US Ex Rel. Geraldine Godecke v. Kinetic Concepts, Inc.

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

GERALDINE GODECKE, Relator; ex No. 18-55246

rel. United States of America,

Plaintiff-Appellant, D.C. No.

CV 08-6403 CAS

v.

KINETIC CONCEPTS, INC.; KCI- OPINION

USA, INC.,

Defendants-Appellees.

Appeal from the United States District Court

for the Central District of California

Christina A. Snyder, District Judge, Presiding

Argued and Submitted April 12, 2019

Pasadena, California

Filed September 6, 2019

Before: A. Wallace Tashima and Jay S. Bybee, Circuit

Judges, and M. Douglas Harpool,* District Judge.

Opinion by Judge Tashima

*

The Honorable M. Douglas Harpool, United States District Judge for

the Western District of Missouri, sitting by designation.

2 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS

SUMMARY**

False Claims Act / Medicare

The panel reversed the district court’s dismissal of a

relator’s qui tam case against Kinetic Concepts, Inc. and KCI

USA, Inc. (collectively “KCI”), brought under the federal

False Claims Act, alleging that KCI submitted false claims to

Medicare.

The panel held that the relator sufficiently alleged that

KCI violated the False Claims Act. Specifically, the panel

held that the relator adequately alleged a fraudulent scheme

to submit false claims and reliable data that led to a strong

inference that false claims were actually submitted. The

panel further held that the relator sufficiently alleged that

KCI acted with the requisite scienter under the False Claims

Act. The panel also held that the relator sufficiently alleged

that KCI’s false claims were material to the government’s

ultimate Medicare payment decision.

**

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 3

COUNSEL

Kurt Kuhn (argued), Kuhn Hobbes PLLC, Austin, Texas;

Patrick J. O’Connell, Law Offices of Patrick J. O’Connell

PLLC, Austin, Texas; Mark I. Labaton, Glancy Prongay &

Murray LLP, Los Angeles, California; Michael A. Hirst, Hirst

Law Group P.C., Davis, California; for Plaintiff-Appellant.

Gregory M. Luce (argued), Skadden Arps Slate Meagher &

Flom LLP, Washington, D.C.; Matthew E. Sloan and Kevin

J. Minnick, Skadden Arps Slate Meagher & Flom LLP, Los

Angeles, California; for Defendants-Appellees.

OPINION

TASHIMA, Circuit Judge:

Relator Geraldine Godecke appeals the district court’s

dismissal of her qui tam case against Defendants Kinetic

Concepts, Inc. and KCI USA, Inc. (collectively, “KCI”),

brought under the federal False Claims Act (“FCA”).

Godecke alleges that KCI submitted false claims to Medicare.

Specifically, Godecke alleges that KCI delivered durable

medical equipment to Medicare patients before obtaining a

detailed written order from a physician, which was a

requirement for Medicare reimbursement. She alleges that if

Medicare knew that this delivery requirement had not been

satisfied prior to delivery, Medicare’s policy would have been

to refuse payment on KCI’s claims. She alleges that KCI

knew that it should not have been able to receive payment,

but sought reimbursement regardless of this fact and chose

not to alert Medicare to the issue. On this appeal, we must

determine whether Godecke sufficiently alleges that (1) KCI

4 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS

submitted false claims, (2) KCI acted with scienter, and

(3) the false claims were material to the government. We

hold that she does so. Therefore, we reverse and remand for

further proceedings.

BACKGROUND

The facts as presented here are taken from the allegations

in the Fourth Amended Complaint (“FAC”). For the

purposes of a motion to dismiss, we must take all of the

factual allegations in the complaint as true, although we are

not bound to accept as true a legal conclusion couched as a

factual allegation. Ashcroft v. Iqbal, 556 U.S. 662, 678–79

(2009); Bell Atlantic Corp v. Twombley, 550 U.S. 544, 555

(2007).1

In 2001, Godecke became an employee of MedClaim,

Inc., a specialized billing company that was under contract

with KCI to submit KCI’s claims to Medicare and to provide

evidentiary and other support for appeals of claims denied by

Medicare. In 2003, KCI purchased MedClaim, and Godecke

became an employee of KCI. She was the Director of

Medicare Cash and Collections at MedClaim and then KCI

from June 1, 2001 to October 1, 2007. Her position required

her to work with KCI’s information systems related to billing,

and also required her to review communications regarding

claim payments that were made or denied by Medicare. She

was also responsible for the creation of a new department

within KCI, informally known as the “back end” of the

1

Godecke began this action in 2008 when she filed the original

complaint under seal. This case has been up to the Ninth Circuit before

on the issue of subject matter jurisdiction. See U.S. ex rel. Hartpence v.

Kinetic Concepts, Inc., 792 F.3d 1121 (9th Cir. 2015).

GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 5

billing department, that dealt specifically with the appeal

process for KCI’s claims that had been denied by the

Medicare billing and payment system. She and her staff

evaluated whether KCI should appeal those denials and

provided supporting information for challenging those

denials in administrative hearings.

KCI manufactures a piece of durable medical equipment

known as a Vacuum Assisted Closure device (“VAC”), which

is used to perform negative pressure wound therapy

(“NPWT”). The VAC was added to the list of Medicare

covered devices starting on October 1, 2000, and, at that time,

no other NPWT pump was approved for Medicare

reimbursement. Pursuant to Medicare Part B, the VAC

device is rented on a monthly basis, and the supplies needed

for VAC treatment, such as dressings and a canister, are

purchased. In 2006, the total monthly cost for a VAC for a

Medicare patient was about $2,224 for the first 3 months and

$1,794 for each subsequent month; Medicare pays 80% of

this cost and the patient is liable for the remaining 20%.

Between 2001 and 2011, KCI’s Medicare Part B revenue

totalled $1.325 billion.

Medicare administers the rules for use of the VAC and

similar NPWT devices through private claims processing

contractors known as Durable Medical Equipment Medicare

Administrative Contractors (“DME MACs”). These DME

MACs have issued Local Coverage Determinations (“LCDs”)

that govern reimbursement rules for VACs. DME MACs are

also authorized to make payments on behalf of the

government to Medicare claimants. Because Medicare is

required to pay claims submitted within just a few weeks of

receipt of the claim, the Medicare program has historically

paid claims quickly without verifying the accuracy of the

6 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS

claims before payment. Medicare accepts claims as

submitted by providers as being a true representation that the

claim either qualifies for reimbursement or does not qualify

and automatically pays those claims represented as

qualifying. Medicare must then seek reimbursement or

recoupment if it later determines that the claim should not

have been paid. This payment system has become known as

“pay and chase,” and relies on the honesty of providers and

the accuracy of the claims they submit.

Under the LCD, KCI must receive, prior to delivery of the

VAC to a patient, a detailed written order from a physician,

also known as a written order prior to delivery (“WOPD”),

referred to as a “prior written order” by KCI. If KCI does not

receive a WOPD prior to delivery of the VAC, then KCI is

not entitled to payment from Medicare. This requirement to

obtain a WOPD before delivering the VAC has been in the

Medicare Program Integrity Manual since KCI first started

billing Medicare in 2000. Importantly, if KCI does not

receive a detailed written order prior to delivery, payment

will not be made for the device even if KCI was able

subsequently to obtain a written order after delivery.

When KCI submitted claims to Medicare, it used certain

billing code modifiers on the claims to indicate whether all of

the reimbursement requirements had been met. The KX

billing code modifier specifically represents to Medicare that

all requirements for payment have been satisfied. By adding

the KX modifier to a claim, KCI attested that the specific

required documentation is on file before submitting the claim

to the DME MAC. As early as 1999, the Office of Inspector

General of the U.S. Department of Health and Human

Services warned that misuse of the KX modifier could result

GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 7

in false claims.2 In contrast, there is a separate billing code

modifier that must be used in order to represent to Medicare

that not all requirements for payment have been satisfied. In

2003, the billing code modifier “EY” was adopted for use

when a NPWT item was delivered before a signed written

order had been received by the supplier. KCI is allowed to

submit claims for costs that are presumptively non-

reimbursable, but must do so openly by using the proper

Medicare billing code modifier, describing the claims

accurately while challenging the presumption and seeking

reimbursement.

Godecke alleges that KCI delivered many VACs without

the required WOPD. Due to time constraints and business

pressures, KCI management would authorize “exceptions” to

KCI’s standard operating procedures, which were based on

Medicare’s requirements. These exceptions would allow KCI

employees to release the VAC and supplies for delivery to the

patient before receiving the written order. The exception

granted by management would make the claim appear to be

billable under KCI’s internal procedures, even though

Medicare’s WOPD requirements had not been satisfied. KCI

was not required to disclose the actual date on which it

received the written order, and there was a 30-day window

after a patient’s treatment started before KCI had to bill

Medicare. During this 30-day window, KCI could get a

detailed written order from a physician for the VAC. In such

cases, of course, the order was not technically a WOPD

because it was not written prior to delivery. Based on

2

The KX billing code replaced the ZX billing code in 2002. The only

difference between the codes is that ZX was a temporary designation and

KX is a permanent designation. For the sake of simplicity, we use “KX”

throughout this opinion.

8 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS

reviews of reports and conversations with customer service

representatives and KCI management, Godecke learned that

KCI management granted these exceptions and allowed

customer service representatives to deliver VACs to patients

before all the WOPD requirements had been satisfied. She

also knew that KCI management understood the Medicare

requirements and the rules for reimbursement, and she also

helped KCI management set up tracking systems specifically

for following up on orders for VACs that had been delivered

but did not satisfy the WOPD requirements.

Godecke next alleges that KCI knowingly used the wrong

billing code modifiers to conceal from Medicare that these

VACs were delivered before receiving a WOPD. KCI would

routinely submit claims for payment when KCI either did not

have any WOPD in its possession or had some form of a

WOPD, but the order was defective. KCI would bill

Medicare using the KX modifier as long as it was able to

obtain a detailed written order before the 30-day window to

submit bills had closed. KCI would submit these claims

without including the EY modifier, even though it was

required to do so. Because of the 30-day window and the fact

that KCI was not required to submit the actual date the

WOPD was received, KCI’s alleged scheme avoided

detection by Medicare, unless Medicare chose to audit a

claim and knew exactly what to look for and where to look.

Godecke provides fifteen representative examples of false

claims that were submitted for reimbursement without the EY

code. These claims are identified by Rental Order Entry

(“ROE”) numbers, a unique identifying number assigned to

each VAC delivery request. Godecke used an internal KCI

report to identify ROEs for a group of VACs delivered

without a WOPD (or with an incomplete WOPD). By cross-

GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 9

referencing this group with another internal report, Godecke

was able to identify the ROEs in this group for which KCI

management granted an exception in order to approve the

delivery and billing of these VACs without a WOPD. Then,

Godecke generated a report through KCI’s billing and appeals

databases to confirm that these ROEs had been either paid or

appealed. Therefore, because claims with the EY modifier

would not be paid and could not be appealed, these ROEs not

only were delivered despite noncompliance, but also were

billed by KCI without the required EY modifier.

After gathering evidence and customized reports,

Godecke brought her concerns about the billing non-

compliance issues to the attention of KCI’s management.

Godecke presented her findings at a meeting with her boss

Rich Brinkley, KCI Senior Vice President Steve Hartpence,

and with Godecke’s former supervisor Deb Smith on the

phone. Smith disputed Godecke’s interpretation of the

Medicare rules, but Hartpence requested that Godecke

continue her research on the issue. Within hours of the

meeting, Hartpence was fired and escorted out of KCI’s

building. About a month later, Brinkley was also fired, and

he called Godecke to say that she was going to be fired

“because senior management told him she was going to be a

whistleblower.” Godecke was fired a few weeks later on

October 1, 2007.3

3

The district court stayed Godecke’s retaliation claim and KCI’s

breach of contract and conversion counterclaims pending the outcome of

this appeal.

10 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS

JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction pursuant to 28 U.S.C. § 1291. We

review the dismissal of claims under the FCA de novo. U.S.

ex rel. Hendow v. Univ. of Phx., 461 F.3d 1166, 1170 (9th

Cir. 2006). We assume that the facts as alleged are true and

examine only whether the relator’s allegations support a

cause of action under the FCA, under the theories presented.

Id. A Rule 12(b)(6) dismissal “can be based on the lack of a

cognizable legal theory or the absence of sufficient facts

alleged under a cognizable legal theory.” Balistreri v.

Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). A

complaint must plead “sufficient factual matter, accepted as

true, to ‘state a claim to relief that is plausible on its face.’ ”

Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570).

A claim under the FCA must not only be plausible, Fed. R.

Civ. P. 8(a), but pled with particularity under Rule 9(b), U.S.

ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d

1047, 1054–55 (9th Cir. 2011). Rule 9(b) requires that the

circumstances alleged to constitute fraud be specific enough

to give the defendant notice of the particular misconduct so

that it can defend against the charge. Kearns v. Ford Motor

Co., 567 F.3d 1120, 1124 (9th Cir. 2009). The party must

allege the “who, what, when, where, and how” of the

misconduct. Id.

DISCUSSION

I. Godecke sufficiently alleged that KCI violated the

FCA.

The FCA makes liable anyone who “knowingly presents,

or causes to be presented, a false or fraudulent claim for

payment or approval,” or “knowingly makes, uses, or causes

GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 11

to be made or used, a false record or statement material to a

false or fraudulent claim.” 31 U.S.C. § 3729(a)(1)(A), (B).

A claim under the FCA requires a showing of: “(1) a false

statement or fraudulent course of conduct, (2) made with

scienter, (3) that was material, causing (4) the government to

pay out money or forfeit moneys due.” U.S. ex rel. Campie

v. Gilead Sci., Inc., 862 F.3d 890, 899 (9th Cir. 2017), cert.

denied, 139 S. Ct. 783 (2019).

The district court dismissed the FAC on the ground that

it failed to plead a violation of the FCA. Godecke challenges

the district court’s determination that she failed sufficiently

to allege that, either (1) KCI actually submitted any claim

without the EY modifier when it was required, or (2) there

were “reliable indicia” leading to “a strong inference” that

KCI actually submitted claims without an EY modifier.

Godecke also challenges the district court’s determination

that her claims failed to meet the FCA’s scienter

requirements. KCI, on the other hand, argues that Godecke

failed to allege sufficient facts to meet the FCA’s materiality

requirement. The district court denied KCI’s motion to

dismiss on materiality grounds in an earlier ruling on the

Second Amended Complaint.

A. Godecke adequately alleges a fraudulent scheme to

submit false claims and reliable indicia that lead to

a strong inference that false claims were actually

submitted.

To state an FCA claim, a relator is not required to identify

actual examples of submitted false claims; instead, “it is

sufficient to allege ‘particular details of a scheme to submit

false claims paired with reliable indicia that lead to a strong

inference that claims were actually submitted.’” Ebeid ex rel.

12 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS

U.S. v. Lungwitz, 616 F.3d 993, 998–99 (9th Cir. 2010)

(quoting U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180,

190 (5th Cir. 2009)). A relator is not required to identify

representative examples of false claims to support every

allegation, although the use of representative examples is one

means of meeting the pleading obligation. Id. at 998.

Godecke sufficiently alleged particular details of a

scheme to submit false claims paired with reliable indicia that

lead to a strong inference that the claims were actually

submitted. Godecke alleges that she learned about KCI’s

scheme to submit false claims through her role as KCI’s

Director of Medicare Cash and Collections. Even though

Godecke never personally was directed not to include an EY

modifier or directly observed other employees omitting the

EY modifier, her complaint alleges particular details of a KCI

management scheme to submit claims omitting the EY

modifier when it should have been included. Based on

knowledge gained from talking with sales representatives,

Godecke learned that KCI often delivered VAC devices

without receiving a prior written order at the urging of sales

executives. She alleges that she “knew from management

explanations” that KCI management knew that Medicare

would not pay for the VAC devices delivered under these

“exceptions” to the rules, and KCI management “set up

tracking systems to expedite [the] effort . . . to mask the fact

that VACs were delivered without all of the required

elements in hand.” Godecke has alleged personal knowledge

that KCI management was actively and knowingly looking

for ways to conceal the fact that certain VAC devices would

not be reimbursable.

Godecke’s ROEs analysis shows reliable indicia that raise

a strong inference that KCI actually submitted false claims.

GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 13

The district court found that Godecke’s analysis did not

sufficiently support the theory that KCI actually submitted

false claims because Godecke’s analysis of ROEs in KCI’s

appeals database was entirely consistent with an equally

plausible interpretation that the ROEs instead represented

claims that were submitted with an EY modifier and were

consequently denied. But Godecke shows that her system of

cross-referencing ROEs in different databases allowed her to

rule out that interpretation. In paragraphs 157 through 160 of

the FAC, Godecke specifically alleges that she could pinpoint

those ROEs for claims without a WOPD where the claim was

either paid or appealed, which would have been impossible

had the claim included the EY modifier as it should have had.

Furthermore, the FAC includes detailed allegations from

Theresa Duffy, a former colleague of Godecke, who

personally reviewed KCI’s claims denied by Medicare to

determine whether KCI should appeal the denials. Starting in

2002, “Duffy complained to Godecke about the inadequate

documentary support for submitted claims,” and Duffy and

Godecke “discussed that numerous claims lacked required

documentation.” Less than two weeks before Godecke filed

the FAC (in 2017), Duffy confirmed to Godecke “that KCI’s

claims submitted to Medicare that Duffy had personally

reviewed lacked appropriate documentation, including claims

which required an EY modifier because KCI did not have a

valid WOPD before delivery of a VAC.” In 2017, Duffy also

confirmed to Godecke that she “personally saw that claims

for first cycle treatment had routinely been billed to

Medicare, and paid by Medicare, even though the VAC had

been delivered before KCI had obtained a valid WOPD.”4

Duffy also stated that she “did not recall ever seeing an EY

4

First cycle treatment refers to the first month of VAC therapy.

14 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS

modifier placed on any first cycle claims, even when

Medicare required that an EY modifier be included.” Duffy

also confirmed that when she “reported to KCI management,

including Deb Smith, that she had not found any WOPD for

claims submitted, Smith directed Duffy not to appeal the

claim . . . because Smith was worried that Medicare would

notice the lack of a WOPD.”

Duffy’s allegations provided the necessary reliable indicia

that give a strong inference that KCI actually submitted false

claims to Medicare, and the district court incorrectly

disregarded the information provided by Duffy. The district

court recognized that, “[w]hile it is certainly suspect that

Plaintiff is on her Fourth Amended Complaint, and Plaintiff

now, for the first time, alleges facts pertaining to

conversations that occurred starting in 2002, the Court must

accept Plaintiff’s allegations as true when deciding a motion

to dismiss.” In spite of that acknowledgement, however, the

district court did not accept the allegations as true, stating that

the “allegations regarding [Godecke’s] conversations with

Duffy are not particularly reliable, given that Duffy was

allegedly recounting what she recalled from fifteen years

prior.” The district court ultimately held that “Plaintiff’s

allegations regarding her 2002 conversations with Duffy and

Duffy’s recollections that Plaintiff ‘confirmed’ in 2017 do not

provide the necessary “reliable indicia” that KCI actually

submitted false claims to Medicare.”

The district court imposed too high of a hurdle to test the

sufficiency of these allegations. The only unreliable aspect

of Duffy’s allegations is the fact that Duffy’s recollection is

based on events that happened fifteen years prior. Although

it is true that a fifteen year old memory is less reliable than a

more recent one, Duffy’s memories clearly allege a false

GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 15

claim: she “personally saw that claims for first cycle

treatment had routinely been billed to Medicare, and paid by

Medicare, even though the VAC had been delivered before

KCI had obtained a valid WOPD.” Duffy’s recollections can

be more closely examined in a deposition, and it is possible

that they would not hold up under cross-examination. But a

motion to dismiss is too early a stage to render a judgment on

the reliability of Duffy’s recollections when the only

indication that they might be less than reliable is the length of

time that has elapsed since she witnessed the events at issue.

Godecke alleges details of a scheme to submit claims that

were fraudulent because they lacked the EY modifier when it

should have been included. And Duffy’s recollections and

Godecke’s cross-referencing of ROEs are enough reliable

indicia to lead to a strong inference that KCI actually

submitted false claims to Medicare.

B. Godecke sufficiently alleges that KCI acted with

the requisite scienter under the FCA.

Liability under the FCA is established only when the

defendant “knowingly” presents a false or fraudulent claim

for payment. 31 U.S.C. § 3729(a)(1)(A). “Knowingly” is

defined as having: (1) actual knowledge of the information;

(2) deliberate ignorance of the truth or falsity of the

information; or (3) reckless disregard of the truth or falsity of

the information. 31 U.S.C. § 3729(b)(1)(A). The FCA’s

“knowingly” requirement “require[s] no proof of specific

intent to defraud.” 31 U.S.C. § 3729(b)(1)(B). Instead of

pleading specific intent to defraud, it is sufficient to plead that

the defendant knowingly filed false claims, or that the

defendant submitted false claims with reckless disregard or

deliberate ignorance as to the truth or falsity of its

16 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS

representations. United States v. Bourseau, 531 F.3d 1159,

1167 (9th Cir. 2008). The deliberate ignorance standard can

cover “the ostrich type situation where an individual has

buried his head in the sand and failed to make simple

inquiries which would alert him that false claims are being

submitted.” United States v. United Healthcare Ins. Co., 848

F.3d 1161, 1174 (9th Cir. 2016) (internal quotation marks

omitted). “Congress adopted the concept that individuals and

contractors receiving public funds have some duty to make a

limited inquiry so as to be reasonably certain they are entitled

to the money they seek.” Id. (internal quotation marks

omitted).

The district court erred in holding that Godecke failed to

plead the requisite scienter under the FCA.5 The district court

indicated that Godecke and Duffy’s knowledge of the appeals

process would only support an inference that KCI found out

during the appeals process that it was submitting false claims

5

The district court misstated the standard for scienter at the

conclusion of its scienter analysis, stating that Godecke had not

sufficiently alleged that KCI “knowingly submitted false claims with an

intent to deceive the government.” (Emphasis added.) But this incorrect

legal standard was only mentioned once, and it is clear from the rest of the

district court’s analysis that the district court understood that the proper

standard only required KCI knowingly to submit false claims. As the

district court stated, “[t]he more appropriate inquiry is whether Plaintiff

has pleaded facts indicating that KCI knowingly submitted claims without

a completed WOPD to Medicare without the requisite EY modifier.”

Therefore, reversal would not be warranted solely on the ground that the

district court misstated once the proper legal standard for scienter. See

Hooper v. Lockheed Martin Corp., 688 F.3d 1037, 1049–50 (9th Cir.

2012) (holding that when the district court applies the wrong legal

standard by requiring the relator to prove that the defendant acted “with

the intent to deceive,” reversal may be warranted).

GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 17

to the government, not that it knew they were false at the time

of submission.

But Godecke sufficiently alleges that KCI knowingly

submitted claims without the requisite EY modifier when

KCI had not gotten a written order prior to delivery. First,

Godecke alleges that KCI knowingly delivered VAC devices

without receiving a prior written order, as evidenced by the

“exceptions” authorized by managers. Although this

allegation by itself would not be sufficient to allege that KCI

knowingly submitted false claims, it is an important building

block in the overall allegations sufficiently to plead FCA

violations. Building on the allegations that KCI knowingly

delivered VAC devices without a WOPD, Godecke

sufficiently alleges that KCI knowingly submitted these

claims without a WOPD to Medicare without the requisite

EY modifier. Godecke alleges that KCI management

explained they knew that Medicare would not pay for the

VAC devices delivered under the “exceptions” to the rules,

and KCI management “set up tracking systems to expedite

[the] effort . . . to mask the fact that VACs were delivered

without all of the required elements in hand.”

Godecke’s scienter allegations are bolstered by

information from her former co-worker Theresa Duffy.

Godecke alleges that Duffy recently confirmed to her “that

KCI’s claims submitted to Medicare that Duffy had

personally reviewed lacked appropriate documentation,

including claims which required an EY modifier because KCI

did not have a valid WOPD before delivery of a VAC.”

Duffy also confirmed to Godecke that KCI’s billing and

management head Deb Smith told her not to appeal denials of

certain claims “because Smith was worried that Medicare

would notice the lack of a WOPD.” Partially through Duffy’s

18 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS

recollection, the FAC alleged that false claims were

submitted without the proper WOPD documentation and KCI

management deliberately avoided appealing denials of claims

that lacked a WOPD. Combined, this is sufficient to allege

scienter. The district court explained away Godecke’s

conversations with Duffy as not alleging the requisite

scienter, saying “at most, Duffy ‘confirmed’ that KCI realized

after the fact, during the appeals process, that it had submitted

claims to Medicare without a WOPD or the required EY

modifier.” But at the very least, Duffy’s recollections are

sufficient to show the “ostrich type situation” of deliberate

ignorance on the part of KCI, where KCI “has buried his head

in the sand and failed to make simple inquiries which would

alert [it] that false claims are being submitted.” See United

Healthcare Ins. Co., 848 F.3d at 1174.

Furthermore, when Godecke raised concerns about

whether KCI was following proper rules for billing Medicare,

KCI quickly fired not only Godecke, but also her supervisor,

and the senior vice president to whom they both reported.

Godecke’s supervisor told her that KCI management was

afraid she was gathering information on false claims and was

going to be a whistleblower. While the circumstances of the

firings does not establish on its own that KCI knowingly

submitted false claims, KCI’s extraordinarily aggressive

reaction to these concerns suggest that KCI was at least trying

to remain willfully ignorant of the falsity of its VAC claims.

When combined with Duffy’s recollection and the tracking

systems, the firings are added support of the allegation that

KCI knowingly submitted false claims.

In sum, the allegations of scienter were sufficient, at least

under the “deliberate ignorance” standard, based on the

FAC’s discussion of the tracking systems set up by KCI

GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 19

management, Godecke’s colleague’s assertions that she

personally reviewed claims that lacked appropriate

documentation, KCI management’s instructions not to appeal

denials for fear that Medicare would notice the lack of a

written order prior to delivery, and the quick termination of

Godecke, her supervisor, and the senior vice president after

they raised concerns about false claims being submitted.

C. Godecke sufficiently alleges that KCI’s false claims

were material to the government’s payment

decision.

KCI argues that the FAC fails the FCA’s materiality

requirement because it does not allege with particularity that

the allegedly false submissions would have affected

Medicare’s ultimate payment decision. In an earlier order,

the district court denied KCI’s motion to dismiss the Second

Amended Complaint on the issue of materiality. “In

reviewing decisions of the district court, we may affirm on

any ground finding support in the record. If the decision

below is correct, it must be affirmed, even if the district court

relied on the wrong grounds or wrong reasoning.” Cigna

Prop. & Cas. Ins. Co. v. Polaris Pictures Corp., 159 F.3d

412, 418 (9th Cir. 1998).

The FCA defines the term “material” as “having a natural

tendency to influence, or be capable of influencing, the

payment or receipt of money or property.” 31 U.S.C.

§ 3729(b)(4). Although the requirement is “demanding,” the

Supreme Court has held that there is not a bright-line test for

determining whether the FCA’s materiality requirement has

been met. See Universal Health Servs., Inc. v. U S. ex rel.

Escobar, 136 S. Ct. 1989, 2003 (2016). Instead, the Supreme

Court has given a list of relevant, but not necessarily

20 GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS

dispositive, factors in determining whether the false claims

were material, such as whether the government decided “to

expressly identify a provision as a condition of payment.” Id.

“Likewise, proof of materiality can include, but is not

necessarily limited to, evidence that the defendant knows that

the Government consistently refuses to pay claims in the

mine run of cases based on noncompliance with the particular

statutory, regulatory, or contractual requirement.” Id.

“Conversely, if the Government pays a particular claim in full

despite its actual knowledge that certain requirements were

violated, that is very strong evidence that those requirements

are not material.” Id. “Or, if the Government regularly pays

a particular type of claim in full despite actual knowledge that

certain requirements were violated, and has signaled no

change in position, that is strong evidence that the

requirements are not material.” Id. at 2003–04. “Materiality,

in addition, cannot be found where noncompliance is minor

or insubstantial.” Id. at 2003.

Filing for Medicare payment for a VAC and related

supplies without disclosing that no written order was received

prior to delivery is a material false claim. Godecke’s

allegations, taken together, sufficiently allege materiality to

survive a motion to dismiss. According to the FAC, the

LCDs explicitly provide that payment would not be made if

a VAC was delivered before the written order was received.

Although this express identification of a condition of payment

“may not be sufficient, without more, to prove materiality,

. . . it is certainly probative evidence of materiality.” See U.S.

ex rel. Rose v. Stephens Inst., 909 F.3d 1012, 1020 (9th Cir.

2018). Godecke further alleges that the prior written order

requirement was not just some “paperwork issue” but the

result of extensive negotiations KCI had with Medicare

representatives in order to prevent fraud and abuse. Although

GODECKE EX REL. UNITED STATES V. KINETIC CONCEPTS 21

this is not an allegation based on how Medicare “has treated

similar violations,” the fact that the requirement was

“extensively negotiated” is also probative. See id. KCI

simply suggests that because the government “may reimburse

a particular claim in full despite its not meeting the LCD

guidelines (including the EY modifier requirement), those

guidelines cannot be said to be material to the government’s

payment determination.” (Emphasis added.) But KCI has

not shown that Medicare has paid a particular claim in full

despite its actual knowledge that there was no prior written

order. Nowhere in the record is there evidence that the

government actually has reimbursed a particular claim in full

despite knowing that it did not meet the LCD guidelines

related to the EY modifier requirement. Godecke’s

allegations also do not indicate that noncompliance would be

minor or insubstantial. Godecke alleges that Medicare would

not pay for the VAC at all if it knew that there was no prior

written order. Godecke therefore has sufficiently alleged

materiality.

CONCLUSION

For the foregoing reasons, we reverse the district court’s

dismissal of the FAC.6

REVERSED and REMANDED.

6

Because we hold that the FAC’s allegations are sufficient under the

FCA, we do not reach Godecke’s alternate argument that the district court

erred in denying her leave to further amend her complaint.