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Singh v. Cigna Corp.

United States District Court, D. Connecticut

September 28, 2017

MINOHOR SINGH, Individually and On Behalf of All Others Similarly Situated, Plaintiff,
v.
CIGNA CORP., ET AL., Defendants.

          MEMORANDUM OF DECISION GRANTING DEFENDANTS' MOTION TO DISMISS SECOND AMENDED COMPLAINT [DKT. 66]

          HON. VANESSA L. BRYANT UNITED STATES DISTRICT JUDGE.

         Proposed Lead Plaintiff Minohor Singh (“Proposed Lead Plaintiff” or “Singh”) brings this action individually and on behalf of all others similarly situated[1] against Defendants Cigna Corp. (“Cigna”), Cigna Chief Executive Officer David M. Cordani (“Cordani”), Cigna Chief Financial Officer Thomas A. McCarthy (“McCarthy”), former HealthSpring CEO and Chairman of the Board of Directors Herbert A. Fritch (“Fritch”), and Cigna Medicare Compliance Officer Richard A. Appel (“Appel”) (collectively, “Defendants”). The Second Amended Complaint (“SAC”) alleges violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act” or “Act”), codified under 15 U.S.C. §§ 78j(b) and 78t(a) respectively, and Rule 10b-5 promulgated by the Securities Exchange Commission (“SEC”) under 17 C.F.R. § 240.10b-5, that occurred during the Class Period. Defendants move to dismiss the case in its entirety for failure to satisfy Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act (“PSLRA”). For the following reasons, the Defendants' Motion to Dismiss is GRANTED.

         BACKGROUND[2]

         The following facts and allegations are taken from the SAC, exhibits attached to the SAC, the public documents and filings, or any other document upon which Plaintiff references and relies.

         Cigna is a health services organization incorporated in Delaware that provides medical, dental, disability, life, and accident insurance both in the United States and internationally. [Dkt. 57 (Second Am. Compl.) ¶ 37]. In early 2012, Cigna acquired HealthSpring, a managed health care organization (“MCO”) focusing primarily on providing Medicare Advantage and Part D medical insurance plans. See Id. ¶¶ 50-51, 66. Cigna acquired HealthSpring for $3.8 billion: its largest ever acquisition. Id. ¶ 62. HealthSpring was one of the largest private Medicare insurers in the United States as of 2010. Id. ¶ 57. Its Medicare Advantage and Part D medical insurance plans are regulated by the Center for Medicare and Medicaid Services (“CMS”). Id. The acquisition was intended to create “synergies” across Cigna's health insurance offerings and to complement its commercial health business for those who are current Cigna customers as they transition to Medicare, id. ¶ 66. Prior to the acquisition, CMS had never cited or sanctioned HealthSpring for non- compliance and never prohibited marketing or selling Medicare policies to new customers. Id. ¶ 60. One year after the acquisition HealthSpring became Cigna's largest source of revenue. Id. ¶ 68. This growth continued throughout 2013 and 2014. Id. ¶ 69.

         The SAC alleges that the 2011 Form 10-K acknowledges Cigna would be subject to CMS compliance reviews in light of the HealthSpring acquisition, which could lead to changes in business practices, fines, penalties, or other sanctions. Id. ¶ 70. The Defendants' excerpt of the 2011 Form 10-K specifically states the success of the acquisition “will depend on Cigna's ability to integrate HealthSpring with its existing businesses and the performance of the acquired business.” [Dkt. 66-28 (201110-K) at 37]. In addition, the 2011 Form 10-K recognizes the integration will be complex, costly, time consuming, and will likely pose various difficulties.[3]Ultimately, “[i]f Cigna is unable to integrate the HealthSpring business successfully, or if the acquired business underperforms, it could have a material adverse effect on Cigna's business, results of operations and financial conditions.” Id.

         On January 17, 2013, CMS publicly issued a memorandum to All Medicare Advantage Organizations, Prescription Drug Sponsors, Cost Plans, and Medicare-Medicaid Plans regarding the 2014 Application Cycle Past Performance Review Methodology Final. [Dkt. 66-7 (Mot. Dismiss Ex. 6 (CMS Mem.)]. This memorandum documents the review methodology used by CMS “to evaluate the performance of all Medicare contractors” and to “identify organizations with performance so impaired that CMS would prohibit the organization from further expanding its Medicare operations.” Id. at 1. It applies to an organization's application to offer Medicare benefits under a new contract or in an expanded service area, and CMS may deny the application if the past performance is out of compliance pursuant to the methodology. Id. at 1. CMS identified 11 performance categories for which “negative performance points” may be assigned, including a category for Compliance Letters and a category for Enforcement Actions.[4] Id. at 6. “The number of potential negative performance points corresponds to the risk to the program and our beneficiaries from deficient performance in that particular area.” Id. Pursuant to this memorandum, CMS Groups Directors will notify the affected organizations during the application review process if they will receive a Notice of Intent to Deny, so that they may proactively withdraw applications. Id. at 17.

         The memorandum includes a chart and describes in detail the differences between compliance letters:

Compliance Letter Type

Weight

Rationale for Weight

Notice of Non-Compliance

1

Mildest type of letter. Does not

contain specific language regarding

further compliance escalation or

other consequences should the

behavior/non-compliance continue.

Warning Letter

3

Formal communication that describes

the consequences of continued noncompliance;

weighted 3 times greater

than notices of non-compliance.

Warning Letter with a

Business Plan

4

The matter is serious enough to

warrant a written response from the

organization but not significant

enough to warrant a CAP.

CAP - Ad hoc compliance

event

6

Ad hoc CAPs represent the most

serious form of compliance notice.

Rated at twice the weight of warning

letters because the issuance of this

type of letter indicates continuing

and/or severe, systemic problems.

Id. at 7. The memorandum details that CMS calculates a total Compliance Letter score and then ranks the contracts in descending; the contracts in the 90thpercentile receive an additional 2 negative performance points in the Compliance Letter category. Id. at 8.

         With respect to CAPs, the memorandum states that ad hoc CAPs are “relatively rare and are typically issued only when other forms of interventions have failed to correct a problem and/or the problem was especially egregious, ” noting as well that “[r]eceiving more than one such CAP during a performance period is a powerful indication of ongoing performance problems.” Id. at 9. CAPs with Beneficiary Impact are defined as those “related, directly or indirectly, to a beneficiary's experience with the services and protections the contracting organization is required to provide. . . .” Id. Examples include “proper administration of the organization's beneficiary call center, ” as well as the following:

4RX data submissions to CMS, enrollment and disenrollment processing, application of correct low income subsidy (LIS) status for plan members, volume of member complaints logged into CMS' Complaints Tracking Module (CTM), failure to provide appropriate Part D drugs, failure to apply safety edits when processing claims, processing of member appeals and grievances, marketing abuses, overall failure to appropriately administer the Part D benefit, execution of benefit coverage determinations, and formulary administration.

Id. CAPs that are not a “significant threat to beneficiaries (and therefore [present] no beneficiary impact as defined here)” include “late reporting of financial information to CMS.” Id.

         When CMS applies immediate sanctions, contracts under immediate sanction but released before the end of the end of the performance period receive 3 negative performance points. Id. at 12. Sanctions still in place at the end of the performance period yield 4 negative performance points, bringing the possible total to 7 negative performance points for immediate sanctions in the Enforcement Action category. Id.

         On February 27, 2014, the first day of the Class Period, Cigna filed its 2013 Form 10-K. [Dkt. 57 ¶ 119]. The 2013 Form 10-K states, “We have established policies and procedures to comply with applicable requirements.” Id. ¶ 120. Under the “Medicare Regulations” section, Cigna recognized the right to obtain payment, enroll and retain members as well as the marketing and sales activities are heavily regulated by CMS, but Cigna “expect[s] to continue to allocate significant resources to [its] compliance, ethics and fraud, waste and abuse programs to comply with the laws and regulations governing Medicare Advantage and prescription drug plan programs.” Id. ¶ 121. Acknowledging that the Federal Government prioritizes the prosecution of health care fraud and abuse, Cigna further stated in the “Federal Audits of Government Sponsored Health Care Programs” section that “[t]he regulations and contractual requirements in this area are complex, are frequently modified, and are subject to administrative discretion. We expect to continue to allocate significant resources to comply with these regulations and requirements and to maintain audit readiness.” Id. ¶ 122. Cordani certified that based on his knowledge the 2013 Form 10-K did not contain “any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. . . .” Id. ¶ 123. McCarthy signed a similar Sarbanes-Oxley Act (“SOX”) certification of compliance. Id. ¶ 124.

         The 2013 Form 10-K also contains a Risk Factor section, an excerpt of which is submitted as an exhibit to the Defendants' Motion to Dismiss.[5] See [Dkt. 66-3 (Mot. Dismiss Ex. 2, 2013 Form 10-K) at 18]. This section documents “risks related to litigation, regulatory audits and investigations” and states that such regulatory audits or agency reviews could lead to “changes to or clarifications of [Cigna's] business practices, retroactive adjustments to certain premiums, significant fines, penalties, civil liabilities, criminal liabilities or other sanctions, including restrictions on [Cigna's] ability to operate, that could have a material adverse effect on [Cigna's] business, results of operation, financial condition, and liquidity.” See Id. at 19. With respect to risks involving Medicare participation, Cigna also acknowledges that failure to comply with CMS and state governmental contractual requirements can lead to “fines or penalties that could impact [Cigna's] profitability. See Id. at 20. Failure to comply with state and federal health care laws and regulations can result in “fines, limits on expansion, restrictions or exclusions from programs or other agreements with federal or state governmental agencies that could adversely impact [Cigna's] business, cash flows, financial condition and results of operation.” See Id. at 20-21.

         The SAC alleges that CMS “cited” Cigna in April 2014 “for misleading advertising in October and November 2013 relating to its Florida MA and PDP offerings, ” although the type of compliance letter is not specified. [Dkt. 57 ¶ 117]. Later that year in October 2014, CMS issued two separate notices of non-compliance “for failure to provide required medical records and improper payments to approximately 410 non-eligible medical service providers.” Id.

         Also in October 2014, CMS's Medicare Parts C and D Oversight and Enforcement Group (“MOEG”) published its 2013 Part C and Part D Program Annual Audit and Enforcement Report. [Dkt. 66-6 (Mot. Dismiss Ex. 5, 2013 Audit Report)]. This annual audit publication is designed to “provide a brief overview of the Part C and Part D program audit and enforcement processes, a current and projected snapshot of the program audit landscape, a summary of the program audit and enforcement activities in 2013, and other highlights and noteworthy developments in MOEG's operations since the issuance of our 2012 annual report.” Id. at 3-4. The private companies that contract with CMS to provide health and prescription drug benefits to Medicare beneficiaries, i.e. “sponsors, ” can be audited by MOEG through this program. See Id. at 7. MOEG chooses certain sponsors based on “data-driven risk assessment, ” which “generate[s] a risk score and subsequent ranking for all sponsors. . . .” Id. Both low and high ranking sponsors can be chosen, and MOEG reserves resources to conduct Ad Hoc audits and audits based on referrals. Id. MOEG's goal for this program since its inception in 2010 is to “audit every sponsor in the Part C and Part D programs within a reasonable time period.” Id. at 11. Cigna was not listed as an audited sponsor for 2013.

         The SAC alleges that in December 2014, Cigna received five separate notices of non-compliance for improper pharmacy coverage. [Dkt. 57 ¶ 117]. Defendants submitted two warning letters from December 2014 pertaining to the failure of Cigna Healthcare of Arizona, Inc. and Bravo Health Pennsylvania, Inc. to comply with Medicare Part D in administering Cialis coverage contracts. See [Dkt. 66-16 (Mot. Dismiss Ex. 15, Cigna of Ariz. Warning Letter); Dkt. 66-17 (Mot. Dismiss Ex. 16, Bravo Warning Letter)].

         The SAC also refers to Cigna's Code of Ethics and Principles of Conduct (“Code of Ethics”), published in December 2014. Id. ¶ 127. McCarthy is cited in the Code of Ethics as saying it is important to do things “the right way, ” which includes reporting financial results fairly and accurately. Id. ¶ 128. This is because “shareholders who invest in us expect it, as do the analysts who follow us” and accordingly “it's so important for every employee on the global Cigna team to handle[, ] maintain, and report on this information in compliance with all laws and regulations.” Id. The Code of Ethics also includes a statement from Fritch acknowledging the responsibility to act with integrity, including under circumstances dealing with government officials. Id. ¶ 129. Proposed Lead Plaintiff believes these statements were materially false and misleading when made because Defendants knew about the notices of non-compliance, such non-compliance constituted a “serious threat to the health and safety” of Medicare patients and showed a lack of integrity in dealing with government officials, and CMS's notices would have a material impact on Cigna if left unaddressed. Id. ¶ 130.

         The 2014 Form 10-K filed on February 26, 2015, contains the same compliance statements[6] as those from the 2013 Form 10-K set forth in the “Medicare Regulations” and “Federal Audits of Government Sponsored Health Care Programs” sections. Id. ¶¶ 133-34.[7] It does not contain the statement from 2013: “We have established policies and procedures to comply with applicable requirements.” Id. ¶ 120. The 2014 Form 10-K does include the same language from the risk factor section as those alleged in the 2013 Form 10-K above. Compare [Dkt. 66-2 at 18]; with [Dkt. 66-3 at 18]. Both Cordani and McCarthy issued certifications substantially similar to that which is stated above. Id. ¶ 135.

         The SAC lists several compliance letters sent over the course of 2015, which are alleged to be addressed to Appel as the Medicare Compliance Officer and establish violations that later became the basis for the sanctions. See [Dkt. 57 ¶¶ 115-18]. In February 2015, Cigna “was cited” for “inadequate claims processing systems that ‘were not accurately configured to capture and track the [maximum-out-of-pocket] amounts and ensure appropriate payment, ” although the type of compliance letter is not specified. Id. ¶ 117. The next month Cigna received five separate notices of non-compliance “for failure to provide required certifications and failure to send members required timely explanations of benefits.” Id. In April 2015, Cigna received two notices “for wrongly discontinuing coverage for 433 members and improper denial of prescription coverage for more than 1, 700 claims.” Id. In May, Cigna received two separate notices of non-compliance “for inaccurately describing benefits and failing to inform more than 500 physicians of their appeal rights who had been terminated by HealthSpring.” Id. Then in June 2015, Cigna received at least 21 separate notices or warning letters “for failing to add a requisite class of pharmaceuticals to its plan formulary and for failure to meet call center timeliness requirements.” Id. In July, CMS then sent Cigna at least 20 notices of non-compliance, warning letters, and a Corrective Action Plan Request “for failure to timely process enrollment applications, double billing, submission of incorrect and unreadable data for audit purposes, failure to submit required plans to regulatory agencies, untimely processing of approximately 1, 600 appeals or redetermination requests, improper and untimely call center service, and failure to maintain an adequate network.” Id. The SAC does not specify to what topic the Corrective Action Plan pertains. Cigna “was cited” in August 2015 “for failure to comply with pharmacy formulary submission and review requirements, ” but the type of compliance letter is unspecified. Id. In October 2015, Cigna “was cited” for “directing customer coverage determination requests to a voicemail line.” Id.

         On October 13, 2015, CMS published its 2014 Part C and Part D Program Audit and Enforcement Report. [Dkt. 66-5 (Mot. Dismiss Ex. 4, 2014 Audit Report)]. Cigna was not listed as an audited sponsor for 2014.

         The SAC states that in December 2015, Cigna received 16 notices of non-compliance or warning letters “for improper and untimely call center service and failure to ensure the accurate entry of Notice of Change/Evidence of Coverage documents.” Id.

         On January 22, 2016, Cigna filed a Form 8-K disclosing that the day prior CMS informed the company in a letter (“CMS Letter”) that it would impose intermediate sanctions suspending the enrollment of Medicare beneficiaries and the marketing to new Medicare beneficiaries effective at 11:59 p.m. on January 21, 2016. Id. ¶ 101; [Dkt. 57-2 (Am. Compl. Ex. B., CMS Letter) at 1]. Cigna announced that the sanctions were imposed on account of operative deficiencies relating to its Parts C and D appeals and grievances, Part D formulary and benefit administration, and compliance program. [Dkt. 57 ¶ 102]. The Form 8-K states that “Cigna is working to resolve these matters as quickly as possible and is cooperating fully with CMS on its review.” Id. ¶ 139; [Dkt. 66-9 (Mot. Dismiss Ex. 8, Form 8-K (Jan. 21, 2016)), Item 8.01]. Proposed Lead Plaintiff alleges Cigna failed to acknowledge the severity of the findings stated in the CMS Letter: that Cigna's conduct was a “serious threat to the health and safety of Medicare beneficiaries” and that the violations resulted in delays, denials and increased costs regarding medical services and prescription drugs. Id. ¶ 103; [Dkt. 57-2 at 2].

         The CMS Letter stems from an audit performed from October 5, 2015, to October 20, 2015, and it notes that “Cigna has had a longstanding history of non-compliance with CMS requirements.” [Dkt. 57-2 at 2]. Specifically, “Cigna has received numerous notices of non-compliance, warning letters, and corrective action plans from CMS over the past several years. Id. A number of these notices were for the same violations discovered during the audit, demonstrating that Cigna has not corrected issues of non-compliance.” Id. Many of these notices of non-compliance were sent during the Class Period, including a notice of non-compliance sent as early as 2013. See Id. at 5. A subsequent warning about continued non-compliance was sent in 2015. Id. The CMS Letter also cited the HealthSpring acquisition, which added over one million beneficiaries to Cigna's operations, “creat[ed] an organizations structure that is decentralized and fragmented.” Id. Notably, the CMS Letter states that on December 9, 2015, CMS met with Cigna's senior leadership “to discuss the serious nature of the deficiencies discovered during the audit.” Id. The breakdown in operations, according to the CMS Letter, is attributable to the failure to integrate operations, which leads to inadequate monitoring and oversight of Part C and D requirements. Id. In failing to satisfy CMS regulations, Cigna “substantially failed to provide its enrollees with services and benefits. . . .” Id. ¶ 139; [Dkt. 57-2 at 2].

         Cigna's stock fell from $140.13 closing price on Thursday, January 21, 2016, to $137.90 closing price on Friday, January 22, 2016. [Dkt. 57 ¶ 140]. By the end of the next closing day, Friday, January 25, 2016, Cigna's stock price fell to $135.85.

         After receiving sanctions, Fritch announced in a media interview that Cigna had internal quality review processes that identified some areas prior to the audit findings. Id. ¶ 114.

         On July 29, 2016, Cigna filed a quarterly report, Form 10-Q, for the quarter ending June 30, 2016. Id. ¶ 143. This report indicated that Cigna would reduce its 2016 financial outlook due, in part, to substantial $30 million in costs to remedy compliance violations related to the CMS sanctions. Id. Such costs were expected to continue to grow until sanctions could be remediated, which Cigna acknowledged may not occur in a “timely and satisfactory manner. . . .” Id. ¶ 144. Stock price fell from $135.99 at closing on Thursday, July 29, 2016, to $128.96 at closing on Friday, June 29, 2016. Id. ¶ 151. By closing on August 2, 2016 (the third consecutive trading day), stock price fell to $124.13, representing a drop of $11.86 per share. Id. ¶ 152.

         On the same day Cigna held an earnings conference call with analysts where Cordani and McCarthy addressed Cigna's failure to comply with regulations and the timing and costs for remedying the violations. Id. ¶ 145. McCarthy acknowledged the costs were higher than expected and that they would continue at the same pace until violations were fully redressed. Id. ¶ 146. Analysts expressed concern about whether Cigna could resolve the audit issues prior to the annual enrollment period (“AEP”) beginning October 15 and ending December 7 each year. Specifically, analysts understood that Cigna's inability to participate in the AEP could lead to loss of membership and impact revenue and earnings contributions. See Id. ¶¶ 149-50.

         During the Class Period (February 27, 2014 to August 2, 2016), Cordani sold 668, 529 shares and Fritch sold 455, 180 shares of Cigna stock.[8] Id. ¶¶ 176. Such sales sharply contrast with their share sales from February 28, 2012 to January 21, 2014[9]: Cordani sold 137, 621 shares and Fritch sold 0 shares. Id. Proposed Lead Plaintiff alleges that the timing of the sales are suspicious given CMS already provided at least one notice of non-compliance but Cigna had not yet publicly reported any substantial non-compliance. See Id. ¶ 180. The stock sales, Proposed Lead Plaintiff contends, are evidence of scienter. See Id. ¶ 173.

         Proposed Lead Plaintiff alleges the market prices of Cigna's common stock became artificially inflated as a result of Cigna's material misstatements and omissions. Id. ¶ 183. This artificial inflation was partially removed as a result of the stock prices falling after the filing of the Form 8-K on January 22, 2016, and the filing of the Form 10-Q on July 29, 2016. Id. ¶¶ 184-85.

         As senior executives and/or directors, Cordani, McCarthy, and Appel are alleged to have obtained confidential and proprietary information about Cigna's operations, compliance, information about Cigna's failure to comply with regulations, including the 75 notices of non-compliance, and the effects of non-compliance. See Id. ¶¶ 186-87. They took part in drafting, preparing and/or approving information and reports circulated to the public, shareholders, and investors, which contained material misstatements and omissions. Id. ¶ 187. By acting as senior executives and directors, Cordani, McCarthy and Appel were “controlling persons” of a publicly held company who had a duty under the Exchange Act to disseminate accurate information or correct any incorrect information. Id. ¶ 188.

         Also, Proposed Lead Plaintiff alleges that HealthSpring's employees had “extensive institutional knowledge” but nonetheless Defendants “systematically engaged in a pattern of conduct in the wake of the acquisition that would lead to the exodus of many of HealthSpring's regulatory compliance employees, ” which included some confidential witnesses. Id. ¶ 77. Confidential witnesses reported that Cigna replaced HealthSpring's senior leadership team with new senior leadership from Cigna who were inexperienced with Medicare compliance, id. ¶ 78, and Cigna underpaid its compliance employees resulting in high turnover, id. ¶ 80. As such, approximately 90% of the employees brought in were legacy Cigna employees with little to no experience in CMS regulations or compliance. Id. ¶ 82. Appel chose not to seek out legacy HealthSpring employees with institutional knowledge about compliance. Id. ¶ 84. As Medicare Compliance Officer, Appel “was legally Cigna's most senior officer charged with ensuring CMS's Medicare regulations were followed” and therefore was legally responsible for reporting compliance problems up the chain of senior management, including Cordani, McCarthy, and Fritch. Id. ¶ 90 (emphasis omitted). Cigna also elected to reduce customer service staff during this time. Id. ¶ 91.

         In addition to the turnover from HealthSpring to Cigna employees, data processing systems failed to properly integrate patient information stored by the two companies. Id. ¶ 93. Without a centralized system Cigna could not quickly and accurately access information necessary to patient or provider needs. Id. ¶ 95. HealthSpring's Vice President of Health Services, Claudia Douds, issued a plan in response to findings from internal audits that Cigna was out of compliance; despite its estimated cost of less than $5 million, Cigna rejected the plan and continued to oust HealthSpring legacy employees with significant experience. Id. ¶ 98. CMS sanctioned Cigna for non-compliance in January 2016, by the next month Cigna had not developed a plan to fully integrate the system. Id. ¶ 100.

         On September 6, 2016, CMS published its 2015 Part C and Part D Program Audit and Enforcement Report. [Dkt. 66-4 (Mot. Dismiss Ex. 3, 2015 Audit Report)]. Cigna was listed as an audited sponsor for 2015. It received a worse than average audit performance with a score of 1.90, wherein the average was 1.76 and the lower audit score represents better performance. See Id. at 15. Specifically, Cigna received a better than average score for Compliance Program Effectiveness, id. at 16; Part D Coverage Determinations, Appeals, and Grievances, id. at 18; and Special Needs Plans Model of Care, id. at 20; but it received a worse than average score for Part D Formulary and Benefit Administration, id. ...


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