Dr. Behzad Nazari, D.D.S. D/B/A Antoine Dental Center Dr. Behzad Nazari Harlingen Family Dentistry, P.C. A/K/A Practical Business Solutions, Series LLC Juan D. Villarreal D.D.S., Series PLLC D/B/A Harlingen Family Dentistry Group v. State

ACCEPTED

03-15-00252-CV

6432785

THIRD COURT OF APPEALS

AUSTIN, TEXAS

8/10/2015 4:53:21 PM

JEFFREY D. KYLE

No. 03-15-00252-CV CLERK

IN THE COURT OF APPEALS

FOR THE THIRD DISTRICT OF TEXAS AT AUSTIN

FILED IN

3rd COURT OF APPEALS

DR. BEHZAD NAZARI, D.D.S., ET AL., AUSTIN, TEXAS

Appellants, 8/10/2015 4:53:21 PM

v.

JEFFREY D. KYLE

Clerk

THE STATE OF TEXAS,

Appellee,

v.

XEROX CORPORATION, XEROX STATE HEALTHCARE, LLC

F/K/A ACS STATE HEALTHCARE, LLC,

Appellees.

On Appeal from the 53rd Judicial District Court of Travis County, Texas,

Trial Court Cause No. D-1-GN-14-005380

BRIEF OF APPELLEES

BECK REDDEN LLP BECK REDDEN LLP

Eric J.R. Nichols Constance H. Pfeiffer

State Bar No. 14994900 State Bar No. 24046627

enichols@beckredden.com cpfeiffer@beckredden.com

Gretchen Sween 1221 McKinney St., Ste. 4500

State Bar No. 24041996 Houston, TX 77010

gsween@beckredden.com (713) 951-3700

Christopher R. Cowan (713) 951-3720 (Fax)

State Bar No. 24084975

ccowan@beckredden.com

515 Congress Ave., Ste. 1900

Austin, TX 78701

(512) 708-1000

(512) 708-1002 (Fax)

GIBSON, DUNN & CRUTCHER LLP KELLY HART & HALLMAN LLP

Robert C. Walters C. Andrew Weber

State Bar No. 20820300 State Bar No. 00797641

rwalters@gibsondunn.com andrew.weber@kellyhart.com

2100 McKinney Ave., Ste. 1100 301 Congress, Ste. 2000

Dallas, TX 75201 Austin, TX 78701

(214) 698-3100 (512) 495-6451

(214) 571-2900 (Fax) (512) 495-6930 (Fax)

COUNSEL FOR APPELLEES, XEROX CORPORATION AND

XEROX STATE HEALTHCARE, LLC, F/K/A ACS STATE HEALTHCARE, LLC

Oral Argument Requested

TABLE OF CONTENTS

PAGE

TABLE OF CONTENTS ...................................................................................................i

INDEX OF AUTHORITIES.............................................................................................. ii

STATEMENT OF THE CASE ..........................................................................................iv

STATEMENT OF JURISDICTION ..................................................................................... v

ISSUE PRESENTED........................................................................................................ v

STATEMENT OF FACTS ................................................................................................. 1

SUMMARY OF ARGUMENT ........................................................................................... 8

ARGUMENT ................................................................................................................. 9

I. The Court Should Decide Xerox’s Original Proceeding

Along with this Appeal to Ensure that the Entire Litigation

Is Procedurally Consistent. .................................................................... 9

II. Counterclaims and Third-Party Claims May Be Brought

When the State Brings a TMFPA Claim. ............................................ 10

A. The ordinary rules of civil procedure apply when the

State brings a TMFPA claim..................................................... 10

B. Because the State has brought a tort claim for

damages, Chapter 33 applies and permits contribution

claims as well. ........................................................................... 12

III. Xerox Will Raise Immunity Arguments Once the Providers’

Claims Are Clearer. ............................................................................. 15

PRAYER FOR RELIEF .................................................................................................. 16

CERTIFICATE OF SERVICE .......................................................................................... 18

CERTIFICATE OF COMPLIANCE .................................................................................. 19

INDEX OF AUTHORITIES

CASE PAGE(S)

Janek v. Harlingen Family Dentistry, P.C.,

451 S.W.3d 97 (Tex. App.—Austin

2014, no pet.) ........................................................................................................ 4

U.S. ex rel. Miller v. Bill Harbert Intern. Const., Inc.,

505 F. Supp. 2d 20 (D.D.C. 2007) ...................................................................... 13

Mortgages, Inc. v. U.S. Dist. Court for Dist. of Nev.,

934 F.2d 209 (9th Cir. 1991) .............................................................................. 13

Reata Const. Corp. v. City of Dallas,

197 S.W.3d 371 (Tex. 2006) .......................................................................passim

Rusk State Hosp. v. Black,

392 S.W.3d 88 (Tex. 2012)................................................................................. 15

Sec. Trust Co. of Austin v. Lipscomb Cnty,

180 S.W.2d 151 (Tex. 1944) .............................................................................. 12

Shipp v. Malouf,

439 S.W.2d 432 (Tex. App.—Dallas

2014, pet. denied).................................................................................................. 3

State v. Naylor,

No. 11-0114, 2015 WL 3852284

(Tex. June 19, 2015) .......................................................................................8, 11

Texas Dep’t of Corr. v. Herring,

513 S.W.2d 6 (Tex. 1974)................................................................................... 11

Texas Mut. Ins. Co. v. Ruttiger,

381 S.W.3d 430 (Tex. 2012) .............................................................................. 11

United States v. Campbell,

No. CIV.A. 08-1951, 2011 WL 43013

(D.N.J. Jan. 4, 2011) ........................................................................................... 13

Wortham v. Walker,

128 S.W.2d 1138 (Tex. 1939)

(orig. proceeding)................................................................................................ 12

ii

STATUTES

TEX. CIV. PRAC. & REM. CODE § 33.002(a)(1) ......................................................... 14

TEX. HUM. RES. CODE

§ 36.002 ................................................................................................................. 4

§ 36.007............................................................................................................. 4, 5

§ 36.052................................................................................................................. 4

OTHER AUTHORITIES

25 TEX. ADMIN. CODE § 33.71 (2015) ................................................................... 2, 3

iii

STATEMENT OF THE CASE

Nature of the case This is a civil Medicaid fraud case brought by the State

of Texas against orthodontic-service providers.

The providers have brought counterclaims against the

State and third-party claims against Xerox.

In this lawsuit, the State has sued only the providers.

Although the State’s fraud theory alleges intertwined

claims against the providers and Xerox, the State is suing

Xerox in a separate lawsuit, seeking to recoup from

Xerox payments the State made to the providers.

Trial court Honorable Stephen Yelenosky

345th Judicial District Court of Travis County

Trial court disposition: The trial court ruled that counterclaims and third-party

claims cannot be brought in a suit brought under the

Medicaid fraud statute. Thus, the trial court:

(1) granted the State’s plea to the jurisdiction and

dismissed the claims against the State with

prejudice and

(2) granted the State’s motion to dismiss third-party

claims against Xerox. Tab A.

iv

STATEMENT OF JURISDICTION

This Court has jurisdiction under TEX. CIV. PRAC. & REM. CODE §

51.014(a)(8).

ISSUE PRESENTED

Did the trial court err by dismissing the Dental Group’s third-party claims

against Xerox?

v

STATEMENT OF FACTS

This fraud suit is brought by the State of Texas against Medicaid providers.

It is factually intertwined with a separate fraud suit the State has brought against

two Xerox entities. The State simultaneously accuses Medicaid providers and

Xerox of a fraudulent scheme, yet it contends it can take a divide-and-conquer

approach and seek double recovery by suing them in separate lawsuits.

Although Xerox benefits from the State’s argument that the trial court

adopted in this case, Xerox does not agree with it. There is no prohibition against

counterclaims and third-party claims in a Texas Medicaid fraud suit. Because the

order under review assumes there is, Xerox agrees that it is erroneous.

The Dental Group’s statement of facts accurately sets forth the procedural

background of this case. This statement of facts provides additional context for the

broader landscape of this litigation and a related proceeding before this Court.

HHSC contracts for processing of Medicaid claims

The Texas Health and Human Services Commission oversees the Texas

Medicaid program, which serves low-income Texans. The program includes a

process for reimbursing providers for the services provided to eligible children.

HHSC has in recent years hired contractors to assist it in claims processing.

During the time period from 2004 to 2014, HHSC contracted with a private entity

to be its fiscal agent and claims processor. Tab B at 30. That entity was later

acquired by Xerox Corporation. Id. at 2.

Long known as a brand name for copiers, Xerox now has a business division

that provides analytic, consulting, revenue improvement, technological, and

business process outsourcing solutions to the healthcare industry worldwide. The

Xerox entity that contracted with HHSC is Xerox State Healthcare, LLC. Id.1

HHSC contracted with Xerox State Healthcare to provide multiple Medicaid

administrative and technical services, including the processing of “prior

authorizations” for orthodontic services submitted by the providers. Id. at 3. The

“prior authorization” process requires providers to submit forms, materials, and

certifications related to the provider’s diagnosis and the patient’s condition in order

to receive prior approval for the orthodontic services. Instead of performing

services first and then submitting the bill for payment, Medicaid “[o]rthodontic

services must be prior authorized” before the provider performs the service.

25 TEX. ADMIN. CODE § 33.71 (2015).

Under the contract, Xerox State Healthcare established the Texas Medicaid

& Healthcare Partnership (TMHP), a consortium of Xerox State Healthcare and

other subcontractors. TMHP processed hundreds of thousands of prior-

authorization requests for orthodontic services over the span of a decade. During

that time period, the State alleges that it spent approximately $1.1 billion for

orthodontic services to Medicaid-eligible children. Tab B at 3.

1

HHSC first contracted with ACS State Healthcare LLC, which changed its name to Xerox

State Healthcare, LLC after it was acquired by Xerox Corporation. Tab B at 2. Xerox

Corporation and Xerox State Healthcare, LLC are distinct entities with separate legal arguments;

references to them jointly as “Xerox” are solely for ease of reading.

2

HHSC approved the contract and prior authorization policies under which

TMHP operated, and it oversaw the work of Xerox State Healthcare (and the other

TMHP contractors). Tab C.2 In fact, HHSC’s Office of Inspector General

conducted a full contract audit of the prior authorization process, and the results

were made public in a 2008 report. Id. Xerox State Healthcare continued to

perform under its contract until May 2014, when the State terminated the contract.

Negative publicity prompts the State to cast blame

As the Dental Group explained, there has been a great deal of negative

publicity about HHSC and the State’s spending on Medicaid orthodontic services.

See Dental Group Br. 2-3; see also Shipp v. Malouf, 439 S.W.2d 432, 437–38 (Tex.

App.—Dallas 2014, pet. denied) (discussing publicity about Medicaid provider).

A series of “investigative” news reports in 2011 raised questions about the State’s

spending on orthodontic services to Medicaid-eligible children and about the

medical judgments of orthodontic providers, causing HHSC to second-guess that

spending and begin casting blame on others.

HHSC’s Office of Inspector General, led by a now-departed deputy, made

sweeping pronouncements of a vast fraud against the Medicaid program by

orthodontic providers across the State. HHSC then filed separate administrative

proceedings against members of the Dental Group. See Dental Group Br. 1.

2

The 2008 audit report is publicly available at http://www.tdmr.org/texas-state-audit-report.

It is not yet filed as evidence in this case but is cited merely as an uncontested background fact.

3

Meanwhile, Xerox State Healthcare continued to perform under its contract

with HHSC. After all, HHSC had approved the contract and prior authorization

policies under which TMHP operated, and it continued to oversee the work of

Xerox State Healthcare (and the other TMHP contractors). Tab B at 19-20.

As HHSC received adverse findings and results in the administrative

proceedings against the providers,3 the State ultimately turned on Xerox and filed

suit in Travis County against two Xerox entities in May 2014. Tab B. The State

accused Xerox of failing to “catch” the providers’ alleged fraud through the prior

authorization process. Rather than suing for breach of the prior authorization

procedures set by the State in the HHSC contract, the State brought a single tort

claim under the Texas Medicaid Fraud Prevention Act (“TMFPA”).

The TMFPA defines “unlawful acts,” beginning with knowing

misrepresentations and nondisclosures. See TEX. HUM. RES. CODE § 36.002.

It also provides for substantial civil remedies. A person who commits an

“unlawful act” can be sued for the amount of payments made “as a result of the

unlawful act,” plus double damages, civil penalties for each unlawful act between

$5,500 and $15,000, prejudgment interest, and reimbursement of the State’s

reasonable attorneys’ fees, expenses, and costs. See id. §§ 36.052, 36.007.

3

See, e.g., Janek v. Harlingen Family Dentistry, P.C., 451 S.W.3d 97 (Tex. App.—Austin 2014,

no pet.).

4

The State seeks the same recovery

from Xerox and the providers in separate lawsuits

The State’s suit against Xerox seeks “all relief possible” under the TMFPA.

Tab B at 21. This relief even includes the value of payments made under the

Medicaid program to the Medicaid orthodontic-service providers—not to Xerox.

Id. The State’s administrative proceedings against various providers sought

recovery of the same payments.

Several providers then filed four separate suits against Xerox and the State.

See CR47 n.2.4 The State filed a plea to the jurisdiction, which the trial court

granted. CR67. Those providers suits are now pending solely against Xerox.

Several other providers intervened in the State’s suit against Xerox, asserting

common-law tort claims against the State and Xerox and seeking to recover for

losses incurred as a result of payment holds and administrative claims that the

providers contend the State wrongfully asserted. Tab D. The State moved to

strike the intervention, and its motion was granted. CR69-78 (motion to strike);

CR61-62 (order in State v. Xerox suit).

Meanwhile, in December 2014, the State nonsuited its administrative cases

against the Dental Group and filed this suit the next day. Just like the suit against

Xerox, the State has sued the Dental Group solely under the TMFPA.

4

Harlingen Family Dentistry v. ACS State Healthcare, LLC, Cause No. D-1-GN-14-000319;

Antoine Dental Center v. ACS, No. D-1-GN-14-000320; M&M et al. v. ACS, D-1-GN-14-

000321; and Dr. Paul Dunn v. ACS, No. D-1-GN-14-000322.

5

In this suit, the Dental Group answered the State’s TMFPA claim and

asserted counterclaims and third-party claims against Xerox. CR29. Xerox filed a

general denial but has not yet asserted affirmative defenses or filed any motions.

Tab E. The State answered and simultaneously asserted a plea to the jurisdiction,

plea in bar, and a motion to dismiss the third-party claims. CR43.

The State maintains in both of its fraud suits that it can exclude any party

that it has chosen not to name in that suit—even while it seeks the same damages

against the excluded party elsewhere. It contends that counterclaims against the

State and third-party claims against parties who may share responsibility for any

damages are not permissible. Thus, while the State resists the counterclaims and

third-party claims in this suit, it is simultaneously arguing that Xerox cannot file

third-party claims against the providers in the State v. Xerox suit. CR69-109. The

State further argues that Chapter 33 does not apply, such that Xerox could not even

designate the providers as responsible third parties. CR91-108.

The trial court agrees with the State in both lawsuits and dismisses

all counterclaims, third-party claims, and RTP designations

The various lawsuits between the State, Medicaid providers, and the Xerox

entities have all been specially assigned, through the Travis County district court

administrative process, to one district judge. The trial court was made aware that

the State is seeking the same damages against separate parties in separate lawsuits

based on factually related allegations.

6

Yet the trial court decided that the State divide-and-conquer approach is

permissible. In the State’s suit against Xerox, the trial court struck the providers’

petitions in intervention. CR61-62. It twice denied motions to consolidate the

various lawsuits. CR286-92. It struck Xerox’s third-party contribution claims

against the providers. CR294. And it denied Xerox’s motion for leave to

designate the providers as responsible third parties. CR381-82. The last two

rulings are pending before this Court in an original proceeding. See Cause No. 03-

15-00401-CV (filed 7/1/15).

In this suit, the trial court reached the same result by granting the State’s

plea to the jurisdiction and dismissing the counterclaims, as well as granting the

State’s motion to dismiss the Dental Group’s third-party claims against Xerox.

Tab A. The order in this suit made plain that the trial court’s rationale is

consistent with the rulings in the State’s suit against Xerox:

Consistent with this Court’s rulings in the State’s litigation against

Xerox, the Court finds that the State is entitled to bring this action

against defendants to the exclusion of other parties.

Tab A; see also CR65 (Court letter to counsel: “The State is entitled to pursue a

Medicaid Fraud claim against a defendant to the exclusion of all other parties[.]”).

While the premise underlying the trial court’s rulings in both proceedings is

consistent, the differing postures require different analyses. Xerox responds to the

part of the order that grants the State’s motion to dismiss third-party claims.

CR383-84.

7

SUMMARY OF ARGUMENT

I. The Court should decide the issue presented in Xerox’s original

proceeding along with the issues presented in this appeal. The causes are on a

parallel track; the issues are closely related; and it will promote fairness and

efficiency to ensure the issues are all decided now. The trial court’s rulings have

resulted in multiple skewed lawsuits. Deciding related issues in the separate

lawsuits together will assist the Court’s decisional process and ensure that it

understands how its holdings affect the entire litigation landscape.

II. When the State sues, it must generally abide by the same rules that

apply to private litigants. The Texas Supreme Court recently reaffirmed this rule.

See State v. Naylor, No. 11-0114, 2015 WL 3852284, at *6 (Tex. June 19, 2015).

This settled rule is equally true when the State brings a TMFPA claim, because

nothing in the TMFPA prohibits counterclaims or third-party claims.

III. The State has asserted sovereign immunity arguments on Xerox’s

behalf, and Xerox would welcome an affirmance on that ground. But if the

claims against Xerox are reinstated, Xerox may assert immunity arguments

on its own behalf at a later date, once the Dental Group’s claims are clearer.

Any holding that the State has waived immunity should not implicate Xerox,

because Xerox has not asserted its own claims for affirmative relief. See

Reata Const. Corp. v. City of Dallas, 197 S.W.3d 371, 377 (Tex. 2006).

8

ARGUMENT

I. The Court Should Decide Xerox’s Original Proceeding Along with this

Appeal to Ensure that the Entire Litigation Is Procedurally Consistent.

Before turning to the merits, it bears emphasis that the issues in this appeal

are closely related to the issue presented in Xerox’s original proceeding, which is

currently pending in this Court. See Cause No. 03-15-00401-CV. In that

proceeding, Xerox challenges orders striking its third-party claims against the

providers and denying it leave to designate providers as responsible third parties.

Xerox argues in that proceeding that Chapter 33 applies to the State’s fraud claim

for damages and thus permits it to bring third-party claims for contribution and to

designate responsible third parties. Because the two causes are on virtually parallel

tracks with nearly identical briefing schedules, it would be appropriate for the

Court to decide them together.

Further, it would promote efficiency and ensure fairness in this entire

landscape of litigation for the Court to decide all the issues presented by the Dental

Group and Xerox together. While the issues in each cause are interrelated, they are

not identical. Considering all the issues together would therefore assist the Court

in understanding all the consequences of its holdings for all of the State’s lawsuits.

The trial court’s rulings have resulted in a multiplicity of lawsuits that are

procedurally skewed in the State’s favor. The due process rights of all the

defendants hinge on correcting these errors now.

9

II. Counterclaims and Third-Party Claims May Be Brought When the

State Brings a TMFPA Claim.

The threshold issue presented by this appeal is whether the State has waived

sovereign immunity. Xerox agrees that the governing standard for waiver is set by

Reata Const. Corp. v. City of Dallas, 197 S.W.3d 371, 377 (Tex. 2006). The State

has asserted an affirmative claim for monetary relief and therefore “must

participate in the litigation process as an ordinary litigant.” Id. To the extent the

Dental Providers show that their counterclaims satisfy the standard set forth in

Reata, they should be allowed to bring them. Xerox takes no position on whether

the Dental Group has met that burden.

The State has argued that Reata does not apply because its claim under the

TMFPA is an “enforcement action.” CR48. Xerox does take a position with

respect to this conclusory assertion, which is the foundation for all of the State’s

arguments—including its position that third-party claims may not be brought in a

suit under the TMFPA. Xerox agrees with the Dental Group that when the State

brings a TMFPA claim, it is like any litigant subject to the rules of civil procedure.

A. The ordinary rules of civil procedure apply when the State brings

a TMFPA claim.

The State has never presented any authority for its assertion that a TMFPA

claim is an “enforcement action” that somehow trumps the rules of procedure

related to counterclaims and third-party claims. Yet the trial court agreed with this

10

argument in the State v. Xerox suit and presumably agreed with it here. CR297

(premising ruling on characterization of State’s suit as an “enforcement action”).

There is no basis for displacing these rules of civil procedure when the State

brings suit under the TMFPA. It is immaterial whether the State calls its suit an

“enforcement action” or simply a tort suit for damages. The label is irrelevant to

the legal analysis.

The TMFPA does not address third-party claims or counterclaims, and there

is no basis to infer from the Legislature’s silence that it intended to displace the

ordinary rules of procedure. Where statutes are silent on an issue, courts “presume

the silence is a careful, purposeful, and deliberate choice.” See Texas Mut. Ins. Co.

v. Ruttiger, 381 S.W.3d 430, 453 (Tex. 2012).

Absent any statutory directive in the TMFPA itself, the controlling rules are

the same rules that apply to ordinary litigants. The Texas Supreme Court recently

reaffirmed that these rules apply equally to the State when it becomes a litigant:

“where the Legislature has given no indication to the contrary the State must abide

by the same rules to which private litigants are beholden.” State v. Naylor, No. 11-

0114, 2015 WL 3852284, at *6 (Tex. June 19, 2015). “As a general rule, the State

litigates as any other party in Texas courts.” Texas Dep’t of Corr. v. Herring, 513

S.W.2d 6, 7 (Tex. 1974).

11

This principle is settled:

[W]hen a State enters the Courts as a litigant, it must be held subject

to the same rules that govern the other litigants, and abide the

consequences of the suit . . . . When a state appears as a party to a

suit, she voluntarily casts off the robes of her sovereignty, and stands

before the bar of a court of her own creation in the same attitude as an

individual litigant; and her rights are determined and fixed by the

same principles of law and equity . . . .

Wortham v. Walker, 128 S.W.2d 1138, 1145–46 (Tex. 1939) (orig. proceeding)

(internal quotation marks omitted); accord Reata, 197 S.W.3d at 377 (“Once it

asserts affirmative claims for monetary recovery, the City must participate in the

litigation process as an ordinary litigant . . . .”); Sec. Trust Co. of Austin v.

Lipscomb Cnty, 180 S.W.2d 151, 159 (Tex. 1944) (“When the state becomes a

party to a suit it is subject to the same rules that govern other parties . . . .”). These

rules likewise apply here.

B. Because the State has brought a tort claim for damages, Chapter

33 applies and permits contribution claims as well.

The Dental Group has set forth the correct analysis about counterclaims and

third-party claims generally, but their analogy to the False Claims Act goes too far.

Specifically, because contribution claims are not permitted in federal cases under

the False Claims Act, the Dental Group incorrectly assumes that they are likewise

unavailable under Texas law. This assumption is incorrect. Chapter 33’s

contribution scheme under the Texas Civil Practice and Remedies Code is the

controlling law in state court.

12

Federal law has no analogue to the Texas contribution scheme in Chapter 33.

Instead, federal law provides a right to contribution or indemnity only in limited

circumstances:

A defendant held liable under a federal statute has a right to

contribution or indemnification from another who has also violated

the statute only if such right arises (1) through the affirmative creation

of a right of action by Congress, either expressly or implicitly, or (2)

via the power of the courts to formulate federal common law.

Mortgages, Inc. v. U.S. Dist. Court for Dist. of Nev., 934 F.2d 209, 212 (9th Cir.

1991) (citing Texas Indus., Inc. v. Radcliff Materials, 451 U.S. 630, 638 (1981);

Northwest Airlines v. Transport Workers Union of Am., 451 U.S. 77, 90–91

(1981)).

The False Claims Act does not contain an express or implied right to

contribution, and over the last quarter century, federal courts have uniformly

refused to create such a right as a matter of federal common law. See Mortgages,

934 F.2d at 212 (“We decline, therefore, to formulate federal common law on this

basis.”).5 The federal rule—that contribution and indemnification claims are

unavailable under the False Claims Act—prohibits all claims (no matter how

styled) that are in substance claims for contribution or indemnity. If the instant

case were a False Claims Act case in federal court, there is no doubt this rule

would apply.

5

See, e.g., United States v. Campbell, No. CIV.A. 08-1951, 2011 WL 43013, at *10 (D.N.J. Jan.

4, 2011) (citing Mortgages, Inc. v. U.S. Dist. Court of Nev., 934 F.2d 209 (9th Cir. 1991)); U.S.

ex rel. Miller v. Bill Harbert Intern. Const., Inc., 505 F. Supp. 2d 20, 25 (D.D.C. 2007) (same).

13

The Dental Group relies on this federal framework, arguing that their claims

do not sound in contribution and would therefore not be barred by the False Claims

Act. This may be true, but it is irrelevant to whether their claims are permissible in

a Texas court under the TMFPA. In this case, the controlling legal framework for

contribution claims is found in Chapter 33. Analogizing to the False Claims Act is

helpful in many respects, but not where conflicting state law controls the issue.

Xerox therefore disagrees with any suggestion in the Dental Group’s arguments

that contribution claims cannot be brought in a TMFPA suit. See Dental Group Br.

20-21 (counterclaims), 29-32 (third-party claims).

Xerox’s mandamus petition fully sets forth the analysis for why a TMFPA

claim is a “cause of action based on tort,” and thus is governed by Chapter 33.

TEX. CIV. PRAC. & REM. CODE § 33.002(a)(1). In short, the State’s claim is merely

a statutory fraud claim seeking to recover damages, so it is subject to Chapter 33’s

proportionate responsibility and contribution schemes.

Rather than fully briefing this argument here, Xerox incorporates it by

reference. Tab F. It would be more appropriate to decide that issue in Xerox’s

original proceeding, where the issue will be fully joined by the State.

So long as the Dental Group is conceding that none of its claims sounds in

contribution, the Court need not decide whether Chapter 33 applies in this appeal.

The Court could narrowly hold that the Dental Group’s claims are permissible on

their own terms—regardless of whether contribution claims are permissible.

14

III. Xerox Will Raise Immunity Arguments Once the Providers’ Claims Are

Clearer.

Xerox has not yet filed a plea to the jurisdiction or raised an affirmative

defense of immunity. Instead, the State raised immunity on Xerox’s behalf.

CR54-57. While Xerox would welcome an affirmance on this basis (rather than on

the incorrect premise that the TMFPA prohibits third-party claims), it leaves it to

the State to assert those arguments. For now, Xerox addresses the issue simply to

clarify that it would be premature to hold that Xerox does not have an immunity

defense.

Xerox can and likely will raise immunity arguments in the trial court if the

claims against it are reinstated. There is no deadline or risk of waiver, because

sovereign immunity implicates subject-matter jurisdiction and can be raised at any

time. See Rusk State Hosp. v. Black, 392 S.W.3d 88, 95 (Tex. 2012) (defense of

governmental immunity is jurisdictional and can be raised for first time on appeal).

Xerox may well benefit from sovereign immunity as to acts taken as a contractor

for the State. Likewise, official immunity is an affirmative defense, which Xerox

can still plead.

Any holding in this appeal about waiver of sovereign immunity under Reata

should be limited to the State, because Xerox has not asserted any affirmative

claims for relief. Reata holds that an entity waives immunity from affirmative

damage claims brought against it as an offset by asserting its own affirmative

15

claims for monetary relief. Reata, 197 S.W.3d at 377. Under Reata, parties sued

by the government may “assert, as an offset, claims germane to, connected with,

and properly defensive to those asserted by the governmental entity.” Id. Because

Xerox has not brought any claims in this case, none of the Dental Group’s claims

against Xerox satisfies the Reata waiver standard.

PRAYER FOR RELIEF

The Court should either affirm the order on immunity grounds or reverse the

trial court’s order. The Court should not allow the order to stand on the basis of an

interpretation of Texas law that imposes a blanket prohibition on counterclaims

and third-party claims when the State brings suit under the TMFPA.

16

Respectfully submitted,

By: /s/ Eric J.R. Nichols By: /s/ Constance H. Pfeiffer

Eric J.R. Nichols Constance H. Pfeiffer

State Bar No. 14994900 State Bar No. 24046627

enichols@beckredden.com cpfeiffer@beckredden.com

Christopher R. Cowan BECK REDDEN LLP

State Bar No. 24084975 1221 McKinney St., Ste. 4500

ccowan@beckredden.com Houston, TX 77010

BECK REDDEN LLP (713) 951-3700

515 Congress Ave., Ste. 1900 (713) 951-3720

Austin, TX 78701

(512) 708-1000

(512) 708-1002 (Fax)

Robert C. Walters C. Andrew Weber

State Bar No. 20820300 State Bar No. 00797641

RWalters@gibsondunn.com andrew.weber@kellyhart.com

GIBSON, DUNN & CRUTCHER LLP KELLY HART & HALLMAN LLP

2100 McKinney Ave., Ste. 1100 301 Congress, Ste. 2000

Dallas, TX 75201 Austin, TX 78701

(214) 698-3100 (512) 495-6451

(214) 571-2900 (Fax) (512) 495-6930 (Fax)

COUNSEL FOR APPELLEES, XEROX CORPORATION AND XEROX STATE

HEALTHCARE, LLC, F/K/A ACS STATE HEALTHCARE, LLC

17

CERTIFICATE OF SERVICE

I hereby certify that on August 10, 2015, a true and correct copy of the

above and foregoing Brief of Appellees was forwarded to all counsel of record by

the Electronic Service Provider, if registered, otherwise by email, and to

Respondent, by hand delivery, as follows:

Counsel for Appellants:

Jason Ray E. Hart Green

Riggs, Aleshire & Ray, P.C. Weller, Green, Toups & Terrell, L.L.P.

700 Lavaca, Suite 920 Post Office Box 350

Austin, TX 78701 Beaumont, TX 77704-0350

jray@r-alaw.com hartgr@wgttlaw.com

Counsel for Appellee State of Texas:

J. Campbell Barker Philip A. Lionberger

Deputy Solicitor General Assistant Solicitor General

Office of the Attorney General Office of the Attorney General

P.O. Box 12548 (MC 059) P.O. Box 12548 (MC 059)

Austin, TX 78711-2548 Austin, TX 78771-2548

Cam.Barker@texasattorneygeneral.gov Philip.Lionberger@texasattorneygeneral.gov

Raymond Winter Reynolds Brissenden

Chief, Civil Medicaid Fraud Division Assistant Attorney General

Office of the Attorney General Office of the Attorney General

P.O. Box 12548 P.O. Box 12548

Austin, TX 78711-2548 Austin, TX 78711-2548

raymond.winter@texasattorneygeneral.gov reynolds.brissenden@texasattorneygeneral.gov

By: /s/ Constance H. Pfeiffer

Constance H. Pfeiffer

18

CERTIFICATE OF COMPLIANCE

1. This brief complies with the type-volume limitation of

Tex. R. App. P. 9.4 because it contains 3,843 words, excluding the parts of the

brief exempted by Tex. R. App. P. 9.4(i)(2).

2. This brief complies with the typeface requirements of Tex. R. App. P.

9.4(e) because it has been prepared in a proportionally spaced typeface using

Microsoft Word 2007 in 14 point Times New Roman font.

Dated: August 10, 2015.

/s/ Constance H. Pfeiffer

Constance H. Pfeiffer

Counsel for Appellees

19

No. 03-15-00252-CV

IN THE COURT OF APPEALS

FOR THE THIRD DISTRICT OF TEXAS AT AUSTIN

DR. BEHZAD NAZARI, D.D.S., ET AL.,

Appellants,

v.

THE STATE OF TEXAS,

Appellee,

v.

XEROX CORPORATION, XEROX STATE HEALTHCARE, LLC

F/K/A ACS STATE HEALTHCARE, LLC,

Appellees.

On Appeal from the 53rd Judicial District Court of Travis County, Texas,

Trial Court Cause No. D-1-GN-14-005380

APPENDIX TO

BRIEF OF APPELLEES

TAB

A Order Granting State’s Plea to the Jurisdiction and

Motion to Dismiss Third Party Claims

B Plaintiff’s Original Petition in Cause No. D-1-GV-14-000581

C Office of Inspector General Report dated August 29, 2008

D Providers’ Plea in Interventions in Cause No. D-1-GV-14-000581

E Xerox’s Original Answer to Defendants’ Original Third Party Petition

F Xerox Corporation and Xerox State Healthcare, LLC f/k/a

ACS State Healthcare, LLC’s Mandamus Petition

Tab A

Order Granting State’s Plea to the Jurisdiction

and Motion to Dismiss Third Party Claims

DC BK1 5120 PG81

Filed in The Distric~ Court

of Travis County, texas

µ-

CAUSE NO. D-1-GN-14-005380 At _ _--41.....:.....!::==--4-F-..__M .

Velv a L. Pri

THE STATE OF TEXAS § IN THE DISTRICT COURT OF

§

Plaintiff, §

§

v. §

§

DR. BEHZAD NAZARI, D.D.S. § TRAVIS COUNTY, TEXAS

D/B/A ANTOINE DENTAL §

CENTER, DR. BEHZAD NAZARI, §

DR. WAEL KANAAN, §

HARLINGEN FAMILY §

DENTISTRY, P.C., NIKIA, §

PRACTICAL BUSINESS §

SOLUTIONS, SERIES LLC, JUAN §

D. VILLAREAL D.D.S., SERIES, §

PLLC D/B/A HARLINGEN §

FAMILY DENTISTRY GROUP, §

DR. JUAN VILLAREAL, DR. §

VIVIAN TEEGARDIN, RICHARD §

F. HERRSCHER, D.D.S., M.S.D., §

P.C., DR. RICHARD F. §

HERRSCHER, M & M §

ORTHODONTICS, PA, DR. SCOTT §

MALONE, DR. DIANA MALONE, §

MICHELLE SMITH, NATIONAL §

ORTHODONTIX, MGMT, PLLC, §

DR. JOHN VONDRAK, RGV §

SMILES BY ROCKY L. SALINAS, §

D.D.S. PA, AND DR. ROCKY §

SALINAS § 53RD JUDICIAL DISTRICT

§

Defendants. §

ORDER GRANTING STATE'S PLEA TO THE JURISDICTION

AND MOTION TO DISMISS THIRD PARTY CLAIMS

On April 15, 2015, the Court heard the State of Texas's Plea to the Jurisdiction, Plea

in Bar and Motion to Dismiss Third Party Claims, filed on January 20, 2015. All parties

appeared through their respective counsel and announced ready.

Case# D-1-GN-14-005380

1~~m~m~m~m~u~M~M~w~w1a~

004002256

383

DC BK15120 PG82

r b~ \-tlN- l tf- 00?3 go

~&9 (?.; i of 2-

Having considered the Pleas, Motion, response briefs, and arguments of counsel,

the Court ORDERS that the State of Texas's Plea to the Jurisdiction is GRANTED.

Defendants' counterclaims against the State are DISMISSED with prejudice. The Court

further ORDERS that the State of Texas' s Motion to Dismiss Third Party Claims is also

GRANTED. Consistent with this Court's rulings in the State' s litigation against Xerox,

the Court finds that the State is entitled to bring this action against defendants to the

exclusion of other parties. Defendants' third party claims against Xerox are DISMISSED.

J-h A~

Signed this.{li day of~' 2015

I

Jud~J'h;;lle{osky l

I

2

384

Tab B

Plaintiff’s Original Petition in Cause No. D-1-GV-14-000581

5/9/20141:05:46 PM

Amalia Rodriguez-Mendoza

District Clerk

D-1-GV-14-000581 Travis County

CAUSE NO. ~-------

D-1-GV-14-000581

THE STATE OF TEXAS, IN THE DISTRICT COURT

PJaintiff,

v.

53 RD JUDICIAL DISTRICT

XEROX CORPORATION; XEROX STATE

HEALTHCARE,LLC;ACSSTATE

HEALTHCARE, LLC, A XEROX

CORPORATION,

Defendants TRAVIS COUNTY, TEXAS

PLAINTIFF·' S ORIGINAL PETITION

The State of Texas. by and through the Attorney General of Texas, Greg Abbott, brings

this law enforcement action pursuant to the Texas Medicaid Fraud Prevention Act, ("TMFP A"),

TEX. HUM. RES. CODE ANN. chapter 36. The State would show the Court:

I. DISCOVERY CONTROL PLAN

L Plaintiffs designate this case as a Level 3 case requiring a discovery control p lan

tailored to the circumstances of 1he specific suit.

TI. THE PARTIES

2. Plaintiff is the State of Texas, by and through the Attorney General of Texas

("Texas" or "the State").

3. Defendant Xerox Corporation is a corporation organized under the laws of New

York and may be served with process upon its registered agent, Prentice Hall Corporation, 211

E. 7111 Street, Suite 620, Au~ Texas 78701-3218. Defendant Xerox State Health Care, LLC, is

a whoIIy-owned subsidiary of Xerox Corporation organized under the laws of the State of

Delaware with Texas offices at 2828 N. Haskell Ave., Dallas, Texas 75204, and may be served

with process upon its registered agent, CSC-Lawyers Incorporating Service Company, 211 E. 71h

Street, Suite 620. Austin. Te~as 78701-3218. Dt:fom.lattl ACS Healthcare, LLC. a Xcmx

Corporation, is a wholly-owned subsidiary of Xerox Corporation organized under the laws of the

State of Delaware with its Texas otlices ai 2828 N. I IaskeH Ave., Dallas, Texas 75204 1 and may

be served with process upon ils registered agent, CSC-Lawye.rs lncorpQrating Service Company.

70 I Brazos Street. Suite l 050, Austltl, Texas 7870 I. Defendant Xerox Corporation acquired

Defendant ACS in 2010. On info11nation and belief, ACS State Healthcare, LLC, changed its

name to Xerox State Healthcare. LLC, on April 1. 2012. Defendants are referred tu hereatter as

"Xerox.··

Ul. JURISDICTION ANO VENUE

4. This Court has subject-matter jurisdiction over this action pursu~mt to section

.36.052(d) of the TMFPA, which provides statutory rerncdi~s to redress the conduct of

Defendants. The TMFP A provides authority for this action to be brought by the Attorney

General. Tex. Hum. Res. Code §§ 36.052. 36. 102. Jurisdiction is further proper be.cause the

amounts sought from each Dcfondtint arc in exce~ of the minimum jurisdictional limits of this

Coun.

5. This Court has jurisdiction over the Detendants named in this Petition, because

each Defendant does busines~ in the State of Texas and committed the unlawful acts alleged in

this Petition in whole or in part in Texas.

6. Venue is proper in T.-avis Co.unty under section 36.052fd) of the TMFPA and

because many of the unlaw'ful acts committed by Defendants were committed in Travis County,

including the making of false statements and misrepresentations of material fact to the Texas

Medicaid Prngram.

PLAIN rlFF'S ORIGINAL PETITION PAGE2

IV. PRELlMlNARY STATEMENT ANO NATURE OF THIS ACTION

7. This is a law en.forcemenl action alleging unlawtiJJ acts and seeking civil remedies

under the TMFPA

8. Xerox's unlawful acts resulted in a slibstantial breach of safoguards intended to

protect ta:.xpayer dollars, maintain the integriry of Medicaid policies, and ensure the appropriate

delivery of services to Medicaid clients. Xerox permitted an unpreeedented loss of Medicaid

funds to predatory and unscrupulous dental providers. As a result of the conduct of both Xerox

and these providers, the Medicaid program wa~ deeply ~omprnmised. During the time periocJ

beginning January 1, 2004, when Xerox began its tenure as the State's Medicaid contractor, and

ending March l, 2012, when Texas shifted most of its dental benefits to managed care, Texas

Medicaid expended approximately $1.l billlo,1- dollars for orthodontic services to Medicaid

chems. Although a comprehensive damage estimate has not been completed, initial reviews of

t h ose expenditures indicate that a substantial percentage was paid in violation of Medicaid

policies, policies Xerox repeatedly assured Texas it was enforcing. Additionally, because of its

misrepresentations, Xerox was paid tens of millions of dollars for services it was, in fact, not

performing.

9. Xerox's liability arises from its misrepresentations regarding, and c-0ncealment of,,

material facts regarding its discharge of contractual obligations. Xerox bid for, and won,

contracts with the Texas Healtb and Human Services Commission (''HHSC') and its

predecessors to perfonn program administra tion for T~xas Medicaid. Included among the

administration responsibilities was evaluation .and proper disposition of prior authorization

requests s ubmitted lo Med[caid by dental providers for approval of orthodontic treatment. Xerox

repeatedly represented to Texas Medicaid of1jcia!s that its prior authorization system ensured

PLAINTIFf' SORJGINAL PETfTlON P.AGE 3

propt.!r pre-determinations of medical necessity and enforcement of Medicaid po.Jicy. Contrary to

those repre-sentat!ons. Xerox knowingly failed to adequately review the orthodontic PA requests

and documentation submitted by providers to obtain prior authorizatio11 for orthodontic

treatment. Onhodontic PA requests were routinely "rubber-stamped" by Xerox employees

without proper review. Vast numbers of these orthodontic PA requests were for children whose

condition did nol meet Medicaid criteria for treatment. Xerox·s failure lo properly review these

applications penniued Medicaid dentaJ providers to re\.,-eive payment for services that were not

within the scope of medically necessary services pennitted by Medicaid Jcntal policy. Xerox's

conduct violates the TMFPA.

I 0. The State seeks to recover: ( l) the amount of any payments or the value of any

monetar~ or in-kind benefits provided under the Medicaid program, directly or indirectly, as a

result of the Detcndants' unlawful acts~ (2) pre-judgment interest on the amount of the payments

or the value of such payments; (3) two times the amount of the payments or the value of such

payments; ( 4) civil penalties in an amount not kss than $5,5.00 Of more than $11.000 for each

unlawful act ~ommitted by Defendants~ 1 ( 5) costs, attorneys· fees, and expenses; and ( 6) any and

all other remedies that may be allowed under the TMFPA.

V. BACKGROUND

A. The Texas Medicaid Orthod.ontic Benefit

11. Orthodontic services for children covered by Texas Medicaid arc limited by rufe

and by policy. To quallfy for orthodontic treatment, a child must meet a Mcdicaid~dcfinetl test of

medical necessity. In general 1 a child must be age twelve or older, or ha:vc lost all primary

1

This maximurn civil penalty would rise to not.more than $15,000, for each unlawful act which results in

injury 10 a ch ild under 18. disabled person. or elderly person. See TMFPA § 36.052(a)(3)( A).

PLAINTIFF'S ORIGINAi PETl'I ION PAGF. 4

dentition (sometimes known as "baby teeth"), and suffer from ~i severe handicapping

malc..,cclusion. Medicaid does not authorize orthodontic treatment for cosmetic cotTectio11.

12. To ensure compliance with policy, Texas requires dental providers to obtain pdor

authorization of orthodontic treatment plans. Claims submitted for treatment are not considered

for payment unless prior authorization is obtained in advance. Each prior authorization request

must include- documentation specified by effecti.ve policy, These requirements include the

submission of a treatment plan, a properly-completed and scored Handicapping Labio~Ungual

Deviation score sheet ("HLD sheet;') with a minim.um score, and clinical documentation

supporting medical necessity incl uding but not limit.e d to facia1 and intraoral photographs and

radiographs. Medical necessity for the requested treatment can be verified only by examination

and verification of the clinical documentation by a licensed dental professional. HHSC expected

and required the prior authorization process implemented by Xerox to include a proper review of

all documentation and verification o.f the client's eligibility fot the services requested; that is, a

thorough review to·ascertain that the dient a1:id treatment plan met all program requirements.

8. The 2003 Contract

l3 . On nr about May 1, 2002, HHSC released a Request for Proposal (''2002 RFP")

for fiscal and business adminii:.tration D( the Texas Medicaid Program. The 2002 RFP described

the prior authorization performance required of a successful bidder:

Prior authorization (PA} is a mechanism to determine the medfoal necessity of selected

non-emergency, Medicaid-covered, and medical services prior to service delivery, . . •The

PA function will serve as a utilization tnanagernent measure allowing payment for only

those services that are medically necessary, appropriate, and cost-effective, and reducing

tbe misuse of specified services.

Additionally, the 2002 RfP listed Vendor Responsibilities that included:

Receive, correctly disposition (i.e., approve, deny, modify, or determine

incomplete) ..• prior authorization requesls for services.. . .

PLA!NTIFF'S.ORJGIN AL PETfflON PAGES

PAC-5 Ensure that non-covered services are not prior authorized.

PAC-8 Conduct quality assurance reviews to ensure appropriateness of Medicaid , . .

PA analyst decisions.

PAC-15 Ensure PA staff use welt-defined processes and procedures for analysis and

research for PA approvals.

PAC-17 Provide sufficient. and adequate professional medical staff for staffing and

managing the [>A function, induding medically knowledgeable PA analysts

for processing requests and availability of licensed medical protess.ionals to

provide consultative services regarding all Medicaid . . . covered service

types.

PAC-40 Implement a quality assurance process and e~tab lfah procedures to

periodically sample and review dispositioned [sic I PA requests to determine if

PA policy and procedures are being followed.

14. Ln response, Xero}( submitted a proposal 011 August 21, 2002 (''2002 Proposal"). In

lhe 2002 Proposal, Xerox represented to Texas Medicaid tha.t its prior authorization process

would ensure the implemerttation of HHSC-approved dental criteria and policy and prevent

medically unnecessary services and identify over-utilization of ~rvices. Xerox represented that

qualified PA staff would review each request ant! determine whether the orthodontic: PA requests

complied with Medicaid policy an<i the. services were medicalty necessary. Xerox assured Texas

Medicaid thac qualified clinical personnel would use their medicaJ expertise and HHSC-

approved policy to evaluate medical necessity and cost-effectiveness of requesk~d services.

Xerox promised that it would provide ongoing quality reviews of PA activities, including

reviews of accuracy of the PA determinations an<l adherence to documented pr-0cedures.

l 5. HHSC awarded the Texas Medicaid Claims/Primary Cate Case Managen:1em

Administrative Services Agreement ('.2003 contract") to Xerox. The parties executed the 2003

contract in February-, 2003 . The 2003 cr111tract specifically incorporates the 2002 RFP and the

2002 Proposal. The 2003 contract expired by its terms on or about August 31, 2007.

PLAINi'lFF' S ORJGINAL PBTITION PAGE6

l 6. During the transition period between execution of the contract and the assumption

by Xerox of operations on or about January f. 2004, Xerox personnel submitted for HHSC

approval written poJicies and procedures ("P&Ps'') specific to dental PA reqi1ests which

specifically represented to HHSC that every PA request would be st1bmitted to the dental director

employed by Xerox for review. The Xerox P&Ps incorporate<l the procedure followed by the

contractor preceding Xerox, a procedure HHSC expected Xerox to follow bnless changes were

auth0riz:ed by HIJSC. The P&Ps included a representation that the review of eacb PA request

would include an examination of the HLD scoring sheet as well as the radiographs, faciaJ

photographs, and plaster cast models of the patient's teeth.

17. Xerox assumed -operations u nder the 2003 contract on or about Jam1ary l~ 2004.

At or around that same time} Xerox implemented adifferent procedure than that described in the

P&Ps. Without submitting documentation of this chat1ge to HHSC, Xerox instructed its dental

clerical personnel to automatically approve applications for Medicaid-eligible chi ldren, age 12 or

over, accompanied by an lILD score sheet that showed a score of 26 or above ou its face. The

employees assigned to tbis task had no ql!al.ifications to ronduct a medical necessity evaluation;

and, indeed, these employees made no attempt to do so. In most instances, the employees did not

l!-ven ascertain that any or all of the required medical documentation was actually submitted by

the provider as required by Medicaid policy. Further, the clerical personnel were inadequately

lrained to review the HLD sheet for obvious over-scoring. If the application was for .a person

who me.t Medicaid eligibility requirements and the HLD score was facially 26 or more,, approval

was entered by the clerical personnel without forthcr ex.amination. This new procedure

drastically reduced the number of applications receiving review by the dental director, who was

the only perso11 employed by Xerox with the medical qualifications necessary to make a pr.opet

PLAINTIFF'S ORIGINAL PETmON PAG£ 7

review of these applications.

18. Clerical personnel were directed by Xerox to send only orthodontic PA requests

for children whose age was under twelve or whose HLD scores were below 26 to the dental

director for review, That was estimated to be l 0% of all orthodontic PA requests. However. even

the W% reviewed by the dental director were not properly evaluated. The vast majority of those

orthodontic PA requests were approved by lne dental director, in many instances when the denm!

director knew the patient did not meet Medicaid p<'llicy requirements. Furt'her, as time went on

and the number of 'PA requests increased, Xerox clerical personnel were instructed to approve

applications for children under twelve without dental director review or proper authentication

that the chitd·s primary dentition had been lost.

19. During the course of the 2003 contract, Xerox continued to promulgal~ written

documents indicating that every dental PA request was submitted for dental director review.

These documents misrepresented material facts regarding the actual procedures followed by

Xerox employees.

20 . The Xerox clerical j:)ersonnel processing dental PA Tequests repeatedly observed

providers were submitting dent::il Pr\ requests that, on their face, indj.c;ated a need for

pmfessional review by the dental director to ascertain compliance with ~1ledicaid policy. They

reported their observations and concerns to their superiors. Despite the concerns raised, Xerox

tnade 110 changes in its process to increase the level of review. Further, despite its representations

regardi.ng the efficacy of its quality assurance processes, Xerox made no attempt to test Lhe

accuracy of its orthotfontic PA dispositions.. Xerox did not even retain the medical

documentation necessary to conduct such a test.

21 . In fact, Xerox 'implemented cost-saving measures that made adequate reviews less

PLAINTJFF'S ORJGINAL PETlTION PAGE8

Likely. In or around August of 2006, Xerox launched its so-called Activity Based Compensation

("ABC"). Under ABC, Dental PA Specialists began working from home and were c-0mpcmsated

on a piece-work basis. This incentivized employees to process more PA requests in less time.

Xerox's home-base.d employees had no access to the medical documentation suhm.itted by

providers.

'22. In 200,8, tbellHSC' Office of Inspector General ("HHSC-OIG") began an auqit of

the PA processes followed by Xetox employees, HHSC-OTG auditors ohsewed Xerox clerical

personnel approving orthodontic PA requests without any review of submitted medica1

documentation . HHSC-OfG questioned whether this p(ocess rnet Xerox's contractual

obligations. Xerox management vigorously contested the issue. Xerox represented to HHSC-010

that its procedures constituted a medical necessity review of each dental PA request and t11at the

vast majority of the dental PA requests submitted met Medicaid coverage requirements. Xerox

made those representations even though it had not. verified medical necessity for, in its 'OWn

estimation. 90% of the dental PA requests stibmiU·ed and even though Xerox's ·d~ntal director

was approving most of the I 0% he reviewed himself even when they did not qualify for services

under Medicaid policy. Moreover, Xerox made its representations knowing it had done nothing

to test the validity of any prior authorizatiol1 approvals made by clerical personnel or the dental

director.

23. On or about August 29, 2008. HHSC-010 published its Performance Audit

Report C'2008 HlISC·OlO Audit'))..finding: "The PA dental team members could be approving a

portion of orthodontic PA requests that arc nol for the treatment of severe handicapping

malocclusion and other specially medically necessary circumstances. Dollars paid. for

orthodontic treatment, for the months of September 2007 through February 2008, were at least

PLAINTIFF'S ORIGINAt J>ETJT!ON PAGE9

$52.6 million.'' 'HHSC-OJG made the formal recommendation that Xerox .should sample the

01thodontic PA requests approved by its per~onnel to ensure the PA re.quests meet the crit~ria for

Texas Medicaid benefits. ln its management response to the audit findings and

recommendations, Xerox represented that it reviewed the orthodontic PA requests "in

accordance with the Medicaid administration contract, policies and rules.'' Xerox further

r.epresented, "[T]he absence of PA reviews by a licensed dental professional does not mean that

payments for orthodontic treatment during the audit period of September 2007 through February

2008 were inappropriate." Xerox maintained that dental d irector review was not required by the

contrac;t, only statTing by "medically knowledgeable analysts,'' Xerox rnade that represeniation,

knowing that, in f~c(, none of the clerical personnel processing orthodontic PA requests were

medically knowledgeable. Xerox never implemented a process to sample for and confirm

compliance with Medicaid policy and/or the documentation of med.ical necessity in applications

apptoved by its personnel.

24. In or arouod March, 2009, in response to demands by HHSC for updated P&Ps

for all areas of operations, Xerox submitted Dental Prior Authorfaation P&Ps and Werk

Jnstructions to HHSC that indicated that aJI reqllests for dental PA were scrutinized 10 determine

that all required d ocumentation was submitted, that the dental and ot1hodontrc PA requests and

H LD sheets mer Medh:aid policy requirements. anc..1 that <tUa1ifying dental and orthodontic PA

requests were routinely submitted for demal director review to determine medical necessity.

25 . ln or about April. 2009, the HHSC Deputy Medicaid/CHIP Director for Claims

Administrator Operations ("HHSC Deputy'\) became concerned about Xerox's orthodontic PA

process. The HHSC Deputy was responsible for oversighl of Xerox's contractual performance

and was vested with authority to imp!)se sanctions under the contTact. The HHSC Deputy's

PLAINTlfF'S ORIGINAL PETtTION PAGE 10

concerns arose from a n::view of the 2008 HHSC-OIG Audit and a letter written to HHSC-OIG in

November, 2008, by the Texas Office of Attoniey Geileral Medicaid Fraud Control Unit

("MFCU letter''). The MFCU letter set out infortnati:on obtained by MFCtl from Xerox's dental

director regarding the way Xerox was reviewing orthQdontic PA requests.

26. On or about April 15, 2009, the HHSC Deputy issued a State Action Reque51

(SAR) to the Managing Direct<.1r for Xerox. The SAR attached the MFCU letter of November,

2008, noting: "The contract required that [Xeroxl research, analyze, and evaluate all PA

decision.s and ensure aH facts an~ considered and documented prior ~o making. a PA

determination. The contract funher requires that [Xerox] correctly disposition all PA requests.''

The SAR fiirther stated:

The temarks attributed to the [Xerox I Dental Director by the OAG, if accur-ate,

suggest a serious lack of undei:standiog of the prio-r authorization requirenwnts for

t11~ Medicaid dental program. It is absolutely imperative that rxeroxj exercise

clinical ,judgment for each individual dental prior authorization request submitted

and approve only those services that are clinically appropriate.

If the . . . Dental Directors [sicJ c,omments are accurate then those comments

represent a serious and material breach o f the contract. [Xerox] may be subject to

actual damages for any procedures that were not clinically evaluated but were

authorize<l and/or liquidated damages for failure to adequately manage the dentaJ

prior authorization program.

Prepare a response to each comment attributed to the ... dental director in the

attached [MfCll) letter and provide HHSC with assurances that each prior

authorization for dental services is reviewed 'by an appropriately -credentialed

professional to determine dental necessity for the service. Provide HHSC 'Nitb

assurance that every dental service during the cmrent [Xerox] Dental Dir~tors

[sic] tenure has been reviewed for clinical necessity.

27. ln a meeting held in or about early May~ 2009, the HHSC Deputy confronted

Xerox with the evid~nce that XerQx was not reviewing orthodontic PA requests to determine

medical necessity and ensure Medicaid policy was. properly enforced. Xerox was asked

specifically whether it was "rubber-stamping'' these requests based solely on the lILD score;

P LA INTIFF'S ORIGINAL PETlTlON PAGE II

Xerox's Managh1g Director assured th'e HHSC Deputy that such was not the case. Xerox

represented lha1 it was following policy and properJy reviewing orthodontic PA req.uests. Xerox

did not re¥eal to HHSC that it had. without authorization from HHSC, interpreted HHSC's

policies to mean that clerical personnel without any deotal training whatsoever were making

detem1inations of medical nece·ssity based solely on whether they saw a 26 or above on the HLD

score sheet.

28. On nr about May 13, 2009, the Managing Director submitted Xerox's formal

written. response to HHSC's SAR. Xerox stated: "We have reviewed the SAR comments with

lthe Dental Directorl who stares his comroe11ts were taken out of context." Xerox made the

fo1Jowing representations:

We review the dol:umentatio11 the provider submits to determine the medical

necessity criteria, as outlined in the Texas Health Steps (THSteps) Orthodontic

Dental Services Medical Policy.... [Xerax] reviews the dental seFVices prior

authorization request for medical necessity based on tbe medical policy guidelines

established by HHSC and the dental policy and procedures that are approved by

HHSC. The dental specialists who review the requests are trai.11ed in the dental

MedkaJ Policy and follow the approved policy and procedures to appropriately

disposition ihe PA requests.

29. On or about July 3, 2009, Ill1SC issued another SAR requesting infonnation

regarding Xerox's con-ective measures to address the HHSC-OlG audit recommendations had

been appropriately implemented. Specifrcally, HHSC reqnired Xerox to provide to lfHSC

docwnenta1ion demonstrating Xerox's quality assurance process and the existing P&P describing

that process. HHSC also requested updated work instructions used to train PA staff. On or aboul

July 20. 2009, Xerox issued its response to the July 3, 2009, SAR. Xerox stated that it had not

added the sample step recommended by 1-U-ISC-OJG but had reviewed an internal sample of ten

cases approved by its dental team. Xerox represented to HHSC: ·'The results of that sample were

that all ten cases reviewed showed evidence of a malocclusr011 and were approved correctly

PL AIN.l'IFV'S ORIGINAL P'ETJTION PAGE 12

according to dental policy." Xerox. attached what it represented to be its current quality assurance

("QA") P&P for PA. The QA P&P tepresents tbat the QA process tests whether '"[a]ll medical

facts are considered and documented in the PA determination." ln addition to the QA P&P.

Xerox attached what it represented were current Dental PA work instructions. The described

procedure represents dental altthorization requests assigned to Dental PA specialists are reviewed

"tu be certain the request is submitted in its ~ntitety."' The procedure continues: "After the

request is checked for client and provider el igi.bility and duplications, the request is forwarded to

tb~ Dental Director,s in-box for review, and x-rays/photographs (molds, if necessary) are

prepared for his inspection." Th.e work instruction adds: "The DentaJ Director will entel' the

decision , _!' This documenta.J.ion submitted by Xerox to HHSC misrepresented material tacts

regarding actual procedures followed by Xerox persormel.

C. The 2010 Contract.

30. On or about August 15, 2008, HHSC released a new Request fol' Proposal ("2008

RFP") for administrative services to Texas Medicaid. The 2008 RFP included svecifications of

the Prior Al1lhori-'zation services HI ISC expected a successful bidder lo provide:

Generally, Ptior Authotization (PA) is a process used to determine the me.dical

necessity for selected non.emergency medical services. equipment, drugs and

s1.1pplies before the services or .supplies are provided . . . .In compliance with State-

approved policies and procedures, the Vendor prospectively implements

processes to review the facts associated with cett<'lin treatments proposed by

providers • . . and makes detenninations regarding the me.dical necessity and

apprnpriatcncss of care. Prior Authorization requests must be reviewed on a case-

by-case basis for clients who are eligible for services ....

The primary objective of the P /\ function by the Vendor is to manage utilization

by only aJlowing payment for those covered services that are medil;ally necessary,

appropriate, and cost~effective, thereby reducing over-utilization andior abuse of

spedfied services.

The general requirements imposed upon the Ven.dnr included:

PLMNTll>F' S ORIGINAL PETITION PAGE l3

PAC-03 R~tain and retrieve al I PA records in accordance with the State~

approved record-retention and retrieval guidelines.

PAC-04 Establish and follow State-apt'roved policies and procedures. for

analyzing and researching PA determinations.

PAC-06 Submit to the State for review and approval a quality assurance

plan and procedures for verifying the accuracy of analyst and

medical director prior authorization dispositions/decisions

(approval, denial, incomplete and modification). The quality

assurance p!an must include al least a bi-annum review schedule

for all types of Prior Authorization decisions, and be submitted to

the State annually. Changes to the quality assurance plan and

procedures must be approved by the State prior to implementation.

Prior Authorization Processing tasks and activities were iocluded in the 2008 RFP to

describe lh.c "results/outcomes'' the Vendor mt1sl achieve:

PAC-20 Receive1 correctly disposition (i.e. approve, denY.. modify., or

determine incomplete). . . . -prior authorization requests for aH

services....

PAC-23 Eslablish and maintain State-approved processes and procedures to

ensure that non-covered services are not prior aul~orized unless

specifically directed by the State.

Tbe 2008 RFP also identified specific criteria to "ensme chat appropriate Medical

Necessity evaJuation i-s conducted for PA determinations,\' including:

Pt\C- 36 Research, analyze and evaluate all PA decisions and ensure all

medical facts arc considered and documented prior to

determination,

The 2008 RFP specified the following with regard to PA staffing:

The Vendor's PA staff must have the education and professional credentials

defined by the State to penorm the PA tasks and activities.

PAC-37 Provide and maintain a st1fficienl number of knowledgeable and

profossional medical personnel to perform the PA function, in

accordanc.e with State-approved proce$ses a(ld procedures.

PA personnel must include:

PLAINTIFF'S ORIGINAL PETJTION PAGE 14

• Medically knowledgeable PA analysts, to process teguests;

• Licensed medical professionals available at all times to

provide consultative services with regard to all covered

service types; and

• Licensed nurses acting within their scope-of practice ...

31. On or about January 27, 2009, Xerox submitted its Proposal for Medicaid/Child1·en

with Special llt!altb Cart! Needs Services Program Claims .Processing, Primary Care Case

Management and Pharmacy Claims and Rehate Administraiiou (''2009 Proposal") to HHSC. The

Proposal included representations specific to Prior Authorization management:

The [Xerox} Prior Authori>tation department offers clients. providers~ and the

State the benefits of detailed knowledge of medical policy authorization criteria

cmd program services limitations, industry standard evidenced based criteria; as

well as the clinical knowledge to faciJitate medical necessity determinations.

The Prior Authorization (PA) department consistently demonstrates the principles

of good health ca:re program management. enabling the State to conserve health

care funds while ensuring the provision of necessary servfoes to clients who

genuinely need them.

The director of the PA department . . . accepts responsibility for pmcessing

provider authorization requests according to . . . Medicaid . . . program

requfrements. The director ensures compliance with State and Federal regulafions

for authorization of services. Along witb [Xerox's) medical affairs officer and the

medical director, [the PA dire~tor} feads the prior authorization activities and is

responsible for processing provider authorization reqltests in accordance with

HHSC approved medical policies. We review authori2at1oo requests for clients

who are eligible for services .•. 011 a case-by-case basis.

Xerox represented that its PA department met the "primary business objective of the PA function

. . . to redi1ce the excessive utilization or abuse of specified serviees by requiring prior

uuthorization based on Medicaid policy and sound medical/dental criteria before allo\\>ing

payment ... [ensuring] 'that the services are medically necessary,. appropriate~ and cost-eITective.

Xero" represented that it meets this objectiv~ by "maintaining a.o efftcient prior authorization

process using HHSC approved medical/dental criteria attd experienced qualified staff to review

authorizatio11 requests. 1• Xerox r~presented that it was meeting HHSC's Busjness Objective of

PLAINTl.FF 'S ORIGINAL PETITION PACE IS

Utilizatlon Review to Rn:-ure Appropriate Determinations for Requested Services and Supplies

through its reviews of authorization requests for ~ompleteness and lts determinations by

professional medical personnel for medical necessity. Xerox represented that its ·•p A policies

and procedures provide the ability for tne prospective review of requested services and benefits,"

allowing "a comprehensive medical necessity review." Xerox addressed the quality assurance

requirements as follows:

PA quality assurance activities include reviewing that PA determinations apply ..

. established policies and procedures appropriat~ly, thereby meeting the

applicable Federal and State laws, tules. and regulations and guidelines.

Xerox. stated:

PA staff review ·and consider all medical facts submitted by a provider • .. when

determining medical necessity for requested services. Before making a PA

determination. we research. analyze, evaluate. and ensure we consider all

d<>cumented medical facts, in accordance with State approved criteria.

Xerox represented U1at its PA pcrsonneJ includeS' "Medic.ally knowledgeable PA Specialists wno

analyze and process reque,sts.1' Xerox fUrther represented that medical necessity review~ were

perfonned only by medically qualified personnel. All oftbese representations were false.

32. On or about S~ptember I. 2010. Xerox was awarded the new contract ("'2010

Contract"). The 20 IO contract. 1nc<rrporates both the 2008 RFP and Xerox'--s 2009 Proposal.

33. On or about January 19, 201 l , HHSC issued a. SAR identifying perfotmance issues

with the prior authorization of orthodontic requests. This SAR Mtned specific authorizations

approved ~Y Xerox that did not meet Medicaid policy. On or about May 18, 201 J, HHSC issued

an ••oral Notice of Deficiency with Corrective Action Plan - Orthodontia Prior Authoriz~tion."

On or ab0ut May 201 20 l t Xerox sent a response SAR lo HHSC with what it represented a.:> its

current work instmctions aJong with what purported to be "draft" work instructio11s, The

"current" work instructions still described all dental prior atnhorization requests going to the

l'LAfN f IFF'S ORJGrNAL Pl:.TI flON PAGE 16

dental director. The "draft'" work instructions describe a process wherein the Dental Specialist

ensures that the request is complete, ensures that the HLD score is 26 or more, and sends

orthodqntic PA re-quests for dental director review if the score is less than 26.. On or about .June

8, 201 1~ Xerox sent a "follow-up•• SAR response to the Oral Notice of Deficiency-. In it, Xerox

represented to HHSC that the PA specialists who process requests for orthodontia serviees are

·•medically knowledgeable PA analysts who do not make final .determinations of medical

necessity; therefore, these staff are not licensed or certified ," Xerox represented to HHSC that

the "medically knowledgeable'' analysts only approved those applications with a "verified" score

of26 or ~bove. In fact, Xerox personnel were not trained to check the validity of a score of 26 or

above. On or about July 19. 2011, in response to continuing requests for ·clarifi.catjon by l-IFISC,

Xerox finally admitted; "[Xerox) ' validates' the score by 111a.theml)tically calculating I.he

providers recorded numbers to ensure the score totals 26 or higher!'

34. In or about October, 2011, at HHSC's insiscence, Xerox implemented new

pfocedures including a review by a licensed dental (Yrotessional of all orthodontic PA requests.

35. ln or about January~ 2012, HHSC instructed Xerox to discontinue processing

dental prior authoriz.ation requests in anticipation of the implementation of managed care.

VI. APPLICABLE TEXAS STATUTORY PROVISIONS

36. Prior to August 31~ 2005, a person committed an unlawful act as defined under the

Texas MeCLicaiq F"raud Prevention Act by, among other things:

A. Knowingly or intentionally making or causing to be made a false

statement or misrepresentation of material fact on an application for a.

contract, benefit, or payment under the Medicaid Progra;m; or that is

intended to be used to determine a person ~s eligibiiity for a benefit or

payment under the Medicaid program. TEX. HUM. Res. CooE §

36.002(l)(A) & (B).

PLAINTIFF'S ORfGJNAI., PETITION PAGl: 1'7

B. Knowingly or intentionally concealing or failing to disclose an event that

the person knows affects the initial or cominued right of the person to a

benefit or payment under the Medicaid program and to pennit a person to

receive a benefit or payment that is not authorized, or that is greater than

the benefit or payment that is authorized.. TEX. HUM. RES. CODE §

36.002(2).

C. Knowingly or intentionally making, or causing lX> be made, inducing, or

seeking to induce the makirtg of a false statement or misrepresentatiou of a

material fact concerning 'information required to be provided by a federal

or stare law. rule, regulation or provider agreement pertaining to the

Medicaid Program. TEX. HUM. RES. CODE § 36.002(4)(8). .

D. Knowingly or intentionally entering into an agreement. combin,ation. or

conspiracy to defraud the state by obtaining or aiding another person in

obtaining an unauthorized payment or benefit from the Medkaid program

or a fiscal agent TEX. HUM. RES. CODE § 36.002(C>).

37. Since August 3'1, 2005, a person commits an unlawful ac1 as defined under the

Texas Medicaid Ji'rnud Prevention Act by, among other things:

A Knowingly making or causing to be made a false statement or

misrepresentation of,a material fact to permit a person to receive a benefit

or payment under the Medicaid program that 1s not aulhorized or tbat is

greater than the benefit or payment that is authorized. TEX. HUM. RES.

CODE ANN.§ 36.002(l)(A) & (B).

13. Knowingly concealing or failing to disclose information that pennits a

pers0n to receive a benefit or payment under the Medicaid program that is

not authori7.ed or that is greater than the benefit or payment that is

authorized. TEX, HUM. RES. CODE ANN. § 36.002(2).

C. Knowingly making, causing to be made, inducing, or seeking to induce the

making of a false statement or misrepresentation of material fact

concerning information required to be provided by a federal or state law,

rule, regulation, or provider agreement pertaining to the Medjcaid

program. TEX. HUM. RES. CODE ANN. § 36.002(4 )(R).

PLA INTIFF'S ORIGlNAL Pl:".Tl'rlON PAGE 18

VU. DEFENDANTS' VTOLATlONS OF T HE

TEXAS MEDICAID FRAUD PREVENTION ACT;i

38. The State re-alleges and incorporates by reference as set forth her~in the

allegations contained in Paragraphs t through 35 of this Petition.

39. Xerox knowingly made or caused to be made false statements or

misrepresentations of material facts to HHSC authorities charged with overseeing Xerox's

contractual perfonnance tegardi ng:

• The application and enforcement of M~dicaid policy with regard to orthodontic

treatment~

• The conducting of medical necessity reviews of requests for orthodontic prior

aulhori;r.ation;

• The provision of adequate rnedicalJy knowledgeable personnel to make medical

necessity determinations;

• The application and .appropriate enforcement of Medicaid pollcy with regard to

the review of documentation submitted by providers to support medical necessity

fot orthodontic treatment

• The implementation of quality assurance processes necessary to assess the

dispositions of requests for orthodontic prior authorizations;

• The retention of reco·rds necessary to justify the dispositions of requests for

orthodontic p.rior authorizations.

Xerox•s false statements and/or misrepresentations permitted orthodontic providers to receive

benefits under the Medicaid pro~ran1 in violation ofSection 36.002{1) of the TMF~A.

2

rn August of 2005, applicable provisions of the TMFPA were amended as set forth in 1[~

36 through 37 above. Plaintjff:s are seeking the appropriate remedies for Defendants' unlawfol

acts (which Include Defendants' conduct both prior to and after August 2005 for purposes of this

lawsuit) as.defined in the TMFPA at the time such unlawful acts were- committed.

PLAlNTTFf'S ORIGINAL PETITION J>AGE 19

40. Xerox knowingly concealed from, or failed to di.sclose to. l JHSC authorities

charged with overseeing Xerox's contractual performance events or information regarding:

• The application and enforcement of Med.icaid policy with regard to orthodontic

treatment;

• The conducting of med1cal necessity reviews of requests for orthodontic prior

authorjzation;

• The provision of adequate medicalJy knowledgeable personnel to conduct medical

necessity tletermitiations;

• The application and appropriate enforce1rteL1l of Medicaid policy with regard to

the submission by providers. of medical documentation to support medical

necessity for orthodontic treatment:

• The implementation of quality assurance processes necessary to assess the

dispositions of requests for orthodontic prior authorizations~

• The retention of records necessary to justify the dispositions of requests for

orthodontic prior authorizations,

Xerox's concealment and failure to disclose material information pennt~ted orthodontic

providers to receive payments under the Medicaid program that were not authorized o r that were

greater than the benefits autJ1orized in violation of Section 36.002(2) of the TMFP A.

41 . Xerox knowingly or intentionally made, or caused to be made, induced, or sol,lght

to induce the making of false statements or misrepresentations of material facts concerning

information required to be provjded by a foderal or state law, rule, regulation or provider

agreement pertaini.ng to the Medicaid Program in violation of Section 36.002(4) of the TMFPA.

Xerox's conduct permitted Xerox to receive payments for services it failed to perfotm and

PLA!NTiFF'S ORJGINAL PETITION

induced the Texas Medicaid program to. make payments to both Xerox and orthodontic providers

that should not have been paid.

42. As a result of Xerox's conduct, hundreds of millions of dollars in pay'tnents were

made for services not performed and orthodontic. benefits not authorized by Medicaid policy by

the State of Texas.

43. Under the TMFPA, Xerox is liable to the State of Texas for the value of any

payments or any monetary or in-kind benefits provided unde1· the Medicaid program, directly or

indirei.!tly~ as a result of its unlawful acts. two times the amount of those payments, plus pre-

judgment intetest on the value of those payments, and a civil penalty for each unlawful act

committed, in addition to the fees, expenses, and costs of the State of Texas in investigating and

obtaining civil r~medies in this matter. TEX. HUM . RES. C ODE§§ 3.6.052, 36.007.

44. The State invokes ~JI relief possible at law or in equity under TEX. HUM. RES.

CODE §36.052, whether specified in this pleading or not

45. The amounts sought from Xerox; are in excess orthe minimum jurisdictional limils

of this Court.

vrn. STATUTORY TNJUNCTION UNDER§ 36.051 OF THE ACT

46. The Attorney General bas good reason to believe the Defendants are committing,

have committed, or are about to commit lln1awfo1 acts as defined by the TMFPA. These illegal

acts may be enjoined under§ 36.051 Of the Act, and under TEX. GOVT. CODE§ 200L202.

lX. JURV DEMA~D

47. The State respectfully requests a trial by jury on all claims pursuant to Texas Rules

of Civil Procedm'e 2 l 6.

PLATNTIFF'S ORIGINA L PETITION PAGE: 21

X. PRAYER

48. The State asks that judgment be. entered upon trial (}[this case it1 favor of the State

against Xerox to the maximum extent allowed by law.

49. The State asks for injunctive relief pursuant to§ 36.051 of the TMFPA and ·under

TEX. GOVT. CODE § 2001.202.

50'. The State asks that it recover from Xerox:

A. restitution of overpayments made as a result ofXerox7 s unlawful acts;

B. lwo. times the value of any overpayments made as a result of Xer0x's

ur1iawful (lets;

C. civil penalties~

D. prejudgment interest;

E. expenses, costs and attorneys· lees: and

F. post-judgment interest al the Jega1 rate.

Respectfully stJbmitted,

GREG ABBOTT

Attorney General of Texas

OANlEL T. HODGE

First Assistant Attorney General

JOHN SCOTT

Deputy First Assistant Attorney General

PLAINTIFF'S ORlGINAl Pf.1Tf!ON PACE.22

/\ss1st,m1 AUurni.;ys Ot:nernl

P.O. Ao\ I2~·lN

Auslm. Tc u 787 1t-2548

51 :?l 4 ~9-0 I:! tu\

rro.u t·V. FOR THE s l'ATE OF fE ·"·

Pt.ANTIFl- '.\ U U.ilNAI Pl· llK • . lJ

,~,

Tab C

Office of Inspector General Report dated August 29, 2008

TEXAS

Health and Human

Services Commission

Albert Hawkins, Executive Commissioner

Office of Inspector General

Performance Audit Report

Texas Medicaid Healthcare Partnership

Prior Authorization Audit

August 29, 2008

Bart Bevers, Inspector General

OlG Report No 08-70-Sl903t91-MA-03j

CONTENTS

...

Transmittal Letter

Executive Su·mmary ........ ,...,. ........................................ ,. ............................................................... ~.....•....•. J

Detailed. Findings and Reconunendations ................................................................................................. 3

Appendix A - Objective, Scope, and Methodology ......................................... ,. ..................................... I 0

Appendix. B-Report Distribution ........................................................................................................... 12

August 29, 2008 Performance Audir Rep<lrt Page i

TMHP Prior Authorization Review

otG Report No. 08-70-52903191-MA-03

TEXAS HEALTH AND HUMAN SERVICES COMMISSION

AL!fF.RT IfAWKIN&

r.\E<L H\ r o 1~1 ,11o;,1n:-.1.J{

August 29, '.2<108

.Rick Pope, Vice President, Managing Director

Texas \-fedicaid Healthcare PartnL-rship

l 2365~A Riata Trace Pkwy, Building 9

Austin. Texas 78727

Dea.r Mr. Pope:

The Health and Human Services Commission (HHSC) - Office of Inspector General, Audit Section

(OIG) has completed its audit of the Texas. Medicaid Healthcare Partnership (TMHP) Prior

Authorization Ptocess. The audit obj.ective was to detennine if TMHP's prior authorization process

complies with contractual obligations, Texas Administrative Code, and federal regulations. Upon

finallzing th!! audit objectives, the audit scope was the period September J, 2006 to March 31, 2008.

The detailed findings and recommendations with management responses ate presented in the enclosed

finaJ report.

We would like to thank you for the '-=ourtesy extended to us by TMHP Prior Authorization section

management and staff during the audit. tf you have any questions or i::uncems~ pleac;e do not hesitate

to contact Mark Poch I, Director of the: OJG Audit Section, ar mark. poch lCCi1hhsc.statc.t.x..us M by phone

at (512) 491-2872.

Sincerely,

Mark Poehl. CPA. ClA, CFE. ClSA

Director, Audir Section

Endosure

P , 0. Bo.~ 85200 •Austin, Texas 78708 •Mali Code 1342 • 11 lOl Metric Blvd., Building I, Austin, Texlii\ 7ll758

ILXECUTlVE SU~IMARY

Audit Results (Statement of Findings)

Based upon the evidence provided and test conducted. Texas Medicajd Healtlware Partnership 's

(TMHP) pri(lr authorization process partially complies with contractual obligationsr Texas

Administrative Code., and federaJ regulations, Areas of noncompliance are as folll1ws:

• An opportunity for improvement exists in the orthodontic prior authorization requt:sts process

• Prior authorization staff approved prior authorization requests that were not m compliance with the

Texa!i Medicaid Providers Pr::oced-ures Manual

• Four prior authorization requests were not processed in a timely manner

• USB ports are enabled on Prior Aµthorization systems for employees who work from home

Objecth:e (Subject)

The Health and Human Services Commission (HHSC) - Office of the Inspector General.

Medicaid/CHIP Audit Unit (OIG) has completed Its audit ofTMHP Prior Authorization Process. The

audit covers the period September I, 2006 to March JI, 2008-. The objective of the audit was to

determine if TMHP's prior authorization process complies with contractual ob1igatians, Texas

Administrative Code; and foderal regulations.

This audit was conducted under the authority granted to .OLG in the Texas Government Code Section

531.102(h)(4). This performance audit was conducted in accordance with Government Auditing

Srandards. 2007 revision, issued by the Comptroller GeneraJ of the United States. Those standards

re~uire that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a

reasonable basis for our findings and conclusions based on our audit objectives. We betieve that the

evidence obtained provides a reasonable basis for our findings and conclusions based on our audit

objectives.

Summary of Scope and Methodology (Summary of Activ;ties Performed)

The audit of the TMHP Prior Authorization Process covered the period beginning Septt-mber 1, 2006

and ending March J L 2008 , The methodology employed throughout this performance audit incl oded

objectively reviewing and analyzing various fonns of documentation, conducting interviews and

observations, and conducting tests necessary lo achieve the objectives of the audit. See AppendJ.x A

for detailed objective, scope, and methodology.

Background

As of January I. 2004, ACS State Healtbcare LLC, under contract with the Texas Health and Human

Services Commission (HHSC). assumed administration of Medicaid claims processing and the

Medicaid primary care case management services program. ACS meets its new consolidated Medicaid

1

responsibilities w·ith a team of subcontractors under the name of TMHP .

1 Obtained tT<Jrn TMHP··~ \~O::bs[te as ,1f' August 5. 20<)8. ACS 1!> 1\ffflilltecf C\1mpu11.~r Services.

August 29. 2008 Performance Aud1t Report Page 1

fMHP Prior Authorization Audit

OIG Report No. 08-70-5290319 l -MA·il3

111is Medicaid ad1ni11istration contruct incorporates the Request for Propo::icd (RFP) . Sc:ction 8, Vendor

Rcsponsihilitic::s, of the RFP states ~ Prior authorizatio n (PA) is a mechanism to determine the medical

necessity of selected non·c:mergency, Medicaid-covered. and medical services prior to service d~livery

(and retrouctively m special casi:s). Providers submit requests for PA to pcrionn s~ificd services.

The PA funct ion will ser\'e as a utilization manag~ent measure.: allowing payment for only those

serv1ces that arc medically ncce~sury, appmpriat~. an<l cost-dfccth·c. and reducing the misuse of

spe1.:i fied services.

Augu~t 29. 2U08 r>~rformance Audit Repl)rt

TMHP Prior Au(J10riz.atioo Audit

OJG Report No. 08· 70-5~9031 l) l -MA-1) '

DETAILED FINDINGS AND RECOMl\ifENDATJONS

Finding - Opportunity for Improvement in the Orthodontic Prior Authorization Requests

Process

An <)pp\lrtunity for improvement was noted in the documentation review process for orthc><lontic prior

authorization (PA) requests. CutrentJy, not all documentation that supports the Texas Medicaid

Program benefits for orthodontic PA requests, approved by the PA dental team, is reviewed. Rules and

Regulation~ governing the orthodontk PA requests include:

o S~~tion I 9, 18. Orthodtmtic Services. of the T t!Xas Medicaid Provlders Procedures- Manual,

stares "Orthodontic s~'Tv1ces for cosmetic purposes only arc not .a benefit of rhe Texas Medicaid

Pro~am . Orthodontic serv1ces are limited to the treatment of severe handrcapping

mnfocdusion and other special medically necessary circumstances as outlit1!!d tn Benefits and

Limitations...'~

o Section 19. l 8.2, Mandatory Prior Authorization, of the Texas Medicaid Provide·rs Procedures

Manual, states "Requests for orthodontic services JllUl't be accompanied by all the following

d ocum entation:

• An orthodontic treatment plan. ,.

• Cephaf(~metric radiograph with tracing models

• Completed and scon:d HLD .sheet . .

• Facial photographs

• Full series of radiographs or a panoramic radiograph; .. ,

• Any additional pertinent inform.a tion as determined by the dentist or requested by

TMHP's Dental Director ... "

o In s1::ction 8.9.5. Vendor Responsibilities, of the Request for Proposal, it is stated in PAC-o that

the Vendor must ''Research. analyze, and evaluate all PA decisions and ensur~ all medical facts

are consi<lered and documentell pri\)r to determination ...

o Additionally. PAC·l7 states that the Vendor must "Provide sufficient and adequate

professional medical staff for staffing and managing the PA function, including medically

knowlt:dgeabJe PA analysts for processing requests and availability 1Jf licensed medical

profe$sionals to provide consultative services regarding all Medicaid and CSHC'N covered

service types, .. "

To approve an orthodontic PA request the PA dental team members verify the mathematical accuracy

nf. and ensure that, the HanJict1pping Labiolingual Deviaifon (HLD) index S\.":Qre is at least 26. The PA

dental wam members do t1ot re\.'iew the additional documentation required per the Texas Medicaid

Providers Procedures Manual (TMPPM) and do not have rbe dental licenses ne<::essary to determine if

the additivnal docurnemati.on supports the H LD index score.

TMHP staff did state that under predefined circumstances. approximately I 0%2 of the orthodontic PA

reque!:its a.re referred to, and the documentation reviewed by, the Dental Director. This means

fhi.-; p~n:emage ha:s nol been audited by O IG. The audit client providr•l !he 51at1stu:-

1

Augtt."t 29. 2001! Performance Audit R..:pon PageJ

TMHP Prior Authorization Audit

OlG Rt!port No. 08-70-5290Jl9l-MA~03

approxlrna,tery 90% of the documentation for orthodontic PA requests is not being reviewed. Zero of

the 18 orthodontic sample items tested were rcforred to the Dental Director.

The PA dental team members could be approving a portion: of orthodontic PA cequests thal are not for

the treatment of severe handicapping malocclusion and other special medically necessary

circumstances. Dollars p.a.id for orthodontic treatment for the mlmths of September 2007 through

February 1008, were at least $52.6 rnH1km.

Recommendation:

TMHP $hould sample the orthodontic PA requests approved by the PA dental team members. The

sampte and its documentation should be reviewed by a licensed dental professional to ensure that the

orthodontic PA requests meet the criteria for Texas Medicaid Progratn benefits.

Management Re.spom•e:

TMHP r~vicws orthodontic prior authorization requests 1n acc."Ordancc with the Medicaid

administration contract, policies and rules. The contract does not require orthodontic PA requests to be

reviewed by a licensed dental professional. Therefore, the absence of PA reviews by a licensed dental

profossional does not mean that payrrH.~nts for orthodontic treatment during the audit period of

September 2007 through February 2008 were inappropriate.

PAC-6 and P AC-17 require consideration of documentation to determine medical necessity and

adequate management and staffing of the PA function, includjng medically knowledgeable analysts

and ''the availability of' licensed medical professionals to prv1•ide consultative services." When a

provider submits a PA request according to Section l 9. l 8.2, the request includes a score sheet with

preset scoring criteria. According to the currently approved medical policy, a score of 26 or 1nore

meets medical necessity fur approval. Scores below 26 require the r~view of a licensed medical

profe,ssjonal. fn additjon, certain high cost items arc referred to a licensed medical professional for

approval. As noted by the auditorS, approximately l 0% of the orthodontic PA requests were referred.

to the Dental Director for consultative services in accordance with the contract. All of the orthodontic

PA requests sampled by the auditors that w~e not referred to the Dental Director achieved a score of

26 or higher in accordance with the policy.

TMHP is willingfo add a sample step to this process; however, it may require a change order. TMHP

PA will discuss the audit recommendation to sample the orthodontic PA requests approved by the PA

dcnt~l team members with HHSC. The sampl~ could be added tQ the ClUTent PA process once the

scope~ resources, methodology and reporting are agreed to by TMHP and HHSC.

Finding 2 - Prior Authorization Staff Approved Prior Authorization Requests That Were Not in

Conlplianc.e With the Texas Providers Procedures Manual

lncorrect Signatures on tire HLD Jnde)(

PA staff approved two orth0dontic· PA requests, om nf the nine samp1 e items tested ( 22 .2"/o ). with

incorrect signatures for the Handicapping Labiolingaul Deviation (HLD) lndex for the Comprehensive

Orthodontic Treatment procedure code 08080. Section l 9. l 8.21 Mandatory Prior Authorization, in the

TMPPM states that ''Requests for orthodontic services must oe

accompanied by all the following:

<lo<.:umentation: ,,. Completed and scored HLD sheet with diagnosis of Angle class (26 points required

Augu~< 29', 2008 Perfonnancc Audit Report P~ge 4

lf\411P Prior Aut hori:r.ation Audit

OlG Report ~o . 08-70-52903191-MA-03

for approval of non-cleft palate cases)." Seclion l9.20. How to Si;ore the Handicapping Labiolingual

Deviation !HLD} Index, jn the TMP,PM further states that ·'The orthodontic prnvider must complete

and sign the diagnosts (Angle class~. ·•

When the provider submitted the HLD sheet to Tl'vfHP, the primary practitioner did 0(1f sign it. A

stamp was used in place of the handwritten, original signature. The two sample items in tiuc:stion were

from the same provider. This provider had used three difforeot signatures on the THStcps Dental

Mandatory Prior Authorization Request Fonns and HLD Indexes.

Incomplete THStt:p.s-CCP Prior AutborizatiOn Request Forms

PA staff approved four incomplete THSteps-CC'P Prior Authorization Request Fonns out of fhe 62

sample items tested (6.5%} fur tht! Pri vate Duty Nursing services procedure code TlOOJ. Section

43 .4. l 3 .6, Documentation. in the TM PPM states that ·'The THSteps-CCP Prior Authori7.at1un R~uest

Form must be completed, signed, and dated by the physician. The physician must mark ch.e Private

Duty Nursing box documenting the stahility of the client for PON. All requested dat<..as of service must

be irn:Ju<led."

When the provider submitted the THSteps-CCP Prior Authorization Request Forms to TMHP, the

primary practitioner did not ~omplete the section Primary Practitioner's Certifications

TMHP did not comply witb the requirem.:nts in the TPPM tor the HLD Jndex and the THSteps-CCP

Prior AuthoriLation Request Forms.

Recommendation:

TMHP should consider increasing training for current and. future PA staff to ensure that ini.:orrect

signatures and incompJete forms arc not apprcwed.

Management Re.\po11se:

Incorrect Signatures on the HLD fmlex

TMHP PA leadership will conduct rewuning with PA dental team staff to ensure that stamped

signatures are not approved and will update the PA Work [nstruction.s used for new staff training to

include the same infimnatinn. However. the currertt dental medical policy docs not require an original

handwritten signature: neither the policy nor the provider manual specifies that a provider cannot use a

stamp or an electric signature on the dental request fonn or th~ HLD Index. TMHP PA will work with

DRT to draft HHSC approved provider harmer and bulletin communications that dental PA requests

and HLD Index sht.."ets must have original provider signatures and that stamped signatures cannot be

avprove<l. These communications w111 then be inclut!c<l in the next revisions of the Texus Providers

Prot.:t:dures Manual (TMPPM) Denta] section as the sechmi does not current!)' state that stamped

signatures cannot be approved.

Incomplete Tl lSteps-CCP Prior Authonzation ~est Forms

The auditor ~1.mectly noted that a box was not checked on four PA request forms sampled. fn each

instance. the form included all substantive documentation requited as well as the physkian's signature,

and the fonn was reviewed by PA staff and detennined to adequately support medical necessity. Jn

these cast:s. the PA was approved in th!! interest of efficiency mther than pending the request and

requiring the provider to resubm;t it.

Auguiit ~9. ~01)8 Perfunnani.:c Au<JiL Report Page 5

fM HP Prior Authorization Audit

OIG Report No. 08-70-52903 I91-MA·(1J

TMHP PA leadership will tonduct retraining with PA CCP team staff to ensure that Private Duty

Nursing (PDN) requests where the provider has not marked the PON box are ttot approved and will

update the PA Work Instructions used for new staff tra1ning to include the same info.rmation. In the

interest of streamlining the PA process for providers. TMHP PA leader~hlp will work with HHSC

through the Medical Policy review process to consider revisions to the CCP PON .request fonn

removing the. cbeckbox.es from the Primary Pr~ctitioncr's Certi1icalions. section and allowing the

existing wording along with the physicia:n 1 s signature tu be the provider's certjficatfon.

Finding 3 - Fout Prior Authorization Requests Were Not Processed in a Timely Manner

Four out of I 0 ( 40%) PA requests for power v1-heelchairs (PWC) were not processed in a timely

m~nner. Rules and Regulations for all prior authorization requests include:

o In section 8.9.5, Vendor Responsibilities, of' the Request for Proposal, it is stated in PAC-24

that ·•upon receipt of the r.equ<.!sted infonnat1on from the provjder, the Vendor must process the

request and make a PA detennination within one· business day.•,

o Add1tiooally. P A:C-25 states that ~·ff the Vendor does not receive U1e requested infom1ation by

the end of the f()urth business day, the Vendor must send a letter to the client stating that the PA

request cannot be processed until the provider responds with the speci fie information necessary

to complete the PA request. This letter must be sent w1thin one business day along with a copy

of the initial letter to the provider that lists the specific information necessary to make the PA

determination."

Two PA requests were not processed wJthin one business day after receiving the requested information

trom the provider. For two PA requests the vendor did not send a letter to the client notifying the

client of the need for additional information from his/her pro vider within four business days after the

Vendor notified the provider.

A delay in processing PA requests could mean a delay in a client receiving needed mc:dical care.

TMHP is subject to liquidated damages. per section 14.07 of the Service Agreement between HHSC

and TMHP. Section 14.07 states "The Parties agree .tl1at, except as limited by subsection (e} of this

Section 14.07, HHSC may ussess a liquidated damage of up to $1,000 per calendar day for each

instance of CONTRACTOR's breach or nonperfonnance of a duty that is not specified in the

Performance Standards and Measures," The liquidated tlama.ges are detetmin~d to be $5S,OOO.

Calculation of Liquidated Damages

Sample Item No. Dates in Noncompliance No. of Days X $LOOO/Day Liquidated Damages

PWC - t:t2 8131 /07 - 9/ 11.'()7 12 $1 ,000.00 Sl2,000.00

PWC - #4 8/22i07 - 8/23107 2 $ IJ)00.00 $2.000.00

PWC - #6 l/l2/08 - l/2W08 l8 Sl ,000,00 $18,000.00

PWC - #10 I 0/ l l /07 - J l/2107 23 $1 .000.00 $23.000.00

Total $55,000 ..00

August 29. 2008 Perfom1anc~ Audit Report Page 6

·l'MHP PrioT Authorization Audit

O lG Report. No, 08-70-52903191 -MA-03

RecommeJJdatlon:

TMH P .shuul<l 1.:~•nsider increasing training for current nnd futur\! PA staff to ensure that PA requests

are processed in a timely manner. TMHP should puy the stat~ liquidated damages m the arrwunt of

S55.000 in acc.ord~tnce with the Service Agreement between HHSC and TMHP.

~fanagement Re.'ipott.w!:

TMHP PA leadership will conduct rt:trammg with PA staff to ensure that requests pended for

im:ompletl! information are pro~esscd in a timely manner. The retraining will include e review of the

PAC 24 r~quirement for pro~t!ssing requests within one bui'itness day upon receipt of U1e rcqucsrcd

infornHition and PAC 25 r~wremt!nl for sending the CH~rH Notification Lener for incomplete

requests. lncomplc:te request training for Ot!W PA employees will emphasize PAC 24 and PAC 25.

The Medidad administration contract indudes spec-ific liquidated damages for failure to meet service

level agre~mcnts . The LDs for prior authorization are addre~sed in Appendix D of the contract. The

contract sets forth a progressive and tailored remedies proces~ that TMHP and HHSC follow to address

perfonnanc~ deficien<;ies. The pro~ess must be completed us prescribed by the contract prior to the

detennination of liquiJated damages.

Flndln~ 4 • USB Ports Arc Enabled oo Prior Aulbo~ation Systems For Employees Who \Vock

from Home

USS ports are ~nabled on the computer equipment used by the PA employees who work from home.

Rules and regulations include:

o HlPAA Security Rule. Section 164.JlO(d)(l): A cov~ed entity must, in accordance with

Sl!ction l 64.306, "fmple1nent policies and procedures thar govern the receipt and removal of

hardware und electronic media that contain electron1c protected health information into and out

of a facility. and the movement of these items within the facilit y."

o Texas Medkard Healthcare Partnership (TMHP) lntbrmation Tcchnolob'Y Security Policies,

Version 2. I. page 18, Section 1.6.2.b: "Workers perfonning, specific business functions

indudlng data entry an<l home kt!ying will not save conti<lt;1ntial information data on a worker

provided system or removahle storage lnedia. All TMHP, customer. provider, or dknt data

must reside on a TMHP network server. 11

TMHP has riot <li:.;1.1hlt:d USB ports on PA systems used in homes of PA employees. Flash drives (a

fonn of removable medial could be used to copy. store, and transport electronic protected heaJtb

informatit)n without the knowledge or consent of TMHP manag"-ment.

Recommendation:

TMHP should disable USB ports to prevent the use uf tlash dri ves or external hard driv~~ to copy

electronic protected health infonnation.

Managemetu Respmue:

The USB ports a.re required for the current set up of the PA in-home workers' headsets used in

conjunctiC'ln with rhe Avaya CCQ softphone application. A USB adapkr is required to connect the

uset' !i head.scl to the computer. All f> A employees wht:thcr on-site or in-hoine are required to comply

Pcrfomiance Audtl Rt:port Page 7

TMHP Prior Authorization Audie

OIG Report No. 08-70-52903 l9l·M/\·03

with all TMHP infomiation technology security policies, which state that they will not save

confidential information dn.ta on a worker-provided system or- removnble storage media. However, in

order to mitigate any risk, a tcm1inaJ server gateway solution is currently being researched1 which

would prevent the download of darn from the TMHP network to the local machine or removable

storage media over the VPN connection.

August 29, ~008 Pe.rfonnance Audit Report Pageil

TM.HP Prior Authorization Audjt

QIG Report No. 08-70-529"03 L9 l-MA-OJ

APPE~ll l XES

Augul>t 21), .:!OOR Pertbrrnance Audi! R~port Pagl! 9

l"Mf1P Prior Authorfaation Audi\

OIG Report No. 08-7Ch)l'l0J I<> J -MA .OJ

APPENDIX A

OBJECTIVE, SCOPE, AND l\1ETHODOLOGY

Objecti\'e

To .det~n11i11e if ThtHP'.s prior authorization process ~omphes with contracttlal obligations. Texas

Administrative Code, and federal regulations

The initial scope of the audit of TMHP's prior authorization covered the period beginning S~tember

l , 2006 and ending March 31 , 2008 . An engagement letter was issu<..>d to TMHP outlining the

understanding of the OlG witb respect to the audit of the TMHP Prior Authorization Division for the

period September I, 2006 to March 3 l, 200~ . The scope of procedu1es was based upon an assessment

of ~isk and results of prejiminary audit cesting. The final scope of the audit for fieldwork testing was

determined to be September 1, 2007 to February 29, 2008. Professional judgment was exercised in

planning, t!xecuting an<l reporting the ~esulL~ of the audit.

Methodology

The methodology employed throughout this perfonnahce audit included objectively reviewing various

forms of documentation including:

• TMHP e-OPM (electronic-Online Proccdufcs Manual)

• Request for Proposal part of the Medicaid administration contract

• Texas Medicaid Provider Procedures Manual (TMPPM)

• Quality Assuranct: reports

• Claims infonnation, and other to formation maintained by TMHP

The methodology also included:

• Comparing policies an<l procedures to applicablt: Texas Administrative Codes (TAC) and

contract requirements

• Ohserving and i'nterviewing operational and administrative personnel

• Performing tests using statistical random samples of data

• Pcrt<.mning test using a judgmental sample of power wheelchair PA requests

• Analyzing various data for aspects of practices, processes, and perfrmnancc

Criteria Used

• Texas Admini8trative Code (TAC'), Title l , Part 15

• The contract te1ms ideoiifying Prior Authorization vendor responsibihties

• TMHP e-OPM (electronic-Online Procedures Manual)

• 2007 & 2008 Texas Medicaid Provider Procedure Manual (TMPPM)

• Health lnsuranct!:. Portability and A:ccountability A<.:t, Security Rule

• TMHP lnfom1atioo Technology Security PoJicies. Version 2.1

Augu~t 29, 200R Pcrfom1ance Audit Report Page 10

TMHP Prior r\uthorizatfoft AudiL

OlG Report No. 08-'70-5290J 19 l-MA-0}

Team Members

Juanita Henry. CHC, ClG, Deputy Jnspector General for C'ompliam.:e

Mark Pochl, CPA. C'IA. CFE, ClSA~ Dif'e(.:tor Audit Sectiop

Sandra Hardin, CPA. Audit Team Le<1<ler

Richard Hut~hinson, CIA, CISA, IT Audit Teum Leader

Kancttc Blomberg. CPA,. Lead Auditnr

lkennalke Chidume, CPA. Auditor

Trunara Stephens. Auditor

Anthony Webb. Auditor

John Zappa; IT Auditor

Susan Phillips. Auditor

Augusc 19, JOOH P~rfonnance Audif Report Page l L

fMHP Prior Authorization Audit

oro Rep(lTI No. 08-70-52903191 -MA-0)

APPENDIXB

REPORT DISTRIBUTION

Texas Medkaid Healthcare Partnership

Rick Pope, Vice President. Managing Director

Texas Medicaid Healthcare Partnership

12365-A Riata Trace Pkwy, Building 9

Austin, Texar-; 78727

Erik Holt, Prior Authorization Director

Texas Medicaid Healthca.n: Partnership

12365-A Riata Trace Pkwy, Building 9

Austin, Texas 7R727

Health and Human Services Commission

l'vfr. Albert Hawkins, Executive Commissioner

Texas Health and Human Services Commission

4900 North Lam.a r Blvd.

Austin..- Texas 7875 ?

Mail code BH- 1000

Dr. Charles Bell, Deputy Executive Commissioner

Texas Health anQ Human Services Commission

4900 North Lamar Blvd.

Austin. Texas 78751

Mail code BH- 1000

Mr, Chris Traylor. Medicaid and CHIP Associate Commissioner

Texus Health and Human Services Commissioner

l 1209 Metric Blvd.

Austin, Texas 78758

Mail code. H-100

Mr. Billy Millwee, Deputy Medicaid/CHIP Director for CJajms Administrator Operations

Texas Health attd Human Services Commissioner

11209 Metric Blvd.

Austin, Tex-as 78758

Mail c<>de H-390

Mr. David M , Griffith, CPA. CIA, Director Internal Audit

1 exas Health and Human Services Cum.mission

4900 North Lamar Blvd.

Austin. Texas 78751

Mail code BH-1600

August 29, 200S Perfonnance Audit Report Page l1

TMHP Prior Autl\orization Audit

OIG Report No, 08-70~52903191-MA-OJ

Tab D

Providers’ Plea in Interventions in Cause No. D-1-GV-14-000581

CAUSE NO. D-1 -GV-14-000581

ATLAS DENTAL, LP, AND § IN THE DISTIUCT COURT

DR. IDEU HUYNH, §

lNTERVENORS, §

§

vs. §

§

THE STATE OF TEXAS, §

PLAINTIFF, §

§ 53rd JUDICIAL DISTRICT

vs. §

§

XEROX CORPORATION; XEROX §

STATE HEALTHCARE, LLC; ACS §

STATE HEALTHCARE, LLC, A XEROX §

CORPORATION §

DEFENDANTS. § TRAVIS COUNTY, TEXAS

PLEA IN INTERVENTION

TO THE HONORABLE JUDGE OF SAID COURT:

NOW COMES, Atlas Dental, LP and Dr. Hieu Huynh, hereinafter lntervenors, and file

this Plea in Intervention, and in support hereof, would respectfully show the Court the following:

I. Parties and Service

l. Plaintiff, State of Texas, has appeared in this action and may be served with a notice of

this Plea by sending a copy to its attorney, the Attorney General of Texas, Greg Abbott, at P. 0.

Box 12548, Austin, Texas 78711-2548.

2. Defendant Xerox Corporation is a corporation organized under the laws of New York has

agreed to accept service with process upon its Attorney in this suit. Defendant Xerox State

Health Care, LLC, f/k/a ACS State Healthcare, LLC (misnamed by the State of Texas as ACS

State Healthcare, LLC, a Xerox Corporation is a wholly-owned subsidiary of Xerox Corporation

organized under the laws of the State of Delaware with Texas offices at 2828 N. Haskell Ave.,

Dallas, Texas 75204, and has agreed to accept service with process upon its Attorney in this suit.

Plea in Intervention

Page 1 of25

Defendant Xerox Corporation acquired Defendant ACS in 2010. On infonnation and belief,

ACS State Healthcare, LLC, changed its name to Xerox State Healthcare, LLC, on April l, 2012.

Defendants are referred to hereinafter as "Xerox Defendants."

3. Atlas Dental, LP, (hereinafter ATLAS) is an approved Medicaid provider. ATLAS can be

served through the undersigned counsel.

4. Dr. Hieu Huynh 1 is a licensed Texas dentist, approved Medicaid provider, and the owner

of ATLAS. Dr. Hieu Huynh can be served through his undersigned counsel.

II. Jurisdiction and Venue

5. This Court has subject-matter jurisdiction in that the amounts sought by lntervenors from

all parties (both Plaintiff and Defendants) are in excess of the minimal jurisdiction limits of this

court. Tntervenors affirmatively plead that this suit is not governed by the expedited-actions

process in TEXAS RULE OF CrvIL PROCEDURE 169 because intervenors seek monetary relief over

$100,000.

6. This Court has jurisdiction over all parties in this petition because:

a) The State has waived sovereign immunity and is subject to lntervenors' claims;

b) This Court has jurisdiction over Xerox Defendants because each Defendant does

business in the State of Texas and committed the unlawfu l acts alleged in this petition

in whole or part in Texas.

7. Venue is proper in Travis County under TRCP §15.020 because this suit involves a

"major transaction"; Venue is permissive under TRCP §I 5.035(a) because Intervenor asserts

claims for breach of contract. Venue is proper pursuant to TRCP §15.02 because all or a

substantial part of the events or omissions giving rise to the claim occurred in Travis County.

Many of the unlawful acts committed by the State and Xerox Defendants were committed in

1

For the sake of simplicity, the lntervenors will be collectively referred to as "ATLAS" unless expressly noted.

Plea in Intervention

Page 2 of25

Travis County, including the making of false statements and misrepresentations of material fact.

ill. Intervenors' Interest in the Suit

8. Intervenors ATLAS and Dr. Hieu Huynh have a judicial interest in the matters and

controversy in this litigation. The relationship between Intervenors, the State as the Plaintiff and

the Xerox Defendants is a tripartite arrangement necessitating that, in the interest of judicial

economy and justice, all claims be bound and subsumed into one cause of action. Upon

infonnation and belief, lntervenors were initially sued by the State in a qui tam action wherein

the State alleged that Lntervenors defrauded the State. The State has elected to pursue its

remedies against the lntervenors in an administrative hearing. Now, the State has sued Xerox in

State Court on the same facts, alleging that Xerox has committed fraud against the

State. Intervenors have c laims against both the State and Xerox. It is assumed that Xerox will

have claims against the State, and perhaps allege claims against the lntervenors. All of the

different parties' claims are inextricably intertwined, as they relate to [ntervenors' submission of

prior authorization requests to Xerox, the handling of those claims by the Xerox Defendants, the

State's handling and oversight of its agent Xerox in Xerox's performance of its contractual and

legal duties, and State's subsequent legal action against the Intervenors for services approved by

Xerox.

IV. Facts

What is Prior Authorization?

9. Texas Medicaid requires that orthodontic services be independently and objectively

scrutinized before the State consents to treatment and payment. Prior authorization is the

mechanism the State uses to determine the medical necessity of non~emergency orthodontic

items/services prior to delivery of those items/services. Pursuant to Texas Health and Human

Plea in Intervention

Page 3 of25

Services Commission (hereinafter "HHSC") rules, Texas Medicaid greatly restricts when it will

pay for orthodontic services:

Orthodontic services for cosmetic reasons only are not a covered Medicaid

service. Orthodontic services must be prior authorized and are limited to

treatment of severe handicapping malocclusion and other related conditions as

described and measured by the procedures and standards published in the

[TMPPM2].

25 TEX. ADMIN. CODE §33.7 1 (emphasis added). Prior authorization is a statement of assurance

to the orthodontic provider that, absent an intervening disqualifying factor, the delivery of the

requested orthodontic serv ice has been deemed by Xerox to be medically necessary, and

therefore approved by the State.

I 0. The prior authorization process is straightforward. Texas Medicaid requires that a dental

provider send documentation (x-rays, cephalographs, photos, etc.) regarding the patient's

orthodontic condition to Xerox for review. In addition, the 01thodontic provider submits his

professional opinion of the patient on a Handicapping Labio-lingual Deviation index (HLD)

score sheet. Xerox knew providers relied entirely on the prior authorization process because

approval was a mandatory prerequisite to provid ing orthodontic services and being paid. Once

Xerox issued its prior authorization decision, the decision was not appealable by the provider.

11. The HLD scoring system combines a number of treatable orthodontic conditions into an

index. HLD score sheets use a mix of objective and subjective conditions to detennine whether a

Medicaid patient qualifies for orthodontic services. The fact that the HLD score sheet requires

both objective and subj ective fmdings highlights the importance of Xerox performing a thorough

prior authorization review.

T he Histor y of O rthodontic Prior Authorization.

2

"TMPPM" is the Texas Medicaid Provider Procedures Manual, which is issued yearly by the HHSC and provides

valuable guidance to Medicaid providers.

Plea in Intervention

Page 4 of25

12. The process for reviewing and approving orthodontic prior authorization requests pre-

dates the defendant Xerox's handling of Medicaid claims processing. The National Heritage

Insurance Corporation (NHIC) was responsible for reviewing prior authorization requests before

Xerox assumed the contract in January 2004. Starting January l, 2004, Xerox acted as an

independent contractor, and was a contracted agent of the State, under the contract with HHSC.

Xerox was responsible for reviewing each orthodontic service request, and Xerox was further

charged with the respons ibility to grant or deny each prior authorization req uest per the program

requirements. The resu lt was that Xerox had the final say in detem1ining the medical necessity of

each request for orthodontic services.

13. Prior to assuming the NHIC contract, and for a period ohime after assuming the contract

from NHIC, Xerox received training from NHIC personnel regarding the proper method for

receiving and processing orthodontic prior authorization requests. NI-llC personnel explained

how and why the review of each prior authorization submission was important, and walked

Xerox through the process. Despite its training from NHIC, Xerox had no intention of following

the prior authorization system that had been in place for years, nor d id Xerox intend to otherwise

meet the prior authorization requirements set out in its contract, the TMPPM and required by

state law.

Xerox rejects its contractual responsibilities.

14. When Xerox took over the contract in 2004, it immediately abandoned the prior

authorization review process that had been setup by NHTC. Xerox never intended to fulfill its

orthodontic prior authorization responsibi Iities to HHSC. From 2004 to 20 11 , Xerox continually

misrepresented that it was acting in compliance with its contractual duties.

IS. It is now known that Xerox failed to adequately staff their prior authorization division

Plea in Intervention

Page 5 of25

with knowledgeable medical professionals. Xerox employed only one licensed dentist from 2004

through 20 I I , which was far short of the manpower necessary to handle the review of tens of

thousands of orthodontic prior authorization requests every year. Xerox could not reasonably

have expected to handle such a workload by employing only one dentist.

Xerox potentially comm its thousands of violations.

16. It is believed Xerox allowed "dental specialists"- unlicensed, unqualified individuals-

to render prior authorization opinions regarding the medical necessity of requested orthodontic

services. The "dental specialist" approvals were not reviewed or ratified by Xerox's licensed

dental director or another qualified dental professional. These actions not only violated Xerox's

contractual obl igations, they may have also violated other Texas law such as the Dental Practice

Act. 3 lt is believed these unlicensed Xerox "specialists" rendered tens of thousands of prior

authorization approvals/medical opinions in violation of Texas law.

17. Xerox was paid by the state for each prior authorization decision that was made. It is

believed that Xerox employed unlicensed "specialists," rather than licensed Texas dentists, as a

profit generating measure.

18. From January 2005 through February 2012, Intervenor submitted prior authorization

requests, as required, to Xerox for a detennination of med ical necessity. Unbeknownst to

[ntervenor, Xerox's dental specialists-not the dental director- approved almost all of

Intervenor's requests. Xerox's prior authorization approvals were promises that:

a) the requested orthodontic services were medically necessary, and/or

b) the approval had been issued by a licensed dentist, and/or

3

Texas Occupations Code §251.003 prevents unUcensed individuals from diagnosing conditions of the human teeth

and mouth. Section 256.001 states that a person may not practice dentistry without a license. Thus, state law requires

that opinions regarding medical necessity of orthodontic treatment must be made by licensed dentists. Section

264.151 prescribes penalties for certain violations of the Dental Practice Act.

Plea in lntervention

Page 6 of25

c) the approval was an actual and legitimate dental diagnosis, and/or

d) the requested orthodontic services were allowable under Texas law and as permitted

by Medicaid policy, the TMPPM, and HHSC rules, and/or

e) a proper, thorough and legal review had been made, and/or

t) future orthodontic services would be properly reimburseable to lntervenors, absent

some intervenfog disqualification (such as the patient's ineligibility).

19. Because Xerox was charged with determining medical necessity, and because prior

autho rization approval was a mandatory prerequisite to furni shing services, the promises were

material. lntervenors expected performance of these promises. lntervenors relied on Xerox.

Further, Xerox promised that its subsequent payments to lntervenors (after the services had

actually been delivered) were made because the services had been, in fact, properly approved as

medically necessary. Each prior authorization approval represents a separate violation of the law

if Xerox 's approval was issued illegally and/or in violation of its contractual obligations.

Xerox actively concealed its potentially illegal activity.

20. Xerox withheld the truth regarding its prior authorization program. In an attempt to

publicly appear consistent with NHIC's prior authorization process, Xerox continued to require

that dental providers (such as Intervenor) submit all supporting documentation for each HLD

score sheet. lt is now believed that, incredibly, Xerox did nothing with that documentation, other

than assure that it had been submitted by the provider. It is believed that Xerox's specialists were

instructed to forward to its dental director only those requests lhat had scored below the

threshold for orthodontic services (i.e. below 26 points on the HLD score sheet), or had some

provider j usti fi cation attached. As a result, only I 0% of the orthodontic prior authorization

requests were actually forwarded to Xerox's one licensed dentist. Xerox 's actions were

Plea in Intervention

Page 7 of25

calculated to make Xerox appear compliant with its contract and HHSC policies, while Xerox

knew that its actions we re entirely inconsistent with the letter and spirit o f its obligations.

Effectively, then, Xerox's actions not only damaged the Medicaid program directly by approving

services without determining their medical necessity, but Xerox 's deception also exacerbated the

problem by failing to give providers guidance regarding the proper standard for medical

necessity, thus caus ing these providers substantial damages.

2 1. For the past ten years, Xerox has continued to publicly represent to the world that it was

fulfilling its contractual and legal responsibilities. Based on Xerox's representations that it was

fulfilJing its duties to the State, Xerox had its contract with HHSC repeatedly renewed from 2004

through the present. Each year that Xerox had its contract renewed, it represented that it would

fulfill its contractual obligations and abide by Texas law requiring that decisions about medical

necessity be rendered onl y by licensed dentists. Xerox made those representations knowing that

it had not done so in the past, and had no intention of changing its procedures to do so in the

future.

The Frew decisio n magnifies Xerox's acts.

22. In September 2007, after fifteen years of litigation on the subject, Texas was ordered to

implement a corrective action plan that increased the Medicaid reimbursement rates to all dental

providers. That plan was required pursuant to the Frew case 4 , which was a 1993 c lass-action

lawsuit against the HHSC alleging that Texas' Medicaid reimbursement rates were so low that

they prevented indigent children from receiving timely, comprehensive health care .

4

Frew v. Gilbert, 109 F. Supp. 2d 579 (E.D. Tex. 2000) vacated sub nom. Frazar v. Gilbert, 300 F.3d 530 (5th Cir.

2002) rev'd sub nom. Frew ex rel. Frew v. Hawkins, 540 U.S. 431, 124 S. Ct. 899, 157 L. Ed. 2d 855 (2004) and

affd in part, appeal dismissed in part sub nom. Frazar v. Hawkins, 376 F.3d 444 (5th Cir. 2004); Frew v. Hawkins,

401 F. Supp. 2d 619 (E.D. Tex. 2005) aff'd sub nom. Frazar v. Ladd, 457 F.3d 432 (5th Cir. 2006); Hawkins v.

Frew, 549 U.S. 111 8, 127 S. a. !039, 166 L. Ed. 2d 714 (2007).

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23. In response to Frew 's corrective action plan, the 2007 Texas Legislature allocated $707

million ($1.8 billion in state and federal funds combined) to increase medical and dental

reimbursement rates. The increase in dental reimbursement rates was intended to entice dentists

to become Medicaid providers. It worked. The state raised payment rates for dental services, and,

as a result, the number of dentists participating in Medicaid increased from 45.4% in 2007 to

63.4% in 20 l 0. As expected indeed, as intended spending on Texas's dental services increased

dramatically.

24. Although the number of prior approval requests increased by 240% between 2007 and

20 L0, Xerox continued to employ only one dentist. That dentist was neither tasked with nor

responsible for supervising the clerical specialists that were issuing the approvals.

25. By 20 I0, orthodontic spending under Texas' Medicaid program had skyrocketed. Xerox

was the sole entity responsible for overseeing this increase, because it was the sole gatekeeper

for the approval and payment of orthodontic services. Although the Texas Legislature had

increased funding to attract dentists into the Medicaid program, all of the budgeted funds were

required to be spent only on medically necessary services.

The Office of Inspector General seeks recovery from Medicaid providers.

26. In early 20 I 1, a series of news stories began highlighting the large amount of money

being spent on orthodontics in Texas. In July 20 I 1, the Federal government notified Texas of its

intent to audit whether Texas' prior authorization process was ensuring that only medically

necessary orthodontic cases were being approved and paid. With the prospect of a federa l

clawback action looming against Texas because of Xerox's prior authorization failures, the

Texas Office of fnspector General (hereinafter "State") took a drastic step. Beginning in 2011,

the State generated a list of the top Medicaid orthodontic billers and placed them on "payment

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hold." Intervenor was one of those providers.

27. Given Intervenors' proximity to some of the state's poorest children, and the mandates of

the Frew decision, Intervenor served a large Medicaid patient population. Because it served a

large Medicaid population, it submitted a large number of prior authorization requests to Xerox

from 2004 through 20 I 1.

28. fntervenors did not know that Xerox was failing to perform a true and accurate review for

medical necessity. lntervenors relied on Xerox's prior authorization approvals to confirm that

dentists' analysis was proper and consistent with Medicaid standards and requirements.

29. Again unbeknownst to Intervenors, State audits in 2008 and 2012 concluded that most, if

not almost all, of the prior authorization requests for patients with HLD scores of 26 or greater

(indicating medical necessity) had not been actually "evaluated" at all by Xerox. These State

audits made the Federal government's pending audit especially dangerous to Texas, because the

2008 and 2012 audits were admissions that Xerox had been approving and paying claims that

may not have met the federal standards for prior authorization. T hus the State, through the

Attorney General, concluded that a true finding of medical necessity had in reality not occurred.

The Attorney General claimed that billing for services that are not necessary is fraud, despite

Xerox's prior authorization approvals.

30. It is now believed that rather than prosecute Xerox for its failure to properly evaluate

dentists ' prior authorization requests, the State and the Texas Attorney General protected Xerox.

This protection included the State failing to allow TMHP to hire additional medically licensed

staff, and in 2008-2009 telling TMHP to continue its prior authorization practices. Although the

Attorney General took immediate action against the providers, the Attorney General refused to

hold Xerox accountable for its orthodontic "approvals," its repeated contractual failures, or its

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violation of State law. Instead, the Attorney General made fraud allegations against each of the

top 25 dental providers, including Intervenor, which has caused more injury and damages to

lntervenors. Stated d ifferently, Xerox issued its approvals through a process that gutted the

State's belief in che accuracy of Xerox's decision, and the Texas Attorney General punished the

providers instead of Xerox.

3 L. Because the acts/omissions of Xerox so undermined the process, the State

eventuallyinstituted a "payment hold" against Intervenor. A payment hold temporarily freezes

future Medicaid payments to a provider, despite the provider's ongoing participation in the

Medicaid program. The payment hold against lotervenor was issued pursuant to what the State

called a "credible allegation of fraud" regarding intervenor's orthodontic prior authorization

requests. The State placed a I00% payment hold against Intervenor's orthodontic billings.

32. At the time the Attorney General began prosecuting Intervenor and similarly situated

Medicaid providers, it knew Xerox, not Intervenor, had the sole authority and responsibility to

authorize orthodontic services and payments. The Attorney General knew that the State's audits

of Xerox in 2008 and 2012 had concluded that Xerox was violating its contract with the State,

violating its own State-approved policies and procedures, and violating State law. Nevertheless,

the Attorney General continued to only prosecute dental providers like the Intervenor; the

Attorney General refused to hold Xerox responsible. ln fact, in one shameless and brazen

demonstration of State' s unwavering protection of Xerox, the Deputy Director of Texas' Office

of the Inspector General testified in a hearing that Xerox' s acts and omissions were so egregious

they were outside the course and scope of Xerox's agency with State.5 Upon information and

' Incredibly, that testimony came in an administrative proceeding in which the State was seeking $8 million from a

dental provider for following Xerox's instructions to provide braces to the provider's patients. The idea that the

State could not hold Xerox responsible for its contractual obligations because Xerox had done such a poor job that it

was acting outside of its contract is a novel and imaginative reason not to prosecute Xerox.

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belief, the State and the Attorney General protected Xerox for over 6 years fearing that revealing

the State's culpability would subject the State to a federal clawback for hundreds of millions of

dollars. Instead, the State and the Attorney General pointed at the dental providers.

33. Ultimately, the evidence of Xerox's failures, and the State's refusal to correct Xerox for

over 6 years, became too much to hide. Three months after some providers filed suit against

Xerox, and fo llowing a series of news stories questioning why Xerox had not suffered for its

failures, the Attorney General reversed course. On May 9, 2014, the State, through the Texas

Attorney General, filed this lawsuit against Xerox for fraud, basically mirroring the suit filed

approximately I 00 days earlier by similarly situated providers. The State's claims in this fraud

lawsuit include admissions that the State knew as early as 2006 that Xerox's actions were

improper.

34. As a result of the payment hold, Intervenor was required to make significant financial

concessions and changes to its business. Intervenor also engaged legal counsel to defend itself

from the State's claims, at a significant expense that continues today.

35. The State 's allegations against lntervenor are rooted in two assumptions. First, the State

assumes Intervenor's prior authorization requests were not properly vetted by Xerox; that is,

Xerox approved Intervenor's requests without knowing whether approval was actually proper.

Because Xerox is not a party to lntervenor's administrative case, Intervenor is prevented from

determining whether Xerox did, in fact, perform a proper review of lntervenor's prior

authorization requests. By intervening in this lawsuit, lntervenor seeks to address that question,

and finally detennine whether Xerox reviewed Intervenor's requests as required by its contract

and the law.

36. Regarding the State's second assumption, the State alleges some of lntervenor's requests

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were approved when, in fact, they should have been denied. Intervenor denied that assertion in

the administrative case, and Intervenor continues to deny that c laim here. All services provided

to Intervenor's patients were actually medically necessary, regardless of what Xerox decided and

in any event under Medicaid guidelines once the authorization was approved, Intervenor was

required to provide the services.

37. The State continues to aggressively fight any allegation or affirmative defense that could

result in Xerox being held accountable for its part in these HLD scoring cases, despite the State's

contentions in the District Court case to the contrary. Damages continue to accrue.

V. Causes of Action

A. Jntervenors ' Claims Against Xerox

Common Law Fraud (Fraudulent Misrepresentation and Fraudulent Inducement)

38. Intervenor re-alleges and incorporates the above facts and allegations as if fully set out

herein. Xerox's prior authorization approvals were fa lse representations made to Intervenor. It is

believed Xerox knowingly issued these prior authorizations to Intervenor because Xerox knew

that it was approving requests without a proper medical review, and/or because it approved the

prior authorization requests without any knowledge of their truth. It is believed Xerox intended

for rntervenor to rely on the approvals as a prerequisite fo r prov iding the requested services.

Approval was material because it was a mandatory prerequisite for payment. Intervenor actually

and justifiably relied on Xerox's fraudulent approvals.

39. Xerox's approvals induced Intervenor to continue to grade subsequent HLD requests in

the same o r similar manner, and led Intervenor to believe that their requests were consistent with

Medicaid standards and requirements.

40. Xerox's fraudu lent approvals caused injury to Intervenor. As a resu lt of Xerox's actions,

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Intervenor submitted requests for payment and Xerox actually paid for those services, Intervenor

was placed on payment ho ld, Intervenor is fo rced to defend itself in an administrative payment

hold hearing, and Intervenor is facing administrative claims by HHSC for repayment (including

claims for treble damages and attorney fees). Intervenor's reputation and business have suffered

severe injury. Intervenor seeks recovery of actual and exemplary damages, interest, court costs,

and attorney fees.

Breach of the Xerox-State of Texas Contract

41. Intervenor re-alleges and incorporates the above facts and allegations as if fully set out

herein. In the alternative, Xerox's actions constitute a breach of Xerox's contract with the State

for the benefit of Intervenor. Xerox's contract with the state required that it conduct a proper,

thorough and legal review of prior authorization requests for the purpose of determining medical

necessity. To that end, Xerox should have employed a licensed dentist.

42. Xerox was an agent of the State of Texas engaged specifically for the purpose of

determining medical necessity. The third party beneficiaries of that Xerox-State of Texas

contract were Medicaid patients and Intervenor. The patients were entitled to receive orthodontic

services that were medically necessary. Intervenor was responsible for actually delivering the

orthodontic services that Xerox had deemed medically necessary. Thus, Intervenor was a third

party beneficiary that relied on Xerox's approvals.

43. Xerox breached its contract by, inter alia, failing to provide qualified staff; possibly

violating Texas law; permitting non-dentists to make detenn inations of medical necessity; and

issuing medical opinions without conducting a reasonable and prudent examination of evidence.

The breaches were material, and recurred across many different Medicaid patients and for many

years.

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44. Xerox's actions proximately caused Jntervenor's injury. Intervenor's injuries were

caused-in-fact by Xerox's actions, and they were foreseeable. Because Xerox's prior

authorization was a necessary prerequisite to providing services, lntervenor relied entirely on

Xerox's determinations regarding medical necessity; thus, Xerox's actions were the direct factual

cause of Intervenor's injuries. Xerox's actions were foreseeable in that a person of ordinary

intelligence should have anticipated that issuing a decision without actually reviewing or

considering the evidence (x-rays, photos, models, etc.) would eviscerate the credibility and

reliabiJity of the decision. Once the State assumed that Xerox's approvals were not trustworthy,

it was foreseeable that the State would demand repayment, and/or would require Intervenor to

independently do Xerox's job after the fact by proving that payment was proper because the

services were medically necessary and reimbursable under Texas Medicaid law.

45. Intervenor suffered and continues to suffer significant damage. Intervenor seeks damages

that would have given the lntervenors the benefit of the bargain by putting them in as good a

position as they would have been in if the contract had been perfonned. Intervenor seeks

reliance interest damages to restore the expenditures Intervenor made in reliance on Xerox's

contract with the state and the approvals that Xerox made under that contract. Intervenor also

seeks damages for its restitution interest to restore money sought by the Office of the Inspector

General from Intervenor. Such damages wou ld put the lntervenors in as good a position as it

would have been in if the contract had been properly fulfilled. In addition, Intervenor seeks

liquidated damages as set out in the Xerox-State of Texas contract. Intervenor has engaged legal

counsel to defend itself from the State's charges, and those legal expenses continue today.

Intervenor has incurred benefit of the bargain damages, out-of-pocket damages, lost profits, lost

future profits, loss of credit, and Joss of goodwill. Intervenor seeks recovery of actual and

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exemplary damages, interest, court costs, and attorney fees.

Breach of Contract (Promissory Estoppel)

46. Intervenor re-alleges and incorporates the above facts and allegatio ns as if fully set out

herein. In the alternative, Xerox's actions constitute promissory estoppel.

47. Xerox's prior authorizations constitute promises to Intervenor in numerous ways.

Because prior authorization was a prerequisite to furnishing services, and because Xerox was the

entity charged with discharging prior authorization duties, Interveno r reasonably, substantially,

and foreseeab ly relied on Xerox's promises.

48. Intervenor suffered and continues to suffer significant damage. [ntervenor suffered

reliance damages by investing time, labor, equipment, and o rthodontic appliances in each

Medicaid patient that Xerox approved. Intervenor has engaged legal counsel to defend itself from

the State's charges, and those legal expenses continue today. Intervenor has been required to do

Xerox's job after the fact-namely, demonstrate that the services were medically necessary and

properly reimbursable under Texas Medicaid law. lntervenor has incurred benefit of the bargain

damages, o ut-of-pocket damages, lost profits, lost future profits, loss of credit, and loss of

goodwill. All of these damages were directly and/or prox imately caused by Xerox's promises.

Intervenor seeks recovery of actual and exemplary damages, interest, court costs, and atto rney

fees.

Negl

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