, 655 F.3d at 996.

Swoben’s proposed f

ourth am ended com

plaint satisfies these standards. He alleges that, beginning in approxim atelyS W O B E N V

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2005, each of the defendants em ployed coding com

panies to p erform retrospective reviews designed not to reveal o v e r

reporting errors. F o urth Am

. Com pl. ¶¶ 12–13. He alleges that from approxim ately 2005 to 2007 United Healthcare and HealthCare Partners used specialized software t o identify enrollees for retrospective reviews but, ag ain, the reviews

were designed not to reveal o ver-reporting e rrors. Fourth Am

. Com pl. ¶¶ 14–15. He alleges HealthCare Partners used another software product, HCC Manager, to sim ilar effect in approxim ately June 2008. Fourth Am

. Com pl. ¶¶ 16–17. He alleges that from approxim ate l y 2 0 0 6 to 2012 each of the defendants used the flawed tem plate to repo rt the results o f their retro sp e ctive reviews to CMS. Fourth Am

. Com pl. ¶¶ 23–24. The proposed com pl a i n t alleges that each of the defendants (other than HealthCare Partners) had RADV audit

error rates e x c eeding 20 percent during the relevant tim e period. F ourth Am

. Com pl. ¶ 25. It alleges that each of the defendants (other than HealthCare Partners) subm itted false § 422.504( l) certifications periodically, and at least annually, during the relevant t i m e period. Fourth Am

. C om pl. ¶ 27. W e acknowledge that som e of these allegations are n ot as detailed as they m ight be. But the allegations, each of which i s fleshed out to som e extent in the proposed pleading, are adequate to satisfy Rule 9(b).

2. Aga i n , th e d efendants’ argum ents to the contrary are not persuasive.

The defendants argue S wob e n ’ s p leadin g s are insufficient because they “do not describ e any specific instances o f falsity, let alone any such instances with particularity by identifying the tim e, p lace, and m anner of the alleged falsity, the person m aking the f alse representation, or what they obtained thereby.” Joint Answering Br. 35; see also id

. atS W O B E N V

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40–41. Under o ur c ase law, however, the plaintiff need not “identify representative exam ples of f alse claim s to support every allegation.” E

b eid
, 616 F.3d at 998. “[I]t is sufficient
to allege ‘particular d etails of a schem e to subm it false claim s paired with reliable indicia that lead to a strong inference that claim s were actually subm itted.’” Id. at 998–99 ( quoting United States ex rel. Grubbs v. Ravikumar Kannegan t i
, 565 F.3d 180, 190 (5th Cir. 2009)). Swoben, therefore, need not identify specific false § 422.504( l) certifications.

The defendants also argue Swoben’s pleadings “fail[] to identify a single instance where p reviously subm itted codes

were inconsistent with those identified dur i n g the retrospective reviews, or to expl a in why any such inconsistencies would necessarily lead to false claim s.” Joint Answering Br. 35. Under Swoben’s theory, however, th e false claim s are the allegedly false § 422.504( l) certifications,
not the erroneously r e po rted d iagnosis codes. See Hendow
, 461 F.3d at 1171 (explaining that it “is the false certification of com pliance which creates liability when certification is a prerequisite to o b taining a governm ent benefit”). S woben need no t i d entify specific d iagnosis codes that should have been withdrawn.

The defendants next fault the proposed fourth am ended

com plaint f or using (often, though not exclusively) collective allegations to refer to the defendants rather than differentiating am ong them

. Joint An s we r i ng Br. 38. The defendants are corr e c t th at “Rule 9(b) does not allow a

com plaint to m erely lum

p m ultiple d efend an t s together but requires p laintiffs to differentiate th eir alleg atio n s wh en suing

m ore tha n o n e defendant and inform each defendant separately of the allegations surrounding his alleged
part i cipation in the fraud.” Corinthian Colls.
, 655 F.3d atS W O B E N V

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997–98 (quoting Swartz v. K P MG LLP
, 476 F.3d 756, 764–65 (9th C ir. 2 007)). A plaintiff m ust “identify the role of e a c h defendant in the alleged fraudulent schem e.” Id. ( qu o t i ng Swartz
, 476 F.3d at 765). T here is no flaw in a p leading, however, where, as here, collective allegations ar e u s e d to describe the actions of m ultiple defendants who are alleged
to h ave engaged in p recisely the sam e conduct. Under these circum stances, Swoben’s allegations, although collect ive, nonetheless afford each d efendant am ple notice of its alleged role.

Finally, the defendants argue with respect to the RADV audits that “Swoben fails to pr o v ide any of the particular details required by R

ule 9 (b),

. . . which would be necessary for these allegations to have any relevance to the Defendants’ knowledge or i n tent.” Joint Answering Br. 42. As noted, however, knowledge need not b e pled with particularity. See Fed. R. C iv. P. 9(b); O dom v. Microsoft C orp. , 486 F.3d 541, 554 (9th Cir. 2007). T he defendants’ argum ent therefore falls short.

In sum , we hold the allegat i o ns in the p roposed fourth

am ended comp l a i nt are adequate to satisfy Rules 8 and 9(b) and hence Rule 12(b)(6). B e c aus e the com plaint alleges a cognizab l e legal theory and satisfies Rules 8 and 9(b), we hold that am endm ent w ou l d not be f utile. The district court erred by deem ing am endm ent futile, and therefore abused its discretion by denying leave to am end on this ground.

II. The District Court Abused its D iscretion By Denying Leave to Amend Based on Undue Delay

The district court a l t ernatively denied leave to am end “based on undu e d e l ay” because “Swoben was aware of theS W O B E N V

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purportedly ‘n e w’ allegations he proposes to add to the Fourth Am ended Com

plaint since at least 2005.”

W e conclude the district court abused its di s c r etion by relying on undue delay. Undue delay by itself is insufficient
to justify denying l e a v e to am end, see Owens v. Kaiser Found

. Health Plan, Inc.
, 244 F.3d 7 08, 712–13 (9th Cir. 2001), and the record here d oes not suppo rt any additional ground – such as prejudice o r bad faith
, s e e Johnson v. Mammoth R ecreations, In c

. , 975 F.2d 604, 607 (9th Cir. 1992) – that would justify the deni al of leave to am end in

com bination with undue delay.

The d efendants’ argum ent they would be prejudiced by affording Swoben leave to am end is unpersuasive. They fault Swoben for failing to announce h is intention to seek leave to

am end during the m eet-and-confer conferences preceding the filing of their m otions to dism iss. See C.D. Cal. R. 7-3. They
argue that, if Swo b en had announced his intention to seek

am endm ent at that tim e, they could have avoided the expense of preparing their m otions to dism iss. In the absence of bad fai th
, however, litigation expenses incurred before a m otion
to am end is filed do not e s t ablish prejudice. See Owens
, 244 F.3d at 7 12. More b roadly, the defendants have not shown prejudice here. The litigation against these defendants is at a very early stage, Swoben does not seek to assert a new legal theory and this is Swoben’s first attem pt to cure deficiencies in his com

plaint. The circum stances of this case stand in stark contrast to those in the cases o n which th e defendants rely. See AmerisourceBergen Corp. v. Dialys ist W

. , Inc.
, 4 65 F.3d 946, 9 53–54 (9th Cir. 2006) (the plaintiff sough t leave to am end a reply to a counterclaim to assert a

new legal theory, wh i c h “would have unfairly im p osed potentially high, additional litigation costs

. . . that could haveS W O B E N V

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easily b een av o i d e d ”); Ascon Props., Inc. v. Mobil Oil Co.
, 866 F.2d 1149, 1160–61 (9th Cir. 1989) (th e d e fe ndant h ad filed several m otions to d i s m i ss over several years of active litigation, the plainti ff h ad been g iven several opportunities
to cure the deficiencies in the com plaint, the plaint iff h ad prosecuted the action in a dilatory fashion an d the plaintiff sought to am end the com

plaint to assert a new legal theory).

C O N C L U S I O N

The district court abused its discr e t ion by dism issing Swoben’s third am ended com plaint without leave to am end. Swo ben’s proposed fourth am ended com plaint adequatel y alleges a false certification claim under the False Claim s Act,

so am endm ent would not have been futile. T he district court also abused its discretion by denying leav e t o a me nd on the ground of undue delay. The judgm ent of the district court is vacated and the case is rem anded for further proceedings.

VACATED AND REMANDED. Costs on appeal ar e awarded to Swoben.