F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

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

,

and

J A M E S M. S W

O B E N , Qui Tam Relator, Plaintiff-Appellant

,

v.

U N I T E D H E A L T H C A R

E I N S U R A N C E C O M P A

N Y , a Connecticut corporation; U N I T E D H E A L T H C A R

E S E R V I C E S , I N C ., Minnesota corporation; UHI C; U N I T E D H E A L T H G R

O U P ; U N I T E D H E A L T H C A R

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

R E H E A L T H P L

A N A D M I N I S T R A T O R S , I

N C .; UHC O F C A L I F O R

N I A , F KA PacifiCare of California; P A C I F I C A

R E L I F E & H E A L T H I

N S U R A N C E C O .; P A C I F I C A

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

D.C. No. 2:09-cv-05013-J F W -J EM

ORDER AND AMENDED OPI

NI ONS W O B E N V

. U N I T E D H E A L T H C A R

E 2

W E L L P O I

N T ; A E T N

A ; H E A L T H C A R

E P A R T N E R S , L L C; H E A L T H C A R

E P A R T N E R S M E D I C A L G R O U P , I N C .; H E A L T H C A

R E P A R T N E R S I N D E P E N D E N T P H Y S I C I A N A S S O C I A T I O N , D efendants-Appellees.

A ppeal from the United States District Court for the Central District of California J ohn F . W a lter, District J udg e, Presiding

Arg u ed and Submitted December 9, 2015

Pasadena, California

F iled Aug ust 10, 2016 Amended December 16, 2016

B efore: Stephen Reinhardt, Ray mond C. F isher and J acqueline H. Ng

uy en, Circuit J u d g es.

Order; O pinion by

J udg e F isherS W O B E N V

. U N I T E D H E A L T H C A R

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SUMMARY *

Medicare

T h e panel amended the opinion, filed Aug ust 1 0, 20 1 6
, and vacated the district court’s judg ment dismissing qui tam relator J ames S woben’s third amended complaint, which alleg ed that defendant Medicare Advantag e org aniz ations submitted false certifications in v iolation of the F alse Claims Act, and remanded with instructions to afford Swoben leave to file a proposed fourth amended complaint.

The Centers for Medicare & Medicaid Services (“CMS”)
pay s Medicare Advantag e org an i z ations fix ed monthly
amounts for each enrollee, and CMS calculates the pay ment for e ach enrollee based on various “risk adjustment data” a s reflected in submitted diag noses c odes. Medicare reg ulations require a Medicare Advantag e org aniz ation to c ertify that the data it submits are “accurate, c omplete, and t r u t h f u l .” 42 C.F .R. § 422.504( l ), ( l )(2 )

. S woben alleg e d that the defendant org aniz ations submitted false certific a t ions b y performing biased retrospect i ve medical record reviews desig ned not to identify e r

roneously r eported d iag nosis codes.

The p anel h eld that the district court abused its discretion by deny ing leave to amend o n the g round of futility o f

a mendment. The panel held that the theory alleg ed h er e

– that the defendants desig ned their retrospec tive r eview procedures to not reveal erroneously reported dia g nosis codes – adequately

alleg ed that the defendants’ § 422.504( l )

* T h is su m m ary co n stitu

tes n o part o f th e o p in io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.S W O B E N V

. U N I T E D H E A L T H C A R

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certifications were false and stated a cog niz able leg al theory under the F a lse Claims Act.

The panel h e l d that the proposed f ourth amended complaint alleg ed sufficient factual matter to satisfy F e d. R. Civ. P. 8, 9(b) and 12(b) (6), or may be amended to do so. The panel held that with respect to defendants Unite d Healthcare and HealthCare Partners, the alleg ations adequately identified the details of t h e misconduct charg ed, and afford e d e a c h defendant notice of its alleg ed role in a fraudulent scheme; and therefore, satisfied Rul e 9(b). The panel further held that with re s p e ct to defendants Aetna, W e l l P o int and Health Net, the a lleg ations lacked sufficient detail to satisfy Rule 9(b), but Swoben shou l d b e a fforded leave to amend to cure this deficiency

.

The panel held that the district c o u r t also abused its discretion by deny ing leave to amend based on undue delay

. The panel held that leave to amend was p r oper in this case where the litig ation ag ainst the defend a n t s was at an e arly stag e, Swoben did not seek to assert a new leg al theory

, a nd this was Swoben’s f

irst attempt t o cure deficiencies in his pleading s.

COUNSEL

W illiam K. Ha nag ami (arg ued), The Hanag ami L a

w F irm, A .P.C., W oodland Hills, California; Abram J

. Z inberg

, T h e Z inberg L aw F irm, A.P.C., Hunting ton B each, California; for Plaintiff-Appellant J ames M. Swoben.

David J

. Schindler (arg

ued), L a tham & W atkin s L L P
, L os Ang eles, California; Rog er S

. G oldman, Daniel Meron,S W O B E N V

. U N I T E D H E A L T H C A R

E 5

J onathan Y. E llis, and Matthew J

. Glover, L atham & W atkins L L P
, W a s h i n gt 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 I nsurance Company
, UnitedH ealthCare S e r v i c e s I n c

. , U H I C
, U

n itedHealth G roup, UnitedHealthC a r e , UnitedHealth, Pacificare H e a l t h P l a n A d m i nistrators, UHC o f California (F KA PacifiCare of California), PacifiCar e L ife and Health I

nsurance Company , PacifiCare Health Sy stems, and Health Net.

Da v i d W

. Skaar, Hog an L ovells US L L P, L os Ang eles, California; Michael C

. T h eis, Hog an L o v ells US L L P, Denver, Colorado; for Defendants-Appellees H ealthCare Partners L L C, HealthCare Partners Medical Group, I nc. a nd HealthCare Partners I

ndependent Phy sician Association.

Geoffrey M. Sig ler, Thomas M. J o hnson, J r., and Mig uel A. Estrada, Gibson, Dunn & Crutcher L L P, W ashing ton, D.C.; Richard J

. D oren, Gibs o n , D unn & Crutcher L L P, L os Ang eles, California; for Appellee Aetna.

D a v id Deaton, O’Melveny & My ers L L P, Newport B e ac h

, California; D avid J

. L eviss, O’Melveny & My e rs L L P, W a shing ton, D.C.; Stephen Sullivan, O ’ M e lveny & My ers L L P, L os Ang eles, California; for Appellee W ellPoint, I nc.

Charles W

. S c arboroug h a nd Karen Schoen, Attorney s, Appellate Staff; Eileen M. Deck er, United States Attorney ; B e n j amin C. Miz er, Principal Deputy Assistant Attorney General; Civil Division, United States Department of J ustice, W a shing ton, D.C.; for Amicus Curiae United States.S W O B E N V

. U N I T E D H E A L T H C A R

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ORDER

J udg e s Reinhardt and Ng uy en have voted to deny appellees’ petition for rehe a ring en banc, and J udg e F isher has so recommended.

The full court h as b ee n advised of the petition for rehearing en b anc and no j u d ge has requested a vote on whether to rehear the matter e n b a n c. See F ed. R. App. P. 35.

The petition for rehearing en banc is DENIED

.

The opinion, filed Aug ust 10, 2016 and publishe d at 832 F .3d 1084, is AMENDED

. An amended opinion is filed concurrently

with this order.

F urther petitions for rehearing may be filed.

OP INION

F I SHER, Circuit J udg e :

The Centers for Medicare & Medicaid Services (CMS), administrator of the federal Medicare prog ram, pay s Medicare A d v a ntag e org aniz ations fix ed monthly amounts for each enrollee. CMS calculates the pay ment f o r e ach enrollee based on various “risk adjustment data,” such as an enrollee’s demog raphic profile and the enrollee’s health status, as reflected in the medical d iag nosis codes associated with healthcare the enrollee r eceives. These diag nosis codes (also known as en c o u n ter data) a re reported by Medicare Advantag e org aniz ations to CM S. B ecause MedicareS W O B E N V

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A d vantag e org aniz ations have a financial incentive t o

ex a g g erate a n enrollee’s health risks b y reporting diag nosis codes that may not be s u p ported by the enrollee’s medical records, Medicare reg ulations r equire a Medicare Advantag e org aniz ation, as an ex pre s s c o ndition of receiving pay ment, to “ c ertify ( based on b est knowledg e, information, a nd belief) that the [ risk adjustment] data it submits

. . . are accurate, complete, and truthful.” 42 C.F

. R. § 422.504( l ), ( l )(2).

Qu i tam relator J ames Swoben alleg es Medicare A d v a n t ag e org an i z a t i o n s U n i t e d He a l t h c a r e , A et n a, W e llPoint and Heal th Net, and p hy sician g roup HealthCare Partners, submitted false certifications under this pro v ision, in violat i o n o f the F a lse Claims Act, by conducting retrospective reviews o f medical records desig ned to identify and report only under-reported diagn o sis codes (diag nosis codes e rroneously not submitted t o CMS despite adequate support in an enrollee’s medical records), not over- r eported

c o d e s (codes erroneously submitted to CMS despite the absence of adequate record support). The d i s t r ict court denied Swoben leave to f ile a proposed fourth amended complaint, citing futility of amendment and undue delay

. W e hold the district court abused its discretion.

F irst, the court erred b y concluding amendment would be futile. Swoben’s proposed fourth amended complaint asserts

a cog niz able leg al theory

. CMS has long made c l e a r t hat, under § 4 22.504( l ), Medicare A dvantag e org aniz ations have “an oblig ation to undertake ‘due dilig ence’ to e n s u r e the
accuracy , completeness, and truthfulness” of th e risk adjustment d ata they submit to CMS and “ w ill be h eld responsible for making go o d faith efforts to certify the
accuracy , completeness, an d t ruthfulness” of these data. Medicare+Choice Program, 65 F ed. Reg

. 40,170, 40,268S W O B E N V

. U N I T E D H E A L T H C A R

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(J une 29, 2 000). W hen, as alleg ed here, Medicare Advantag e org aniz ations desig n retrospective reviews o f enrollees’ medical records deliberately to avoid identify ing erroneously submitted diag nosis codes that mig ht otherwise hav e been i d entified with reasonable dilig ence, they can no lon ge r certify

, b ased on best knowledg e, information and belief, the
accuracy , completeness and truthfulness of the data submitted
to CMS. This is especially true when, a s a l l e g ed here, they

were o n n o t i c e

– based on audits c o nducted by CMS – that their data likely included a sig nificant number o f erroneously reported diag n osis codes. T he alleg ations in Swoben’s proposed fourth amended complaint also partly satisfy Rules 8 and 9 (b) of the F ederal Rules o f C i v i l Procedure. W ith respect to d efendants United H ealthcare and HealthCare Partners, the alleg ations adequately identify “the who, what, when, w here, and how of the misconduct charg ed,” Ebeid ex rel. United States v. Lungwitz
, 6 16 F .3d 993, 99 8 ( 9th Cir. 2010) (quoting Vess v. Ciba-Geigy Corp. USA
, 3 1 7 F.3d 1 097, 1106 (9th Cir. 2003)) (internal quotation marks omitted), and afford each defendant notice of its alleg ed role in a fraudulent scheme. W ith respect to defendants Aetna, W e llPoint and Health N et, the alleg ations lack sufficient detail to satisfy Rule 9(b), but Sw o b en s h ould be afforded leave to amend to cure this deficiency

.
Second, the district court abused its discretion by deny ing leave to amend based o n undue delay

. U ndue delay by itself is insufficient to justify den y i n g leave to amend, a nd the record here d oes not support any additional g round – such a s prejudice or bad faith – that would justify the deni a l. See Owens v. Kaiser Found. Health P lan, Inc.
, 244 F. 3 d 708, 712–13 ( 9th Cir. 2001). L eave to amend is proper here g iven the litig a tion a ga i n s t these defendants is at an early stag e ,S W O B E N V

. U N I T E D H E A L T H C A R

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Swoben d o es n ot seek to assert a new leg al theory and this is Swoben’s first attempt to cure deficiencies in his pleading s.

B A C K G R O U N D

I. The Medicare Advantage P rogram

Medicare beneficiaries have the o p t i on of r eceiving benefits throug h private heal th plans a s an alternative to the traditional fee-for-service M e dicare prog ram. Under this
op t i o n , known as Medicare Advantag e or Medicare Part C,
t h e g overnment pay s Medicare Advantag e org aniz ations a capitated (per en r o l lee) amount to provide medical benefits. The capitated a mount is a f ix ed monthly

pay ment reg ardless of the volume of services an enrollee uses.

The g overnment adjust s t he monthly pay ments to Medicare Advantag e org aniz ations to reflect the health status of their enrollees. See 42 U.S.C. § 13 9 5 w -23(a)(1)(C)(i), (a)(3); 4 2 C.F .R. § 422.308(c)(2). Thi s e n s u res Medicare Advantag e “org aniz ations are paid a pprop r iately for their plan enrollees (that is, less f or he a l t h i e r enrollees and more for less healthy enrollees) .” E stablishment of the Medicare Advantag e Prog r am, 70 F ed. Reg

. 4588, 4657 ( J an. 28, 2005). The risk adjustment methodo l o g y relies on enrollee diag noses. S

e e P o licy and Technical Chang es to the Medicare A dvantag e and the Medicare Prescription Drug B enefit Prog r ams, 74 F ed. Reg

. 5 4
, 634, 54,673 ( O ct. 22, 2009). Phy sicians and other health care provide rs s ubmit diag nosis c odes t o the Medicare Advantag e org aniz ations, which in turn submit them to CMS. S ee id. at 54,674. These diag nosis codes contribute to an enrollee’s risk score, which is used to adjust a base pay ment rate. See id. Each diag nosis code submitted must be supported by a properly documentedS W O B E N V

. U N I T E D H E A L T H C A R

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medical record. See 42 U.S.C. §§ 1395 l (e), 1395y (a)(1)(A); 42 C.F

. R

. § 4 22.310(d); Contract Year 2015 Policy a nd Technical Chang es t o t h e Medicare Advantag e and the Medicare Prescription Drug B enefit Prog rams, 79 F ed. Reg

. 29,844, 29,923 (May 23, 2014) (“CMS has required for many y ears that diag noses that [ Medicare Advantag e] org an i zations submit for pay

ment be supported b y medical re c o r d documentation.”).

“Since there is an incenti v e for [ Medicare Advantag e]
org aniz ations to p otentially over-report diag noses so that they

can inc r ea se their pay

ment, [ CMS] audits plan-submitted diag nosis data a few y ears later to ensure they are supported by medica l r ecord documentation.” Contract Year 2015 Policy and Technica l Chang es to the Medicare Advantag e and the Medicare Prescription D r u g B enefit Prog r a ms, 79 F ed. Reg

. 1918, 2001 (J an. 10, 2014). These risk adjustment data validation (RADV) a u d i t s review selected

m e d ical records to determine whether they support the diag noses reported b y Medicare Advantag e org a ni z a tions. See id. 1

As a further bulwark ag ainst fraud, Medicare Advantag e org aniz ations must c ertify the a ccuracy , co m p leteness a nd

1 In itially

, w

h en co n d u ctin g RA DV au d its, C MS reco u p ed o v erp ay

m en ts

so lely w ith resp ect to t

h e s am p led b en ef

iciaries. Mo re recen tly

, CMS h as im p lem en ted a p ro ced u re th ro u g h w h i ch th e p ay

m en t erro r rate calcu l ated f o r th e sam

p led b en ef

iciaries in th e au dits is ex trap o lated to th e co n t ract p o p u latio n as a w

h o le. S ee CMS, Med i ca re Ad

va n ta g e Risk Ad

ju stmen t Da ta Va l i d a t i o n Au d its Fa ct S h eet 1
, 3 (u

p d ated Dec. 1 1
, 2 0 1 5 ), 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

Pa y m e n t / D o w n l o a d s / M A

_ R A D V

_ A u d i t

_ F a c t

_ Sh eet.p d f

; see a lso 7 4 F e d

. Reg . at 5 4,6 7 3

– 74

.S W O B E N V

. U N I T E D H E A L T H C A R

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truthfulness of t h e d a t a they provide to CMS, including risk adjustment data, as a condition to receiving pay ment:

As a c o ndition for receiving a monthly payment u n d er subpart G o f this part, the [ Medicare Ad v antag e] org aniz a tion ag rees th at its chief ex ecutive officer (CEO), chief financial officer (CF O), o r an individual deleg ated the a

ut h o rity to sig n on behalf o f

one of these officers, and who reports directly
t o such officer, must request payment under the c ontract on a d

ocument that cer t i

f i e s (b a sed on best knowledge, information, an d belief) t h e accuracy, completeness, and truthfulnes s of relevant data that CMS requests

. S u ch data include specified enrollment information, encounter data a n d other information that CMS may specify

.

42 C.F .R. § 4 22.504( l ) (emphasis added). 2 S pecifically

, a M edicare Advantag e org aniz ation “must certify (based o n best knowledg e, information, and belief) that the [ risk adjustment] data it submits under § 422.31 0 are accurate, complete, and truthful.” Id. § 422.504( l )(2).

A Medicare A d vantag e org aniz ation is also required to “[ a] dopt a

nd implement an e f

fective c ompliance prog ram, which must include measures that prevent, detect, and correct non-compliance wi t h C MS’ prog ram requirements.” Id.

2 T h is reg u latio n h as b een in f o rce, i n s u

b stan tially th e sam e f

o rm , sin ce 2 0 0 0

. S ee 4 2 C.F.R. § 4 2 2 .5 0 2 ( l ) (2 0 0 0 ).S W O B E N V

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§ 422.5 0 3 (b)(4)(vi). 3 I n addition, althoug h Medicare Advantag e org aniz ations g e nerall y s u bmit data to CMS shortly after services are provided, the reg ulations also allow for data submissions after the pay ment y ear. See id

. § 422.310(g ). CMS uses these data to “recalculate[ ] the risk factors for affected individuals to determine if adjustments to pay ments are necessary .” Id. § 422.310(g )(2)

I n lig ht of these provisi o n s , Medicare Advantag e org aniz a tions may , but are n ot required to, conduct retrospective reviews o f th e i r enrollees’ medical records to

ensure the accuracy of the diag nosis c o d e s they have provided to CMS. See CMS, 2008 Risk Adjustment Data T echnical Assistance For Medicare A d v a n t a ge O r g a n i z a t i o n s Participant Guide § 7.7.

Certification under § 422.504( l ) has alway s required d ue dilig ence and g ood faith. W hen CMS adopted t h e “best knowledg e, information, a nd belief” standard in 2000, it

ex p lained in the preamble to the reg ula t i o n that Medicare Advantag e org aniz ations “cannot reasonab l y be ex pected to know that every p iece of data is correct,” so “simple mistakes will not r esult in sanctions.” Medicare+Choice Pro g r a m , 65 F ed. Reg

. 40,170, 40,268 (J une 29, 20 00). B ut § 422.504( l ) does not require actual knowledg e that the data supplied to CMS are false. Rather, as under the F alse Claims Act, a certification is false under § 422.504( l ) when the Medicare Advantag e org aniz ation h a s a ctual knowledg e o f the falsity of the risk adjustment data or demonstrates either “reckless disreg ard” or “deliberate ig norance” of the truth o r

3 T h is req u irem en t h as b een on th e b o o k s , in sim ilar f o rm , sin ce 2 0 0 5

. S ee 4 2 C.F.R. § 4 2 2 .5 0 3 (b )(4 )(v i)(F), (G) (2 0 0 5 ); id

. § 4 2 2 .5 0 3 (b )(4 )(v i) (2 0 1 0).S W O B E N V

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falsity of the data. I d. Thus, Medicare Ad v a n t ag e org ani z a tions “have an o blig ation to undertake ‘due dilig ence’ to ensure the accuracy , complete n es s, a nd truthfulness of encounter data submitted to [ CMS] ” and “will b e h e ld responsible f

or making g ood faith efforts to cert i f y the accuracy , completenes s , and truthfulness of encounter data submitted.” Id.

I n 2014, CMS cons i d e r ed but ultimately decided n ot to finaliz e a p roposed rule that w ould have altog ether p rohibited Medicare Advantag e o rg aniz ations fr om performing onesided retrospective reviews. Under the p roposed reg ulation:

medical record reviews conducted by [ a Medicare Advantag e] org aniz ation cannot be desig ned only to identify d iag noses that would trig g er additional pay

ments by CMS to the

. . . org aniz ation; and medical r ecord r eview methodolog ies mus t be desig ned to identify

errors in diag n oses submitted to CMS as risk adjustment data, reg ardless o f whethe r the data e rrors would result in positive or neg a tive
pay ment adjustments.

79 F ed. Reg

. at 2000. Althoug h CMS decided not to finaliz e t h e proposed rule, see id. at 29,926, it reiterated that it h a s “alway s ex pected that [a Medicare A dvantag e] o r ganiz ation

. . . implement, during the r out i n e c ourse of business, appropriate pay

ment evaluatio n procedures in order to meet the r equirement of certify ing the data they submit to CMS for purposes of pay

ment,” id. at 29,923. CMS ex plained:

[ Medicare Adv a n t ag e ] org aniz ations

. . . a re responsible for ensu r i n g that pay ment dataS W O B E N V

. U N I T E D H E A L T H C A R

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they submit to CMS are accurate, truthful, a nd

c o m p l e t e ( b a s e d o n b e s t k n o w l e d g e , information, a

nd belief), and are ex p e cted to have effective and appropriate pay ment

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 compliance prog rams a s a way to avoid receiving or retaining overpay ments. Thus, at

a minimum, reasonable dilig ence would include proactive co m p l i a n c e a c t ivities conducted in g o od faith by q uali fi ed in d ividuals to monitor for the receipt o f
overpay ments.

Id. CMS added, “[ i] f the requirement to rep o rt and return overpay ments applied only to situations where the [ Medicare Advantag e] org aniz a tion

. . . has a c t u a l knowledg e of the

ex istence o f an overpay

ment, then these entities could easily avoid returning improperly received pay ments.” Id. at 29,924. 4 A lthoug h these 2014 e vents p ostdate the alleg ations in Swoben’s pleading s, w hich cover the y ears between 2005 and 2012, they are consistent with the r e gulatory requirements that have ex isted since 2000.

4 Al s o in 2 01 4
, CMS ad o p ted a reg u latio n statin g th at a Med i care A d v an tag e o rg an izatio n “ h as id e n tif ied an o v erp ay

m en t w h en [it] h as d eterm in ed

, o r sh o u ld h av e d eterm in ed th ro u g h th e ex ercise o f reaso n ab le d ilig en ce, th at [it] h as receiv ed an o v erp ay m en t,” 4 2 C.F.R. § 42 2 .3 2 6 (c),

an d f o r th is p u rp ose an “ o v erp ay m en t” i n clu d es a p r e v i o u sly su b m i tted

m ed i cal d iag n o sis co d e th at is n o t p ro perly su p p o rted by a m ed i cal reco rd

, see 7 9 Fed

. Reg

. at 2 9 ,9 21 (statin g “ a risk ad j u stm en t d iag n osis th at h as b een s u b m itted f o r p ay m en t b u t is f

o u n d t o b e in v alid b ecau se it d o es n o t h av e su p p o r t i n g m ed ical reco rd do cu m en tatio n w o u ld resu l t in an

o v erp ay m en t”).S W O B E N V

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II. P rocedural History

Swoben filed a

n initia l c omplaint in this action in 2009. His first amended complaint added c laims a g ainst United Healthcare. He f

iled a second amended complaint in 2010. I n 2011, he filed a third a mended complaint, adding c l a i m s ag a i n s t HealthCare Partners, Aetna, W ellPoint a nd Health Net. I n a ccordance w ith the F alse Claims Act, Swoben filed each of these pleading s under seal. S e e 31 U .S.C. § 3730(b)(2).

The g is t of Swoben’s c omplaint is that the defendants

– Medicare Advantag e org a niz ations U nited Healt

h c a r e , A e t n a , W e llPoint and Health Net, and HealthCare Partners, a phy sician g roup provid i ng health care services to these

or ga n iz ations’ enrollees in ex c hang e for a percentag e of the
org aniz ations’ capitated pay ments – perfo r m e d biased retrospective medical record reviews. A ccording to Swoben, retrospective reviews b y Medicare A dva n t ag e org aniz ations ty pically should identify (and report t o C MS) two ty pes o f

errors in the risk adjustment data previously submitted: (1) diag nosis codes supported by an enrollee’s medical records but not previous l y s u bmitted to CMS (underreporting e rrors); and (2) diag nosis codes pre v i ously submitted to CMS but not s u p p orted by the enrollee’s medical r ecords (over-reporting errors). I d en t i f y ing a nd reporting the first ty

p e of error is favorable to the M e d i c a re Advantag e o rg aniz ation; identify ing and reporting the second ty pe o f e rror is unfavorable. Swoben alleg es the defenda nts conducted one-sided retrospective reviews desig ned to identify (and report to CMS) solely the first ty pe of error. He alleg es these reviews were desig ned to ex ag g erate enrollees’ health r isks and caus e C M S to make inflated capitated
pay ments to the defendants. These a c tions, Swoben alleg es,S W O B E N V

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rendered the defendants’ periodic certifications under § 422.504( l ) false, i n violation of the F alse Claims Act, 31 U.S.C. § 3729(a)(1).

S p e c i f i c a l l y , S w o b e n alleg es the defendants’ retrospe c t i v e reviews were biased in several respects. F or instan ce, he alleg es each of the d efendants retained coding companies or purchased specializ ed software to perform retrospective reviews of th e m e d i cal c h a r ts of tens o f thousands of their patients with severe illnesses but “concealed from the coders the diag nosis codes that had b een p reviously submitted to the Government.” F ourth Am. Compl. ¶¶ 1 2
, 1 6 –17. As a consequence, “the res u l t s o f the coders’ r eviews did not identify the d i a g nosis codes unsupported by proper documentation of the reviewed medical charts that had been previously submitted to the Go v e r n m ent.” F ourth Am. Compl. ¶¶ 13, 17. Swoben alleg es the defendants eng ag ed in these a ctivities beg inning in 2005. F ourth Am. Compl. ¶ ¶ 12, 16.

Swoben also alleg es United Health c a r e instructed its medical providers, including HealthCare Partners, to review the medical charts of selec t e d patients to determine whether those charts supported speci f i c d iag noses that had not previously been reported to CMS. F ourth Am. Compl. ¶ 14. The m e d i c a l p r o v iders r e p orted the additional diag n osis codes supported by the records “but made no attempt to determine

or report those previously reported diag nosis codes that were unsupported by properly documented medical charts that

were reviewed.” Fo u rth Am. Compl. ¶ 14. Swoben alleg e s United Healthcare a

n d H ealthCare Partners eng ag ed i n this activity f ro m a p p rox imately 2005 to 2 007. F o urth Am. Compl. ¶ 14.S W O B E N V

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Swoben further alleg es the defendants used a template to report the r e sults of their retrospective r eviews t o C M S that allowed c oders to enter any additional diagn o sis codes identified by the reviews but “did not permit the entr y o f information indicating what previously submitted [diag nosis] codes should be withdraw n .” F ourth Am. Compl. ¶ 23. Swoben alleg es the defendants used the faulty template from
approx imately 2006 to 2012. F ourth Am. Compl. ¶ 2 4. He
asserts the defendants were involved in the devel o p m e n t o f the template and were aware o f its shortcoming s. F ourth Am. Compl. ¶¶ 22, 27.

Swoben also alleg es CMS conducte d annual RADV audits of sample medical charts for United Healthcare, Aetna, W e llPoint a

nd Healt h N et. F ourth Am. Compl. ¶ 25. He alleg es each of these Medicare A dvantag e org aniz a tions “had RADV audit e rror rates well in ex c ess of 20%, reflecting that

more than 20% of [ their] d iag nosis codes submitted to CMS

were not supported by p roperly documented medical charts.” F ourth Am. Compl. ¶ 25. 5 Swoben a lleg e s the over-reporting

error rate found in these audits of r e p resentative medical records placed the defendant s o n n otice that the risk adjustm ent data they more broadly submitted to CMS also contained sig n ificant o ver-reporting errors. F ourth Am. Compl. ¶ 25.

Swoben alleg es the defendants’ practices rendered their § 422.504( l ) certifications false and f raudulent. H e alleg e s they submitt e d false claims by attesting to the accuracy o f their risk a djustment data even thoug h they kno w i n gly

5 Sw ob en alleg es t h e RA D V au dits sh o w ed a h ig h p ercen tag e o f o v errep o rtin g erro rs. His alleg atio n s d o n o t ad d ress w h eth er th e RA DV au dits also id en t if

ied u n d er- rep o rtin g erro rs.S W O B E N V

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desig ned a

nd performed r etrospective reviews to conceal a nd
not withdraw previously submitted diag nosis codes that were unsupported by retrospectively reviewed medical records. F ourth Am. Compl. ¶ 2 7

. H e alleg e s, moreover, that the defendants knew their certifications were false because t hey (1) helped d e v elop the reporting template and knew the template would not capture over-reporting error s i d e n t ified b y retros pective reviews; (2) had RADV audit over-reporting

error rates in ex cess o f 20 percent, placing them on notice that “a similar percentag e of medical charts that we re retrospectively

reviewed should have resulted in [ d iag nosis] codes being withdrawn as u nsupported by the medical charts”; and (3) desig ned their retrospective reviews to avoid identify ing or reporting u n suppor t e d diag nosis c odes that should have been withdrawn. F ourth Am. Compl. ¶ 27.

I n 2012, the United States intervene d i n the action as to Swoben’s claims ag ainst certain defendants not relevant h ere. I n J anuary 2013, the U nited States declined to intervene as to the defendants who are parties to this app e a l (collectively

, “the defendants”). The district c ourt ordered the complaints unsealed and served o n the defend a n t s

. I n J une 2013, a fter
t he district c ourt issued an initial scheduling and c a s e manag ement order, the n ewly s e r v e d defendants moved to dismiss Swoben’s claims, arg u ing his third amended compl ai n t f

ailed to satisfy Rules 8, 9(b) and 12(b)(6) o f the F ederal Rules of Civil Procedure.

I n his opposition to the defendants’ motions, Swoben did
not defend the third amended complaint. I nstead, h e advised the court h e would voluntarily dismiss his claims under state l a w and would seek leave to amend his complaint wi t h respect to his claims under the F a lse Claims Act. The district

c o urt ordered Swoben to file a d eclaration describing “ i nS W O B E N V

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detail the proposed F o u

rth Amended Complaint and why such

an amendment would not be futile or denied due to evidence of a lack of dilig e nce or undue delay .” A s directed, Swoben filed a declaration of c ounsel setting out the additional alleg ations h e would include in a f ourth amended complaint.

I n a J uly 2013 order, the district c ourt dismissed the third

a m e n d e d c o mplaint with prejudice, concluding Swobe n f a i l e d
to alleg e a claim under the F a l s e C laims Act with particularity as required by Rule 9 (b). The court denied leave
to a mend, citing both futility of amendment and undue delay

. The court entered final judg ment, a nd Swoben timely appealed. H e d o es not challeng e dismissal of the third amended complaint but contends the d istrict court abused its discretion by deny ing leave to amend.

After h earing oral arg ument, w e asked the parties to submit supplemental briefing to addre s s when conducting retrospective medical record reviews d esig ned to identify only d iag noses that would trig g er addition a l pay ments b y CMS, not errors tha t would result in neg ative pay ment adjustments, would cause a certification to be false for
purpose s o f § 4 22.504( l ) and the F a lse Claims Act. The parties filed briefs address i n g this question, and the D e p a rtment o f J ustice, representing the United States a s amicus curiae, filed a brief supporting Swoben.

S T A N D A R

D O F R E V I E W

W e review the de n i a l o f leave to amend for an abuse o f discretion, see United States ex rel. Lee v

. Corinthian Colls.

, 655 F

. 3d 9 84, 995 ( 9th Cir. 2011), b ut we review the question

o f futility of amendment de novo, see Carvalho v. Eq u i f a x 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 O N

The d istrict court denied leave to am e n d o n two independent g rounds

– fut i l i t y of amendment and undue delay . W e address these in turn.

I. Am e ndm ent Would Not Be F utile

The d istrict court denied leave to a mend in par t o n t he
g round that amendment would h ave been futile. A c cording ly

, we address whether Swoben’s proposed fourth amended complaint, or a further amended pleading

, would be adequate to survive a motion to dismiss.

A. The P roposed F o u rth Am ended Com plaint Adequately States a Cognizable Legal Theory

T h e parties dispute w hether Swoben’s p roposed fourth amended complaint alleg es a cog niz able leg al theory

.

1. The F alse Claims Act imposes liability in part on “any
person who

. . . knowing ly presents, or caus e s t o be presented, a false o r fraudulent clai m for pay ment o r approval,” 31 U.S.C. § 3729(a)(1)(A), or “knowing ly makes,
uses, o r causes to be made or used, a false record or statement material to a false or f

raudulent claim,” id. § 3729(a)(1)(B ). 6 “I n an a rchety pal qui tam F alse Claims action, such as where

a private company overcharg es under a g overnment c ontract,

6 In ad d itio n to th ese F alse C laim s A ct p ro v isio n s, th e Un ited States, as

am icu s cu riae, arg u es th e d ef en dan ts’ c o nd u ct v io lates § 37 2 9(a)(1 )(G), k n o w n as t h e “ rev erse f

alse claim s” p ro v i sio n

. Sw o ben

, h o w ev er, d id n o t rely o n th at p ro v isio n in h is op en in g an d rep ly b rief s. W e th eref

o re d o n o t ad d ress it h ere.S W O B E N V

. U N I T E D H E A L T H C A R

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the claim for pay

men t i s itself literally f

alse or fraudulent.” U n ited States ex rel. Hendow v. Univ. of Phoenix

, 461 F

. 3 d 1 1 6 6
, 1170 (9th Cir. 2006). A s relevant here, however, “ a claim under the F alse Claims Act c a n be false where a party merely falsely certifies complianc e w i th a statute o r reg ulation a s a condition t o g overnment pay ment.” Id. at 1171. Under a fals e c e r t i fication theory

, “it is the false certif i c a t ion of compliance w hich creates liability when certification is a prerequis i t e to obtaining a g overnment benefit.” Id. (alteration omitted) (quoting United Stat e s ex rel. Hopper v. Anton
, 91 F .3d 1 2 61, 1 266 (9th C i r

. 1 996)). The essential elements of a false certification claim are: “(1) a false statement or fraudulent c ourse of c onduct, (2) made with scienter, (3) that was material, causing (4) the g overnment to pay out money or forfeit money s due.” Id. at 1174. 7 Proof o f damag e to the g overnment is not required. See Bly-Magee v

. California

, 236 F .3d 1014, 1017 (9 th Cir. 2001); United States ex rel. Hagood v. Sonoma Cty. W a ter A gency , 929 F .2d 1416, 1421 (9th Cir. 1991); Claire M. Sy lv i a , The False Claims Act: Fraud Agai n s t t he Government §§ 4:2, 4:3 (2015).

The defendants challenge S w oben’s theory that the

manner in which they desig ned and conduc ted their retrospective reviews rendered their certifi c ations under § 422.504( l ) false. They

contend:

During the time p eriod alleg ed in the complaint, no statute, reg ulation, or g uidance

7 T h e d ef en d an ts’ b rief

in g ch allen g es o n ly th e f

irst an d seco n d o f th ese elem en ts h ere. A cco rd in g ly

, f o r p u rp o ses o f o u r an aly sis, w e as s u m e Sw o b en ’ s p ro p o s ed f

o u rth am en d ed co m

p l a i n t satisf

ies th e th ird an d f o u rth elem en ts.S W O B E N V

. U N I T E D H E A L T H C A R

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from CMS indicated that a certification could only be “acc u r a t e, complete, a nd truthful” if [ a Medicare Advantag e] pl an validated for itself that the millions of diag nosis codes submitted to it by third-party providers were supported by

the underly

ing medical charts

– i.e., that the plan was required to attest to the
accuracy of someone else’s w o r k

. Nor did
any authority indicate that a p lan was oblig ed
to underta k e affirmative steps to unearth potentially

unsupported codes before it could certify th e third-party risk adjustment data b a s ed on its “best knowledg e, information

, and belief.”

J oint Suppl. B r. 1

. These arg uments are unpersuasive for two distinct reasons.

F irst, the defendants mischaracteriz e Swoben’s theory o f the case. Swoben d oe s not alleg e the defendants’ certifi c a t i ons are false merely because they p assively forwarded to CMS unsupported diag nos i s c o d e s they received from their medical providers. That ty pe of conduct would not necessarily result in f

alse § 422.504( l ) certifications. A s CMS made clear in the 2000 preamble, Medicare Advantag e org aniz ations “ cannot reasonably be ex pected to know that

e v e r y p i e ce of data is correct, nor is that the standard th at [ CMS and the Department of J ustice] b elieve is reasonable to enforce.” 65 F ed. Reg

. a t 40,268. “[ S] imple mistakes will
not resul t in sanctions.” Id. I n stead, Swoben alleg es the defendants took aff

irmative steps to g enerate and report

s k ewed d ata. Even in the face of “RADV audit error r at e s well in ex cess o f 20% ” (Fourth Am. Compl. ¶ 2 5), they “conceived, planned a

nd conducted the retrospective reviewsS W O B E N V

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by not causing the previously submitted diag nosis codes that

were unsupported by the r etrospective reviews to be c orrected and withdrawn from the G overnment,” doing s o “ with the knowledg e and intent th at t h e r e trospective reviews would only increase, a

nd not decrease, the number of diag noses, a nd thus their respective risk scores in order to increase capitated
pay ments paid b y the G o v e rnment” ( F ourth Am. Compl. ¶ 19). T he d efendants’ attempts to portray themselves as the passive victi m s of their providers’ errors wholly misstates Swoben’s leg al theory

, w hich focuses on the defendants’ o wn conduct in alleg edly conceivin g , directing and conducting retrospective reviews desig ned t o identify only favorable reporting errors.

Second, the defendants ’ c o ntention that, during the relevant time p eriod between 2 0 0 5 and 2012, there was no “authority [ to] indicate that a [ Medicare Advantag e] p lan was

o b lig ed to undertake affirmative steps to unearth potentially unsupported codes before it could certify the third-party risk adjustment d ata based on its ‘ b est k no w l edg e, information, and b elief’” is unpersuasive. W hen it adopte d t h e “best knowledg e, information, and belief” standard in 2000, CMS made clear this was the same standard as the one establishing liability under the F alse Claims Act – i.e., that it encompasses not o nly actual k

nowledg e of falsit y but also reckless disr e g a rd and deliberate ig n orance. See 65 F ed. Reg

. at 40,268; s e e also 31 U.S.C. § 3729(b)(1)(A) (F alse Claims Act). As we have ex plained in describing this standard under the F alse Claims Act:

I n defining knowing ly

, Cong ress at tempted “to reach what h as become kn o w n a s the ‘ostrich’ ty

pe situation where a

n individual has ‘buried his h ead in the sand’ and failed toS W O B E N V

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make simple inquiries w hich would alert him
t h a t false claims are being submitted.” S

. Rep. No. 99-345, at 21 (1986), as reprinted in 1986 U.S.C.C.A.N. 5266, 5286. Cong ress adopted “ t h e concept that individuals a nd
contractors receiving public f unds have some duty to make a limited i n q uiry so as to be

r e asonably certain they are entitled to the
money they seek.” Id. at 20; see also i d

. a t 7 (discussing the importance of in d i vidual responsibility because the g overnment has limited resources to police fraud). “W hile the Committee intends that at least some i nquiry be made, the inquiry need o nly be ‘reasonable and prudent under the circumstances.’” Id. at 21.

United States v. Bourseau
, 5 31 F .3d 1159, 1168 (9th Cir. 2008); see also Universal H ealth Servs., Inc. v. U.S. e x r e l. Escobar , 136 S. Ct. 1989, 2000 (2016) (holding “half-truths

– representations that state the truth only s o f a r a s it g o es, wh i le omitting critical qualify ing information – can be actionable misrepresentations” under the F alse Claims Act).

Thus, as CMS made cle ar , Medicare Advantag e org aniz ations have alway s had “an oblig ation to take steps to

ensure the accuracy , completeness, and truthfulness of the
encounter data” and “an oblig ation to undertake ‘due dilig ence’ to ens u r e the accuracy , completeness, a nd truthfulness of encounter data submitted to [ CMS] .” 6 5 F ed. Reg

. a t 40,268. CMS made perfectly clear that M e dicare Advantag e org aniz ations would be “held responsible for

m aking g ood faith efforts to c ertify the accura c y , completeness, and truthfulness of e ncounter data submitted.”S W O B E N V

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Id. I n deed, CMS ex pressly r ejected the arg ument that Medicare Advantag e org a n iz ations “should not be required to certify t h e accuracy of the encounter data they receive from third parties.” Id. The defendants’ contention that they were under no o blig ation to take affirmative steps to address errors also ig n ores § 422.503, which since 2005 has r equired Medicar e Advantag e org aniz a tions to have effective compliance prog rams in plac e , i ncluding “[ p] rocedures for internal monitoring and auditing ” and for “ens u r ing
p r o m pt response to d etected offenses.” 42 C.F

. R

. § 422.503(b)(4)(vi), (vi)(F ) , (vi)(G) (2005).

I n lig ht o f these authorities, we hold that when, as alleg ed here, Medicare Advantag e o rg aniz ations desig n retrospective

r eviews of enrollees’ medical records deliberately to a v o i d identify ing erroneously submitted diag nosis codes that mig ht otherwise have been identified with reasonable dilig ence, t h ey can no long er c e rtify

, based on best knowledg e , information and belief, the accuracy , completen e s s a nd truthfulness of the data submitted to CMS. This is especially true, when, as alleg ed here, they were o n notice that their data included a sig nificant numbe r of erroneously r eported diag nosis codes. W e do not see how a Medicare Advantag e contractor who has eng ag ed in such conduct can in g ood faith certify that it believes the resulting risk adjustment data reported to CMS are accurate, c o mplete and truthful. A s the
g overnment arg ues in its amicus brief, when a Medicare Advantag e plan “has implemented record-review procedures specifically desig ned not to reveal unsupported d i a gnosis codes – the plan’s certification under § 422.504( l ) is ‘false o r fraudulent’ under 3 1 U.S.C. § 3729(a)(1)(A) & (B ).” B r. United States as Amicus Curiae 4.S W O B E N V

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B y holding that one-sided r etrospective reviews can resul t in false c ertifications under § 422.504( l ), we do n o t s u gg e st that they necessarily a lway s do. The “best k n owledg e , information, a

n d b e l ief” standard under § 422.504( l ) prohibits only a “reckless disreg ard” or “deliberate ig norance” of the truth or falsity of the risk adjustment data submitted to CMS. W e do not in this opinion attempt to define the parameters o f these r equirements. W e h old only that the theory alleg ed here

– that the defendants desig n ed their retrospective r eview procedures to not reveal u nsupported diag nosis codes, alleg edly for no other reason than to avoid r ep orting that information to the g overnment

– s t a t e s a cog n iz a ble leg al theory under t he F alse Claims Act. That the defendants alleg edly did so in spite of RADV audit errors rates of 20 percent or more only

streng thens Swoben’s claims.

W e also do not intend to sug g est tha t t h e practice o f concealing p reviously submitted diag n o sis codes from coders conducting retrospective reviews is ne c e s s arily a suspect practice. On the contrary , blind coding m a y help ensure the integ rity of a retrospective review: if r e v i e wers are told in advance w hich codes were submitted to CMS, they may have

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

B u t blind coding cannot be squared with th e go o d faith required by § 422.504( l ) when i t i s e m p l oy ed as a means o f avoiding or concealing over-re p o r t i ng errors. I f Medicare Advantag e o rg aniz ations acquire the c o d es identified b y retrospective c oders, compar e them to the codes previously submitted to CMS, identify ing both under- and o v e r

- r e porting
errors, but withhold information about the over-rep o r t ing

errors from CMS, this w ould result in a f a lse certification. The sam e i s true when a Medicare Advantag e org aniz ationS W O B E N V

. U N I T E D H E A L T H C A R

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undertakes comprehensive blind coding but then runs a unidirectional comparison with the previously submitted codes to reveal o nly under-reporting errors

. As the
g overnment ex plains, the use o f blind coding cannot ex c u s e failing to “c h e c k whether diag n osis codes previously submitted to CMS w ere included o n t h e list of diag noses found by the reviewers to be supported by the medica l records.” B r

. United States as A micus Curiae 15. I n the first

ex a mple, in which a Medicare Advantag e org aniz a t i on withhold s known over-reporting errors from CMS, the
org aniz ation h as actual knowledg e that the data are false. I n the second e x ample, w here the org a n iz ation turns a blind ey e to the over-reporting errors, it ex hibits reckless disreg ard a nd deliberate i gnorance toward the truth or falsity of the data submitted to CMS. B oth ex amples show a lack of dilig e nce

an d a n absence of g ood f aith. On the other hand, if throug h reasonable d ilig ence the comparison b e t ween the codes identified by the retrospective revie w e r s a nd the codes previously submitted to CMS is capable of identify ing only under-reporting errors, w e assume this w o u ld not result in false certifications under current CMS reg ulations. The due dilig ence standard requires only reasonable efforts.

I n sum, Swoben has alleg ed a cog niz able leg al theory

.

2. The def

e ndants’ arg u ments to the c ontrary are not persuasive.

The d efendants arg ue their ce r t i f i c a tions cannot have been false because they did not k n ow of any specific u n supported diag nosis codes in the data they submitted to CMS. J o int S u ppl. B r. 4

. As ex plained, h owever, neither the “b e s t knowledg e, information, and belief” standard un der § 422.504( l ) nor the scienter element of the F alse Claims A ctS W O B E N V

. U N I T E D H E A L T H C A R

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requires actual knowledg e of falsity

. Under the F alse Claims Act,

the term s “knowing ” and “knowing ly ”

– (A) mean that a person, wit h respect to information – (i) has actual knowledg e of the information; (ii) acts in d eliberate ig norance of the truth o r falsity of the information; o r (iii) acts in reckless d isreg ard of t he truth o r falsity o f the information; and ( B ) require no proof of specific intent to defraud.

31 U.S.C. § 3729(b)(1). Section 422.504( l ) adopts precisely the same standard. See 65 F ed. R e g. a t 40,268. And this standard reaches “what has become k nown as the ostrich ty

pe situation where an individual has buried his head in the sand and f ailed to make simple inquiries w h ich would alert him that false claims are being submitted.” Bour s e a u , 531 F .3d

a t 1168 (quoting S. Rep. No. 99-345, at 21) (internal quotation marks omitted). Althoug h the F alse Claims Act’s scienter requirement is “ rig orous,” U n iversal Health Servs.
, 136 S. Ct. at 2002, Swoben’s alleg ations satisfy it here.

The defendants also sug g est they could n ot have conducted their retrospective rev i e w s in bad faith because retrospective reviews o f a portion of an enrollee’s medical

r ecords are not a p lausible means of identify ing o v e r

reporting errors. They p oint out that “CMS reg ulations deem

a diag nosis code proper if it is supported by a sing le medical record by a single provider.” J oint Answering B r. 36. “According ly

, the absence o f documentation for a diag nosis code in a sing le retrospective review of a s ing le provider’s charts does not e s t a b l i s h that the submission of that code to CMS was improper: the code may simply be located in chartsS W O B E N V

. U N I T E D H E A L T H C A R

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n o t e n compassed by the retrospective review.” Id. W e ar e not p ersuaded. F irst, if the retrospective r eviews were desig ned in b ad faith, then it is no defense that the reviews, a s desig ned, could not readily i d en tify over-reporting e rrors. Second, the record at thi s e arly stag e does not tell us h ow easy or difficult it would have been for the defenda nts to identify over-reporting errors, and Swoben alle ge s only that the defendants intentionally prevented coders from doing so. W h ether the defendants had a g ood-faith reason to desig n the reviews a s they d id i s n o t a matter to decide at this stag e o f the pro ce e ding s, particularly w here the defendants’ f actual assertions are less than obvious. F or instance, because CMS

r e q uires medical diag nosis codes to be supported by a

m e d ical record, it may be that each diag nosis code report e d
to CMS is linked to a speci f i cally identified supporting medical record. I n that event, if a reviewer finds a previously reported diag nosis code is not supported by the very medical record used to document the diag nosis code in the first place, then the diag nosis code was r eported in error, even if it is possible that some other, u nidentified record mig ht support the same d iag nosis. 8 As the g overnment points out, “[ e] v en if it turns out that the diag nosis is supported by other medical records, the failure o f [th e] plan to investig ate to make that determination – after it h as been put on notice that t h e diag nosis may not be supported – makes it s broad certification reg ardin g t he accuracy , completeness, a nd

8 In oth er w o rd s , i f a Med i care A d v an tag e o rg an izatio n r e l i e d o n

m ed i cal reco rd X to j u stif

y su bm ittin g a p articu lar d iag n o s is co d e to CMS in itially

, an d th e retro sp ectiv e rev iew er co n clu d es X d o es n o t su p p ort th at d iag n o sis, th en th e co de sh o u ld b e w ith d raw n

. If it tu rn s o u t th e co d e can b e s u b stan tiated by a d if

f eren t m ed ical reco rd

, th en th e co d e can b e lef t in
p lace o r resu

b m itted

. B u t th e Med icare A dv an tag e o rg an izatio n c a nn o t sim p ly ig n o re t

h e r e p o r tin g erro r b ecau se it sp ecu lates th at so m e o th er

m ed i cal reco rd m ig h t su

p p o rt th e sam e d iag n o sis co d e.S W O B E N V

. U N I T E D H E A L T H C A R

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truthfulness of s u b mitted data false.” B r. United States a s Amicus Curiae 17.

The defendants also arg ue the statements by CMS in 2000
reg arding due dilig ence and g ood faith should n ot be gi v e n weig ht bec a u s e , at the time, risk adjustment w as based primarily on demog r aphic factors ra t her than patient
encounter data. J oint Resp. to Amicus B r. 9–10 & n

. 3

. W e disag ree. F irst, the statements by CMS are authoritative not because of what they say about encounter data o r d i a g n osis codes but because they

provided clear g

uidance to Medicare Advantag e org aniz ations (then known as Medicare+Choi ce org aniz ations) reg arding their oblig a tions under § 422.504( l ) (then codifi ed a t § 422.502( l ) ), including their o blig ations under the “best knowledg e, information, and belief” standard. Second, the defendants’ rep resentations to the contrary notwithstanding

, it is quite clear that the risk adjustment methodolog y in place in 2000 focused o n patient encounter data, just as it does today

. See 65 F e d. Reg

. 40,246–51. The defendants p oint out that at the time CMS collected encounter data only for inpatient care. J oint Res p

. t o A m i c us B r. at 9

n

. 3

. B u t, as CMS made clear at the time, it was a l r e a d y “de v e l o p i n g a m o r e co m p r e h en s i v e r i s k

- a d justment methodolog y that uses diag nosis data from phy sician services and hospital outp a t i ent department encounters” as well. 65 F ed. Reg

. at 40,247–48. Thus, when CMS emphasiz ed the importance of due dilig ence a n d g ood faith in reporting patient encounter data in 2000, it c learly had w i t h i n its contemplation the reg ime that was then in develo p m e n t a nd which w as in place a t the time the a lleg edly false claims were submit t e d in this case. Third, even if the defendants were correct that the focus of the risk adjustm e n t m ethodolog y in 2000 was o n d emog raphic factors rather than encounter data,S W O B E N V

. U N I T E D H E A L T H C A R

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there is no question that CMS’ statements about due dilig e nce and g ood faith were focused on the latter:

M+C org aniz ations have an oblig ation to take

s teps to e nsure the a c curacy , completeness

, and truthfulness of the e ncounter data

. W e acknowledg e that encounter data co me into M+C org aniz a tions in g reat volume and f rom

a number of sources, presenti n g sig nificant verification challeng es for the org aniz ations. However, we believe that M+C org aniz ations have an ob l i gation 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 , co m p leteness, and truthfulness of encounter data submitted to [ CMS]

. Therefore, they will be held to a “best knowledg e , information, a

nd belief” standard. Therefore, M+C org aniz ations will be he l d responsible for making g ood f

aith ef f o rt s to certify the

accu r acy , completeness, and truthfulness o f encounter data submitted.

Id. at 40,268 (emphasis added). 9

9 T h e s tatem en ts CMS m ad e in t h e p r e a m b le to th e certif

icatio n reg u latio n m erit d ef

eren ce. S ee, e.g

. , Ch risto

p h er v. S mith Klin e Beech a m Co rp

. , 13 2 S. C t. 2 1 56
, 2 1 6 3 (2 0 1 2 ); Fid

. Fed

. S av. & Lo a n Ass’n v. d

e la Cu esta , 4 5 8 U .S. 14 1
, 1 5 8 n .1 3 (1 9 8 2 ) (“ [W ]e lo o k to th e p ream b le

. . . f or th e ad m in istrativ e co n stru ctio n o f th e reg u l atio n , to w h i c h ‘ d ef eren ce is

. . . clearly in ord er.’ ” (th ird alteratio n in o rig in al) (q u o t i n g Ud a ll v. Ta llma n , 3 8 0 U.S. 1
, 1 6 (1 9 6 5 ))). CMS’ statem en ts reg ard i n g th e

m ean in g o f th e “ b est k

n o w led g e, in fo rm atio n , an d b elief ” stan d ard are

en titled to d ef

eren ce b ecau se t

h ey rep resen t th e ag en cy ’ s in terp retatio n of its o w n reg u latio n

. T h e in terp retatio n is also en titled to d ef eren ce b ecau s e it rep resen ts th e ag en cy ’ s co n sid ered j u d g m en t af ter n o tice an d co m

m en t,S W O B E N V

. U N I T E D H E A L T H C A R

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The defendants also contend their certifications c ould not have been knowing ly false b ecause their conduct b etween 2005 a nd 2012 represented at least an objectively reasonable interpretati o n o f their o blig ations under § 422.504( l )

. J oint Suppl. B r. 12. See Safeco Ins. Co. of Am. v. Burr
, 551 U .S. 47, 70 n.20 (2007) (“W h e re, as here, the statutory tex t a nd relevant court and ag ency g uidance allow for more than o ne reasonable interpretation, it would defy h i s t o ry and current thinking t o t r e a t a defendant who merely adopts one such interpretation as a knowing or r e c k l ess violator.”); Hagood

, 929 F .2d at 1 42 1 (“To take advantag e of a disputed leg al question

. . . is to b e neither d el i b erately ig norant nor recklessly disreg ardful.”). W e ag ain disag ree. CMS’ clear
statements in the 2000 preamble – “[ Medicare Advantag e]
org aniz ations have an oblig ation to undertake ‘due dilig ence’
to ensure the accuracy , completenes s , and truthfulness o f
encount e r data submitted to [ CMS and] will be h eld responsible for making g ood faith ef f o r t s to certify the
accuracy , completeness, and truthfulness of encounter data submitted,” 65 F ed. Reg

. at 40,268

– resolved any ambig uity about the meaning of § 422.504( l ). See Fid. F e d

. Sav. &

in d u stry in

p u t an d in terag en cy co n su ltatio n

. S ee Estab lish m e nt o f th e Med icare+Ch o ice P ro g ram , 6 3 Fed

. Reg . 3 4 9 6 8 , 3 5 01 7 (J u n e 2 6 , 1 9 9 8) (in t erim f in al ru le w ith co m

m en t p erio d); 6 5 Fed

. Reg

. at 4 0 ,1 7 6, 4 0 ,2 6 8
, 4 0 ,2 9 9 (f i n al ru le w ith co m

m en t p erio d). In d eed

, th e g oo d f aith stan d ard ab o u t w h ich th e d ef

en d an ts n o w co m

p lain ap p ears to h av e b een su g g ested b y th e i n d u stry

. S

ee 6 5 Fed

. Reg

. at 4 0,2 6 8
, 4 0 ,2 9 9

. Co mp are 6 3 Fed

. Reg

. at 3 5 1 0 3 (in terim ru le), with 6 5 Fed

. Reg

. at 4 0 ,3 2 7

– 2 8 (f in al ru le). W e also af

f o rd def eren ce to CMS’ in terp retatio n o f th e reg u latio n b ecau s e it is co n s isten t w ith

th e stan d ard f

o r liab ility

u n der th e False Claim s A ct,

an d th eref

o re p resu m a b l y c a r ries o u t co n g ressio n al in ten t. Cf. W yeth v. Levin e , 5 5 5 U.S. 5 5 5
, 5 7 6 –8 0 (2 0 0 9 ) ( d e c l i n in g to af f o rd d ef eren ce to

s t a t e m e n t s in an ag en cy ’ s p ream b le w h ere th e ag en cy f

ailed t o o f

f er in terested p arties n o tice o r an o p p o rtu n i ty f o r co m m en t an d th e p ream

b le

w as at o d d s w ith

ev i d en ce o f

Co n g ress’ p u rp oses).S W O B E N V

. U N I T E D H E A L T H C A R

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Loan A ss’n
, 458 U.S. at 158 (“Any ambig uity i n [ the
reg ula t i o n’s] lang uag e is d ispelled by the preamble

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

, ig noring t h e g ood faith and due dilig e nce requirements would not have been objectively reasonable.

The defendants a lso c ontend their § 422.504( l ) certifications c ould not have been false because they offered

on ly a qualified certification of their risk adjustment data, “based on best k

nowledg e , information, and belie f.” J oint Suppl. B r. 5–6. They rely on U nited S tates v. Ekelman & Associates, Inc.
, 5 32 F

. 2d 5 45, 550 ( 6 th Cir. 1976) ( “I n certify ing the truth of the information in the applicat i o n ‘ to the b est of its knowledg e a n d belief’ F rankl i n d i d no more than assert that it had no k nowledg e of, nor intention to make, misrepresentations.”). Eke l m a n is disting u ishable on a number of g rounds. F irst, § 422.504( l ) ’s “best knowledg e , information, and b e lief” standard is i nformed by the 2000 preamble, which makes clear the standar d e n compasses d ue dilig ence, g ood faith, r eckless disreg ard a n d deliberate i gn o r ance. See 65 F ed. Reg

. at 40,268. I n this sen s e, § 422.504( l ) ’s “best k

nowledg e, information, and b e lief” standard is similar to the “ be st of the person’s knowledg e , information, a

nd belief” standard under F ederal Rule of Civil Procedure 11, under which an attorney ’s “sig n ature certifies
to the court that the s ig ner has read the document, has conducted a reasonable inquiry into the facts and the law a nd is satisfied that the document is w ell g rounded in both, and is acting without any improper m o t i v e.” Bus. Guides, Inc. v

. Chromatic C

o m m c ’ns Enters., Inc.
, 498 U.S. 5 33, 542 (1991). Second, in contrast to Ekelman

, this is not a case in which it i s c lear the defendants lacked any “intention to mak e [ ] misrepresentations.” Ekelman

, 532 F .2d at 5 50. Swo b e n ’s alleg ations support the inference that the defendants c ertifiedS W O B E N V

. U N I T E D H E A L T H C A R

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that they believed the risk adjustment d ata were complete a nd
accurate even thoug h they did not believe that to be the c ase. Third, E kelman was d e c i d ed in 1976, a decade before Cong r ess ame n d e d the F alse Claims Act to include a d e l i b e r a t e i gn o r a nce standard. See F alse Cla i m s Amendments Act of 1986, Pub. L

. No. 99-562, § 2
, 100 Stat. 3153 ( 1986) (codified as amended at 31 U.S.C. § 3729(b)(1)). The deliberate ig norance standard does not allow a contractor to d e l i b erately turn a b lind e y e to reporting errors and then attest that, to its knowledg e, they do not ex ist.

F inally

, notwithstanding the c ertification and compliance
reg ulations d iscu s s e d in this opinion, the defendants invoke

a separate r e g ulation, 42 C.F .R. § 422.310(d), to arg ue they reasonably b elieved they were not required to take any affirmative steps to find unsupported diag nosis codes. J oint Suppl. B r. 6–7. I n relevant p art, § 422.310(d) s t a t e s that Medicare A dvantag e “org aniz ations mus t s u bmit data that conform to CMS’ require ments for data e quivalent to Medicare fee-for-service d ata, when appropriate, and to all relevan t n ational standards.” 42 C.F .R. § 422.310(d). According to the defendants, b ecause CMS does no t verify diag nosis codes submi t t ed to it by third-party medical providers under the Medicare fee-f o r -service prog r am, this provision means Medicare Advantag e o rg aniz ations were not required to verify diag nosis codes either. W e reject the defendants’ conten t i o n , ag ain for multiple reasons. F irst, becaus e n o t h ing in § 422.310(d) speaks to a Medicare Advantag e o rg aniz a tion’s oblig ations t o ensure the
accuracy of risk a d

justment data, it does not modify a Medicare Advantag e org aniz a t ion’s oblig ations under §§ 4 22.503(b)(4)(vi) and 422.504( l ). Second, this is not a

case about whether Medicare Advantag e org aniz ations have
to take affirmative steps to verify risk adjustment d a t a

. TheS W O B E N V

. U N I T E D H E A L T H C A R

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d efendants indisputably took such steps by c onducti n g retrospective reviews

. This is a case about whether such
org aniz ations, having adopted affirmative v e r ification procedures, have to conduct them in g ood faith.

I n sum, we conclude Swoben’s proposed fourth amended complaint adequately

pleads a cog niz a

ble leg al theory

.

B. The P roposed F ourth Am e n d e d C o m p laint Alleges Su f f i c i ent F actual Matter to Satisf y Rules 8, 9 (b) and 12(b)(6) or May Be Am ended to Do So

T he parties also dispute whether Swoben’s p ropo s e d fourth amended complaint satisfies Rule 8 and 9(b).

1. Under Rule 8, we assume the v eracity of a complaint’s factual alleg a tions and then determine whether they plausibly
g ive rise to an entitlement to r elief. See Corinthian Colls.

, 655 F .3d at 9 9 1. “A claim has facial plau s i b ility w hen the plaintiff pleads factual content that allows the court to draw the r easonable inference that the defend a nt is liable f o r the misconduct alleg ed.” Id. (quoting Ashcroft v. Iqbal

, 5 56 U.S. 662, 678 (2009)).

Cl a i ms under the F a lse Claims A ct are also subject to Rule 9(b). See id. at 992; Cafasso, U.S. ex r e l

. v

. Gen. Dynamics C4 Sys., Inc.
, 637 F .3d 1047, 1054 (9th Cir. 2 011); Bly-Magee

, 236 F .3d at 1018. Un d e r Rule 9(b), a p laintiff “must state with particularity the circumstances constituting fraud.” F ed. R. Civ. P. 9 (b). This m ea n s the plaintiff must alleg e “ the who, w hat, w hen, where, and how of the misconduct charg ed,” Ebeid ex rel. United States v. Lungwitz
, 616 F .3d 993, 998 ( 9 th Cir. 2010) (quoting Vess v. CibaGeigy Corp. USA
, 317 F .3d 1097, 1106 (9th Ci r

. 2003)),S W O B E N V

. U N I T E D H E A L T H C A R

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including what is false or misleading about a statement, a nd why it is false, see i d

. Knowledg e, however, may be p led
g enerally

. S

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

Under our case law, Rule 9( b ) serves two principal
purposes. F irst, “alleg at i ons o f fraud must be ‘specific
enoug h to g ive defendants notice of the p a rticular misconduct which is alleg ed to constitute the fraud charg ed so that they

can defend a g ainst the charg e and n ot just deny that they have done any thing wrong .’” Bly-Magee

, 236 F .3d at 1019 (quoting Neubro n n e r v

. Milken

, 6 F .3d 666, 672 (9th Cir. 1993)). Thus, “[ p] erh ap s t h e most b asic consideration f or a federal court in making a judg ment as to the sufficiency of a pleading for purposes of Rule 9(b)

. . . is the d etermination o f how much detail is n ecessary to g ive adequa t e notice to an adverse party a

nd enable that party to p repare a re s p o nsive pleading .” 5A Charles Alan W rig h t & Arthur R. Miller, Federal Practice and Procedure § 1298 (3d ed. 2016).

Second, the rule serves “to deter the filing of complaints

as a pretex t for the discovery of u nknown wrong s, to protect defendants from the harm that comes from b e i n g subject to fraud charg es, and to p r ohibit plaintiffs from unilaterally imposing upon the court, the parties and so c i e t y enormous social and economic cost s absent some factual basis.” BlyMagee
, 236 F .3d at 10 1 8 ( a lteration omitted) (quoting In re Stac El e c. Sec. Litig.
, 89 F

. 3d 1399, 1405 (9th Cir. 1996)). B y requiri n g s o m e f

actual basis f

o r the claims, the rule protects ag a i n s t false or unsubstantiated charg es. See id. (citing Rolo v. City Investing Co. Liquidating Trust
, 155 F .3d 644, 658 (3d Cir. 1998)).

Consistent with these requirements, “mere conclusory alleg at i o n s of fraud are insufficient.” W ool v

. TandemS W O B E N V

. U N I T E D H E A L T H C A R

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Computers Inc.
, 818 F.2d 1433, 1439 (9th Cir. 1987), overruled on other g

rounds as stated in Flood v. Miller

, 35 F

. App’x 701, 7 03 n.3 (9th Cir. 2 0 0 2 )

. B r oad alleg ations that include no particulariz ed supporting detail do not suffice, see Bly-Magee

, 236 F .3d a t 1 0 1 8, but “statements of the time, place and nature of the a l l e ged fraudulent activities a re sufficient,” W

ool

, 818 F

. 2d at 1439. B e cause this standard “does not require absolute particularity o r a recital of the evidence,” W rig ht & Miller, supra , § 1298, a complaint need
not alleg e “a precise time frame,” “describe in detail a sing le specific transaction” or identify the “precise method” used to carry o ut the fraud, Cooper v. Pickett

, 1 37 F .3d 616, 6 27 (9th C i r. 1997). The complaint also need not “ident i f y representative ex amples o f fa lse c laims to support every alleg ation.” Ebeid

, 6 1 6 F .3d at 998. “[ I ] t is sufficient to alleg e ‘particular details of a scheme to submit false c laims paired with reliable indicia that lead to a strong inference that claims were actually submitted.’” Id

. a t 998–99 (quoting U n ited S tates ex rel. Grubbs v. Ravikumar Kanneganti
, 565 F .3d 180, 190 (5th Cir. 2009)). 1 0

Here, the proposed f

ourth am e nded complaint satisfies Rule 9(b) with respect to some defendants b u t n ot others. W ith r espect to defendants United Healthcare and HealthCare Partners, the complaint offers mo r e t h an broad alleg ations lacking supporting detail and provides a strong factual basis for Swoben’s claims. F or instance, concerning United

10 A lth o u g h

m an y co u rts req u i re less p articu larity “ w h en so m e m atters

are b ey o n d th e k

n o w l ed g e o f th e plead er an d can o n l y b e d e v elo ped th ro u g h d isco v ery ,” W rig h t & Miller, s u p ra , § 1 2 9 8
, w e d eclin ed to ap p ly th at p rin cip le to claim s u n der th e False Claim s A ct in Eb eid

, 6 1 6 F.3 d at 9 9 9

.S W O B E N V

. U N I T E D H E A L T H C A R

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Healthcare, operating as Secure Horiz ons, the complaint alleg es:

B e tween and during a bout 2005 and about 2007, Secure Horiz ons used software, such a s Plan Data Ma n age ment, to create lists o f patient s whose medical charts were to be reviewed. These lists showed the patients that

were susceptible of having

. . . diag noses that had not been previously r eported, a nd identified the

. . . diag nosis codes that w er e believed to be unreported. Se c u re Horiz ons provided these lists to its contracted medical
g r o u p s a n d [ i n d e p e n d e n t p h y s i c i a n associations (I PAs)]

, including but not limited
to HealthCare Par tners, who in turn had the lists u sed by c oders to review the charts of the listed patients to determine whe t her the reviewed charts supported the

. . . diag nosis codes i d e n t ified o n the lists. Such medical
g roups and I PAs, including but not limited to HealthCare Partners, reported to Secure Horiz ons the

. . . d iag n osis codes that w er e

su p p orted by p roperly documented medical charts that were revi ewed, but made no attempt to determine or r eport those previously reported diag nosis c odes that were unsupported by properly d ocumented medical charts that were reviewed. HealthCare Partners did so with the knowledg e and intent that the coders’ reviews would only increase,

a n d not d ecrease, the number of diag noses, and the respective r isk scores in order to increase c apitated pay

ments paid by theS W O B E N V

. U N I T E D H E A L T H C A R

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Government to Secure Horiz ons, of w h i ch HealthCare Partners received a portion.

F ourth Am. Compl. ¶ 14. These alleg ations, in the c ontex t o f
t h e complaint as a whole, adequately alleg e the who, wh a t , w h e n , w here and h ow of the alleg ed fraud. The complaint further alleg e s:

During or after J une 2008, HealthCare Partners utiliz e d software, HCC Manag e r, to evaluate claims data and re t r ospectively reviewed the medical charts of tens o f thousands of HealthCare Partners’ patients with severe illnesses. HealthCare Partners did
so, eve n thoug h the manufacturer of HCC Manag er advised HealthCare Partners that the software should not b e used for retrospective reviews because such use would c reate Medicare compliance v iolations. HealthCare Partners used the data g enerated by HCC Manag er for prosp ective care, as well a s retrospective review, of its Medicare p atients’

m e d i c a l c h a r t s f

o r p r e v i o u s y e a r s ’ submissions.

F ourth Am. Compl. ¶ 16. These a l l e g a t ions too include the level of particularity

Rule 9(b) requires.

W ith respect to defendants Aetna, W ellPoint and Health Net, b y contrast, the c o mplaint offers only broad alleg ations lacking particulari z e d supporting details. As a ty pical

ex a mple, the complaint alleg es that, “[ b] eg inning in or about 2005 a nd at least once per y ear thereafter,” these “Defendant HMOs” “retaine d coding companies and/or purchasedS W O B E N V

. U N I T E D H E A L T H C A R

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specializ ed softw a re to perform retrospective reviews of the

m e dical charts of tens of thousands of their patients wi t h severe illnesses.” F ourth Am. Compl. ¶ 12.

T he coders conducted their review of t h e

me d i c al charts of tens o f thousands o f d e f e n d a n ts’ patients, determined the diag nosi s codes that w er e supported by proper documentation of the r eviewed medical charts, an d p rovided their results to the def e ndant H MOs. The coders’ reviews resulted in (a) d iag nosis codes tha t were supported by proper documentation

. . . t h at had been previously subm i t t ed to the Government, a

n d (b) new diag nosis codes that

were supported by proper docum e n t a tion

. . . that had not been previously submitted to the Government. However, a larg e number of the reviewed medical charts did not c ontai n p r o p e r d o c u m e n t a t i o n s u p p o r t i n g t h e previously

submitted diag nosis codes.

F ourth Am. Compl. ¶ 13. These alleg ations may be sufficient
to “ g ive defendants notice o f the particular misconduct which is alleg e d to constitute t h e f raud charg ed so that they can defend a g ainst the charg e , ” but they are insufficient to show the a ll e g ations ag ainst these d efendants have a “factual basis.” Bly-Magee

, 236 F .3d at 1018–19. The a l l e ga t i ons describe some details of a g eneraliz e d s c heme, b u t they provide no details linking t h ese defendants to the scheme. Such alleg ations are insufficient under Rule 9(b).

There is a sig nificant g ap between Sw o b e n ’s relatively detailed alleg ations involving United Healthcare a ndS W O B E N V

. U N I T E D H E A L T H C A R

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HealthCare Partners o n t h e o ne hand a n d his comparatively conclusory a l l e g a

t i o n s r e g a r d ing Aetna, W ellPoint and Health Net on the o ther. Swoben allege s , f o r ex ample, that United Healthcare “paid its c ontracted medical g roups and I PAs, including but not limited to H e a lthCare Partners, between $40 and $45 for every

medical chart reviewed by them in 2005.” F ourth Am. Compl. ¶ 1 2

. He alleg es Pam L eal, a United Healthcare employ ee, was involved in the d e v elopment o f the alleg edly faulty template used to r e p o r t diag nosis codes
to CMS. F ou r t h Am. Compl. ¶ 22. With respect to Aetna, W e llPoi n t a n d Health Net, by contrast, the complaint offers only g e neral alleg ations, lacking in similar details. Althoug h the complaint broadly alleg es th e s e defendants e ng ag ed in biased retrospective reviews desig ned to identify only underreporti n g e rr ors, the absence of any details reg arding these particular defendants prevents us from concluding the c laims

are sufficiently substantial to satisfy Rule 9(b )

. W e have consistently r ejected F alse Claims Act c l a i m s based on similarly broad and c onclusory alleg ations

. See Ebeid

, 61 6 F. 3d at 1000 (holding the complaint’s “ g eneral alleg ations – lacking any details or facts setting out the who, what, when, where, and how o f the [ alleg e d fr a u d ] ” – were insufficient to satisfy Rule 9(b) (internal quotation marks omitted)); Cafasso

, 637 F .3d at 1057 (holding the complaint failed to satisfy Rule 9 (b) where the alleg ations w ere lacking in detail); U

n i ted S tates ex rel. Lee v

. SmithKline Beecham, Inc.
, 245 F .3d 104 8
, 1 0 5 1 (9th Cir. 2001) (holding a “ broad cl a i m” with “no factual support” was insufficient to satisfy Rule 9(b)). W ithout these de tails, the complaint does not “supply reasonable indicia t h at false claims were actually submitted.” Ebeid , 616 F

. 3d at 999.

I n sum, w e hold the proposed fourth amended complaint satisfies Rule 9(b) with respect to United Healthcare a ndS W O B E N V

. U N I T E D H E A L T H C A R

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HealthCare Partners, but not w ith respect to Aetna, WellPoint and Health Net.

2. Swoben, however, may be able to cure the se deficiencies by further a m e n dment. Dismissals under Rule 9(b) are functionally equ i v alent to d ismissals under Rule 12(b)(6). See Swartz v. KPMG LLP
, 476 F .3d 756, 765 (9th Cir. 2007). L eave to a mend

, therefore, should be g ranted unless th e p leading “could not possibly be cured” b y the alleg ation of other facts. Bly- M a g e e , 2 3 6 F .3d at 1019. On the record before us, w e cannot say Swoben would be unable
to plead with particularity the d etails missing from the fourth amend ed complaint with respect to Aetna, W ellPoint a nd Health Net. See, e.g. , Corinthian Colls.

, 655 F .3d a t 995–96; SmithKline

, 245 F

. 3d at 1 054; B ly-Magee

, 236 F .3d at 1019.

W e recog niz e Swoben h as previously amended his pleading s three times. As a g eneral rule, leave to amend may be d e nied when a plaintiff has demonstrate d a “repeated failure to cu re deficiencies by amendments previously allowed.” Eminence Capital, LLC v. Aspeon, Inc.
, 316 F .3d 1048, 1052 ( 9th Cir. 2003) (quoting Foman v

. Davis
, 371 U.S. 178, 182 (1962)). Th i s is not a case, however, in which Swoben “took ‘three bites at the apple’ by alleg ing a nd

r e

- a l leg ing the same theories in an attempt to cure preex isting d eficiencies.” Id. at 1053. The defendants’ motions
to d ismiss were the first pleading s to attack the sufficiency o f Swoben’s alleg a t i ons, the current d ecisions by the district court and this court are the first to address the sufficiency of those alleg ations, and Swoben is seeking his f irst opportunity
to cure those deficiencies. Swoben also alleg es a novel leg al claim, and this opinion substantially c larifies what alleg ations would b e sufficient to assert such a c laim. Swoben should beS W O B E N V

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afforded an addition a l opportunity to present an adequate pleading

.

3. The defendants’ r emaining arg u ments reg arding Rule 9(b) are not persuasive.

The d efendants arg ue Swoben’s pleading s are insufficient because they “do not describe any specific instances o f falsity

, let a lone any such instances with p articularity b y identify ing the time, p lace, and manner of the alleg ed falsity

, the person maki n g t h e false representation, or what they obta i n e d t hereby .” J oint A nswering B r. 35; see also id. at 4 0

– 4 1

. A s noted, h owever, the plaintiff need not “identify representative ex amples o f fa lse c laims to support every alleg ation.” Ebeid

, 6 1 6 F .3d at 998. “[ I ] t is sufficient to alleg e ‘particular details of a scheme to submit false c laims paired with reliable indicia that lead to a strong inference that claims were actually submitted.’” Id

. a t 998–99 (quoting Grubbs

, 565 F .3d at 190). Swoben, therefore, n e ed not identify specific false § 422.504( l ) certifications. 1 1

Th e d efendants a lso arg ue Swoben’s pleading s “fail[ ] to identify a sing le instance whe re previously submitted codes

11 T h e d ef

en d an ts’ arg u m en t in th eir p etitio n f o r reh earin g en b an c th at

a plain t if f can satisf

y Ru le 9 (b ) o n ly b y alleg i n g rep resen tativ e ex am ples

o f f alse claim s is u n d ercu t by t h e Su p rem e C o u rt’ s recen t d ecisio n in Un ited H ea lth S ervices
, 1 3 6 S. Ct. at 1 9 9 6
, reb u f f in g a sim ilar attem

pt to cab in F alse Claim s A ct liab ili ty th ro u g h artif icial lim its. T h e Co u rt rej ected th e co n ten tio n th at liab ility attach es o n l y t o ex press f alse certif icatio n s rath er th an

im p l ied f alse certif icatio n s, reaso n in g th at w h at

m atters is th e su

b stan ce o f th e claim

. S i m i larly

, w h at m atters h ere is

w h eth er th e co m

plain t ad eq u ately p lead s t h e circu m stan ces o f frau d to satisf y th e d u al p u rp o ses o f Ru le 9 (b ), n o t w h eth er th e co m

p lain t em p lo y s a p articu lar m ean s o f

d o in g so

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were inconsistent w i t h those identified during the retrospec t i v e reviews, or to ex plain why any such inconsistencies would necessarily lead to false claims.” J oint Answering B r. 35. Under Swoben’s theory

, however, the false claims are the alleg e dly false § 422.504( l ) certifications,
not the erroneously r eported diag nosis codes. See Hendow

, 461 F .3d at 1171 (ex plaining that it “is the false certification of compli a n ce which creates liability when certification is a prerequisite to obtaining a g overnment benefit”). Swoben need not i dentify specific diag nosis codes that should have been withdrawn.

T h e d efendants nex t fault the proposed fourth amended complaint for using (often, thoug h not e x clusively ) collective alleg ations to refer to the defendants rather than differentiating among them. J oint Answering B r. 3 8. The defendants are correct that “Rul e 9 (b) does not allow a complaint to merely lump multiple def e n d a nts tog ether but requires plaintiffs to differentiate their alleg ations when suing

more than o ne defenda n t a nd inform each defendant separately of the a l leg ations surrounding his alleg ed participation in the f

r aud.” Co r i n t h ian Colls.

, 655 F .3d at 997–98 (quoting Swartz
, 476 F .3d at 764–65 ). A p laintiff

m u s t “ identify the role of each defendant in the allege d fraudulent scheme.” I

d. ( q u o t ing Swartz
, 476 F .3d at 765). There is n o flaw in a pleading

, however, w her e collective alleg ations are used to describe the actions of multiple defendants who are alleg ed to have eng a g ed in precisely the

same conduct. The f

law in Sw oben’s alleg a tions is not the

use of collectiv e alleg ations, but the failure to a lleg e particular details of the scheme as applied to def e n d a n ts Aetna, W ellPoint and Health Net.S W O B E N V

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F inally

, the defendants arg ue w i th respect to the RADV audits that “Swoben fails to provide any of the particul a r details required by

Rule 9(b), .

. . which would be necessary for these alleg ations to h ave any relevance to the Defendants’ knowledg e or intent.” J o i nt Answering B r. 42. As n oted, however, knowledg e need not b e pled with particularity

. See F ed. R. Civ. P. 9(b); O dom v. Microsoft Corp.
, 486 F .3d 541, 554 (9th Cir. 2007). T he d efendants’ arg ument therefore f alls short.

I n sum, we hold Swoben’s pleading s either satisfy Rules 8, 9(b) and 12(b)(6) or mig ht be able to do so throug h f urther amendment. B ecause the complaint a lso alleg e s a cog niz able leg al theory

, amendment would not b e futile. T h e d istrict
court abused its discretion b y d eny ing leave to amend on this
g round.

II. The District Court Abused its Discretion By Denying Leave to Am end Based on Undue Delay

The dis t rict court alternatively denied leave to amend “b as e d o n undue delay ” because “Swoben was a ware of the purport e dly ‘new’ alleg a tions he proposes to a dd to the F ourth Amended Complaint since at least 2005.”

W e conclude the distri c t court abused its discretion b y rely ing on undue delay

. Undue delay by itself is insufficient
to j u s tify deny ing leave to a mend, see Owens v. Kaiser Found. Health P l a n , Inc.
, 244 F .3d 7 08, 712–13 (9th Cir. 2001), a nd the record here d o es n ot support any additional
g round – such a s prejudice or bad faith, see Jo h n s o n v

. Mammoth R ecreations, Inc.
, 975 F.2d 604, 607 (9th Cir. 1992) – that would justif y t h e d e n ial of leave to amend in combination with undue delay

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The defendants’ arg um e n t t hey would be prejudiced b y affording Swoben leave to amend is unpersuasive. They fault Swoben f or failing to announce his intention to seek leave to amend during the meet-and-confer conferences p r eceding the filing of their motions to d ismiss. See C.D. Cal. R. 7-3. They
arg ue that, if Swoben had a nnounced his intention to seek amendment at that time, they could have avoided the e x pense of preparing their motions to dismiss. I n the absence of b ad faith, however, litig ation e x penses i n cu rr ed before a motion
to amend is filed do n ot esta b l i s h prejudice. See Owens
, 244 F .3d at 712. More b roadly

, the defendants have not shown prejudice here. The litig ation ag a inst these defendants is at a very e arly stag e , Swoben does not seek to assert a new leg al theory and this is Swoben’s first attempt to cure deficiencies in his complaint. The circumstances of this case stand in stark contrast to those in the ca s e s o n which the defendants rely

. See AmerisourceBergen C o r p. v. Dialysist W

. , Inc.
, 465 F .3d 946, 953–54 ( 9th Cir. 2006) (the plaintiff
soug h t leave to amend a reply to a counter claim to assert a

new leg al theory

, whic h “would have u nfairly imposed potentially hig h

, additional litig ation costs

. . . that could have easily been avoided”); Ascon P rop s

. , Inc. v. Mobil Oil Co.
, 866 F .2d 1149, 1160–61 (9th Cir. 1989) (th e d efendant h ad filed several motio n s to dismiss over several y ears of active litig atio n , the p laintiff had been g iven several opportunities
to cure the d e f

i c i encies in the c omplaint, the plaintiff h ad prosecuted the action in a dilatory fashion and the plainti f f
soug h t to amend the complaint to assert a new leg a l theory ).

C O N C L U S I O N

The district court abused its d i s c r etion by dismissing Sw oben’s third a mended complaint without leave to amend based on futility o f a m e ndment and undue delay

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judg ment is vacated and the case is reman d e d f o r f urther proceeding s.

VACATED A N D R EMANDED. Costs on appeal a re awarded to Swoben.