Court Opinion

ID: 4249112
Source: CourtListenerOpinion
Date Created: 2018-02-28 20:10:40.298876+00
Date Added: 2024-06-11T14:43:53.885395
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE UNITEDHEALTH GROUP,          )    Consolidated
INC. SECTION 220 LITIGATION        )    C.A. No. 2017-0681-TMR

                      MEMORANDUM OPINION

                    Date Submitted: February 16, 2018
                     Date Decided: February 28, 2018

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

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

MONTGOMERY-REEVES, Vice Chancellor.
      This case involves a demand to inspect the books and records of a health care

company that allegedly overbilled Medicare.            The plaintiffs seek to inspect

numerous books and records of the company in order to investigate: (1)

mismanagement or misconduct; (2) possible breaches of fiduciary duties; and (3) the

independence and disinterest of the board. The demand draws from a complaint in

a qui tam action that contains evidence obtained by the federal government after a

five-year investigation, including depositions from twenty of the defendant’s

employees and the defendant’s production of over 600,000 documents.                  The

defendant argues that the plaintiffs are not entitled to inspection because they do not

have a credible basis to infer wrongdoing or mismanagement based solely on the

allegations in the qui tam action. The defendant also avers that the challenged

activities are not illegal. Finally, the defendant argues that even if there is a credible

basis to infer wrongdoing or mismanagement occurred, the scope of the inspection

demand is too broad.

      For the reasons stated in this memorandum opinion, I hold that the plaintiffs’

demand states a proper purpose and a credible basis from which a court can infer

that wrongdoing or mismanagement may have occurred, entitling them to inspect

certain books and records. The plaintiffs have shown that some, but not all, of the

books and records they request are necessary to investigate their proper purpose.

                                            1
I.    BACKGROUND
      The facts in this opinion reflect my findings based on the parties’ briefing,

104 documentary exhibits, and trial held on January 9, 2018. I grant the evidence

the weight and credibility that I find it deserves.1

      A.     The Parties and Relevant Non-Parties
      Plaintiffs Amalgamated Bank,2 Coral Springs Police Officers’ Retirement

Plan (“Coral Springs”), and Central Laborers Pension Fund (“Central Laborers”)

(collectively, “Plaintiffs”) have been stockholders of UnitedHealth Group Inc.

(“UnitedHealth” or the “Company”) since approximately May 27, 2005, January 1,

2006, and May 9, 2006, respectively.3

      Defendant UnitedHealth is a Delaware corporation headquartered in

Minnetonka, Minnesota.4          UnitedHealth is the largest Medicare Advantage

1
      Citations to the trial transcript are in the form “Tr. #.” Plaintiff Exhibits are cited as
      “PX #,” and Defendant Exhibits are cited as “DX #.” Facts drawn from the Pre-
      Trial Stipulation are cited as “PTS ¶ #,” and facts drawn from the Proposed Order
      are cited as “PTO ¶ #.”
2
      As Trustee for the LongView LargeCap 500 Index Fund, the LongView LargeCap
      500 Index Veba Fund, the LongView Quantitative LargeCap Fund, the LongView
      Quant LargeCap Equity-Veba Fund, LongView LargeCap 1000 Growth Index
      Fund, and the LongView Broad Market 3000 Index Fund.
3
      PTS ¶¶ 1, 3; PX 17 at 5; PX 18 at 7.
4
      PX 18 at 7.

                                              2
Organization, or Medicare beneficiary, in the United States, providing health and

well-being services to individuals age fifty and older in all fifty states.5

      Non-party Stephen Hemsley is the CEO and a member of UnitedHealth’s

board of directors.6

      Non-party WellMed Medical Management, Inc. (“WellMed”) is a large

physician-owned practice management company operating in Texas and Florida. In

2011, UnitedHealth acquired WellMed.7

      Non-party Ingenix, Inc. (“Ingenix”) is a direct subsidiary of UnitedHealth and

provides data services for the Company, including submitting claims to Medicare.8

      B.      The Medicare Advantage Program
      The Center for Medicare & Medicaid Services (“Medicare”) is the

administrator of the federal Medicare program, which provides Medicare benefits to

elderly and disabled individuals.9 The Medicare Advantage Program includes a

provision that allows Medicare beneficiaries to enroll in managed healthcare

5
      Id. at 2–3, 7.
6
      Id. at 5.
7
      PX 8 at 13–14.
8
      PX 6 at 11; PX 8 at 11.
9
      PX 8 at 2; PX 18 at 2.

                                            3
insurance plans that are owned and operated by private organizations.10 These

private organizations are called Medicare Advantage Organizations.11 Medicare

pays UnitedHealth and other Medicare Advantage Organizations fixed monthly

amounts for each enrollee based on various “risk adjustment data.”12 These data are

comprised of medical diagnosis codes that each enrollee receives, and the data

fluctuate based on the severity of the diagnosis.13 Medicare pays an additional fee

for enrollees who receive specific and more serious diagnoses.14 The adjustments

are intended to ensure that Medicare Advantage Organizations such as UnitedHealth

are paid more for those enrollees expected to incur higher healthcare costs and less

for healthier enrollees expected to incur lower costs.15

      All Medicare Advantage Organizations, including UnitedHealth, submit

diagnosis codes with the risk adjustment data of the beneficiaries to Medicare for

payment.16 These diagnosis codes are created from the beneficiaries’ medical

10
      PX 8 at 2.
11
      Id.
12
      PX 18 at 3.
13
      Id.; Pls.’ Opening Br. 4.
14
      PX 8 at 3; Pls.’ Opening Br. 4.
15
      PX 8 at 3.
16
      Id.

                                          4
encounters, such as hospital stays and office visits.17 In general, the more numerous

and severe the conditions, the higher the risk score for the beneficiary, and the larger

the payout to the Medicare Advantage Organization.18 The Medicare Advantage

Program requires each Medicare Advantage Organization to submit diagnosis codes

that are “unambiguously” supported by information included in the beneficiaries’

medical records.19 Medicare requires Medicare Advantage Organizations to delete

previously submitted codes that are either unsupported by the medical records or

invalid diagnoses.20

      C.     The Qui Tam Action
      In July 2017, Benjamin Poehling, former Director of Finance at

UnitedHealthcare Medicare & Retirement UnitedHealth, a UnitedHealth subsidiary,

filed a qui tam action (the “Poehling Complaint”) against UnitedHealth.21 He

alleged that since at least 2006, the Company has violated the False Claims Act22 by

17
      Id.
18
      Id.
19
      Id.
20
      Id. at 20; PX 18 at 3, 29.
21
      PX 6 at 1, 8; PX 8 at 8.
22
      Under the False Claims Act, a certification is false when the Medicare Advantage
      Organization has actual knowledge of the falsity of the risk adjustment data or

                                           5
improperly “upcoding” risk adjustment data and failing to delete incorrect diagnosis

codes, which resulted in overpayments from Medicare.23                 Shortly after, the

Department of Justice (the “DOJ”) intervened in that action, United States ex rel.

Poehling v. UnitedHealth Group, Inc. (the “Qui Tam Action”),24 alleging that since

at least 2005, despite repeat warnings, UnitedHealth has violated both Medicare

regulations25 and the False Claims Act.26 The DOJ based its allegations on a five-

year investigation that included depositions of twenty UnitedHealth employees and

UnitedHealth’s production of over 600,000 documents, including the Company’s

      demonstrates either reckless disregard or deliberate ignorance of the truth or falsity
      of the data. PX 18 at 4; see 31 U.S.C. § 3729.
23
      PX 6 at 4–6.
24
      No. CV 16-08697-MWF (SSx). The defendants in that action filed a motion to
      dismiss. Poehling, No. CV 16-08697-MWF (SSx) (Feb. 12, 2018). The United
      States District Court for the Central District of California (the “Federal District
      Court”) denied defendants’ motion as to the First Claim for Relief (violation of the
      reverse false claims provision of the False Claims Act), Fifth Claim for Relief
      (unjust enrichment), and Sixth Claim for Relief (payment by mistake). Id. The
      United States Government also intervened in another qui tam action, United States
      ex rel. Swoben v. Secure Horizons, No. CV 09-5013 JFW (JEMx), which has since
      been dismissed. PX 10 at 1; PX 18 at 2, 4; DX 22 at 10–11.
25
      Medicare regulation 42 C.F.R. § 422.504 requires each Medicare Advantage
      Organization, as a condition of receiving payment, to “certify (based on best
      knowledge and belief) that the [risk adjustment] data it submits are . . . accurate,
      complete and truthful.” PX 18 at 3 (quoting 42 C.F.R. § 422.504(l)(2)).
26
      PX 8 at 2–7; PX 18 at 2, 4.

                                            6
internal emails, letters, audit reports, charts, attestations, policies, presentation

materials, and memoranda.27 Based on this evidence collected, Plaintiffs allege that

Defendant overbilled Medicare by “hundreds of millions – and likely billions of

dollars.”28

        Plaintiffs assert that Defendant engaged in upcoding risk adjustment data by

deliberately leaving diagnosis codes regardless of whether an enrollee actually had

or was treated for that diagnosis in order to receive additional payment from

Medicare.29 Plaintiffs claim UnitedHealth conducted upcoding primarily through its

chart review program (the “Chart Review Program”), patient assessment forms (the

“Patient Assessment Forms”), and doctor incentives.30 For support, Plaintiffs point

to the DOJ’s allegations (the “DOJ Complaint”) in the Qui Tam Action as well as

the voluminous documents and testimony cited and attached to the DOJ Complaint.31

A few examples include:

      Testimony from UnitedHealth’s Vice President of Finance that in 2006,
       UnitedHealth implemented the Chart Review Program designed to

27
        PX 1 at 3; PX 8 at 27, 32, 34, 35, 49, 70; Pls.’ Reply Br. 1.
28
        PX 18 at 4–5.
29
        Pls.’ Opening Br. 8.
30
        Id.
31
        Id. at 31–32.

                                              7
        determine if the physicians’ medical records supported the diagnoses
        that they reported to UnitedHealth, which revealed inaccurate data.32

      Testimony, audit reports, presentations, training guides, and email
       communications that revealed provider-reported diagnoses were
       invalid; in some cases, approximately thirty percent of the codes were
       invalid.33

      Memoranda that showed the Chart Review Program was originally
       designed to “look both ways,”34 but because UnitedHealth would
       recover upwards of $450 in revenue per every $30 spent on a specific
       chart review, the diagnoses coders tasked with finding and deleting
       false codes were told to “look one way” in order to increase these
       payments.35

      Evidence that UnitedHealth created the Patient Assessment Forms, a
       program created to identify chronic conditions coded less frequently
       than their prevalence rates would indicate.36 The program was designed
       to encourage doctors to enter codes for patients that were at all eligible
       for the diagnosis code.37 UnitedHealth only distributed the Patient
       Assessment Forms to providers who were eligible for Medicare
       payments.

      Evidence that UnitedHealth entered into “gainsharing” agreements,
       which gave doctors incentive payments based on the revenues that

32
        PX 8 at 26, 31.
33
        Id. at 31–33.
34
        Id. at 34.
35
        PX 6 at 34; PX 8 at 40–49; PX 12 at 13.
36
        PX 6 at 34–35.
37
        Id. at 35.

                                            8
        UnitedHealth received from Medicare for treating those doctors’
        patients.38

      Testimony that internal audit programs revealed “faulty coding.” When
       UnitedHealth employees found codes unsupported by actual diagnoses,
       they were told that UnitedHealth “did not have the resources [to remove
       or delete them]” before the final submission deadline.39

      A presentation that showed thirty-two percent of diagnosis codes under
       review were not supported by the beneficiaries’ medical records.40

      Testimony that in 2010, UnitedHealth implemented risk adjustment
       coding and compliance reviews (the “RACCR Program”), a program
       designed to meet Medicare requirements of submitting accurate risk
       adjustment data.41 This program revealed that more than forty percent
       of diagnosis codes were invalid.42

      Evidence that UnitedHealth excluded certain providers from the
       RACCR Program in order to reduce the number of deleted codes.43

      Evidence that the RACCR Program found diagnoses codes not
       supported by the medical records, but UnitedHealth did not always
       delete them.44

38
        PX 8 at 64–65.
39
        Id. at 31–32.
40
        Id. at 32.
41
        Id. at 37.
42
        Id. at 38.
43
        Id. at 65–66.
44
        Id. at 67–68.

                                          9
        Plaintiffs’ also allege that UnitedHealth, through its subsidiaries, WellMed

and Ingenix, caused other Medicare Advantage Organizations to submit false risk

adjustment claims.45 In particular, WellMed and Ingenix allegedly pursued contracts

with other Medicare Advantage Organizations that were designed to assist other

Medicare Advantage Organizations in submitting false risk adjustment claims.46

Examples of evidence supporting these allegations include:

      Testimony that UnitedHealth created WellMed’s subsidiary, DataRap,
       a processing system that identified, processed, and submitted diagnosis
       codes for Medicare payment, in order to maximize its risk adjustment
       submissions without regard to their accuracy or eligibility. 47

      Testimony that WellMed’s practice was not to delete incorrect
       diagnosis codes from prior years.48

      Testimony that WellMed claimed Medicare payments for diagnoses
       codes it identified as fraudulent.49

      Evidence that WellMed set up at least two health plans to use DataRap
       for the purpose of submitting fraudulent diagnoses codes.50

45
        Pls.’ Opening Br. 13.
46
        PX 8 at 32; Pls.’ Opening Br. 13.
47
        PX 6 at 62.
48
        Id. at 63.
49
        Id.
50
        Id. at 64.

                                            10
      Evidence that a Medicare Advantage Organization in Dallas, Texas
       paid WellMed a fee based almost entirely on the increase in
       UnitedHealth’s risk score year after year.51

      Evidence that, as a selling point to other Medicare Advantage
       Organizations for its risk adjustment services, Ingenix would
       emphasize that more than thirty percent of provider-reported diagnoses
       were unsupported by the beneficiaries’ medical records.52

      Emails from compliance personnel at Ingenix that acknowledged
       UnitedHealth risked having to return Medicare payments if it alerted
       Medicare of payments it received based on diagnoses that were not
       validated by beneficiaries’ medical records.53

        Further, Plaintiffs claim there is a credible basis to infer that at least ten senior

executives and directors had actual knowledge of UnitedHealth’s “widespread and

systematic corporate misconduct.”54 Some evidentiary examples to support this

claim include:

      Reports given in mid-2010 to executives that showed risk adjustment
       data was over forty percent inaccurate in California and Texas because
       the “diagnoses were not supported by the beneficiaries’ medical records
       or were uncertain or unconfirmed diagnoses.”55

51
        Id. at 26.
52
        PX 8 at 32.
53
        Id. at 33.
54
        PX 1 at 2; PX 17 at 4, 9–10; PX 18 at 4, 8, 20; Pls.’ Opening Br. 2, 20.
55
        PX 8 at 36; PX 18 at 12.

                                             11
      A report given in June 2010 to Hemsley, the CEO and a board member,
       and other members of the executive team that identified compliance as
       an important issue of immediate concern.56 This report showed that
       UnitedHealth knew Medicare Advantage Organizations were liable
       under the False Claims Act for reporting and refunding overpayments
       in an untimely manner.

      A presentation given in November 2011 to Hemsley that noted, “the
       medical record is the ‘source of truth’ and that looking at this ‘source
       of truth’ had a negative revenue impact because comparing provider-
       reported diagnoses with the information in the providers’ medical
       records resulted in having to delete some of their diagnoses.”57

      A report given in October 2012 to executives, including the CFO of
       UnitedHealth, that showed over thirty-three percent of diagnoses
       reviewed were unsupported by the beneficiaries’ medical records, even
       though the coded inputs received two separate reviews for accuracy. 58

      Testimony that executives knew the Medicare advantage claims did not
       always match the medical record documentation.59

      A presentation to executives that indicated “‘[p]rovider coding is highly
       inaccurate and incomplete’ and that ‘more than 30% of coded
       conditions are not supported by [Medicare] validation findings.’”60

56
        PX 8 at 36.
57
        Id. at 46–47.
58
        Id. at 54–55.
59
        PX 10 at 20; PX 18 at 12.
60
        PX 8 at 30; PX 10 at 20–21; PX 18 at 12 (quoting DOJ Compl. ¶ 93).

                                          12
        Plaintiffs argue that senior executives and members of the board either

encouraged or deliberately failed to address the scheme to improperly increase

Medicare payments.61 Examples of evidence underlying this argument include:

      An email from the CFO of UnitedHealth’s Medical Advantage that
       acknowledged “vasculatory disease opportunities, screening
       opportunities, etc with huge $ opportunities.”62 In that email, he
       encouraged employees to “turn on the gas!” in order to increase revenue
       opportunities.63

      Evidence that executives knew that UnitedHealth would not delete or
       otherwise report to Medicare at least 100,000 invalid diagnoses in 2011
       and 2012 encounters.64

      Evidence that UnitedHealth liberalized its coding policies to enable
       coders to identify more diagnoses when it did not achieve its expected
       return on investment from 2012 chart reviews.65

      A presentation given to executives that revealed UnitedHealthcare
       Medicare & Retirement would miss its 2014 target budget by half a
       billion dollars.66 As a result, executives, including Hemsley, terminated
       audit programs that UnitedHealth had implemented in order to improve
       the accuracy of risk adjustment data. By terminating these programs,
       UnitedHealth could “cut the $500 million miss by $250 million by . . .

61
        Pls.’ Opening Br. 20–22.
62
        PX 8 at 30; PX 14 at 2.
63
        PX 14 at 2.
64
        PX 8 at 56, 62.
65
        Id. at 43.
66
        Id. at 57.

                                          13
        not deleting the provider-reported diagnoses invalidated by its chart
        reviews.”67

      A document that showed Hemsley and other executives knew that
       terminating these audit programs would enable UnitedHealth to achieve
       massive financial benefit in the second quarter 2014 earnings.68

        D.       Procedural History
        On July 17, 2017, Plaintiff Amalgamated Bank sent a books and records

inspection demand to UnitedHealth.69 On July 27, 2017, Plaintiff Central Laborers

sent a books and records inspection demand to UnitedHealth.70 On August 7, 2017,

Plaintiff Coral Springs sent a books and records inspection demand to

UnitedHealth.71      On August 3, 2017, UnitedHealth rejected Central Laborers’

demand.72        On August 8, 2017, UnitedHealth rejected Amalgamated Bank’s

demand.73 On August 14, 2017, UnitedHealth rejected Coral Spring’s demand.74

67
        Id. at 58.
68
        Id. at 62.
69
        PX 1 at 1.
70
        PX 3 at 1.
71
        PX 2 at 1.
72
        PX 34.
73
        PX 35.
74
        PX 36.

                                         14
On September 25, 2017, Amalgamated Bank filed a complaint pursuant to 8 Del. C.

§ 220 against UnitedHealth.75 The next day, Plaintiffs Coral Springs and Central

Laborers filed a complaint against UnitedHealth pursuant to 8 Del. C. § 220.76 On

October 11, 2017, this Court consolidated the Amalgamated Bank and the Coral

Springs and Central Labors actions. This Court held trial on January 9, 2018. On

January 31, 2018, Plaintiffs filed a letter to the Court attaching the federal district

court’s tentative ruling on UnitedHealth’s motion to dismiss the Qui Tam Action.

On February 2, 2018, Defendant also filed a letter urging the Court not to consider

the tentative ruling in its decision. On February 13, 2018, Plaintiffs filed another

letter attaching the federal court’s final ruling, which denied UnitedHealth’s motion

to dismiss on three counts and granted the motion on three counts, with leave to

amend. On February 16, 2018, Defendant filed a letter responding to Plaintiffs’

letter and exhibit, urging the Court not to consider the final ruling in its decision.

II.   ANALYSIS
      Under Section 220 of Delaware General Corporation Law, stockholders of a

Delaware Corporation have the right to inspect the books and records of a company

75
      PX 17 at 1.
76
      PX 18 at 1.

                                           15
for any proper purpose.77 A proper purpose includes “a purpose reasonably related

to such person’s interest as a stockholder.”78 “[A] stockholder has the burden of

proof to demonstrate a proper purpose by a preponderance of the evidence.”79

      “It is well established that a stockholder’s desire to investigate wrongdoing or

mismanagement constitutes a ‘proper purpose.’”80 The stockholder is not, however,

“required to prove by a preponderance of the evidence that waste and

[mis]management are actually occurring.”81        Instead, a plaintiff who seeks to

investigate wrongdoing or mismanagement must also show “‘some evidence’ to

suggest a ‘credible basis’ from which a court can infer that mismanagement, waste

or wrongdoing may have occurred.”82 The “‘credible basis’ standard sets the lowest

possible burden of proof.”83 The credible basis standard can be satisfied through

77
      8 Del. C. § 220.
78
      8 Del. C. § 220(b).
79
      Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 121 (Del. 2006).
80
      Id.
81
      Id. at 123 (quoting Thomas & Betts Corp. v. Leviton Mfg. Co. Inc., 681 A.2d 1026,
      1031 (Del. 1996)).
82
      Id. at 118.
83
      Id. at 123.

                                         16
“documents, logic, testimony or otherwise.”84        “The trial court may rely on

‘circumstantial evidence,’” and “[h]earsay statements may be considered, provided

they are sufficiently reliable.”85

      Plaintiffs seek to inspect books and records of the Company in order to

investigate: (1) mismanagement by the directors and/or officers of UnitedHealth; (2)

the possibility of breaches of fiduciary duty by directors and/or officers of

UnitedHealth and its subsidiaries, including without limitation, Ingenix and

WellMed; and (3) the independence and disinterest of the board of directors,

including whether a pre-suit demand is necessary or would be excused before

commencing any derivative action on behalf of the Company.86

84
      Id.
85
      Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 778 (Del. Ch. 2016) (citing Wal–
      Mart Stores, Inc. v. Ind. Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264, 1273
      (Del. 2014); Thomas & Betts, 681 A.2d at 1032–33; Marmon v. Arbinet–
      Thexchange, Inc., 2004 WL936512, at *4 (Del. Ch. Apr. 28, 2004); Skoglund v.
      Ormand Indus., Inc., 372 A.2d 204, 208–13 (Del. Ch. 1976)).
86
      PX 1 at 2; PX 2 at 1–2; PX 3 at 1–2. Plaintiff Amalgamated Bank also listed the
      following purposes for investigation: “[t]o communicate with other stockholders
      regarding their investments in UnitedHealth;” “[t]o determine whether to organize
      a ‘vote no’ campaign against directors who may have behaved recklessly,
      negligently, or disloyally;” and “[t]o determine whether to seek an audience with
      the Board to discuss corporate governance reforms regarding the Company’s
      diagnostic coding and risk adjustment programs.” PX 1 at 2; PX 17 at 19. Aside
      from mentioning them in their consolidated pre-trial brief, Plaintiffs make no
      distinguishing arguments regarding the treatment of these additional purposes for
      investigation. Pls.’ Opening Br. 26.

                                         17
      Defendant here does not identify any deficiencies in the form and manner of

the demand or challenge that a desire to investigate corporate wrongdoing is a proper

purpose.   Instead, Defendant argues that Plaintiffs cannot rely solely on the

allegations in the Qui Tam Action as evidence to suggest a credible basis from which

a court can infer that wrongdoing or mismanagement may have occurred.87

Defendant further argues that there is no credible basis for investigation because the

alleged conduct is not illegal.88 Defendant also avers the scope of the request is too

broad.89 I address each in turn.

      A.     Plaintiffs Have Shown a Credible Basis to Infer Wrongdoing
      Defendant argues that Plaintiffs fail to state a credible basis to infer

wrongdoing or mismanagement sufficient to warrant further investigation.               In

particular, Defendant asserts under Graulich v. Dell Inc.90 that Plaintiffs cannot rely

exclusively on a complaint that has not been found to state a viable claim as evidence

of a credible basis of wrongdoing.91 This challenge fails. While a complaint alone

87
      Def.’s Answering Br. 18–20.
88
      Id. at 18–19, 22.
89
      Id. at 29–30.
90
      2011 WL 1843813 (Del. Ch. May 16, 2011).
91
      Tr. 79–81, 85; PX 34 at 1–2; PX 35 at 2; PX 36 at 2. At trial, Defendant argued that
      I should await a decision from the Federal District Court on the defendants’ motion
      to dismiss the Qui Tam Action because if dispositive, granting books and records

                                           18
may not show a credible basis, the DOJ Complaint includes documents and

testimony provided by Defendant and Defendant’s employees.92 The allegations in

the Qui Tam Action are based on depositions from twenty of Defendant’s employees

and Defendant’s production of over 600,000 documents after the DOJ conducted a

five-year investigation. Defendant does not contest that the Company provided this

information to the DOJ.

      The DOJ Complaint includes references to, and quotations from, the

Company’s internal emails, letters, audit reports, charts, attestations, policies,

presentation materials, and memoranda. These documents suggest that Defendant’s

senior executives, including Hemsley, were involved in meetings and presentations

that revealed the codes submitted to Medicare for reimbursement were inaccurate.

      when another court dismissed the relied upon complaint would be a waste of
      resources. Tr. 81, 93–95, 134. After that court denied the motion—in part—
      Defendant now asserts that I should not consider the ruling as a basis for my decision
      in this action. Def.’s Letter 1–2 (Feb. 6, 2018). The Federal District Court’s ruling
      in the Qui Tam Action does not alter my holding.
92
      This Court has held that a plaintiff fails to state a credible basis for the Court to infer
      wrongdoing when the plaintiff relies solely on the fact that others have sued the
      company. Graulich, 2011 WL 1843813, at *5 n.49. This case, however, is
      distinguishable. Here, Plaintiffs provide detailed allegations of wrongdoing,
      including testimony from numerous employees and several documents
      demonstrating the board’s knowledge of inaccurate billing practices. PX 8 at 25–
      74; PX 17 at 4. Simply because the testimony and documents are available in a
      complaint does not forbid the Court from examining them to determine if there
      exists an inference of wrongdoing.

                                              19
The evidence also suggests that Defendant did not engage in steps to correct the

inaccuracies or alert Medicare of the previous payments it received based on faulty

coding.   Instead, the Company removed audit programs designed to catch

inaccuracies, such as the Chart Review Program, in order to avoid missing a $250

million payout from Medicare for 2014. The documents uncovered by the DOJ’s

lengthy investigation, coupled with the sworn testimony and statements of

Defendant’s own management, are enough to meet the “lowest possible burden of

proof” in Delaware law.93 Therefore, even if a complaint alone is insufficient,

Defendant cannot escape the testimony and documents that demonstrate a credible

basis for this Court to infer possible wrongdoing or mismanagement simply because

they are referenced in a complaint.

      Defendant further asserts that the DOJ Complaint cannot show a credible basis

for wrongdoing or mismanagement because the underlying conduct is not illegal or

fraudulent.94 These are merits-based defenses that require I analyze the strengths

and weaknesses of the underlying Qui Tam Action and potential derivative claims.

This Court has repeatedly stated that a Section 220 proceeding does not warrant a

93
      Seinfeld, 909 A.2d at 123.
94
      Tr. 134; PX 34 at 1–2; PX 35 at 2; PX 36 at 2; Def.’s Answering Br. 18–19, 22, 26.

                                          20
trial on the merits of underlying claims.95 Indeed, as this Court noted, “the Delaware

Supreme Court has made it clear that the public policy of this State is to encourage

stockholders to utilize Section 220 before filing a derivative action . . . in order to

meet the heightened pleading requirements . . . applicable to such actions.”96 I

decline Defendant’s invitation to make merit-based determinations on whether

Defendant’s behavior is actually wrongful or violates the law. Plaintiffs have

alleged facts sufficient to infer that Defendant may have violated Medicare

regulations and the False Claims Act by overcharging Medicare. Thus, Plaintiffs

have stated a credible basis sufficient to warrant inspection.

95
      E.g., Lavin v. W. Corp., 2017 WL 6728702, at *1 (Del. Ch. Dec. 29, 2017) (“Any
      contrary finding would invite defendants improperly to draw the court into
      adjudicating merits defenses to potential underlying claims in order to defeat
      otherwise properly supported Section 220 demands.”); Okla. Firefighters Pension
      & Ret. Sys. v. Citigroup Inc., 2014 WL 5351345, at *6 (Del. Ch. Sept. 30, 2014)
      (“Although Citigroup disclaims any effort to turn this proceeding into a trial on the
      merits of Plaintiffs possible derivative claims, Citigroup essentially seeks that result
      by implying that Plaintiff must have specific, tangible evidence that Citigroup’s
      Board or senior management was complicit in the fraud at Banamex. That argument
      ignores the inferences that this Court can—and must—draw under the credible basis
      standard, and would discourage the very behavior this Court has sought to
      encourage among would-be derivative or class plaintiffs.”); LAMPERS, 2007 WL
      2896540, at *12 (rejecting, in a Section 220 proceeding, that no springloading ever
      occurred because “by raising such a defense, Countrywide seeks to litigate the
      ultimate issue in a possible future derivative suit that might eventually be filed by
      LAMPERS. This is neither the time nor the procedural setting to address that
      issue.”).
96
      Freund v. Lucent Techs., 2003 WL 139766, at *4 (Del. Ch. 2003) (emphasis added).

                                            21
     B.      Plaintiffs are Entitled to Some, But Not All, of the Books and Records
             They Seek

          Finding Plaintiffs are entitled to books and records, I turn to the scope of

inspection. Plaintiffs seek the following documents from 2005 to the present: (1)

board and committee meeting documents; (2) meeting preparation materials; (3)

company policy and procedures; (4) internal investigation materials; (5) board

materials concerning director disinterestedness and independence; (6) copies of

documents referenced in the Qui Tam Action;97 and (7) communications of five

senior-level officers.98 Within each category, Plaintiffs demand documents related

to the following topics: (1) “Defendant’s filing of, or failure to fix previously

submitted, false claims to [Medicare] seeking risk adjustment payments;” (2)

“Defendant’s initiatives to increase revenues through risk adjustment submissions;”

(3) “Defendant’s initiatives to identify erroneous risk adjustments;” and (4)

97
          In addition to the corporate records referenced in the civil actions, in their opening
          brief, Plaintiffs also request the records that “UnitedHealth has provided to the
          government and any other stockholders who have made Section 220 requests.” Pls.’
          Opening Br. 39. Plaintiffs appear to have abandoned their request for all of the
          records that UnitedHealth has provided to the government in their reply brief. Pls.’
          Reply Br. 11–12. But, if I have misread Plaintiffs’ position, the request is denied.
          As to the request for documents related to other UnitedHealth stockholders who
          have made Section 220 requests, Defendant represented there are none. Def.’s
          Answering Br. 41.
98
          Tr. 34; PX 1 at 1; PX 2 at 22; PX 3 at 22; PX 18 at 15–18. At trial, Plaintiffs limited
          the temporal scope for communications to 2010 to the present. Tr. 55–56.

                                                22
“Defendant’s compliance, or lack thereof, with any regulations or laws relating to

detecting or preventing the filing of, or failing to fix previously submitted, false

claims to [Medicare] seeking risk adjustment payments.”99

      The stockholder may only inspect what is “necessary and essential to

accomplish the stated, proper purpose.”100 “Documents are ‘necessary and essential’

pursuant to a Section 220 demand if they address the ‘crux of the shareholder’s

purpose’ and if that information ‘is unavailable from another source.’”101 “[T]he

burden of proof is always on the party seeking inspection to establish that each

category of the books and records requested is essential and sufficient to the

stockholder’s stated purpose.”102 The Court of Chancery must “tailor the inspection

to the stockholder’s stated purpose.”103 “[W]here a [Section] 220 claim is based on

alleged corporate wrongdoing, and assuming the allegation is meritorious, the

99
      PTO ¶ 2.
100
      Saito v. McKesson HBOC, Inc., 806 A.2d 113, 116 (Del. 2002).
101
      Wal–Mart, 95 A.3d at 1271 (quoting Espinoza v. Hewlett–Packard Co., 32 A.3d
      365, 371–72 (Del. 2011)).
102
      Thomas & Betts, 681 A.2d at 1035.
103
      Yahoo! Inc., 132 A.3d at 787 (quoting Sec. First Corp. v. U.S. Die Casting & Dev.
      Co., 687 A.2d 563, 569 (Del. 1997)).

                                          23
stockholder should be given enough information to effectively address the

problem.”104

      First, at trial, Defendant did not dispute Plaintiffs’ entitlement to written

materials for board and committee meetings of the Company and its subsidiaries,

WellMed and Ingenix.105 Written materials may include minutes, notices, agendas,

exhibits, board books, reports, and presentations. Written materials do not include

draft minutes. Plaintiffs’ request to inspect the written materials produced for board

and committee meetings is granted.

      Second, Plaintiffs have shown meeting preparation materials are necessary for

the purpose of their inspection. This includes memoranda, outlines, scripts, notes,

and talking points used for board or committee meetings. Plaintiffs, however, seek

preparation materials over a twelve-year period.106 Given the vast time period,

Defendant makes a reasonable request that Plaintiffs identify meetings from which

Plaintiffs request preparation materials.107      While Plaintiffs are entitled to

preparation materials, they are limited by Defendant’s request.

104
      Saito, 806 A.2d at 115.
105
      Tr. 99.
106
      Pls.’ Opening Br. 50.
107
      Tr. 102.

                                         24
      Third, at trial, Defendant conceded policies and procedures are appropriate

books and records for Plaintiffs’ stated purpose.108 Thus, they are granted.

      Fourth, Defendant represented at trial that the board has not conducted any

internal investigation related to this matter.109 Thus, this request is denied.

      Fifth, for documents relating to director disinterestedness and independence,

Plaintiffs request books and records used in the director nomination process as well

as disclosure and questionnaire files. At trial, Defendant agreed that both requests

are appropriate in a Section 220 action.110 Therefore, Plaintiffs are entitled to such

documents.

      Sixth, while Defendant argued at trial that Plaintiffs’ request for documents

referenced in the Poehling Complaint and the DOJ Complaint was “wholly

unmanageable,” it recommended that Plaintiffs provide a list detailing which

documents Plaintiffs seek from the complaints.111 Plaintiffs agreed to produce this

108
      Tr. 105:20–24 (“Policies and procedures, yes, they exist. They exist with respect to
      officer attestations, chart review programs. If Your Honor would rule in their favor,
      that level of policy and procedure would be appropriate.”).
109
      Id. at 106.
110
      Id. at 107–08.
111
      Id. at 113–14.

                                           25
list.112 Therefore, I grant the request with the parameters the parties negotiated

during trial.

       Seventh, and finally, Plaintiffs request officer communications, including

emails, with respect to the alleged misconduct identified in the demands. Unlike the

production of other books and records, email communications are generally “the

exception rather than the rule.”113        “Unlike in plenary discovery, where the

responding party bears the burden of limiting its scope, the burden in a Section 220

proceeding is on the party seeking production. Moreover, the court must tailor the

production order to balance the interests of the stockholder and the corporation.”114

While Plaintiffs narrowed the scope of this request to (1) five senior-level officers,

(2) documents that have already been collected from the Qui Tam Action, and (3) an

eight-year period rather than a twelve-year period,115 they have not established that

the email communications are necessary for their proper purpose. Plaintiffs rely

primarily on Wal–Mart Stores, Inc. v. Indiana Electric Workers Pension Trust Fund

112
       Id. at 131–32.
113
       PX 22 at 109; Citigroup Inc., 2014 WL 5351345, Tr. at 109; see Yahoo! Inc., 132
       A.3d at 790 (“The starting point—and often the ending point—for a sufficient
       inspection will be board level documents evidencing the directors’ decisions and
       deliberations, as well as the materials that the directors received and considered.”).
114
       Yahoo! Inc., 132 A.3d at 789 (citation omitted).
115
       Tr. 44, 55–56.

                                             26
IBEW and Amalgamated Bank v. Yahoo! Inc. as support for their demand to inspect

emails.116 But this case is distinguishable from both Wal–Mart and Yahoo!. In both

Wal–Mart and Yahoo!, the plaintiffs were granted officer-level communications

because the plaintiffs carried their burden of showing why board-level documents

alone would not be sufficient for their stated purposes.117 Here, Plaintiffs have not

done so. Evidence does not suggest that the board was unaware of the upcoding

scheme. In fact, Plaintiffs are alleging that members of the Company’s board

deliberately took steps to further the fraudulent scheme.118

      Furthermore, given the amount of information Plaintiffs are receiving, they

have not shown why additional communications of five custodians across an eight-

year span is necessary for their investigation. In particular, Plaintiffs will receive all

of the written materials for board and committee meetings, meeting preparation

materials that they identify, policies and procedures, and disclosure and

questionnaire files related to director disinterestedness and independence.

Additionally, Plaintiffs will receive all of the documents referenced in the Poehling

Complaint and the DOJ Complaint, which include email communications. They

116
      Pls.’ Opening Br. 43 n.133–34, 44 n.138.
117
      Wal–Mart, 95 A.3d at 1272–73; Yahoo! Inc., 132 A.3d at 792.
118
      Pls.’ Opening Br. 1–2.

                                           27
have not met their burden of showing that additional email communications from

these particular officers are necessary to their investigation.

       At trial, Defendant conceded that the twelve-year date range “would be

appropriate in light of the length -- the long period of time covered by the allegations

in the complaint.”119 Therefore, of the books and records granted above, Plaintiffs

are entitled to documents from 2005 to the present.

       Defendant requests that any production be subject to a reasonable

confidentiality order and incorporated by reference into any future derivative

complaint.120 Plaintiffs did not contest this in their briefing or at trial. This request

is granted.

III.   CONCLUSION
       For the aforementioned reasons, I grant Plaintiffs demand to inspect the books

and records detailed above subject to the incorporation-by-reference doctrine and

confidentiality order. Parties shall submit a conforming order within ten days.

       IT IS SO ORDERED.

119
       Tr. 109.
120
       Def.’s Answering Br. 44.

                                           28