Steven Hartpence v. Kinetic Concepts, Inc. ( 2022 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
UNITED STATES OF AMERICA EX REL. No. 19-55823
STEVEN J. HARTPENCE, Relator,
Plaintiff-Appellant, D.C. No.
2:08-cv-01885-
v. CAS-AGR
KINETIC CONCEPTS, INC.; KCI-USA,
INC., OPINION
Defendants-Appellees.
Appeal from the United States District Court
for the Central District of California
Christina A. Snyder, District Judge, Presiding
Argued and Submitted July 10, 2020
Pasadena, California
Filed August 9, 2022
Before: Bobby R. Baldock, * Marsha S. Berzon, and
Daniel P. Collins, Circuit Judges.
Opinion by Judge Collins
*
The Honorable Bobby R. Baldock, United States Circuit Judge for
the U.S. Court of Appeals for the Tenth Circuit, sitting by designation.
2 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
SUMMARY **
False Claims Act
The panel reversed the district court’s summary
judgment in favor of defendants in a qui tam action brought
under the False Claims Act, and remanded for further
proceedings.
Plaintiff and relator Stephen J. Hartpence alleged that
defendants Kinetic Concepts, Inc., and its indirect subsidiary
KCI USA, Inc. (collectively, “KCI”) submitted claims to
Medicare in which KCI falsely certified compliance with
certain criteria governing Medicare payment for the use of
KCI’s medical device for treating wounds. The district court
granted summary judgment to KCI, concluding that
Hartpence had failed to establish a genuine issue of material
fact as to the False Claims Act elements of materiality and
scienter.
In the context of a false certification of compliance with
a regulatory or statutory requirement for payment, the
certification is material if the requirement is so central to the
claims that the government would not have paid these claims
had it known that the requirement was not satisfied. The
panel held that there was a genuine issue of material fact as
to whether KCI’s use of a “KX” modifier was material to
KCI’s reimbursement claims submitted to Medicare. This
modifier indicated compliance with the requirements of
Local Coverage Determinations (“LCD”) issued by Durable
Medical Equipment Medicare Administrative Contractors,
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 3
which processed claims on behalf of the Centers for
Medicare and Medicaid Services. The panel concluded that
the fact that the KX modifier was not accepted at face value
in case-specific auditing did not mean that compliance with
the LCD criteria (which is what use of the modifier was
supposed to signify) was not material to most payment
decisions on “stalled-cycle” claims, where KCI’s device was
used but there was no wound improvement.
The panel agreed that compliance with the specific LCD
criterion that there be no stalled cycle would not be material
if, upon case-specific review, the Government routinely paid
stalled-cycle claims. In other words, if stalled-cycle claims
were consistently paid when subject to case-specific
scrutiny, then a false statement that avoided that scrutiny and
instead resulted in automatic payment would not be material
to the payment decision. The panel concluded, however, that
the record did not show this to be the case. The panel
considered administrative rulings concerning claims that
were initially denied, post-payment and pre-payment audits
of particular claims, and a 2007 report by the Office of
Inspector General of the U.S. Department of Health and
Human Services. The panel concluded that none of these
forms of evidence supported the district court’s summary
judgment ruling.
The panel held that the district court further erred in
ruling that there was insufficient evidence that KCI acted
with the requisite scienter. The district court ruled that,
because the use of the KX modifier on stalled-cycle claims
was not material, evidence that KCI knew that it was
wrongly using the KX modifier was insufficient to establish
scienter. Because the district court’s premise concerning
materiality was wrong, the resulting conclusion that it drew
as to scienter was necessarily vitiated. Assuming without
4 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
deciding that scienter requires knowledge of materiality as
well as knowledge of falsity, the panel concluded that the
record in this case established a triable issue regarding KCI’s
knowledge of the materiality of its misuse of the KX
modifier.
The panel further concluded that the remainder of the
district court’s reasoning concerning scienter rested on a
clear failure to view the evidence in the light most favorable
to the relator. The panel concluded that there was ample
evidence to permit a rational trier of fact to conclude that
KCI knew that it was a false statement to attach the KX
modifier to a claim that did not satisfy the LCD and that KCI
did so knowing that it might thereby escape case-specific
scrutiny that, in many cases, it would lose.
COUNSEL
Mark I. Labaton (argued), Glancy Prongay & Murray LLP,
Los Angeles, California; Michael A. Hirst, Hirst Law Group,
Davis, California; Patrick J. O’Connell, Law Offices of
Patrick J. O’Connell, Austin, Texas; Timothy Cornell,
Cornell Dolan P.C., Boston, Massachusetts; for Plaintiff-
Appellant.
Gregory M. Luce (argued), Bradley A. Klein, Paul A.
Solomon, and John A.J. Barkmeyer, Skadden Arps Slate
Meagher & Flom LLP, Washington, D.C.; Matthew E. Sloan
and Rachael T. Schiffman, Skadden Arps Slate Meagher &
Flom LLP, Los Angeles, California; for Defendants-
Appellees.
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 5
OPINION
COLLINS, Circuit Judge:
In this qui tam action brought under the False Claims Act
(“FCA”), 31 U.S.C. § 3729 et seq., Plaintiff and Relator
Stephen J. Hartpence alleges that Defendants Kinetic
Concepts, Inc. and its indirect subsidiary KCI USA, Inc.
(collectively, “KCI”) submitted claims to Medicare in which
KCI falsely certified compliance with certain criteria
governing Medicare payment for the use of KCI’s medical
device for treating wounds. The district court granted
summary judgment to KCI, concluding that Hartpence had
failed to establish a genuine issue of material fact as to the
FCA elements of materiality and scienter. Because there are
triable issues as to both elements, we reverse and remand.
I
A
KCI manufactures and supplies a medical device that
helps to heal wounds by means of a method called Vacuum
Assisted Closure Therapy, or “VAC Therapy.” KCI’s
device, which requires a prescription, uses “an electric pump
connected to specialized wound dressings” to apply
“negative pressure” at the site of the wound, thereby drawing
the edges of the wound closer together. Payment for such
VAC Therapy treatments may be covered by Medicare for
patients enrolled in Medicare Part B. When the therapy is
prescribed to a Medicare-beneficiary patient, KCI directly
bills the Government—on a monthly basis—on that patient’s
behalf. The dispute in this case centers on whether the
claims that KCI submitted for payment falsely certified that
the applicable criteria for payment were met.
6 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
Under the relevant provision of the Medicare Act, “items
and services” otherwise covered by Medicare Part B are
generally eligible for reimbursement only if they are
“reasonable and necessary for the diagnosis or treatment of
illness or injury or to improve the functioning of a
malformed body member.” 42 U.S.C. § 1395y(a)(1)(A).
The Medicare Act authorizes the Centers for Medicare and
Medicaid Services (“CMS”) to facilitate the evaluation and
reimbursement of claims for covered medical treatment by
contracting with private entities, currently known as
“medicare administrative contractors,” who process those
claims on the Government’s behalf. See 42 U.S.C.
§ 1395kk-1(a)(1); see also id. § 1395u(a). With respect to
the sort of durable medical equipment at issue here, CMS
has invoked this authority by entering into contracts with
four regional Durable Medical Equipment Medicare
Administrative Contractors (“DME MACs”). 1 CMS
delegates the initial determination of which treatments are
“reasonable and necessary” to these DME MACs, who are
authorized by the Medicare Act to issue Local Coverage
Determinations (“LCDs”) addressing “whether or not a
particular item or service is covered” on a DME MAC-wide
basis under that standard. See 42 U.S.C. § 1395ff(f)(2)(B)
(citing id. § 1395y(a)(1)(A)); see also id. § 1395kk-1(a)(4).
1
Prior to the effective date of the relevant provisions of the
Medicare Prescription Drug, Improvement, and Modernization Act of
2003, the statute referred to these contracting private entities as
“carriers.” See 42 U.S.C. § 1395u(a) (2002 ed.). Correspondingly, the
predecessors to the four DME MACs were known as “Durable Medical
Equipment Regional Carriers.” No party contends that this distinction is
material to this case, so for the sake of simplicity we will refer to these
entities as “DME MACs” without regard to the specific timeframe at
issue.
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 7
Effective October 1, 2000, all four DME MACs adopted
“substantially identical” LCDs to clarify when use of a
“negative pressure wound therapy” (“NPWT”) pump—such
as KCI’s VAC Therapy device—would be considered to be
“reasonable and necessary” and therefore covered under
Medicare Part B. 2 Among other rules, the 2000 LCDs
provided that coverage for NPWT pumps ends when “[a]ny
measurable degree of wound healing has failed to occur over
the prior month.” The LCDs required that the requisite
“progressive wound healing from month to month” be
“documented in the patient’s medical records” through
“quantitative measurements of wound characteristics” such
as “wound length and width (surface area), or depth.” 3 To
expedite claim processing, the relevant LCDs provided that
a supplier could demonstrate that a given claim met all
relevant conditions for coverage by adding to the claim a
specified two-letter modifier. Here, that modifier was
initially “ZX,” and then, beginning in July 2002, “KX.”
Because the parties agree that these two modifiers had the
same meaning, we will henceforward refer only to the “KX”
modifier. The LCDs expressly stated, in bolded and
underscored typeface, that the KX modifier “must not be
used” if, inter alia, the required month-over-month
measurable wound healing had failed to occur.
As one of the DME MAC directors explained at his
deposition, “if the KX modifier is there” in a submitted
2
At the time, LCDs such as these were referred to as “Local Medical
Review Policies.” Because the parties do not contend that the difference
in nomenclature has any significance for the issues on appeal, we will
refer to them simply as “LCDs,” without regard to the timeframe.
3
In October 2005, the LCDs were revised to specifically define
“[w]ound healing” as “improvement occurring in either surface area
(length times width) or depth of the wound.”
8 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
claim, “then the system is set up to pay that claim.”
Conversely, however, the lack of a KX modifier did not
necessarily mean that payment of a claim would ultimately
be denied. Although the same director explained that “the
system generates an automatic denial” if “the KX modifier
is missing,” KCI could appeal that denial through a multi-
level review and appeal process. See 42 C.F.R. § 405.900 et
seq. That process includes a hearing before an
Administrative Law Judge (“ALJ”), see id. §§ 405.1000–
405.1058, and the ALJ’s decision may be appealed to the
Medicare Appeals Council, id. §§ 405.1100–405.1130. In
conducting such review, the ALJ and the Appeals Council
“are not bound by LCDs, . . . but will give substantial
deference to these policies if they are applicable to a
particular case.” Id. § 405.1062(a). By pursuing this appeals
process, KCI could obtain a case-specific review as to
whether the particular use of NPWT was “reasonable and
necessary” for the treatment of the wound. 42 U.S.C.
§ 1395y(a)(1)(A).
In late 2002, KCI sent a formal letter to the DME MACs,
seeking clarification of several issues concerning the
application of the LCDs. One of these issues concerned the
handling of what the parties have referred to as “stalled
cycles,” i.e., a month in which VAC Therapy was used but
there was no wound improvement. Specifically, KCI asked
whether, if the month after a stalled cycle shows “significant
healing, should we submit a claim for both cycles?” In June
2003, the four DME MACs sent a joint responsive letter to
KCI. On the issue of stalled cycles, the DME MACs
responded in relevant part as follows (emphasis added):
Lack of improvement in one cycle of use (i.e.,
a month) would not justify coverage of
NPWT for the months following the month in
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 9
which improvement is lacking[]. Even
should the carrier make a payment,
subsequent post-payment audit could result
in an overpayment assessment for that month.
Lack of improvement in one cycle of use (i.e.,
a month) would not justify continued
coverage of NPWT for any month after
which wound healing progress is lacking,
according to the [LCD] coverage criteria. If
this cessation of healing occurs within the
first 4 months of therapy, then the claim for
the month of use after which healing ceased,
must be submitted without the KX modifier.
The substance of this position was also communicated by
memorandum to the DME MACs’ personnel handling
“Medical Review, Appeals.” On September 12, 2003, the
DME MAC for “Region D” issued a bulletin confirming
that, if there is a stalled cycle, “there will be no further
coverage” of NPWT for that wound, even if “subsequent
improvement occurs,” and “the KX modifier must not be
added to claims for any subsequent months for use of the
pump on that particular wound.”
Within a few days of the issuance of this bulletin, KCI
temporarily stopped seeking reimbursement for stalled-cycle
claims. In a September 26, 2003 letter to the DME MAC for
Region D, KCI took issue with the bulletin’s seemingly
blanket prohibition on paying any claims after a stalled
cycle. KCI explained that, in its view, there were many
situations in which use of NPWT would be medically
necessary after a stalled cycle and that it believed “that these
situations should be reviewed on a case-by-case basis.”
KCI’s letter did not specifically address the bulletin’s
prohibition on using the KX modifier in such situations. In
10 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
a subsequent October 14, 2003 phone call between KCI and
the Region D Medical Director, the Director assertedly
agreed that “criteria could be established to determine” when
use of NPWT would be “medically necessary” after a stalled
cycle, and that the recent bulletin should be retracted.
In an October 24, 2003 letter to the DME MACs, KCI
provided its formal response to the June 2003 letter. On the
issue of stalled cycles, KCI reiterated its objection to the
DME MACs’ apparent position that, if there is a stalled
cycle, “medical necessity could never be established without
complete healing.” KCI noted that, in a separate LCD
governing a different wound therapy (known as “Pressure
Reducing Support Surfaces”), there was a recognition that,
even if there was an apparent stall in healing, “continued
medical necessity can be established as long as there is
documentation to show that ‘other aspects of the care plan
are being modified to promote healing.’” KCI took the
position that “the coverage guidelines in the support surface
[LCDs] should also be applied to NPWT.” The letter did not
say anything about the use of the “KX” modifier.
Shortly thereafter, the KCI staff decided to resume
billing for stalled-cycle claims under what KCI later termed
a “risk sharing” approach: “If one cycle does not improve[,]
i.e., wound healing stalled, OK to bill that cycle. If the next
cycle does not improve, KCI will NOT bill and VAC will be
picked up.” As part of this approach, KCI resumed affixing
the KX modifiers to its claims where a stalled cycle was
followed by a month of wound improvement. In a
subsequent, January 30, 2004 letter to the DME MACs, KCI
again pointed to the analogy to the “Support Surface” LCD
and took the position that, “[i]f healing resumes” after a
stalled cycle, KCI “request[ed] that coverage be approved
for both cycles.” KCI argued, for example, that payment
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 11
should be made when a stalled cycle resulted from
“debridement”—a medical treatment in which a wound is
cleaned and dead or damaged tissue is removed—because
debridement may cause a temporary expansion in the size of
a wound that is otherwise healing properly and that would
benefit from VAC Therapy. This letter likewise did not
mention the use of the “KX” modifier.
In early January 2004, a KCI billing employee raised
concerns about the stalled-cycle billing practice, asking
billing company president Deb Smith in an email whether,
in light of a regional DME MAC bulletin comparable to the
one discussed above, “it would be fraudulent to submit a bill
that is different from what they indicate in this bulletin.”
Smith forwarded the email to Human Resources Manager
Bob Curlee, who echoed the employee’s concerns:
This sounds like an excellent employee has
identified the real possibility that Medicare
policy is being violated and fraud committed
and wants to know if she should continue
training her staff to continue doing so. Does
challenging the policy actually get us off the
hook when crunch time comes? You don’t
play a game assuming the rules may change
the score when you challenge it at the end.
You play by the rules you have while trying
to get the rules changed for the future. Just
my thoughts and I don’t know this stuff very
well, but I can tell when something is right or
wrong.
Nevertheless, KCI continued the practice of billing for
stalled-cycle claims, reiterating its “risk-sharing” approach
in a February 2004 internal memorandum. Specifically, that
12 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
memorandum stated that, in the event of a stalled cycle, the
claim would “be held pending [the] outcome of the
subsequent cycle,” and if that cycle showed significant
improvement, “both cycles will be billed.” The
memorandum, however, did not specifically address
whether, in billing such a set of cycles, the KX modifier
should be used. KCI’s billing department subsequently
raised the question whether the KX modifier could be used
in such circumstances, and that question was answered in a
March 2004 email from KCI’s Vice President for
Reimbursement Policy and Compliance. Concluding that
there were “inconsistencies in the positions taken by the
[DME MACs] on this point,” she stated that “KCI has made
the decision” that, if “the subsequent cycle” after a stalled
cycle “shows significant progress, both cycles will be billed
using the ZX [i.e., KX] modifier.”
KCI continued its discussions with the DME MACs over
the treatment of stalled cycles, and in April 2004 it
forwarded to the DME MACs its February 2004 internal
memorandum discussing KCI’s approach. That
memorandum, as noted earlier, did not explicitly mention the
use of the KX modifier, but KCI’s subsequent
communications with the DME MACs in 2004 did raise that
issue and also suggested formal amendment of the LCDs. In
particular, a June 23, 2004 KCI email to one of the regional
DME MACs stated that, “[m]oving forward,” KCI would
hold claims for a single stalled cycle and then, “[i]f the
subsequent cycle shows significant progress, [KCI] will
submit claims for both cycles will [sic] the KX modifier.”
The DME MACs and KCI appeared close to an
agreement in August 2004, when a DME MAC medical
director circulated an email stating that the DME MACs
were “planning to accept [KCI’s] concept of a ‘stalled’
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 13
healing cycle, paying for the stalled month and the
subsequent month only if the subsequent month shows
improvement compared to the month before the stalled
month.” Subsequent discussions between KCI and the DME
MACs included proposals to amend or clarify the LCDs to
expressly allow use of the KX modifier in the event of a
stalled cycle, at least where the stalled cycle was due to
debridement. But the negotiations slowed towards the end
of 2004, and ultimately no relevant formal amendment was
ever made to the LCDs during the pertinent timeframe. As
one of the regional DME MAC directors stated at his 2018
deposition, the parties “would get close” in the discussions,
but then the DME MACs “would back away.” He
summarized the overall negotiations by stating that, “after
all the years of discussion, we ultimately found all the points
unconvincing and made no change in the policy.”
In certain internal communications, however, KCI
operated on the assumption that it had an agreement “in
principle” with the DME MACs, even while acknowledging
that the LCDs had not been amended. For example, in one
internal email addressed to KCI’s General Counsel, the
author—who is the relator in this case—explained KCI’s
professed belief that the DME MACs had “bought into this
concept” of billing for stalled cycles that were followed by
improvement, but he cautioned that there was “risk”
“because our billing practice does not comply with this part
of the medical policy and we could be subject to recoupment
of very significant amounts of money if the policy were to
be strictly interpreted.”
In September 2010, the four DME MAC directors held a
conference call to discuss KCI’s billing practices. The
contemporaneous notes of one of the directors described as
14 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
follows the directors’ then-current understanding of the
issues concerning KCI’s billing of stalled cycles:
o Literal reading of policy says not to
use KX if wound size increases
o KCI will hold claim for stalled
month and if next month improves,
will bill stalled month with KX
o KCI does this based on discussions
in 2003 and 2004; however, no
action was taken by [DME MACs] in
policy to memorialize decisions
o Action: Take no action immediately
to address KCI’s stalled billing.
Longer-term action to revise policy
once [DME MACs] decide what
needs to be done with multiple policy
issues . . . .
B
Relator Steven Hartpence worked at KCI from 2001 until
2007, first as Vice President and then as Senior Vice
President of Business Systems. On March 20, 2008,
Hartpence filed this FCA qui tam action on behalf of the
United States. In his operative Third Amended Complaint,
Hartpence alleges, inter alia, that KCI’s so-called “risk-
sharing” approach to billing stalled-cycle claims violated the
FCA because KCI affixed the KX and ZX modifiers to
claims that did not actually satisfy all coverage requirements
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 15
under the LCDs. 4 On April 27, 2011, the United States
declined to intervene.
Hartpence’s FCA suit was initially dismissed by the
district court on the ground that the FCA’s “public
disclosure” bar on certain qui tam actions deprived the court
of subject matter jurisdiction. See United States ex rel.
Hartpence v. Kinetic Concepts, Inc., 792 F.3d 1121, 1123
(9th Cir. 2015) (en banc) (explaining that “[t]he public
disclosure bar precludes qui tam suits where there has been
a public disclosure of the fraud, unless the relator qualifies
as an ‘original source’ of the information” (quoting
31 U.S.C. § 3730(e)(4)). Sitting en banc, we overruled the
precedent on which the district court had relied in applying
the public-disclosure bar, and we remanded the case for
reconsideration. Id. at 1123, 1129–30 (overruling Wang ex
rel. United States v. FMC Corp., 975 F.2d 1412 (9th Cir.
1992), to the extent that it held that a relator qualifies as an
“original source” only if he or she “had a ‘hand in the public
disclosure’ of the fraud” (quoting Wang, 975 F.2d at 1418)).
On remand, the district court held that the public disclosure
bar did not apply to Hartpence’s qui tam action. No party
challenges that ruling on appeal.
After substantial discovery, KCI moved for summary
judgment in January 2019 on the ground that Hartpence
could not carry his burden of proof with respect to several
elements of his FCA claims. Specifically, KCI argued that
4
Hartpence also asserted below that KCI violated the FCA in several
additional respects, but in his opening brief on appeal, he has not
challenged the district court’s grant of summary judgment rejecting those
additional theories. Accordingly, any such further FCA theories have
been forfeited, see EEOC v. Peabody Western Coal Co., 773 F.3d 977,
990 (9th Cir. 2014), and the only FCA claims remaining in this case are
those arising from KCI’s billing of stalled-cycle claims for payment.
16 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
Hartpence lacked sufficient evidence as to the materiality
and falsity of KCI’s claims for payment and as to whether
KCI “knew or recklessly disregarded that such claims were
false.” The district court granted this motion in June 2019,
concluding that Hartpence had “failed to create a triable
issue as to materiality and scienter with respect to each type
of false claim he has identified.” The district court held that,
as a matter of law, any use by KCI of the KX modifier to
falsely certify compliance with LCD criteria that had not
actually been met was not material to the Government’s
ultimate payment decisions. The district court also held that
Hartpence had failed to present sufficient evidence that KCI
acted with the requisite scienter.
We have jurisdiction under 28 U.S.C. § 1291, and we
review the district court’s grant of summary judgment de
novo, see Protect Our Communities Found. v. LaCounte,
939 F.3d 1029, 1034 (9th Cir. 2019).
II
To establish a cause of action alleging liability for a false
claim under 31 U.S.C. § 3729(a)(1)(A), “the United States
or [the] relator must prove the following elements: (1) a false
or fraudulent claim (2) that was material to the decision-
making process (3) which defendant presented, or caused to
be presented, to the United States for payment or approval
(4) with knowledge that the claim was false or fraudulent.”
United States ex rel. Hooper v. Lockheed Martin Corp.,
688 F.3d 1037, 1047 (9th Cir. 2012) (emphasis added).
Thus, although § 3729(a)(1)(A) does not itself use the term
“material,” its reference to a “false or fraudulent claim” must
be understood in light of the common-law understanding of
fraud, which included a materiality requirement. Universal
Health Servs., Inc. v. United States ex rel. Escobar, 579 U.S.
176, 193 (2016). For similar reasons, it does not matter
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 17
whether § 3729(a)(1)(A)’s lack of the word “material”
arguably renders the FCA’s express definition of “material”
inapplicable to that provision. See 31 U.S.C. § 3729(b)(4)
(defining “material,” “[f]or purposes of this section,” as
“having a natural tendency to influence, or be capable of
influencing, the payment or receipt of money or property”).
Regardless of “whether § 3729(a)(1)(A)’s materiality
requirement is governed by § 3729(b)(4) or derived directly
from the common law,” the substance of that standard is
essentially the same. Escobar, 579 U.S. at 193. Materiality
“looks to the effect on the likely or actual behavior of the
recipient of the alleged misrepresentation.” Id. (simplified).
In the context of a false certification of compliance with
a regulatory or statutory requirement for payment, the
certification is material if the requirement is “‘so central’ to
the claims that the government ‘would not have paid these
claims had it known’” that the requirement was not satisfied.
United States ex rel. Winter v. Gardens Reg’l Hosp. & Med.
Ctr., Inc., 953 F.3d 1108, 1121 (9th Cir. 2020) (quoting
Escobar, 579 U.S. at 196). Applying that standard, we hold
that the district court erred in granting summary judgment.
On this record, there was a genuine issue of material fact as
to whether the use of the KX modifier—which indicated
compliance with the requirements of the LCDs—was
material to the reimbursement claims. See Celotex Corp. v.
Catrett, 477 U.S. 317, 322 (1986).
A
As noted earlier, one of the DME MAC directors
explained in his deposition that, if the KX modifier is used
in a claim when it is submitted, then “the system is set up to
pay that claim.” A KCI official likewise testified that the
general purpose of the KX modifier “was to trigger an
automatic payment.” That understanding of the KX
18 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
modifier is unsurprising, given the place of LCDs in the
payment system created by the Medicare Act. As noted
earlier, the whole point of the LCD system that Congress
authorized is to allow a DME MAC to make payments, on a
DME MAC-wide basis and without further consideration of
individual circumstances, when certain specific criteria are
present. See supra at 6. By contrast, omitting the KX
modifier would trigger a denial of the claim and the need to
pursue a case-specific review of medical necessity on
appeal. Given this pivotal practical role played by the use of
the KX modifier, a reasonable trier of fact could readily
conclude that the presence or absence of that modifier is
“material” to the payment decision. That is, given the above-
described structure of the coverage determination system, it
would be reasonable to conclude that the Government
attaches importance, in making a payment decision, to a
provider’s certification of compliance with the relevant
criteria of the applicable LCDs. That inference is further
supported by KCI’s own practice of persisting in using the
KX modifier to ensure prompt payment of stalled-cycle
claims despite its knowledge that those claims did not satisfy
the literal terms of the LCDs. Accordingly, unless the
summary judgment record contains undisputed evidence that
would refute such an inference, summary judgment for KCI
would be inappropriate because a rational jury could find,
consistent with Escobar, that the use of the KX modifier was
material to the payment of stalled-cycle claims. See 579
U.S. at 193.
In rejecting such an inference of materiality, the district
court concluded that use of the KX modifier did not mean
that KCI would be paid automatically, because the audit
evidence in the record revealed that some claims submitted
with that modifier were ultimately not paid. This reasoning
does not support a conclusion that, as a matter of law, the
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 19
KX modifier was not material. The vast majority of claims
with the KX modifier were not subjected to such audits, and
payment of those claims effectively was automatic given
KCI’s use of the modifier to confirm compliance with the
LCDs. The fact that the KX modifier was not accepted at
face value in case-specific auditing does not mean that
compliance with the LCD criteria (which is what use of the
modifier is supposed to signify) was not material to most
payment decisions.
B
We agree, however, that compliance with the specific
LCD criterion that there be no stalled cycle would not be
material if, upon case-specific review, the Government
routinely paid stalled-cycle claims. See Escobar, 579 U.S.
at 195–96. In other words, if stalled-cycle claims were
consistently paid when subject to case-specific scrutiny, then
a false statement that avoids that scrutiny and instead results
in automatic payment would not be material to the payment
decision. But the record does not show this to be the case,
particularly when the record is considered—as it must be—
in the light most favorable to the relator. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 255 (1986). The record evidence
concerning case-specific review of stalled-cycle claims
takes three main forms—administrative rulings concerning
claims that were initially denied, post-payment and pre-
payment audits of particular claims, and a 2007 report by the
Office of Inspector General (“OIG”) of the U.S. Department
of Health and Human Services. None of them supports the
district court’s summary judgment ruling.
1
The record includes a substantial number of
administrative decisions in which KCI appealed denials of
20 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
payments for claims that included stalled cycles. 5 The
picture that emerges from a consideration of these
administrative rulings is that there was no per se rule one
way or the other as to payment of stalled-cycle claims. Such
claims were paid only if case-specific circumstances
demonstrated that the treatment was reasonable and
necessary in a particular instance. Thus, although the record
contains several instances in which, upon further case-
specific review, an ALJ authorized payment of particular
claims involving a stalled cycle, the Government did not
follow KCI’s risk-sharing approach either. Rather than
follow KCI’s preferred bright-line rule, the agency took a
closer look at the totality of the circumstances in determining
medical necessity and deciding whether or not to pay stalled-
cycle claims. As a result, case-specific review of stalled-
5
The evidence indicates that there were at least two ways in which
such an appeal involving a stalled-cycle claim might occur. First, as one
KCI employee explained in an email, a “major driver” of stalled-cycle
denials occurred when a claim was examined by the DME MAC on other
grounds—such as failure to comply with the LCDs’ separate rule against
paying for more than four cycles of NPWT treatment—and the stalled
cycle would then be discovered in the resulting review. Although the
record is not entirely clear on the point, it may well be that, in such cases,
the KX modifier was not used in submitting such claims due to the failure
to meet the generally applicable four-cycle cap. Indeed, the submission
of a fifth claim for the same patient is presumably readily detectable by
the DME MAC and it is therefore unsurprising that a KCI billing
employee explained that, rather than use the normal electronic system of
claims submission, KCI submitted “paper bills to Medicare for claims
for patients whose treatment progressed to a fifth cycle or more.”
Second, the record indicates that some stalled-cycle claims submitted
with the KX modifier were included among KCI claims that were
selected for a pre-payment review or audit. As a result, the pool of
administrative decisions presumably contains some claims in which the
KX modifier was used and some in which it was not. The administrative
decisions themselves, however, are generally silent as to whether the KX
modifier was used in any given case.
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 21
cycle claims was a hit-or-miss proposition—meaning that
KCI’s false use of the KX modifier to obtain automatic
payment avoided a scrutiny that it sometimes lost.
In 2009, the Medicare Appeals Council—“which is the
highest level of agency adjudication” on these matters, see
Int’l Rehab. Sciences Inc. v. Sebelius, 688 F.3d 994, 996 (9th
Cir. 2012)—reviewed KCI’s appeals of 64 VAC Therapy
claims from all four regions and rejected payment for all of
them. In that decision, the Appeals Council squarely
addressed KCI’s argument that “Medicare should cover
cases where there has been no measurable wound healing”—
i.e., a stalled-cycle—“because the wound has undergone
debridement.” The Appeals Council rejected that argument
and instead upheld the ALJ’s “strict adherence to the terms”
of the LCDs. The Appeals Council acknowledged that
medical necessity for use of the VAC Therapy might
nonetheless be shown even when debridement caused a
stalled-cycle that resulted in a failure to satisfy the LCDs.
But the Council held that that would be true “[o]nly if facts
established through documentation show that a debridement
is of such an unusual and unpredictable nature or generates
unanticipated medical complications.” Because KCI failed
to establish such facts, the Appeals Council denied all 64 of
these claims.
Although the record contains a few favorable case-
specific determinations in cases in which KCI challenged
initial denials of payment before ALJs, these rulings do not
establish that the presence of a stalled cycle is immaterial,
but only that it is not always dispositive. At best, these
decisions—which, being from the “low levels of the agency
adjudication process,” are less significant, see Int’l Rehab.
Sciences, 688 F.3d at 996—show only that ALJs sometimes
22 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
authorized payment based on particular case-specific factors
that justified payment despite the presence of a stalled cycle.
For example, a June 2011 ALJ decision allowed payment
of several claims involving allegedly stalled cycles. After
first concluding that some of the cases did comply with the
LCDs (because there was in fact a “reduction in the wound
surface area”), the ALJ found that medical necessity had
been established in the remaining cases based on “sufficient
documentation” in the respective case files, either in the
form of physician prescriptions or a “Letter of Medical
Necessity.” A November 2010 ALJ decision comparably
allowed payment only because the “medical record” for the
particular patient “show[ed] sufficient documentation” from
the treating physician “to support medical need” for the
VAC Therapy. Notably, this decision states that the “mere
occurrence of a debridement does not excuse” compliance
with the LCD’s “progressive healing” requirement
(emphasis added). Two April 2005 decisions (both from the
same ALJ) made the converse point that the mere occurrence
of debridement does not necessarily mean that “the wound
failed to show improvement” (emphasis added). 6 Rather, the
ALJ concluded, whether the wound has improved requires
“consideration of the clinical evidence in the case record for
each beneficiary.” Likewise, a September 2005 ALJ ruling
recognized that payment might be warranted, upon
individualized consideration, if a case involved a “brief
‘stall’ within the context of good overall improvement.”
6
Other decisions, such as ALJ decisions from August 2006, April
2008, and May 2008, similarly made the point that a debridement that
temporarily increased wound size would promote wound healing and did
not necessarily mean that further use of VAC Therapy was unwarranted.
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 23
Taken together, these various decisions reaffirm the
LCD requirements, while recognizing that, under the
circumstances of a given case, medical necessity might or
might not still be shown. But KCI’s success in prevailing in
particular instances of case-specific review does not show
that failure to comply with the LCD—or using the KX
modifier to falsely state such compliance and thereby avoid
individualized review—was immaterial.
Moreover, the record contains additional ALJ decisions
which further support an inference that compliance with the
LCDs was material. For example, in a January 2007
decision, an ALJ upheld and applied the general rule that
when multiple claims are considered at once, “the absence
of measurable healing during the first cycle precludes
coverage for any of the subsequent months” (emphasis in
original). Using reasoning similar to the earlier-described
Appeals Council ruling, the ALJ stated that, when the failure
to satisfy the LCD was due to debridement, continued use of
the VAC Therapy might be medically reasonable and
necessary if the debridement was “of such an unusual and
unpredictable nature, or generate[d] such unanticipated
medical complications, as to justify the continuation of
NPWT despite the lack of measurable healing.” However,
the ALJ found that in the record before it, no such
extraordinary circumstances had been shown, and KCI’s
requests for payment were denied.
In short, there is no basis for concluding that the subset
of ALJ decisions that were favorable are representative of
the “mine run” of cases. Escobar, 579 U.S. at 195. Indeed,
an ALJ decision would only be rendered in those cases that
KCI specifically chose to appeal—which were likely closer
cases or claims with extenuating factors weighing in favor
of reimbursement. A KCI senior manager stated in a 2009
24 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
email that, at least as of September 2007, “the directive [KCI
employees] got was don’t take anything [to appeal] we know
we can’t win.” Because KCI was being selective in choosing
which claims to appeal, it is reasonable to infer that it had a
greater success rate in those appeals than it would have had
if it had appealed all denials in cases involving stalled-cycle
claims.
2
A post-payment audit conducted in Region D supports
the same conclusion that emerges from the administrative
rulings—viz., that case-specific reviews sometimes did, and
sometimes did not, reveal sufficient justification for
payment of claims that did not strictly meet the LCD criteria.
In 2007, one of the DME MACs—known as Region D—
conducted a post-payment audit of VAC Therapy claims.
According to the declaration of a KCI employee, the audit
revealed that, of 241 claims submitted and reviewed, there
were 19 “instances in which KCI submitted claims to the
Region D [DME MAC] using the KX modifier where the
wound’s healing stalled for a cycle followed by a cycle of
resumed improvement.” Of those 19 claims, auditors
approved 14 for payment and denied the remaining five
“because the auditors found insufficient medical records
supporting continued VAC Therapy.” The declaration
indicates, however, that the five denials were not based
simply on a failure to comply with the LCD but on a
consideration of “all of the medical records KCI submitted
for [each] patient.” Once again, the hit-or-miss nature of
case-specific review supports an inference that falsely using
the KX modifier to avoid such a review, and to instead be
paid automatically, is material to the Government’s payment
decision. Indeed, an audit in which five of 19 stalled-cycle
claims are denied—more than 25 percent—confirms the
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 25
materiality of using a code that typically would evade such
a case-specific review.
KCI also points to a pre-payment audit of VAC Therapy
claims that was conducted by the DME MAC for Region B
from 2007 until 2008. A KCI manager’s declaration
subsequently stated, in conclusory fashion, that she believed
there were no claims denied in this audit on the basis of a
stalled cycle. But even if some stalled-cycle claims were
upheld when specifically examined in this audit, that does
not establish, as a matter of law, that all such claims were
paid or even that the mine run of such claims were paid.
3
Finally, the OIG’s 2007 audit report also supports an
inference that the false use of the KX modifier was material.
The OIG report noted that nearly 21 percent of wound-
therapy-pump claims lacked sufficient—or any—supporting
documentation and that an additional three percent were “not
medically necessary,” mostly because they “did not have a
measurable degree of healing over the past month.” These
results affirmatively support the view that falsely using the
KX modifier to escape case-specific review was material.
Indeed, the OIG report specifically noted that “[c]laims that
do not have the KX modifier are automatically flagged for
possible review” (emphasis added).
* * *
26 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
Accordingly, we conclude that the district court erred in
holding that, as a matter of law, KCI’s false certification of
compliance with the LCDs was not material. 7
III
The district court further erred in holding that there was
insufficient evidence that KCI acted with the requisite
scienter. 8
A
As an initial matter, the district court held that, because
the use of the KX modifier on stalled-cycle claims was not
material, evidence that KCI knew that it was wrongly using
the KX modifier is insufficient to establish scienter. Because
the district court’s premise concerning materiality was
wrong, the resulting conclusion that it drew as to scienter is
necessarily vitiated.
7
In addition to the prohibition on presentation of false claims in
§ 3729(a)(1)(A), the FCA contains an alternative prohibition on
knowingly making “a false record or statement material to a false or
fraudulent claim.” See 31 U.S.C. § 3729(a)(1)(B). To the extent that the
relator here also relies on that provision, the analysis as to materiality
under that clause in this case is, so to speak, not materially different.
8
We reject KCI’s contention that Hartpence forfeited this issue by
supposedly failing to raise it adequately in the opening brief. Although
the brief would have benefited from a distinct subsection expressly
devoted to this issue, the brief as a whole makes sufficiently clear that
Hartpence contends, contrary to the district court’s ruling, that KCI well
knew that it was making false statements about facts material to
payment. That is especially true given that, as we explain, see infra
at 26–28, the district court’s erroneous scienter ruling was largely
predicated on its erroneous materiality ruling.
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 27
The district court quoted Escobar, 579 U.S. at 181, for
the proposition that the FCA’s scienter requirement turns on
“whether the defendant knowingly violated a requirement
that the defendant knows is material to the Government’s
payment decision.” Although Escobar was concerned
primarily with materiality and addressed scienter only in
passing, the district court apparently construed the quoted
language as suggesting that liability requires not only
knowledge that a representation was false but also
knowledge that the representation was material. See id. We
need not decide whether this assumption was correct. Even
assuming that Escobar requires knowledge of materiality as
well as knowledge of falsity, the record in this case
establishes a triable issue regarding KCI’s knowledge of the
materiality of its misuse of the KX modifier.
KCI was plainly aware that using the KX modifier
avoided a costly review and appeals process that it would
sometimes win and sometimes lose. In particular, emails
from a KCI senior manager confirm KCI’s awareness of the
risks of losing stalled-cycle claims in a case-specific review.
For example, noting that the LCDs generally limited NPWT
treatment to four monthly cycles, this senior manager
explained that KCI “[h]istorically” did not appeal denials of
a “fifth cycle” if KCI’s review disclosed that there was also
a stalled-cycle in one of the first four months. As she
explained, “[w]e have found that if we were to have pursued
cycle 5 in appeal and there was a stalled cycle previously,
Medicare would recoup their money up to and including the
stalled cycle.” In another email, she also explained that
KCI’s “mindset at that time (2006) was that we were pushing
the envelope with policy,” and that, after several years of
appealing reimbursement denials, KCI was “able to see what
really was going to be paid and what would be denied.
Stalled cycles . . . were [a] large denial area[].”
28 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
More generally, a reasonable jury could conclude that
KCI’s deliberate insistence on using the KX modifier when
it knew that the LCD was not met was driven precisely by
its desire to be paid promptly and without the hassle and
risks of case-specific review. That further confirms that a
rational trier of fact could find that KCI knew that its misuse
of the KX modifier was material to payment.
B
Beyond its threshold error in predicating its scienter
analysis on its erroneous materiality ruling, the remainder of
the district court’s reasoning concerning scienter rests on a
clear failure to view the evidence in the light most favorable
to the relator. To satisfy the scienter requirement, relators
must allege “a false statement or course of conduct made
knowingly and intentionally.” United States ex rel. Campie
v. Gilead Sciences, Inc., 862 F.3d 890, 904 (9th Cir. 2017).
“Innocent mistakes, mere negligent misrepresentations and
differences in interpretations are not false certifications
under the Act.” United States ex rel. Hopper v. Anton, 91
F.3d 1261, 1267 (9th Cir. 1996). Under the statute, a false
statement or false claim is knowingly made by a person if
that person has actual knowledge of the falsity or if that
person acts in deliberate ignorance or reckless disregard of
its truth or falsity. See 31 U.S.C. § 3729(b)(1)(A). “[P]roof
of specific intent to defraud” is not required. Id.§ 3729(b)(1)(B). Here, there is ample evidence to permit a
rational trier of fact to conclude that KCI knew that it was a
false statement to attach the KX modifier to a claim that did
not satisfy the LCD and that KCI did so knowing that it
might thereby escape case-specific scrutiny that, in many
cases, it would lose.
For example, the record contains an email from a billing
employee who, after reading the relevant DME MAC
U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS 29
guidance, expressed serious concerns to higher management
that the “policy instructions” she had been given concerning
the use of the KX modifier in billing for stalled cycles
“contradict” that guidance. See supra at 11. She specifically
raised the question whether “it would be fraudulent to submit
a bill” that does not follow the DME MAC’s instructions
concerning the use of the KX modifier. The record also
contains an email from a KCI employee who worked on
appeals of denied claims, and she explained that, after
experiencing adverse rulings on many claims, KCI had
become more cautious about what it did and did not appeal.
As noted earlier, she specifically identified “[s]talled cycles”
as one of the “large denial areas.” Together with the other
abundant evidence in the record that KCI followed an
intentional policy to use the KX modifier on claims that did
not meet the LCDs’ requirements, such evidence supports a
reasonable inference that KCI did so to avoid case-specific
scrutiny that, often enough, it would lose.
In discounting this evidence, the district court relied on
either (1) its view that knowledge of the “technical[]” falsity
of KCI’s use of the KX modifier was immaterial and
therefore “insufficient to establish scienter”; or (2) record
evidence concerning KCI’s extensive discussions with the
DME MACs concerning KCI’s objections to the LCDs and
its intention to follow a “risk-sharing approach” to billing.
See supra at 8–14. As to the first point, we have already
explained that this reasoning rests on the district court’s
flawed materiality ruling and falls with it. See supra at 26–
28. As to the second, KCI certainly has a strong case to make
to jurors as to why they should not draw the inferences that
we have sketched out above. But KCI’s showing does not
negate those reasonable inferences so as to establish that
KCI is “entitled to judgment as a matter of law.” See FED.
R. CIV. P. 56(a). In particular, even assuming that KCI
30 U.S. EX REL. HARTPENCE V. KINETIC CONCEPTS
communicated to the DME MACs its decision to adopt an
overall approach to billing that did not follow the LCDs, that
does not negate the reasonable inference that KCI knew that,
in practice, its blanket misuse of the KX modifier effectively
ensured near-automatic payment of claims that otherwise
might not survive individualized scrutiny. And, in light of
the internal communications discussed earlier, a reasonable
jury could find that KCI knew that it did not actually have
the DME MACs’ endorsement of its billing practices and
that it decided to take a calculated risk that it could get away
with bending the rules.
IV
KCI asks us to affirm the grant of summary judgment on
the alternative ground that Hartpence’s theory of liability is
contrary to Azar v. Allina Health Services, 139 S. Ct. 1804(2019). In Allina, the Court vacated a Medicare policy that
altered hospital reimbursement rates, holding that the
Government was required to provide opportunity for notice
and comment before adopting that policy. Id. at 1810–12.
KCI argues that, under Allina, the LCDs at issue here may
not validly serve as the basis for an FCA claim. We decline
to reach this issue in the first instance on appeal. We leave
it to the district court to address this issue if it is raised again
on remand.
V
For the foregoing reasons, we reverse the district court’s
grant of summary judgment and remand for further
proceedings consistent with this opinion, including
consideration of any remaining alternative arguments that
KCI raised in its summary judgment motion.
REVERSED and REMANDED.