I. BACKGROUND

We take the following facts from the complaint as true for the purpose of

reviewing a motion to dismiss. Curtis v. Irwin Indus., Inc., 913 F.3d 1146, 1151

(9th Cir. 2019).

Providence is “one of the nation’s largest health systems, operating 34

hospitals and 600 clinics across five states.” A significant portion of Providence’s

revenue comes from Medicare reimbursements.

Medicare reimburses hospitals on a per-discharge basis, meaning a payment

for each time a patient stays at the hospital. The payment amount depends largely

on the patient’s “diagnosis related group” (DRG). Three types of codes contribute

to the DRG: (1) A principal-diagnosis code, (2) surgical-procedure codes, and (3)

secondary-diagnosis codes. There can be multiple secondary-diagnosis codes,

which together represent “all conditions that coexist at the time of admission, that

develop subsequently, or that affect the treatment received [or] the length of stay.”

Secondary-diagnosis codes can modify the base DRG’s severity level to one of three

levels: (1) Without complication or major complication, (2) complication or

1 Because Integra did not adequately allege that Providence submitted false claims, we do not address whether the public-disclosure bar applies.

3 comorbidity (CC), and (3) major complication or comorbidity (MCC). The

inclusion of a CC or MCC code can significantly increase the amount of

reimbursement that the hospital receives from Medicare.

Providence, like many other hospitals, has a “clinical documentation

improvement” (CDI) program that translates clinical language used by medical-

treatment providers to Medicare codes. Providence retained JATA to assist its CDI

program. JATA offers consulting services to healthcare providers through products

and services intended to improve how they document patients’ treatments.

JATA worked with Providence to train doctors to describe medical conditions

that would support coding for higher-paying diagnoses. For example, JATA

provided doctors “Documentation Tips” suggesting specific language conducive to

coding CCs and MCCs; for example, specifying the type and degree of malnutrition.

It also trained Providence CDI specialists to send allegedly “leading queries” to

doctors that were designed to change their initial assessments in a way that would

justify coding a CC or MCC.2 Integra alleged that this pressure “would sometimes

result in the creation of contradictory medical records,” such as an initial

documentation of “delirium” with the later addition of “encephalopathy These

2 The complaint does not provide examples of leading queries used at Providence but claims it is “consistent with JATA’s practice at other hospital systems.”

4 queries were designed to stop short of telling doctors exactly how to document their

care because that would constitute a “noncompliant” leading inquiry.

Integra, a data-analytics company, commenced this suit after its analysis of

data received from the Centers for Medicare and Medicaid Services (CMS)

demonstrated that Providence submitted claims coded with a higher rate of MCCs

than other comparable institutions. Integra is not affiliated with Providence or JATA

and did not rely on insider information such as confidential patient medical records.

Instead, Integra’s supported its complaint primarily through a “proprietary statistical

analysis” of the CMS data.

Integra’s methodology involved comparing the rate at which Providence

coded higher-paying secondary diagnoses in connection with particular principal

diagnoses with the rates coded by other institutions. It labeled claims as false if they

were coded with an MCC at “more than twice the national rate or were used at a rate

three percentage points higher than in the other hospitals.” Thus if the national rate

of an MCC code accompanying a specific principal diagnosis was .1% but

Providence coded it .2% of the time, or if the national rate was 55% and Providence’s

rate was 59%, Integra would label the claims as false.

Integra’s second amended complaint focuses on claims submitted between

2011 and 2017 involving three categories of secondary MCC codes:

Encephalopathy, respiratory failure, and severe malnutrition. Integra refers to these

5 three MCCs as “misstated MCCs.” Providence used at least one of these three

misstated MCCs on approximately 17 percent of its Medicare claims as opposed to

a 10 percent usage rate at non-Providence institutions—1.7 times as often. Integra

asserts that its analysis controlled for inter-hospital variation caused by different

characteristics in patient populations, “such as age, gender, and race, as well as

county demographic factors such as the unemployment rate, median income, and

urban-rural differences.” Its analysis also found that “there was less than a one-

thousandth percent chance” that Providence’s greater rate of coding of these MCCs

was “due to chance.”3 (Second amended complaint, ¶ 51.)

The complaint’s supporting graphs also demonstrate that there was a steadily

increasing trend in coding rates for the three allegedly misstated MCCs from 2011

to 2017 at comparable healthcare institutions. By 2017, non-Providence entities

generally coded claims with encephalopathy, respiratory failure, and severe

malnutrition at similar rates to Providence’s in 2011 or 2012. Providence also

showed a significant increase in coding MCCs after it hired JATA to assist with

claim documentation.

3 We note, however, that the complaint states later that Integra “only considered claim groupings where there was less than a one-in-a-thousand chance that the difference in major complication rate at Providence versus other hospitals was due to random causes.” (Second amended complaint, ¶ 125.)

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II. ANALYSIS

We review de novo a motion to dismiss a claim under the FCA. United States

ex rel. Campie v. Gilead Scis., Inc., 862 F.3d 890, 898 (9th Cir. 2017). The “essential

elements” of an FCA claim are: “(1) [A] false statement or fraudulent course of

conduct, (2) made with the scienter, (3) that was material, causing (4) the

government to pay out money or forfeit moneys due.” Campie, 862 F.3d at 899

(quoting United States ex rel. Hendow v. Univ. of Phx., 461 F.3d 1166, 1174 (9th

Cir. 2006)). On appeal, Defendants contest only the first element, that Integra has

adequately pleaded false or fraudulent conduct.

As with all fraud allegations, FCA claims must comply with Federal Rules of

Civil Procedure 8(a) and 9(b). See United States ex rel. Cafasso v. Gen. Dynamics

C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir. 2011). Rule 8(a) requires the pleading

contain a plausible claim for relief, and Rule 9(b) imposes a heightened requirement

of particularity. Ibid. Integra’s complaint fails to meet the Rule 8 standard.

Rule 8 requires “a plausible claim for relief” to survive a motion to dismiss.

Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). At this stage, we “accept as true all of

the allegations contained in a complaint” but not the truth of “legal conclusions.” Id.

at 678. In evaluating plausibility, “courts must also consider an ‘obvious alternative

explanation’ for defendant’s behavior.” Eclectic Props. E., LLC v. Marcus &

Millichap Co., 751 F.3d 990, 996 (9th Cir. 2014) (quoting Iqbal, 556 U.S. at 682).

7 An allegation merely consistent with a defendant’s liability gets “the complaint close

to stating a claim, but without some further factual enhancement it stops short of the

line between possibility and plausibility . . . .” Bell Atl. Corp. v. Twombly, 550 U.S.

544, 557 (2007).

Integra argues that the existence of an alternative inference does not defeat a

plaintiff’s claim at the pleading stage. It relies on our statement in Starr v. Baca:

If there are two alternative explanations, one advanced by defendant and the other advanced by plaintiff, both of which are plausible, plaintiff’s complaint survives a motion to dismiss under Rule 12(b)(6). Plaintiff’s complaint may be dismissed only when defendant’s plausible alternative explanation is so convincing that plaintiff’s explanation is im plausible.

652 F.3d 1202, 1216 (9th Cir. 2011) (emphasis and word break in original). But the

Starr court expressly relied on factual allegations that did not support an “‘obvious

alternative explanation,’ within the meaning of Iqbal.” Ibid. (quoting Iqbal, 556

U.S. at 682); see also Eclectic Props. E., 751 F.3d at 996–97 (discussing the above

quote from Starr and requiring “[s]omething more . . . , such as facts tending to

exclude the possibility that the alternative explanation is true, in order to render

plaintiffs’ allegations plausible” (quoting In re Century Aluminum Co. Sec. Litig.,

729 F.3d 1104, 1108 (9th Cir. 2013)).

Here, we accept the following factual allegations: Providence submitted

Medicare claims with secondary MCCs—such as encephalopathy, respiratory

failure, and severe malnutrition—at a higher rate than most other comparable

8 institutions; this increased rate was not the result of chance or variations in patient

populations; and Providence’s CDI specialists and JATA staff incentivized doctors

to use language conducive to coding higher-paying secondary diagnoses through

their documentation tips and queries. But we need not—and cannot—accept the

conclusion that these allegations resulted from fraud or that doctors recorded

unsupported medical conditions.

Integra does not rule out an obvious alternative explanation, that Providence,

with JATA’s assistance, was simply ahead of others in its industry. This situation is

unlike the competing inferences in Starr, “both of which [were] plausible.” 652 F.3d

at 1216. Integra offers only a possible explanation—that doctors lied about

underlying medical conditions—to explain a statistical trend that is consistent with

a plausible alternative (and legal) explanation.4 It is reasonable that Providence, one

of the largest healthcare systems in the country, which specifically hired consultants

to improve its Medicare billing, would be at the forefront of a national trend toward

coding these relevant MCCs at a higher rate. We need not accept the conclusion that

the defendant engaged in unlawful conduct when its actions are in line with lawful

“rational and competitive business strategy.” Twombly, 550 U.S. at 554. Therefore,

4 CMS has acknowledged that there is nothing “inappropriate, unethical or otherwise wrong with hospitals taking full advantage of coding opportunities to maximize Medicare payment that is supported by documentation in the medical record.” Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates, 72 Fed. Reg. 47,130, 47,180 (Aug. 22, 2007).

9 Integra does not state a plausible claim for relief, and its complaint must be

dismissed.5

III. CONCLUSION

Accordingly, we REVERSE the district court’s denial of the motion to dismiss

and REMAND with instructions to DISMISS the complaint.

5 We note that this conclusion does not categorically preclude statistical data from being used to meet Rule 8(a)’s pleading requirement and, when paired with particular details of a false claim, Rule 9(b).

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