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In re Universal Health Services, Inc., Derivative Litigation

United States District Court, E.D. Pennsylvania

August 19, 2019

IN RE UNIVERSAL HEALTH SERVICES, INC., DERIVATIVE LITIGATION

          OPINION

          Slomsky, J.

         TABLE OF CONTENTS

         I. INTRODUCTION ................................................................................................................ 4

         II. BACKGROUND ................................................................................................................. 7

         A. Parties ..................................................................................................................................... 8

         1. Plaintiffs .......................................................................................................................... 8

         2. Defendants ...................................................................................................................... 9

         a. Nominal Defendant UHS ......................................................................................... 11

         b. Defendants Alan Miller and Marc Miller ................................................................. 12

         c. Defendant Robert Hotz ............................................................................................ 14

         d. Defendant Lawrence S. Gibbs ................................................................................ 15

         e. Defendant Eileen C. McDonnell ............................................................................. 15

         f. Defendant Anthony Pantaleoni ................................................................................ 15

         g. Defendant John H. Herrell ...................................................................................... 16

         h. Defendant Steve G. Filton ....................................................................................... 16

         i. Defendant Debra K. Osteen ..................................................................................... 17

         j. Defendant Charles F. Boyle ..................................................................................... 17

         k. Defendant James Caponi .......................................................................................... 17

         B. UHS Expands Behavioral Health Division and Approves Business Plans that Lay Out Aggressive Strategies to Increase Revenue .................................................... 17

         C. UHS Behavioral Health Facilities Face Inquiries, Lawsuits, and Government Investigations ....................................................................................................................... 21

         1. State and Federal Agencies Investigate UHS Behavioral Health Facilities ................. 21

         2. The Escobar Qui Tam Lawsuit ..................................................................................... 23

         3. Coordinated Civil and Criminal Federal Investigation ................................................ 25

         D. Buzzfeed News Publishes First UHS Article on December 7, 2016 ................................... 27

         E. Allegations that Individual Defendants Knew About Misconduct at UHS Behavioral Health Facilities ................................................................................................................... 33

         1. Labor Union Letters to the Board of Directors .......................................................... 33

         2. Board of Director Meetings and Board Committee Meetings ................................... 39

         F. Insider Trading Allegations .................................................................................................. 44

         G. Plaintiffs File the Present Action in Federal Court .............................................................. 46

         III. STANDARD OF REVIEW .............................................................................................. 54

         IV. ANALYSIS ....................................................................................................................... 56

         A. Applicable Test to Plaintiffs' Demand Futility Allegations ............................................... 57

         B. Plaintiffs Have Failed to Demonstrate Demand Futility ................................................... 61

         1. Plaintiffs Have Failed to Plead Particularized Facts that Create a Reasonable Doubt That the UHS Board of Directors Was Not Disinterested .............................. 61

         a. Plaintiffs Have Failed to Plead Particularized Allegations that the UHS Board Directed UHS Behavioral Health Facilities to Engage in Fraud………………...63

         b. Plaintiffs Have Failed to Plead Particularized Facts That the UHS Board Ignored Significant Red Flags…………………………………………….68

         i. Qui Tam Lawsuits and Government Investigations…………………………..69

         ii. Labor Union Letters…………………………………………………………..73

         iii. Hotline Compliance Calls…………………………………………………….74

         iv. Business Plans, Performance Metrics, and Statistics…………………………75

         v. Buzzfeed I…………………………………………………………………….77

         c. Plaintiffs Have Not Demonstrated That the UHS Board Faces a Substantial Threat of Personal Liability From the Underlying Claims in the Amended Complaint………………………………………………………78

         i. Count I - Securities Fraud Under Section 10(b) and Rule 10b-5…………….78

         ii. Count II - Securities Fraud Under Section 20(A)…………………………….84

         iii. Count VII - Breach of Fiduciary Duty Based on Insider Trading…………….85

         iv. Count III - State Law Breach of Fiduciary Duty Claim………………………88

         v. Count IV - State Law Constructive Fraud Claim……………………………..89

         vi. Count V - State Law Corporate Waste Claim…………………………………89

         vii. Count VI - State Law Unjust Enrichment Claim…………………………….91

         2. Plaintiffs Have Failed to Plead Particularized Facts that Create a Reasonable Doubt That a Majority of the UHS Board Lacked Independence ............ ………….92

         V. CONCLUSION ..................................................................................................................... 98

         I. INTRODUCTION

         Nominal Defendant[1] Universal Health Services (“UHS”) is the largest provider of behavioral health services in the United States. Beginning in 2017, UHS shareholders began filing shareholder derivative suits on behalf of the company, claiming that alleged misconduct at UHS behavioral health facilities was affecting the price of UHS shares. Four of those suits[2] were consolidated into the present shareholder derivative action, which alleges that from January 16, 2013 to present, the UHS Board of Directors “pushed forward” aggressive business plans for UHS-owned behavioral health facilities, which ultimately resulted in fraudulent billing practices and other issues. Plaintiffs, who are various UHS shareholders, allege that UHS Directors and Officers knew about or authorized the misconduct, but did nothing to remedy it, in violation of state and federal law.[3] Named as Defendants are Alan Miller, Marc Miller, Robert Hotz, Lawrence S. Gibbs, Eileen C. McDonnell, Anthony Pantaleoni, John H. Herrell, Steve G. Filton, Debra K. Osteen, Marvin G. Pember, [4] Charles F. Boyle, James Caponi (“Individual Defendants”), and Nominal Defendant UHS (collectively, “Defendants”). (See Doc. No. 48.)

         On March 28, 2018, former Chief Judge Lawrence F. Stengel consolidated the four shareholder derivative suits into the present action and appointed Plaintiff Amalgamated Bank Longview Funds (“Plaintiff Amalgamated”) as Lead Plaintiff. (Doc. Nos. 42, 43.) On August 13, 2018, this case was assigned from former Chief Judge Stengel to this Court. (Doc. No. 45.) On November 5, 2018, Plaintiffs filed the Verified Shareholder Derivative Amended Complaint (the “Amended Complaint”), which contains seven claims. (Doc. No. 48.)

         First, in Count I, Plaintiffs allege that Individual Defendants knowingly or recklessly made materially false or misleading statements and omissions about UHS's financial position in violation of Section 10(b) of the Securities and Exchange Act of 1934, and Rule 10b-5, which was promulgated pursuant to Section 10(b). (Id. ¶¶ 306-312.) In Count II, Plaintiffs allege that Individual Defendants, by virtue of stock ownership and their positions of control in the company, violated Section 20(A) of the Securities and Exchange Act. (Id. ¶¶ 313-14.) Next, in Count III, Plaintiffs claim that under Delaware law, Individual Defendants breached their fiduciary duty to the company. (Id. ¶¶ 315-318.) In Count IV, Plaintiffs allege that Individual Defendants committed constructive fraud under Delaware law by failing to ensure that the company disclosed true facts about its business. (Id. ¶¶ 319-322.) In Count V, Plaintiffs claim that the alleged improper conduct of Individual Defendants amounts to corporate waste under Delaware law. (Id. ¶¶ 323-325.) In Count VI, Plaintiffs bring a state law claim of unjust enrichment, alleging that Individual Defendants unjustly enriched themselves at the expense of the company. (Id. ¶¶ 326-330.) Finally, in Count VII, Plaintiffs allege that certain Individual Defendants, referred to as “Insider Trading Defendants, ” violated the fiduciary duty they owed to the company under state law by engaging in insider trading. (Id. ¶¶ 331-335.)

         On January 25, 2019, Plaintiff Amalgamated filed a Motion to Amend the Court's March 28, 2018 Order and Appoint Additional Co-Lead Plaintiffs and Co-Lead Counsel. (Doc. No. 62.) On February 22, 2019, the Court granted the Motion (Doc. No. 62) and appointed Plaintiff Amalgamated, together with Plaintiff City of Cambridge Retirement System (“Plaintiff Cambridge”) and Plaintiff Charter Township of Clinton Police & Fire Pension Fund (“Plaintiff Clinton”), as Co-Lead Plaintiffs. (Doc. No. 76.)

         On February 11, 2019, Defendants filed the present Motion to Dismiss the Amended Complaint. (Doc. No. 66.) On March 29, 2019, Plaintiffs filed a Response in Opposition to the Motion to Dismiss (Doc. No. 87), [5] and on April 29, 2019, Defendants filed a Reply in Support of the Motion to Dismiss (Doc. No. 99).[6] On May 31, 2019, the Court held a hearing on the Motion. (Doc. No. 102.) Following the hearing, both parties filed supplemental briefs in further support of their positions.[7] (Doc. Nos. 105, 108.)

         Defendants' Motion to Dismiss is now ripe for disposition. For the reasons discussed below, the Motion to Dismiss (Doc. No. 66) will be granted.

         II. BACKGROUND[8]

         At the heart of this matter is Plaintiffs' claim that starting on January 16, 2013, the UHS Board of Directors “pushed forward” aggressive business plans that incentivized or encouraged UHS behavioral health facilities across the country to engage in fraudulent billing practices and other misconduct in order to meet financial goals. Plaintiffs allege that Individual Defendants knew about this misconduct, but failed to take steps to remedy it, in violation of the law and in breach of their fiduciary duty to the company. Moreover, the Amended Complaint states that in connection with this alleged misconduct, Individual Defendants violated federal securities laws by knowingly or recklessly making materially false or misleading statements about UHS's financial position. Finally, the Amended Complaint contains allegations that a subgroup of Individual Defendants, referred to as Insider Trading Defendants, engaged in insider trading by selling UHS common stock while in possession of material, non-public information about the alleged misconduct at UHS behavioral health facilities. (See Doc. No. 48.)

         To address these allegations, the Court will first list the parties to this action and describe Individual Defendants' positions in the company. Second, the Court will address the alleged “aggressive” business plans and strategies in place at UHS behavioral health facilities. Third, the Court will discuss the purported misconduct that Plaintiffs claim resulted from those aggressive strategies, and the negative attention the misconduct attracted, including government investigations, whistleblower lawsuits, and articles published by Buzzfeed News. Fourth, the Court will set forth Plaintiffs' various allegations that Individual Defendants were on notice of the misconduct and received updates about the various investigations and lawsuits, but did nothing to remedy the reported illicit policies and practices. Finally, the Court will describe Plaintiffs' allegations that certain Individual Defendants engaged in securities fraud and insider trading.

         A. Parties

         At present, there are three Co-Lead Plaintiffs: Plaintiff Amalgamated, Plaintiff Cambridge, and Plaintiff Clinton. As noted, named as Defendants are Alan Miller, Marc Miller, Robert Hotz, Lawrence S. Gibbs, Eileen C. McDonnell, Anthony Pantaleoni, John H. Herrell, Steve G. Filton, Debra K. Osteen, Charles F. Boyle, James Caponi (“Individual Defendants”), and Nominal Defendant UHS (collectively, “Defendants”). (See Doc. No. 48.)

         1. Plaintiffs

         On March 29, 2018, after extensive proceedings, former Chief Judge Lawrence F. Stengel appointed Plaintiff Amalgamated as Lead Plaintiff in this consolidated shareholder derivative suit. (Doc. No. 43.) Plaintiff Amalgamated is a current UHS shareholder and has continuously held UHS stock since 2012. (Doc. No. 48 ¶ 22.)

         On February 22, 2019, this Court granted Plaintiff Amalgamated's request to add additional Lead Plaintiffs, and entered an Order appointing Plaintiffs Cambridge and Clinton, as well as Plaintiff Amalgamated, as Co-Lead Plaintiffs. (Doc. No. 76.) Plaintiff Cambridge is a current UHS shareholder and has continuously held UHS stock since January 31, 2014. (Doc. No. 48 ¶ 23.) Plaintiff Clinton is a current UHS shareholder and has continuously held UHS stock since March 13, 2015. (Id. ¶ 24.)

         2. Defendants

         Because Plaintiffs filed a shareholder derivative suit on behalf of UHS, the company is named as Nominal Defendant. Also named are eleven Individual Defendants, all of whom are either members of the UHS Board of Directors (“Director Defendants”) or UHS Officers (“Officer Defendants”), or both. Defendants Alan Miller, Marc Miller, Robert Hotz, Lawrence Gibbs, Eileen McDonnell, Anthony Pantaleoni, and John Herrell are named as Director Defendants. (Id. ¶ 33.) Named as Officer Defendants are Defendants Alan Miller, Marc Miller, Steve Filton, Debra Osteen, Charles Boyle, and James Caponi. (Id. ¶ 40.) Defendants Alan Miller and Marc Miller are both Director Defendants and Officer Defendants. Counts I through VI of the Amended Complaint apply to all Individual Defendants.

         Count VII of the Amended Complaint only applies to a subgroup of Individual Defendants, referred to as “Insider Trading Defendants.” Insider Trading Defendants include Defendants Alan Miller, Marc Miller, Anthony Pantaleoni, John Herrell, Robert Hotz, Lawrence Gibbs, Steve Filton, and Debra K. Osteen. (Id. ¶ 252.)

         The following chart sets forth whether each Individual Defendant is a Director Defendant, Officer Defendant, or an Insider Trading Defendant:

Individual Defendant

Director Defendant

Officer Defendant

Insider Trading Defendant

Alan Miller

X

X

X

Marc Miller

X

X

X

Robert Hotz

X

X

Lawrence Gibbs

X

X

Eileen McDonnell

X

Anthony Pantaleoni

X

X

John Herrell

X

X

Steve Filton

X

X

Debra Osteen

X

X

Charles Boyle

X

James Caponi

X

         As Directors and Officers, Individual Defendants owe UHS and its shareholders certain fiduciary duties, including a duty of loyalty and a duty of care. (Id. ¶ 281.) In essence, Individual Defendants are obligated to act “in furtherance of the best interests of [UHS] and not for their own personal interest or benefit.” (Id.)

         There are seven directors on the UHS Board of Directors. The Directors sit on various Board Committees, including the Audit Committee, the Compensation Committee, the Nominating & Governance Committee, the Executive Committee, the Finance Committee, and the Compliance Committee. (Id. ¶¶ 34, 39.)

         Relevant here, the Audit Committee is charged with assisting the Board with its oversight responsibilities. (Id. ¶ 292.) The Audit Committee is also responsible for monitoring the company's internal controls, assessing financial risk exposure, overseeing the company's financial reporting process, managing internal employee complaints, and reporting to the Board on these matters. (Id. ¶ 293.) UHS requires that the Audit Committee be comprised of at least three independent directors appointed by the Board. (Id. ¶ 291.) During the years relevant to this action, Defendants Gibbs, Herrell, Hotz, and McDonnell were members of the Audit Committee. (Id.) Plaintiffs claim that these Defendants were not truly independent. (Id.)

         a. Nominal Defendant UHS

         Nominal Defendant UHS was founded by Defendant Alan Miller in 1978. (Id. ¶ 26.) It is a publicly-traded company[9] that owns and operates hospitals throughout the United States, the United Kingdom, Puerto Rico, and the U.S. Virgin Islands. (Id. ¶ 25.) The company, which is incorporated in Delaware and headquartered in King of Prussia, Pennsylvania, is split into two divisions: (1) the Acute Care Division, which operates general hospitals, and (2) the Behavioral Health Division, [10] which operates inpatient and outpatient psychiatric facilities. According to the company's August 8, 2018 Form 10-Q, [11] UHS operates 359 facilities. Twenty-six (26) of those facilities are Acute Care facilities; the rest are managed by the Behavioral Health Division. (Id. ¶ 53.)

         Since 2011, the Behavioral Health Division has accounted for between 45% and 50% of UHS's total revenue.[12] (Id. ¶ 55.) About one-third of the Behavioral Health Division's revenue is derived from government health insurance payers, such as Medicare and Medicaid. (Id. ¶ 57.) According to the company's 2017 Form 10-K, [13] which was filed on February 28, 2018, UHS admitted nearly half-a-million patients into its behavioral health facilities in 2017. (Doc. No. 68 at 12; Doc. No. 75-1 at 6.) On average, these patients remained at UHS facilities for 13.6 days, which resulted in more than six million patient-days that year. (Doc. No. 75-1 at 6.)

         The company's filings with the United States Securities and Exchange Commission (“SEC”) disclose that each UHS behavioral health facility operates under its own leadership, including a chief executive officer, chief financial officer, and compliance staff. Each facility has its own governance board, which includes members of the facility's medical and professional staff and is responsible for the facility's day-to-day medical, clinical, and ethical practices. (Id. at 12.)

         b. Defendants Alan Miller and Marc Miller[14]

         Defendant Alan Miller, who is named as a Director Defendant, an Officer Defendant, and an Insider Trading Defendant, founded UHS in 1978. (Doc. No. 48 ¶ 26.) Since that time, he has served as the company's CEO and Chairman of the Board of Directors. He also served as UHS's President from 1978 until May 2009. From 2010 to 2017, he held a seat on the Board's Executive Committee and Finance Committee.[15] (Id. ¶ 34.) From 2013 to 2017, the Compensation Committee approved a Total Incentive Compensation of $78, 669, 420 for Alan Miller, as CEO of the company. (Id. ¶ 278.) Defendant Marc Miller is Defendant Alan Miller's son. He has served on the UHS Board of Directors since 2006 and replaced his father as the company's President in May 2009. (Id. ¶ 27.) From 2013 to 2017, Marc Miller sat on the Board's Executive Committee. From 2010 to 2017, he served on the Board's Finance Committee. (Id. ¶ 34.) Marc Miller is named as a Director Defendant, an Officer Defendant, and an Insider Trading Defendant. From 2013 to 2017, the Compensation Committee approved a Total Incentive Compensation of $13, 150, 264 for Marc Miller, as President of the company. (Id. ¶ 278.)

         Despite only maintaining a 7 to 8% equity stake in UHS, Alan and Marc Miller retain enormous control over the company. (Id. ¶ 44.) According to the UHS April 5, 2018 Definitive Proxy Statement, [16] Alan and Marc Miller respectively possess 83.6% and 2.6% of company's general voting power. (Id. ¶ 43.) As of March 20, 2018, Alan Miller held 99.7% of UHS Class C voting stock, which entitles the holder to 100 votes per share. And collectively, Alan and Marc Miller hold over 90% of UHS Class A stock, which entitles the holder to one vote per share. (Id. ¶¶ 41-42.) No. other UHS shareholder possesses more than 1.3% of the company's voting power.[17](Id. ¶ 45.)

         Through their control of the company's Class A and Class C stock, Alan and Marc Miller have the power to elect five of the seven directors on the Board. Since 2006, when Marc Miller joined the Board of Directors, the Millers have occupied two of these five seats. Plaintiffs allege that the remaining three directors “maintain[] his/her directorship only at the pleasure of Defendants Alan and Marc Miller, and thus are not truly independent.” (Id. ¶ 47.) Further, Plaintiffs claim that “[b]ecause Defendants Alan and Marc Miller hold the top executive positions at the company - CEO and President, respectively-all other executives ultimately report to either or both of them and, thus, are controlled by them.” (Id. ¶ 46.) Additionally, Plaintiffs emphasize that the company's “purportedly independent oversight committees - the Audit Committee and Nominating & Governance Committee - are staffed by directors who serve almost entirely at Defendants Alan and Marc Miller's pleasure . . . .” (Id. ¶ 48.)

         c. Defendant Robert Hotz

         Defendant Robert H. Hotz is a Director Defendant and an Insider Trading Defendant. Mr. Hotz is a Senior Managing Director and Vice Chairman of Houlihan Lokey Howard & Zukin, which is an investment bank. (Doc. No. 69-2 at 6.) He has served on the UHS Board of Directors since 1991. (Doc. No. 48 ¶ 28.) From 2010 to 2017, Mr. Hotz sat on several Board Committees, including the Executive Committee, the Finance Committee, and the Audit Committee. During that time, he also served as the Chair of the Board's Compensation Committee and the Chair of the Board's Nominating & Governance Committee. (Id. ¶ 34.)

         d. Defendant Lawrence S. Gibbs

         Defendant Lawrence S. Gibbs is a Director Defendant and an Insider Trading Defendant. Mr. Gibbs is a Portfolio Manager at Ramius, LLC, and previously served as a Chief Investment Officer at JP Morgan Chase Bank. (Doc. No. 69-2 at 6.) He has served on the UHS Board of Directors since 2011. (Doc. No. 48 ¶ 29.) From 2011 to 2017, Mr. Gibbs served on the Board's Nominating & Governance Committee, Audit Committee, and Compensation Committee. (Id. ¶ 34.)

         e. Defendant Eileen C. McDonnell

         Defendant Eileen C. McDonnell is a Director Defendant. Ms. McDonnell currently serves as the Chairman and Chief Executive Officer of the Penn Life Mutual Life Insurance Company. (Doc. No. 69-2 at 6.) She has served on the UHS Board of Directors since April 2013. (Doc. No. 48 ¶ 30.) Ms. McDonnell served on the Board's Audit Committee from 2013 to 2017. (Id. ¶ 34.)

         f. Defendant Anthony Pantaleoni

         Defendant Anthony Pantaleoni is a Director Defendant and an Insider Trading Defendant. He served on the UHS Board of Directors from 1982 until January 17, 2018, when he resigned. (Id. ¶ 31.) From 2010 to 2017, Mr. Pantaleoni served on the Board's Executive Committee and Finance Committee. (Id. ¶ 34.)

         Additionally, Mr. Pantaleoni is Of Counsel at Norton Rose Fulbright U.S. LLP (“Norton Rose”), UHS's long-term outside counsel. According to the Amended Complaint, “Norton Rose provides personal legal services to Defendant Alan Miller and is the trustee of certain trusts for the benefit of Defendants Alan Miller, Marc Miller, and other Miller family members.” (Id. ¶ 31.) Plaintiffs further allege that “Pantaleoni's compensation at Norton Rose is largely dependent upon the continued engagement by and payments for legal services to Universal and Defendant Alan Miller.” (Id.) When Mr. Pantaleoni resigned from his position as Director in 2018, he was replaced by Warren Nimetz, another Norton Rose attorney. (Id.)

         g. Defendant John H. Herrell

         Defendant John H. Herrell is a Director Defendant and an Insider Trading Defendant. From 1984 to 1993, Mr. Herrell served as the Chief Financial Officer of the Mayo Clinic Foundation and from 1993 to 2002, he served as the Mayo Clinic's Chief Administrative Officer. (Doc. No. 69-2 at 6.) In 1993, he was elected to serve on the UHS Board of Directors. He remained as a Director until he retired on May 16, 2018. (Doc. No. 48 ¶ 32.) Upon Mr. Herrell's retirement, Elliott J. Sussman, M.D., was appointed to fill his seat. According to the Amended Complaint, Dr. Sussman is a trustee of the Universal Health Realty Income Trust (“UHRI”). Defendant Alan Miller is the CEO and President of UHRI and serves as a trustee and director. Defendant Marc Miller also serves as a UHRI trustee. (Id.)

         Mr. Herrell served on the Board's Nominating & Governance Committee from 2013 to 2017. During those years, he also sat on the Board's Compensation Committee. Additionally, Mr. Herrell served as the Chair of the Board's Audit Committee from 2010 to 2017. (Id. ¶ 34.)

         h. Defendant Steve G. Filton[18]

         Defendant Steve. G. Filton is an Officer Defendant and an Insider Trading Defendant. He has served as the company's Chief Financial Officer (“CFO”) and Secretary since February 2003. He has also served as an Executive Vice President since 2003. (Id. ¶ 35.) From 2013 to 2017, the Board's Compensation Committee approved a Total Incentive Compensation of $9, 267, 631 for Mr. Filton, as CFO of the company. (Id. ¶ 278.)

         i. Defendant Debra K. Osteen

         Defendant Debra K. Osteen is an Officer Defendant and an Insider Trading Defendant. She has served as an Executive Vice President and the President of the Behavioral Health Division since December 2005. (Id. ¶ 36.) From 2013 to 2017, the Board's Compensation Committee approved a Total Incentive Compensation of $8, 545, 195 for Ms. Osteen, as President of the Behavioral Health Division. (Id. ¶ 278.)

         j. Defendant Charles F. Boyle

         Defendant Charles F. Boyle is an Officer Defendant. He has served as the Controller of the company since 2003 and currently serves as a Vice President. Additionally, Mr. Boyle has held various executive accounting positions at UHS since 1983. He has served as the Assistant Vice President for Corporate Accounting since 1994. (Id. ¶ 38.)

         k. Defendant James Caponi

         Defendant James Caponi is an Officer Defendant. He served as the UHS Chief Compliance Officer from November 2010 to June 2018. During that time, Mr. Caponi was responsible for “legal compliance oversight” at UHS. In his capacity as Chief Compliance Officer, he reported to the company's Compliance Committee on numerous occasions. (Id. ¶ 39.)

         B.UHS Expands Behavioral Health Division and Approves Business Plans that Lay Out Aggressive Strategies to Increase Revenue

         The UHS Behavioral Health Division has rapidly expanded in the last decade. In November 2010, the company acquired Psychiatric Solutions, Inc. (“PSI”), which at that point was the largest stand-alone behavioral health operator in the country. (Id. ¶ 50.) The acquisition cost UHS $3.4 billion and added 105 behavioral health facilities across 32 states, Puerto Rico, and the U.S. Virgin Islands, making UHS the largest provider of behavioral health services in this market. (Id.) Mr. Filton, the company's CFO, called the deal “transformative.” (Id.) Additionally, between 2012 and 2018, UHS spent nearly one billion dollars to add more behavioral health facilities to the company. (See id. ¶ 51.)

         Apart from the company's efforts to expand the Behavioral Health Division through acquisitions, UHS implemented numerous strategies to increase profitability at its behavioral health facilities. These strategies can be found in the business plans for behavioral health facilities that were reviewed and approved by the UHS Board of Directors between 2013 and 2017.[19] (Id. ¶ 59.) For each of those years, the UHS Board of Directors reviewed and approved business plans from a small sample of its behavioral health facilities. (See Doc. No. 99 at 7.) In 2013, the Board reviewed and approved plans for seven facilities, or 3.5% of all UHS behavioral health facilities. (Doc. No. 75-15.) In 2014, the Board reviewed business plans for 3.6% percent of facilities. (Doc. No. 75-16.) In 2015 and 2016, the Board reviewed plans for 2.3% of UHS behavioral health facilities (Doc. Nos. 75-17, 75-18), and in 2017, the Board reviewed plans from five facilities, or 1.6% of all behavioral health facilities (Doc. No. 75-19). Plaintiffs claim that the strategies set forth in these business plans prove that UHS “ha[s] long used the patient admissions process as a tool to fuel profit, without regard to its patients' needs and, indeed, the lawful provision of health services.” (Doc. No. 48 ¶ 59.)

         In general, Plaintiffs claim that the business plans reveal that certain UHS behavioral health facilities set goals for patients' average length of stay based on financial concerns, “rather than letting individual patient's needs dictate personalized lengths of stay . . . .” (Id. ¶ 60.) For example, Plaintiffs point to several facilities where the business plans set numerical goals to increase patient days. According to Plaintiffs, allowing numerical goals rather than medical need dictate how long a patient should remain admitted at a facility impermissibly “put[s] the cart before the horse.” (Id. ¶¶ 60-62.) Another strategy involved “[c]onverting residential beds to acute care [beds] to obtain higher reimbursement[.]” (Id. ¶ 60.) Plaintiffs claim that UHS adopted this strategy because acute patient days yield higher insurance reimbursements than residential patient days. (See id. ¶ 73.)

         Plaintiffs also assert that facilities devised strategies to increase admissions of patients with Medicare insurance. According to several business plans, the average length of stay of Medicare patients far exceeded the average length of stay of patients with other types of insurance. Therefore, admitting more Medicare patients increased same-facility patient days, which then translated into higher insurance reimbursements. For example, Peachford Hospital in Georgia reported that Medicare patients stay at its facility for an average of 14.45 days. In comparison, patients with Blue Cross insurance stay at the facility for an average of 7.76 days. (Id. ¶ 75.) As a result, in its 2014 business plan, Peachford noted that it sought to “increase our Medicare mix which will help our length of stay.” (Id.)

         Other facilities engaged in what Plaintiffs call “physician-shaming.” That is, certain facilities implemented programs in which “[p]hysicians receive[d] monthly documentation outlining their admissions, length of stay and days denied in a peer comparative format which allows them to identify any procedural issues before it becomes routine.” (Id. ¶ 78.) According to Plaintiffs, these programs pressured physicians to admit more patients and to extend patients' stays in order to improve performance metrics and ensure higher insurance reimbursements.

         In a business plan section entitled “[o]pportunities for growth, ” Lakeside Behavioral Health System in Tennessee devised a new online assessment scheduling model. The model advertised that “[t]reatment begins with a free, confidential assessment to determine each patient's unique needs and the program that will best serve those needs[, ]” but included a disclaimer that stated that “[t]his reservation system is for scheduling non-life threatening psychiatric assessments. If you are having feels of harming yourself, another person or are in a life threatening situation, please call 911.” (Id. ¶ 79) (emphasis omitted). In its 2016 business plan, Lakeside reported that 27% of the 453 people who scheduled assessments through the online scheduling model were admitted to the facility as inpatients in need of acute care treatment. (Id. ¶ 86.)

         Plaintiffs allege that both facility executives and the Board of Directors were aware of these facilities' “aggressive” strategies. In the Amended Complaint, Plaintiffs claim that facility executives “continuously monitor[ed] and review[ed] weekly and monthly reports . . . to track referral and admission patterns from referral sources.” (Id. ¶ 84.) On the corporate level, Plaintiffs claim that the Board “generally reviewed and approved the business plans for [UHS's] various . . . business segments at the beginning of each fiscal year” and closely monitored facilities' performance. (Id. ¶ 94.)

         It appears that these strategies paid off. In 2013, the Behavioral Health Division reported that its profit margin had increased, that it had exceeded its budgeted net income by $33.5 million, and that inpatient admissions had risen 7.6% on a same-facility basis. (Id. ¶ 67.) The Behavioral Health Division reported similar gains in 2014 and 2015. (Id. ¶¶ 68, 76.) In 2016, the Division operated at ¶ 28% profit margin and exceeded its budgeted net income by $36 million. (Id. ¶ 82.) The Behavioral Health Division also posted increases in its residential and acute average length of stay metrics. (Id.) In 2017, the Division maintained a 28% profit margin and increased net income by $9 million, despite external pressures, discussed infra. (Id. ¶ 88.) Plaintiffs allege that “the strategies disclosed in the facilities' business plans enabled [UHS] to keep its hallmark margins in tact despite the flurry of legal and public pressure.” (Id.)

         The Behavioral Health Division's success also paid off for Defendant Alan Miller. According to the company's April 5, 2018 Schedule 14A filing, in 2017, “Alan Miller earned a base salary of $1, 635, 063, $2, 000, 060 in stock awards, $15, 978, 734 in option awards, $719, 428 for non-equity incentive plan compensation, $43, 407 in earnings for changes in pension value and nonqualified deferred compensation, and $1, 655, 000 for all other compensation, for a total of $21, 630, 861.” (Id. ¶ 95.)

         C. UHS Behavioral Health Facilities Face Inquiries, Lawsuits, and Government Investigations

         Plaintiffs allege that UHS's aggressive strategies pushed behavioral health facilities to engage in fraudulent and unethical conduct to meet financial goals. According to Plaintiffs, this conduct attracted inquiries from state and federal agencies, qui tam whistleblower lawsuits, and a coordinated civil and criminal federal investigation.

         1. State and Federal Agencies Investigate UHS Behavioral Health Facilities

         Plaintiffs claim that as a result of the company's aggressive strategies, UHS behavioral health facilities “have been subject to a plethora of localized inquiries over the years.” (Id. ¶ 98.) They cite to four examples of such inquiries. First, in 2005, a former UHS employee filed a whistleblower complaint against McAllen Hospitals d/b/a/ South Texas Health System, a UHS behavioral health facility. The complaint alleged that the facility had entered into financial relationships with several doctors to refer patients to UHS behavioral health facilities. (Id.) As a result of the complaint, government authorities opened an investigation into the facility for violations of the False Claims Act, the federal Anti-Kickback Statute, 42 U.S.C. §§ 1320a-7b, and the Stark Law, 42 U.S.C. § 1395m. (Id.) UHS later settled the matter for $27.5 million. (Id.)

         Second, in April 2011, the federal government suspended Medicaid payments to Two Rivers Psychiatric Hospital, a UHS behavioral health facility in Kansas, after the Centers for Medicare & Medicaid Services (“CMS”)[20] learned that employees failed to monitor a suicidal woman who ultimately killed herself on their watch. (Id. ¶ 99.) That same month, North Carolina state authorities removed all state wards from The Pines, a UHS facility in Virginia now known as Harbor Point Behavioral Health Center, after discovering allegations of sexual abuse at the facility. (Id. ¶ 100.) Later, North Carolina officials learned of additional patient care issues, prompting Virginia to place The Pines on a provisional license and other states to remove their wards from its care. (Id.)

         Finally, in 2011, the Illinois Department of Children and Family Services and the Department of Psychiatry at the University of Illinois at Chicago opened an inquiry into Hartgrove Hospital, a UHS behavioral health facility in Chicago. (Id. ¶ 101.) The Departments ultimately issued a “scathing” report after random observations, interviews with hospital administrators, and a review of over 12, 000 internal documents. The report found that “[t]he cumulative weight of the available data regarding services provided [to state] wards at UHS's Hartgrove Hospital demonstrates a consistent pattern of unacceptable risks of harm, substandard quality of care, poor clinical treatment and discharge planning, and questionable clinical management practices by hospital and corporate officials at all levels of the organization.” (Id. ¶ 102) (emphasis omitted). The report also found that these issues were not limited to Hartgrove; rather, the report concluded that “troubling reports suggest[] a pattern of quality of care issues, harm to patients or major healthcare fraud charges involving UHS-operated facilities in a dozen other states beyond Illinois . . . [including] Virginia, Tennessee, Pennsylvania, North Carolina, California, South Carolina, Massachusetts, Connecticut, Texas, Nevada, Arkansas and Missouri.” (Id. ¶ 103) (emphasis omitted).

         2. The Escobar Qui Tam Lawsuit

         Plaintiffs also cite to a qui tam lawsuit[21] that was filed against UHS in the United States District Court for the District of Massachusetts in July 2011. The lawsuit, United States ex rel. Escobar v. Universal Health Services, arose out of mental health treatment provided to Yarushka Rivera at Arbour Counseling Services (“Arbour”), a UHS behavioral health facility in Lawrence, Massachusetts.

         After seeking mental health treatment at Arbour, Yarushka Rivera was diagnosed with bipolar disorder and prescribed anti-seizure medication. Soon thereafter, she suffered a fatal seizure, which her parents claim was caused by Arbour's failure to warn her about the side effects of her medication. (Id. ¶ 105.) Miss Rivera's parents later learned that many Arbour employees, including some that treated their daughter, were unlicensed and unsupervised, in violation of state and federal regulations. (Id. ¶ 106.) They then filed the qui tam action against UHS under the False Claims Act, alleging that Arbour had employed unlicensed and unsupervised personnel and had fraudulently submitted reimbursement claims to MassHealth, Massachusetts's Medicaid program, knowing that they were in violation of regulations pertaining to behavioral health facilities.[22] (Id. ¶ 107.)

         In 2017, the United States Office of the Attorney General and the Massachusetts Office of the Attorney General formally intervened in the suit and filed a complaint against UHS. (Id. ¶ 108); see also United States of America v. Universal Health Services, Inc., Civ. No. 17-11843-DPW (D. Mass, filed Sept. 25, 2017).[23] The government's complaint alleged that “staff members from [UHS] facilities told investigators working with the Massachusetts Attorney General's office that there was not a single qualified supervisor in one entire facility, making it impossible that any unlicensed staff could have been properly supervised, as required by the [False Claims Act] and its Massachusetts analogue.” (Id. ¶ 110.) Further, the complaint alleged that “[d]espite the issuance of repeated statements of deficiencies at [UHS] facilities, these facilities failed to come into compliance, as [UHS] continued to use unlicensed and improperly trained staff.” (Id.) The government also claimed that between 2005 and 2013, UHS facilities in Massachusetts asked for reimbursements totaling $94, 217, 691.08 for “counseling and medication management ‘services' that were not administered by certified personnel or otherwise properly supervised . . . .” (Id. ¶ 111.)

         At present, the Escobar qui tam lawsuit is still pending in the United States District Court for the District of Massachusetts. There has been no finding of liability or wrongdoing.

         3. Coordinated Civil and Criminal Federal Investigation

         Plaintiffs also claim that UHS's aggressive strategies “attracted widespread scrutiny by federal investigators.” (Id. ¶ 112). In February 2013, UHS disclosed that the Office of Inspector General for the United States Department of Health and Human Services (“OIG”) had recently served subpoenas on several UHS behavioral health facilities, seeking documents dating back to January 2008. (Id.)

         Throughout 2013, the OIG investigation expanded to several other UHS behavioral health facilities. (See id. ¶¶ 113, 114.) In October 2013, the Department of Justice Criminal Frauds Section[24] advised UHS that it had received a referral from the Department of Justice, Civil Division and had opened a criminal investigation into River Point Behavioral Health and Wekiva Springs Center, two UHS behavioral health facilities in Florida. (Id. ¶ 115.) In 2014, the criminal investigation expanded to include the National Deaf Academy in Florida. (Id. ¶ 116.) In April 2014, the company reported that the federal government had suspended Medicare payments to River Point as a result of the criminal investigation. Later, the Florida Agency for Health Care Administration (“AHCA”) ...


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