IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MAINE

UNITED STATES OF AMERICA )

ex rel. JANE ROLLINSON )
and DANIEL GREGORIE )
) Civil Case No.: 2:16-cv-00447-NT
Plaintiffs, )
) JUDGE TORRESEN
v. )
) JURY TRIAL DEMANDED
BRIGHTON MARINE, INC. (f/k/a )
BRIGHTON MARINE HEALTH )
CENTER, INC.), CHRISTUS HEALTH )
(d/b/a CHRISTUS HEALTH SERVICES), )
THE JOHNS HOPKINS MEDICAL )
SERVICES CORPORATION, MARTIN’S )
POINT HEALTH CARE, INC. (d/b/a )
MARTIN’S POINT HEALTH CARE )
CENTER), PACMED CLINICS (d/b/a )
PACIFIC MEDICAL CENTER), )
SAINT VINCENTS CATHOLIC )
MEDICAL CENTERS OF NEW YORK, )
and US FAMILY HEALTH PLAN )
ALLIANCE, LLC )
)
Defendants. )

UNITED STATES’ COMPLAINT IN INTERVENTION

 TABLE OF CONTENTS

I. INTRODUCTION .................................................................................................................... 1
II. JURISDICTION AND VENUE ............................................................................................. 3
III. PARTIES................................................................................................................................ 4
IV. LEGAL FRAMEWORK ...................................................................................................... 7
A. The False Claims Act ........................................................................................................... 7
B. The National Defense Authorization Act of 1997 ............................................................... 8
V. FACTUAL ALLEGATIONS ............................................................................................... 11
A. The USFHP Program ......................................................................................................... 11
i. 2008-2013 USFHP Contracts ......................................................................................... 11
ii. Individuals and Entities Involved in the USFHP Program ............................................ 12
iii. The Legal Requirements Governing the Rates .............................................................. 15
iv. The Annual Rate Setting Process ................................................................................... 17
B. The Health Status Adjustments (HSAs) Were a Key Component of the Ceiling Rates. ... 20
i. Medicare’s Method of Measuring Health Status............................................................ 21
ii. The Calculation of the HSA ........................................................................................... 22
C. The HSAs Used to Develop the Base Period, OP1, OP2, and OP3 Ceiling Rates Were
Infected by Two Errors.................................................................................................... 24
i. The Filtering Error ......................................................................................................... 26
ii. The Prospective Error..................................................................................................... 27
iii. The Significance of the Two Errors ............................................................................... 29
D. Defendants Eventually Learned of the Two Errors (But TMA Did Not). ......................... 31
i. Rates Paid in 2008-2012: As a Result of the HSA Errors, the Plans Had Been Earning
Profit Margins on the USFHP Program for Years. .................................... 31
ii. Rate Discussions in 2011: The Switch to the TFL Methodology Was First
Attempted. ................................................................................................................. 33
iii. Rate Discussions Begin in 2012: The TFL Methodology Was Actually Implemented
and the HSA Errors Were Discovered. ..................................................................... 35
iv. Rate Discussions Continued Throughout 2012: Defendants Were Informed of the
Errors. ........................................................................................................................ 37
E. By June 2012, Defendants Knew the HSA Errors Impacted the Base Period, OP1, OP2,
and OP3 Rates and Caused the DPs To Be Overpaid in Those Periods. ........................ 43
i. Milliman Provided the Plans with a Detailed Analysis of the HSA Errors. .................. 43

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 ii. The Plans Received Additional Information Indicating That the HSA Errors Had
Inflated the OP3 Rates. .............................................................................................. 46
iii. Internal Communications within the Plans Show That They Understood the Erroneous
HSAs Caused Them to Be Overpaid in OP3 and Earlier Periods. ............................ 48
F. TMA Did Not Become Aware of the Historic HSA Errors or Their Impact Until This Qui
Tam Lawsuit Was Filed. .................................................................................................. 51
i. Defendants Had Several Opportunities to Inform TMA of the Historic HSA Errors,
Their Impact, or the Resulting Overpayments, But They Never Did........................ 51
ii. Kennell, TMA’s Actuarial Consultant, Also Did Not Tell TMA About the Historic HSA
Errors, Their Impact, or the Resulting Overpayments. ............................................ 66
iii. At No Point Prior to the Filing of this Qui Tam Did TMA Know About (Or Even
Suspect) That the HSA Errors Had Impacted Past Rates and Resulted in
Overpayments. ........................................................................................................... 71
iv. Defendants Were Acutely Aware of TMA’s Ignorance and Took Steps to
Maintain It. ................................................................................................................ 74
G. Had TMA Been Aware of the HSA Errors and Their Impact, TMA Would Not Have Paid
the Plans at the Improperly Inflated Ceiling Rates and Would Have Taken Steps to
Recoup Any Overpayments............................................................................................. 78
i. TMA Was Not Legally Permitted to Pay Rates That Violated the USFHP Program’s
Governing Statute and Would Not Have Paid Rates That Violated the Health
Comparison Requirement. ......................................................................................... 79
ii. When TMA Had Knowledge of Other Errors or Violations of Material Requirements, It
Took Action to Remedy Them. ................................................................................. 80
H. The Plans Retained Overpayments and Submitted False Claims. ..................................... 84
i. The Plans Retained Overpayments ................................................................................ 84
ii. The Plans Submitted False Claims ................................................................................. 85
VI. CAUSES OF ACTION ........................................................................................................ 87

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 1. Plaintiff, the United States of America (United States) files this complaint-in-

intervention under the False Claims Act (FCA), 31 U.S.C. § 3729, et seq., and the common law,

against defendants Brighton Marine, Inc. (formerly known as Brighton Marine Health Center,

Inc.), CHRISTUS Health (d/b/a CHRISTUS Health Services), The Johns Hopkins Medical

Services Corporation, Martin’s Point Health Care, Inc. (d/b/a Martin’s Point Health Care

Center), PacMed Clinics (d/b/a Pacific Medical Center), and Saint Vincents Catholic Medical

Centers of New York (collectively, the Designated Providers, DPs, or Plans) and the US Family

Health Plan Alliance, LLC (individually, the Alliance). The Alliance and the six Plans will be

referred to collectively as Defendants.

I. INTRODUCTION

2. The government program at issue here is unique and complex, but the alleged

fraud is not. Between 2008 and 2012, the Department of Defense (DOD) inadvertently overpaid

six private health plans that had contracted to provide health coverage to military families. Prior

to June 2012, those six Plans knew they were being paid highly lucrative rates for providing

coverage for individuals aged 65 and older enrolled in the program, but they did not fully

understand why those rates were so lucrative. However, in June 2012, the Plans realized they

had been overpaid as a result of two errors that had improperly inflated their payment rates for

these individuals. The government never had the same realization. The Plans failed to report or

return any of those overpayments and, in fact, continued submitting claims to the government at

the improperly inflated rates for several more months. Based on an assessment of the errors’

impact by the Plans’ own actuary, the Plans were collectively overpaid by over $300 million

between 2008 and 2012.

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 3. The government program at issue is called the Uniformed Services Family Health

Plan (USFHP). Through this program, DOD contracts with certain private health plans to

provide healthcare services to military personnel, retirees, and their families. There are currently

only six health plans in the country—called the Designated Providers, DPs, or Plans—that can

offer the USFHP benefit: Brighton Marine, Christus, Johns Hopkins, Martin’s Point, PacMed,

and St. Vincent’s.

4. The statute that authorizes the USFHP program contains an express limitation on

payments. Specifically, the government cannot pay the Plans more than the government would

have paid if the USFHP enrollees had received health care from other government programs (i.e.,

through a military treatment facility, TRICARE, or Medicare).

5. In its contracts with the Plans, DOD agreed to pay the Plans a capitation payment

(which is a flat fee) for each beneficiary enrolled in the program. Those capitation payments

were not permitted to exceed the statutory payment limitations.

6. Before 2012, an actuarial firm retained by DOD consistently made two errors

when calculating the statutory payment limitations for USFHP beneficiaries who were 65 years

old or over. As a result of these two errors, the statutory limits the actuaries calculated were

significantly higher than they would have been had the limits been calculated correctly and those

statutory limits were not calculated in an actuarially sound manner. These errors resulted in each

Plan being overpaid by million of dollars each year.

7. Between 2008 and 2012, no one recognized that these two errors were being made

or that the Plans were being paid at rates that exceeded the statutory limits for the 65 and over

beneficiaries.

8. In 2012, DOD’s actuaries and Defendants uncovered those two costly mistakes

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and realized that both errors had been made in prior years. However, neither Defendants nor the

DOD’s actuaries ever told the government about these historic errors or overpayments.

Consequently, the government was not aware of the need to take any action to recover funds that

had been improperly paid to the Plans until the qui tam complaint in this case was filed.

9. The United States now brings this action to recover those funds. The United

States seeks to recover treble damages and civil penalties arising from violations of the FCA and

to recover damages and other monetary relief under the common law theories of breach of

contract, unjust enrichment, and payment by mistake.

II. JURISDICTION AND VENUE

10. This Court has jurisdiction over the subject matter of this action pursuant to 31

U.S.C. §§ 3730(a) and 3732(a) and 28 U.S.C. §§ 1331 and 1345 because this action is brought

by the United States as a plaintiff pursuant to the FCA.

11. This Court may exercise personal jurisdiction over all Defendants pursuant to 31

U.S.C. § 3732(a). The Court may exercise personal jurisdiction over all Defendants because at

least one Defendant, Martin’s Point, transacts business in this District and committed some of the

actions described herein, which are proscribed by 31 U.S.C. § 3729, in this District.

12. Similarly, venue is proper in this jurisdiction under 31 U.S.C. § 3732(a) and 28

U.S.C. §§ 1391(b) and 1395(a). Venue is proper in this jurisdiction because a substantial part of

the events or omissions giving rise to these claims occurred in Maine, by virtue of the actions

taken by Defendant Martin’s Point. Additionally, all Defendants are subject to the Court’s

personal jurisdiction pursuant to 31 U.S.C. § 3732(a).

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 III. PARTIES

13. The Plaintiff in this action is the United States, suing on behalf of the Defense

Health Agency (DHA), which is part of the United States Department of Defense. Among other

things, DHA enables a global network of military and civilian health care professionals to

provide care to over nine million service members, retirees, and family members. During the

time period at issue in this matter, the TRICARE Management Activity (TMA), a DOD field

activity, administered and supervised the USFHP program. On October 1, 2013, TMA functions

were transferred to DHA. This complaint will use the term TMA to refer to the former TMA and

the current DHA.

14. Defendant Brighton Marine, Inc. (“Brighton Marine”) is a nonprofit corporation

incorporated in the Commonwealth of Massachusetts. From 1997 to 2019, Brighton Marine, Inc.

was known as Brighton Marine Health Center, Inc. Brighton Marine is a Designated Provider in

the USFHP program and serves USFHP members in Massachusetts, Rhode Island, Connecticut,

and New Hampshire.

15. In 2008, Brighton Marine entered into an exclusive Master Services Agreement

with Caritas St. Elizabeth’s Medical Center of Boston, which was acquired by Steward Health

Care System, LLC in 2010 (Steward Health Care System, LLC and its predecessors will

collectively be referred to herein as “Steward”). Under that agreement, Steward would perform

all of Brighton Marine’s obligations under its USFHP Contract with TMA and would administer

the USFHP plan on Brighton Marine’s behalf in accordance with the terms of Brighton Marine’s

contract with TMA and all applicable laws and regulations. Throughout the relevant time period,

when Steward employees took action with respect to the USFHP program, they were acting on

behalf of Brighton Marine and held themselves out as representatives of Brighton Marine.

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Steward’s employees also regularly reported to Brighton Marine’s leadership significant

developments with respect to the USFHP rates. Consequently, all of the actions taken by

Steward employees working on the USFHP program can be imputed to Brighton Marine.

16. Defendant CHRISTUS Health, doing business as CHRISTUS Health Services,

(“Christus”) is a nonprofit corporation incorporated in the State of Texas. Christus is a

Designated Provider of USFHP services and serves USFHP members in Texas and Louisiana.

17. Defendant The Johns Hopkins Medical Services Corporation (“Johns Hopkins”)

is a nonprofit corporation incorporated in the State of Maryland. Johns Hopkins is a Designated

Provider of USFHP services and serves USFHP members in Maryland, Delaware, Pennsylvania,

Virginia, West Virginia, and the District of Columbia. The Johns Hopkins Medical Services

Corporation is a part of the Johns Hopkins Health System Corporation, which in turn has

collaborations with the Johns Hopkins University School of Medicine. This collaboration is

known as Johns Hopkins Medicine.

18. Defendant Martin’s Point Health Care, Inc., doing business as Martin’s Point

Health Care Center, (“Martin’s Point”) is a nonprofit corporation incorporated in the State of

Maine. Martin’s Point is a Designated Provider of USFHP services and serves USFHP members

in Maine, New Hampshire, Vermont, New York, and Pennsylvania. Martin’s Point owns and

operates five healthcare centers in the State of Maine, and its corporate headquarters are located

in Portland, Maine. Martin’s Point regularly conducts business and provides healthcare services

throughout the State of Maine. Martin’s Point sometimes is referred to as “MPHC.”

19. Defendant PacMed Clinics, doing business as Pacific Medical Center (or Pacific

Medical Centers), (“PacMed”) is a nonprofit corporation incorporated in the State of

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Washington. PacMed is a Designated Provider of USFHP services and serves USFHP members

in Washington, Idaho, Oregon, and California.

20. Defendant Saint Vincents Catholic Medical Centers of New York (“St.

Vincent’s”) is a nonprofit corporation incorporated in the State of New York. St. Vincent’s is a

Designated Provider of USFHP services and serves USFHP members in New Jersey,

Connecticut, and New York.

21. Defendant US Family Health Plan Alliance, LLC (the “Alliance”) is a limited

liability corporation incorporated in the State of Delaware that acts to advance the collective

interests of the Designated Providers. The Alliance is governed by a Board (the “Alliance

Board”) comprised of members affiliated with and authorized to act on behalf of each

Designated Provider. The Alliance has several committees that conduct Alliance business,

including a Finance Committee (the “Finance Committee”). The Finance Committee is

comprised of members affiliated with each Designated Provider and its activities include

participating in the Designated Providers’ USFHP rate discussions with TMA.

22. Relator Jane Rollinson is a resident of the State of Florida. From 2007 to 2015,

Rollinson worked with Martin’s Point, including serving as its Interim Chief Financial Officer

from October 2011 to February 2013. On August 30, 2016, Rollinson, jointly with relator Daniel

Gregorie, filed this action under the qui tam provisions of the FCA, 31 U.S.C. § 3730(b)(1),

alleging violations of the FCA on behalf of the United States.

23. Relator Daniel Gregorie is a resident of the State of Florida. From 2000 to 2003,

Gregorie was a consultant to the CEO and Board of Martin’s Point, and from 2003 to 2008 he

served on the Martin’s Point Healthcare Centers Board of Trustees. On August 30, 2016,

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Gregorie, jointly with Rollinson, filed this action under the qui tam provisions of the FCA, 31

U.S.C. § 3730(b)(1), alleging violations of the FCA on behalf of the United States.

IV. LEGAL FRAMEWORK

A. The False Claims Act

24. The False Claims Act, 31 U.S.C. §§ 3729-33, is the United States’ primary

litigative tool for combatting fraud, waste, and abuse and for protecting taxpayer funds. As the

Supreme Court has explained, the FCA broadly creates liability for “all types of fraud, without

qualification, that might result in financial loss to the Government.” United States v. Neifert-

White Co., 390 U.S. 228, 232 (1968).

25. The FCA provides, in pertinent part, that a “person who—

(A) knowingly presents, or causes to be presented, a false or fraudulent claim for

payment or approval; [or]

(B) knowingly makes, uses, or causes to be made or used, a false record or statement
material to a false or fraudulent claim; [or]

(C) conspires to commit a violation of subparagraph (A), (B), . . . or (G); [or]

***

(G) knowingly makes, uses, or causes to be made or used, a false record or

statement material to an obligation to pay or transmit money or property to the
Government, or knowingly conceals or knowingly and improperly avoids or
decreases an obligation to pay or transmit money or property to the Government,

is liable to the United States Government for a civil penalty . . . plus 3 times the amount of

damages which the Government sustains because of the act of that person.” 31 U.S.C.

§ 3729(a)(1) (2010).

26. Under the FCA, the term “knowingly” means that a person (i) “has actual

knowledge of the information,” (ii) “acts in deliberate ignorance of the truth or falsity of the

information,” or (iii) “acts in reckless disregard of the truth or falsity of the information.” Id.

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§ 3729(b)(1)(A). No proof of specific intent to defraud is required to show that a person acted

knowingly under the FCA. Id. § 3729(b)(1)(B).

27. The FCA defines “obligation” to mean an “established duty, whether or not fixed,

arising from an express or implied contractual . . . relationship, . . . from statute or regulation, or

from the retention of any overpayment.” Id. § 3729(b)(3).

28. The FCA states that “material” means “having a natural tendency to influence, or

be capable of influencing, the payment or receipt of money or property.” Id. § 3729(b)(4).

29. The FCA provides that a person is liable to the United States Government for

three times the amount of damages that the Government sustains because of the act of that

person, plus a civil penalty of between $5,500 and $11,000. Id. § 3729(a)(1); 28 C.F.R.

§ 85.3(a)(9).

B. The National Defense Authorization Act of 1997

30. The Department of Defense, via TMA, delivers health care to both active-duty

and retired military service members and their families. In some cases, TMA contracts with

private health insurance plans to provide health care benefits to TRICARE beneficiaries.

31. USFHP is one of the managed care health plans available to certain TRICARE

beneficiaries. USFHP is authorized and governed by the National Defense Authorization Act for

Fiscal Year 1997, Pub. L. No. 104-201 § 721 et seq., 110 Stat. 2422 (1996) (NDAA), as

amended, reprinted in the notes of 10 U.S.C.A. § 1073.

32. The NDAA states that “the Secretary of Defense shall negotiate and enter into an

agreement with each designated provider under which the designated provider will provide

health care services in or through managed care plans to cover beneficiaries who enroll with the

designated provider.” Pub. L. No. 104-201 § 722(b), 110 Stat. 2422 (1996).

8
 33. Each month, TMA makes a capitation payment to each Designated Provider for

each of the beneficiaries enrolled with that DP. For purposes of this case, there are three

material requirements necessary to ensure the capitation payments made to the Designated

Providers were legally valid (discussed more fully below). First, the NDAA requires the

payments be within the statutory limit. Second, the NDAA requires the payments be actuarially

sound. Third, the contract requires the payments be derived using an appropriate health

comparison. These three requirements will be collectively referred to as “the material

requirements.”

34. Section 726(b) of the NDAA imposes a limitation on the payments that the

government can make to the Designated Providers participating in the USFHP program. Section

726(b) provides that “[t]otal capitation payments for health care services to a designated provider

shall not exceed an amount equal to the cost that would have been incurred by the Government if

the enrollees had received such health care services through a military treatment facility, the

TRICARE program, or the Medicare program, as the case may be.” Pub. L. No. 104-201

§ 726(b); 110 Stat. 2422 (1996) (hereinafter Section 726(b)). The first material requirement—

that capitation payments not exceed the limitation set forth in Section 726(b)—will be referred to

herein as the “statutory limit.”

35. Congress enacted Section 726(b) to address a concern that the Chief of Staff of a

Subcommittee of the House Armed Services Committee raised about controlling costs. The

Chief of Staff wanted to ensure that the government did not pay more for the USFHP program’s

beneficiaries than if those beneficiaries were enrolled in other government health care programs,

such as Medicare or TRICARE.

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 36. Because Section 726(b) places an upper limit or “ceiling” on what TMA could

pay the Designated Providers for beneficiaries’ care, the term “ceiling rate” was used to refer to

the amount that the government would have incurred had the USFHP enrollee received care from

another government program. During the relevant period, the capitation payments that TMA

made to the Designated Providers each month were set exactly at that calculated upper limit, or

ceiling. Thus, in practice, the term “ceiling rate” or “rate,” as used herein, is synonymous with

the term “capitation payment.”

37. The NDAA defines the term “capitation payment” to mean “an actuarially sound

payment for a defined set of health care services that is established on a per enrollee per month

basis.” Pub. L. No. 104-201 § 721(3); 110 Stat. 2422 (1996). The NDAA also provides that

capitation payments are “subject to periodic review for actuarial soundness and to adjustment for

any adverse or favorable selection reasonably anticipated to result from the design of the

program.” Pub. L. No. 104-201 § 726(c); 110 Stat. 2422 (1996). The second material

requirement—that the ceiling rates be actuarially sound—will be referred to herein as the

“actuarial soundness requirement.”

38. TMA and the Designated Providers each recognized that, at a minimum, actuarial

soundness requires use of an appropriate methodology (i.e., one that is consistent with generally

accepted actuarial principles) and accurate execution of that methodology. Each component of

the methodology used to develop the amount of the ceiling rates had to be actuarially sound to

comply with the statute’s requirements. Additionally, to be actuarially sound, the calculations

needed to be mathematically correct and any underlying member, claim, and other data input into

a calculation needed to be accurate and sufficient for the stated purpose.

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 39. The contracts entered into between TMA and the DPs required that the

methodology used to calculate the ceiling rates include a comparison of the health status of a

DP’s age 65 and over USFHP enrollees and the health status of the age 65 and over Medicare

beneficiaries in that DP’s service area using a particular model. See Section 9.2.2.3.e of each

USFHP Contract. This third material requirement—discussed more fully in Section V.B.i.,

infra—will be referred to herein as the “health comparison requirement.”

V. FACTUAL ALLEGATIONS

A. The USFHP Program

i. 2008-2013 USFHP Contracts

40. Historically, TMA would enter into a new USFHP contract with each of the

Designated Providers once every five years. The contracts at issue here were signed in 2008 and

ran from October 2008 to September 2013 (hereinafter the “USFHP Contracts”).

41. A representative acting on behalf of each Designated Provider, authorized to bind

that DP, signed that Designated Provider’s USFHP Contract with TMA. By signing, each

representative bound the entire Designated Provider to abide by the terms and conditions of the

USFHP Contract.

42. Each USFHP contract incorporated a number of standard contract terms from the

Federal Acquisition Regulation (FAR).

43. One FAR provision incorporated into the contracts provided that if the contractor

learned it was overpaid, it was required to “immediately notify the Contracting Officer and

request instructions for disposition of the overpayment.” 48 C.F.R. § 52.212-4(i)(5) (Feb. 2007).

44. Another subsection of that same FAR provision stated that the contractor “shall

only tender for acceptance those items that conform to the requirements of this contract.” Id.

§ 52.212-4(a). “The Government may require . . . reperformance of nonconforming services at

11
no increase in contract price. If repair/replacement or reperformance will not correct the defects

or it is not possible, the Government may seek an equitable price reduction or adequate

consideration for acceptance of nonconforming supplies or services.” Id.

45. The five years covered by the USFHP Contracts were divided into a Base Period

and four Option Periods (called OP1, OP2, OP3, and OP4). New ceiling rates were calculated

for each of these periods, and those rates were memorialized in modifications to the USFHP

Contracts.

46. The Base Period was co-extensive with TMA’s fiscal year (FY) 2009 (October 1,

2008 to September 30, 2009). OP1 and OP2 were co-extensive with FY 2010 (October 1, 2009

to September 30, 2010) and FY 2011 (October 1, 2010 to September 30, 2011), respectively.

47. OP3 was originally intended to be co-extensive with FY 2012. But, as discussed

in paragraph 231, infra, the OP3 rates were extended for two months. Therefore, OP3 ultimately

ran from October 1, 2011 to November 30, 2012. The Base Period, OP1, OP2, and OP3 will

collectively be referred to as “OP3 and earlier periods.”

48. OP4 began on December 1, 2012 and continued through September 30, 2013.

49. Each month, each Designated Provider submitted an invoice to TMA on

DD Form 250 in order to receive an “invoice payment” based on the established ceiling rates and

the number of beneficiaries enrolled with that Plan. The invoice was then paid by TMA.

ii. Individuals and Entities Involved in the USFHP Program

50. Two TMA employees had primary responsibility for the USFHP program: the

Contracting Officer and the Program Manager.

51. The Contracting Officer for the USFHP program, or CO, was the government

official with the authority to negotiate, execute, and modify the contracts that TMA entered into

with each Designated Provider. In 2011 and 2012, the time period during which many of the
12
allegations described herein took place, the Contracting Officer for the USFHP program was

Beatrice De Los Santos (Bea).

52. The Program Manager for the USFHP program was the individual responsible for

the technical monitoring of the contract once it was executed and managing TMA’s day-to-day

relationship with the Designated Providers. For example, the Program Manager would ensure

that TMA received necessary data about USFHP beneficiaries and paid the Designated

Providers’ invoices. Between 2010 and 2012, the Program Manager for the USFHP program

(and also the Contracting Officer’s Representative) was Danielle McCammon (Danielle).

53. The Designated Providers created a separate limited liability company called the

“US Family Health Plan Alliance,” or the “Alliance,” to organize and coordinate the actions of

the Designated Providers with respect to the USFHP program.

54. The Alliance had its own Executive Director and a number of committees. The

Alliance’s Finance Committee was charged with working on the annual recalculations of the

ceiling rates on behalf of all Designated Providers. The Finance Committee was comprised of

the Alliance’s Executive Director and at least one representative acting on behalf of each

Designated Provider.

55. Before the Finance Committee could take any action or pursue a particular course

of conduct, its members needed to approve that action or course of conduct. Consequently, each

action taken or substantive communication made by the Finance Committee was approved by at

least one representative acting on behalf of each Designated Provider. Both the Alliance itself

and the Designated Providers collectively acted through the Finance Committee.

56. The Plans and Alliance hired Steve Weiner (Steve), an attorney at the law firm

Mintz Levin, to assist Defendants with the USFHP ceiling rate-setting process. Steve provided

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both legal and business advice to the Alliance and its members and often served as the

spokesperson for the Alliance when communicating with TMA.

57. Both the Designated Providers and TMA hired consultants to aid in the process of

calculating the ceiling rates.

58. The Designated Providers hired actuaries at a firm called Milliman to assist them

with the ceiling rate-setting process. Two Milliman actuaries—Tim Wilder (Tim) and Bob

Cosway (Bob)—provided analyses and advice to the Finance Committee and its individual

members during the ceiling rate calculation process.

59. Throughout 2012 when the ceiling rates were being discussed, the Finance

Committee would meet regularly, at least bi-weekly and sometimes weekly, over the phone.

Prior to each call, Tim typically would write a detailed email describing various observations he

made and calculations he performed and he would have Steve distribute that email to the Finance

Committee. Then, on the call, Tim typically would walk through each of the points raised in his

email. During the call, the Executive Director of the Alliance would typically take notes. After

the call, she would circulate proposed meeting minutes to the Finance Committee Chair and/or

Steve for their review. Once any edits were made to those minutes, she would send the meeting

minutes to the full Finance Committee. Thus, throughout 2012, each Finance Committee

member would receive at least three communications with respect to each topic discussed at any

particular committee meeting—one in advance of the meeting (in the form of Tim’s pre-meeting

email), one at the meeting itself (when Tim walked through his email), and one after the meeting

(in the form of the meeting minutes).

60. DOD hired a firm called Kennell & Associates, Inc. (Kennell) to assist TMA with

the USFHP ceiling rate-setting process, among other things. Two Kennell employees—Dave

14
Kennell (Dave) and Geof Hileman (Geof)—advised TMA about actuarial matters regarding the

rate-setting process and calculated the ceiling rates.

61. When discussing actions taken by or statements made by Kennell and its

employees, Defendants and Tim would often refer to those actions being taken by (or those

statements being made by) “the government,” “TMA,” or “DOD.” Kennell, however, was not a

government entity, nor did it have the authority to bind the government. Whenever there is a

basis to believe that a reference to “the government,” “TMA,” or “DOD,” was actually meant to

refer to Kennell, the term “Kennell” will be used herein.

iii. The Legal Requirements Governing the Rates

62. Section 726(c) of the NDAA and Section 9.4 of the USFHP Contracts required

that the rates paid to each Designated Provider be recalculated annually. The process of

recalculating the rates began early each spring. The new rates typically took effect on October 1.

63. There was not a single, uniform rate set for the entire program. Although the

process used to determine the rates was largely consistent across the program, TMA set different

rates for each Designated Provider to account for the differences in the cost of providing care in

different locations in the country.

64. And for each Designated Provider, different rates were set based on the age and

gender of the enrollee, to account for the differences in the cost of providing care to different

demographic groups. In other words, there was one ceiling rate set for males 65-69 years old, a

different ceiling rate set for females 65-69 years old, and another ceiling rate set for males 70-74

years old, and so on. (The process used to calculate and set rates for USFHP beneficiaries who

were younger than age 65 are not at issue in this matter.)

65. Under both the statute and contracts, there were two possible methods for

establishing these payment rates. First, under Section 726(a) of the NDAA and Section 9.1 of
15
each USFHP Contract, the Parties (i.e., TMA and the Designated Providers) were to negotiate

capitation payments based upon, among other factors, the utilization experience of enrollees and

competitive market rates (experience rates). To satisfy this requirement, each Plan developed

and submitted a price proposal to TMA in 2008 that set forth its proposed experience rates and

explained how those proposed rates were derived.

66. Second, under Section 726(b) of the NDAA and Section 9.2 of each USFHP

Contract, the capitation payments could not exceed the costs the government would have

incurred had Plans’ enrollees received care under other enumerated government health care

programs (i.e., the capitation payments had to comply with the statutory limit). To determine the

“ceiling rates” that would yield payments at this statutory limit or “ceiling,” the steps set forth in

the remainder of Section 9.2 of the USFHP Contracts were to be followed.

67. Pursuant to Section 9.2, calculation of the ceiling rates started with a

determination of the government’s per capita costs of providing health care to a baseline

beneficiary population (sometimes referred to as the “baseline costs”). The baseline costs

reflected three components: the costs of Medicare-covered services, expenses related to

Medicare cost-sharing (which TRICARE covered for its beneficiaries), and the cost of

supplemental services that were not covered by Medicare, but were covered by TRICARE. The

baseline costs were then adjusted by several factors. One of the most significant of these

adjustments, described in Section 9.2.2.3.e of the USFHP Contracts, was known as the Health

Status Adjustment or HSA, discussed below.

68. Section 9.3 then required that the experience rates and the ceiling rates be

compared and that the rates that, in the aggregate, produced lower payments to the Plans be

adopted. At all times relevant to this Complaint, the ceiling rates produced lower payments than

16
the experience rates, and thus the ceiling rates were the rates TMA paid to the DPs. As a result,

almost all of the discussions between TMA and the DPs and their respective actuaries focused on

the ceiling rates.

iv. The Annual Rate Setting Process

69. The ceiling rates for each period were determined in advance of the start of that

period. As a result, to determine the ceiling rates, the actuaries had to develop and execute a

methodology to predict what it would cost the government to provide care for the USFHP

beneficiaries if they were enrolled in other government programs, and they had to do so in

advance of knowing which individuals would be enrolled with each Plan or learning which

health care services each individual would require.

70. Each year, Kennell & Associates would prepare an initial ceiling rate package for

each DP and provide those packages to the Contracting Officer and/or Program Manager. Each

package would contain a memo that described in detail the steps Kennell said it took to calculate

the proposed ceiling rates. Each package also would contain related charts and tables showing

some of Kennell’s calculations and a final chart listing the rates. After the Contracting Officer

and/or Program Manager reviewed the packages, the draft memos and charts were sent to the

Plans.

71. Defendants would review these draft ceiling rate packages, with the assistance of

Milliman. Discussions then would ensue between Kennell and TMA, on one side, and Milliman

and Defendants, on the other. The discussions between the Parties would focus on the

methodology used to develop each component of the ceiling rates. The goal of these discussions

was to ensure the rates complied with each of the three material requirements discussed above.

72. Once receiving a draft rate package, Milliman tried to identify arguments the

Defendants could make to TMA that the methodology should be changed in a way that would
17
result in higher rates overall for the DPs, but still comply with the material requirements.

Milliman often would calculate the financial implications of each proposed change. Milliman

would share its conclusions with Defendants, who would decide which issues to raise with TMA.

As a result of Milliman’s work, either Milliman, Steve, or the Alliance would submit a written

response to TMA and propose suggestions on behalf of Defendants for revising the calculations.

73. Although the Defendants’ ultimate goal was to increase the capitation rates they

received, Defendants’ proposals to TMA did not simply ask for an increase in rates without

explanation. Instead, Defendants would couch proposed changes as necessary to comply with

the material requirements. For example, they might explain that the stated methodology was not

executed correctly or that a proposed change was necessary to correct an error that would

otherwise result in payments that were not actuarially sound. Or they might justify a proposal by

citing to a study or research paper or by making an actuarial argument to explain why the change

was necessary to yield ceiling rates that reflected what the government otherwise would have

paid to insure the Plans’ enrollees. In proposing any changes, Defendants’ focus was on the

methodology and ensuring it complied with the actuarial soundness requirement and resulted in

payments that complied with Section 726(b).

74. Kennell would then review those suggestions and make recommendations to

TMA about whether it should accept or reject a particular suggestion. Kennell and TMA would

take into consideration whether the suggestion would result in rates that were actuarially sound

and complied with Section 726(b). Once Kennell conferred with TMA about which suggestions

to accept, Kennell would revise the ceiling rate packages and/or HSA memos and send revised

drafts to TMA. Those drafts would then be sent to the Plans. Milliman and Defendants would

18
continue to make suggestions, and Kennell and TMA would continue to review and respond to

those suggestions.

75. After several rounds of revisions, the discussions would conclude, and the ceiling

rates would be finalized. The Parties intended and understood that the rates they ultimately

agreed to complied with the material requirements. The final ceiling rates for each Plan were

incorporated into a modification to that Plan’s USFHP Contract. Each contract modification was

signed by the Contracting Officer and a representative acting on behalf of the relevant DP.

76. This process for determining the ceiling rates each year was the only mechanism

the Parties used to ensure compliance with the statutory limit. At no point did the Parties engage

in any process after a period ended to determine, retrospectively, what costs the government

would have incurred if the individuals who were enrolled in the USFHP program during that

period had instead received their health care services through the other government programs

enumerated in Section 726(b).

77. The methodology and process used to determine the ceiling rates was so

important to the Parties that, once it was finalized, the written memo detailing Kennell’s process

for determining the ceiling rates, and not just the table setting forth the numerical rates ostensibly

resulting from that process, were incorporated into the contract modification.

78. TMA agreed to pay the DPs at the ceiling rates listed in the contract and

subsequent modifications because TMA believed that (a) those rates were derived from a ceiling

rate methodology that, if accurately executed, satisfied each of the material requirements and

(b) such a ceiling rate methodology had, in fact, been accurately executed. If, before agreeing to

pay the DPs at a set of numerical ceiling rates, TMA had known that the numerical rates were

derived from a ceiling rate methodology that did not satisfy any one of the material requirements

19
or had known that the ceiling rate methodology had not been accurately executed, TMA would

not have agreed to pay the DPs at those numerical rates.

B. The Health Status Adjustments (HSAs) Were a Key Component of the

Ceiling Rates.

79. There were several components used to calculate the ceiling rates. Between the

Base Period and OP3, one of the most important components was the Health Status Adjustment

or HSA. In these periods, the baseline costs and other components of a Designated Provider’s

ceiling rates were multiplied by that DP’s HSA in order to derive that DP’s final ceiling rate

amounts.

80. The HSA was intended to compare the morbidity (or “sickness”) of the universe

of USFHP beneficiaries enrolled in each Designated Provider’s service area to the morbidity (or

“sickness”) of a baseline population living in the same geographic location. The resulting HSA

would indicate whether beneficiaries enrolled in USFHP were, on average, “sicker” or

“healthier” than the baseline population and thus whether an average USFHP beneficiary was

more or less costly to care for, as compared to an average member of the baseline population.

81. The Parties agreed that adjusting the baseline costs by an accurate HSA was an

essential part of the ceiling rate methodology for OP3 and earlier periods and was a crucial

mechanism used to comply with the statutory limit and the actuarial soundness requirement. To

determine how much the government would have paid had the USFHP beneficiaries received

care through a military treatment facility, TRICARE, or Medicare, the ceiling rate calculation

had to account for whether the USFHP beneficiaries, because of their morbidity, were more or

less costly to insure than the baseline population. For similar reasons, the HSA was necessary to

ensure that rates were actuarially sound.

20
 82. Indeed, the Parties’ intent and understanding in Base Period through OP3 was that

the HSAs would accurately compare the health status of a DP’s age 65 and over USFHP

enrollees and the health status of the age 65 and over Medicare beneficiaries in that DP’s service

area.

83. The use of an HSA and the way the Parties intended for it to be calculated were so

significant that they were memorialized in each DP’s contract with TMA. Section 9.2.2.3.e of

each USFHP Contract, titled “Health Status Adjustment,” stated that: “The Government will

compare the health status of the DP enrollees age 65 and over with the health status of the 65 and

over Medicare beneficiaries in the DP’s service area. The Government will use Medicare’s

method of measuring health status unless the DP and the Government mutually agree to use a

more appropriate method to measure health status. This health status adjustment will be used to

adjust the ceiling rates for the 65 and over population. The Government reserves the right to

recalculate this health status comparison in any year.”

84. Additionally, for fiscal year 1998, the NDAA was amended to state that “[i]n

establishing the ceiling rate for enrollees with the designated providers who are also eligible for

[CHAMPUS], the Secretary of Defense shall take into account the health status of the

enrollees.” Pub. L. No. 105-85 § 723, 111 Sta. 1810 (1997). Individuals who are 65 years old

and over, eligible for Medicare, and enrolled in Medicare Part B are eligible for CHAMPUS.

i. Medicare’s Method of Measuring Health Status

85. The USFHP Contracts required use of “Medicare’s method of measuring health

status” when calculating the HSAs, unless there was an agreement to the contrary.

21
 86. There was never such an agreement to the contrary. Accordingly, Medicare’s

method of measuring health status was to be used from the Base Period through OP4.

87. Medicare’s method of measuring health status, the method used by the Centers for

Medicare and Medicaid Services (CMS), was called the CMS-HCC risk adjustment model

(referred to herein as the “CMS Model” or “model”).

88. The CMS Model was publicly available online on the CMS website. There also

was an instruction guide for the CMS Model available on the CMS website. This guide was

called the “Risk Adjustment Data Technical Assistance for Medicare Advantage Organizations

Participant Guide” or “RAPS Guide.”

89. There are two inputs into the CMS Model: enrollment data and claims data. The

enrollment data contains demographic data about the relevant beneficiaries, such as their age and

gender. The claims data contains documentation of the beneficiaries’ diagnoses and health

conditions, as reported on claims submitted by the beneficiaries’ health care providers.

90. When used correctly, the CMS Model produces a risk score, which is a numerical

measure of the anticipated healthcare costs of an individual relative to the cost of an average

Medicare beneficiary. The CMS Model is calibrated so that an individual predicted to have

average healthcare costs has a score of 1.0. If a person has greater morbidity than average, and

thus is expected to have higher-than-average healthcare costs, the CMS Model produces a risk

score greater than 1.0. If a person has a lower morbidity than average, and thus is expected to

have lower-than-average healthcare costs, the CMS Model produces a risk score less than 1.0.

ii. The Calculation of the HSA

91. The HSA was essentially a ratio or fraction made up of average risk scores. The

numerator of the HSA was the average risk score for the USFHP beneficiaries enrolled with a

22
particular DP. The denominator of the HSA was the average risk score for the baseline

population living in that DP’s service area.

92. An HSA of 1.0 indicated that a DP’s USFHP beneficiaries were on average just as

sick as the baseline population and that no adjustment to the baseline costs was necessary based

on health status. An HSA over 1.0 indicated that the USFHP beneficiaries were on average

sicker than the baseline population and resulted in an upward adjustment of the baseline costs

(and thus higher ceiling rates). An HSA under 1.0 indicated that the USFHP beneficiaries were

on average less sick than the baseline population and resulted in a downward adjustment of the

baseline costs (and thus lower ceiling rates).

93. In other words, the HSAs were intended to ensure that the Designated Providers

were paid more if they were providing health services to a population of people who, on the

whole, were sicker (and thus more costly to care for) than the baseline population. The DPs

would be paid less if they were providing health services to a population of people who, on the

whole, were healthier (and thus less costly to care for) than the baseline population.

94. Even a seemingly small change in an HSA could have a significant impact on the

ceiling rates and a DP’s revenue. For example, a one percentage point increase in an HSA (i.e.,

an HSA that went from 1.01 to 1.02) would increase the DP’s final ceiling rates by

approximately one percent, which could increase that DP’s revenue from the USFHP program by

over one million dollars in a single year.

95. The process for determining the HSA for each Designated Provider was similar to

the process used to determine the ceiling rates. See paragraphs 69-78, supra. Kennell would

prepare a separate memo describing the steps it purported to have taken to calculate each Plan’s

HSA and would send that memo and supporting materials to the Plan. TMA and the Plan would

23
then discuss possible revisions and refinements to the HSA calculations in order to ensure that

the HSA complied with the three material requirements.

96. Consistent with Section 9.2.2.3.e of the USFHP Contracts, the HSAs were not

recalculated every year. As a result, the HSA used in the Base Period for a particular DP was the

same as the HSA used in OP1 for that DP. All DPs had their HSAs recalculated in 2010. Those

2010 HSAs were used for the OP2 and OP3 ceiling rates.

97. For those four periods—the Base Period, OP1, OP2, and OP3—the baseline

population used to calculate both the baseline costs and the HSAs was all Medicare beneficiaries

living in each DP’s service area. As a result, in their communications, the Parties sometimes

referred to the method of calculating the ceiling rates for OP3 and earlier periods as the

“Medicare Methodology,” the “current methodology,” the “OP3 methodology,” or the “old

methodology.” The term “Medicare Methodology” will be used herein to refer to this method.

C. The HSAs Used to Develop the Base Period, OP1, OP2, and OP3 Ceiling
Rates Were Infected by Two Errors.

98. Until 2012, the Parties and their actuarial consultants at Kennell and Milliman all

believed that the HSAs that had been used in OP3 and earlier periods were correctly calculated

and that, for each DP, those HSAs accurately compared the relative health statuses of the DP’s

beneficiaries and the baseline population. In 2012, Defendants first learned that this belief was

mistaken. See Section V.D., infra. TMA, however, did not learn that this belief was mistaken

until after Relators’ qui tam complaint was filed. See Section V.F.iii., infra.

99. When the Medicare Methodology was used (i.e., for Base Period through OP3),

Kennell calculated the HSAs by dividing average risk scores for the USFHP beneficiaries for a

particular DP (the numerator of the fraction) by average risk scores for all Medicare beneficiaries

living in that DP’s service area (the denominator of the fraction).

24
 100. When using the Medicare Methodology, Kennell did not calculate the average

risk scores that made up the denominators of the HSA fractions. Instead, Kennell relied on the

average risk scores that CMS itself calculated at a county-by-county level using the CMS Model

and published on its website. CMS calculated these risk scores by following the instructions

provided in the RAPS Guide CMS itself published. Kennell used those published risk scores in

the denominators of its HSA calculations.

101. CMS, however, did not publish county-by-county risk scores for USFHP

members. Kennell, therefore, had to calculate the risk scores that made up the numerators of the

HSA fractions. Kennell input enrollment and claims data for the USFHP beneficiaries enrolled

with each Designated Provider into the CMS Model to calculate average risk scores for each DP.

102. The HSA memos sent to the Plans—both those regarding the HSAs used for Base

Period and OP1, and those regarding the HSAs used for OP2 and OP3—memorialized this

process. Those memos indicated that Kennell had calculated the risk scores for the Plans’

USFHP beneficiaries (i.e., those in the numerators), whereas the risk scores for the comparable

Medicare beneficiaries (i.e., those in the denominators) had been derived from risk scores

published on CMS’s website.

103. For an HSA to be actuarially sound and to provide a meaningful and accurate

health status comparison of the USFHP population and the baseline Medicare population, the

two sets of risk scores needed to be calculated in the same manner. Accordingly, Kennell needed

to calculate the USFHP risk scores (used in the numerator) in the same manner as CMS

calculated the Medicare risk scores (used in the denominator) for the HSAs to be actuarially

sound and to provide a meaningful and accurate comparison. In essence, the comparison had to

be “apples to apples.”

25
 104. Prior to 2012, however, Kennell made two errors when calculating the USFHP

risk scores using the CMS Model. These erroneous risk scores were then compared to correctly

calculated risk scores to derive the HSAs, which were in turn used to establish the ceiling rates.

Kennell’s errors impacted the HSAs used to calculate the ceiling rates in Base Period, OP1, OP2,

and OP3.

i. The Filtering Error

105. The CMS Model is designed, calibrated, and intended to be run using claims that

have a high likelihood of containing accurate diagnoses. Therefore, the RAPS Guide specifies

that only claims from certain sources (or categories of providers) and for specific types of

services should be input into the model. Any claims likely to contain unreliable diagnosis data

(which may make a beneficiary appear sicker than he or she actually is) should not be input into

the model. Thus, before inputting any claims data into the CMS Model, claims from sources or

service types other than those specified in the RAPS Guide should be excluded, or filtered out.

Hereinafter, this concept is referred to as “filtering.”

106. The RAPS Guide instructs that claims input into the CMS Model should be drawn

only from the following sources: hospital inpatient and outpatient, physician, and clinically

trained non-physician (e.g., psychologist, podiatrist). The creators of the model presumed that

claims submitted by trained medical personnel at hospitals or physicians’ clinics are more

accurate than diagnoses submitted by other types of providers, such as home health or hospice

providers. The RAPS Guide instructs that other sources of claims—such as skilled nursing

facility, home health, and hospice claims—should be filtered out before claims are input into the

model.

107. The RAPS Guide further instructs that there are several service types that should

be excluded (or filtered out), regardless of the source of the claim, before the claims data is input
26
into the CMS Model. These service types include laboratory tests, diagnostic radiology, and

ambulance services. For claims associated with diagnostic tests, such as lab work or x-rays, the

diagnosis listed on the claim could be a condition being tested for, not a condition that has been

confirmed. Because the diagnosis listed on the claim might ultimately be ruled out by the test

(and thus not be a condition the patient actually has), such claims should be filtered out and not

input into the CMS Model because they might make the patient appear sicker than he or she

actually is.

108. If claims are not filtered properly before they are run through the CMS Model,

then beneficiaries may inaccurately appear sicker than they would if the claims were filtered

properly. Failing to filter would thus, on the whole, increase average risk scores across a

population.

109. In calculating the USFHP beneficiary risk scores used in the numerators of the

HSAs, Kennell input claims from all sources and all service types into the CMS Model. In other

words, Kennell did not filter out any claims from inappropriate sources or provider types (such

as home health or hospice providers) before running claims through the CMS Model. Nor did

Kennell filter out any claims from inappropriate service types (such as laboratory services or x-

rays) before running claims through the CMS Model. The term “Filtering Error” will be used

herein to refer to Kennell’s failure to filter out any inappropriate claims before running them

through the CMS Model.

ii. The Prospective Error

110. The RAPS Guide describes the CMS Model as a “Prospective Model.” This

means that the CMS Model is designed, calibrated, and intended to be run using diagnostic

information from one year to predict total costs for beneficiaries in the following year.

27
 111. To run the CMS Model prospectively, the data input should be sourced from two

different years: enrollment data (a list of beneficiaries and their demographic data, such as age

and gender) should be from one year, and claims data (containing information about those

beneficiaries’ diagnoses codes and health conditions) should be from the prior year.

Beneficiaries who do not have historic claims data available should be given a “new enrollee”

risk score, which is based on their demographic data alone.

112. If the CMS Model is run using enrollment data and claims data from the same

year (i.e., run concurrently, not prospectively), the results will be meaningless. And, typically,

the results for a cohort of beneficiaries will be biased upward (i.e., be overstated), making the

cohort appear sicker (and more costly to care for) than it would if the model were run

prospectively. This is because individuals typically develop more health conditions over time,

especially chronic conditions that persist from year-to-year. And the CMS Model already

accounts for the likelihood that a beneficiary will develop additional costly health conditions in

future years.

113. Running a prospective model concurrently would thus, on the whole, increase

average risk scores across a population.

114. When calculating the USFHP beneficiary risk scores used in the numerators of the

HSAs, Kennell input enrollment data and claims data from the same year into the CMS Model.

And it did not give beneficiaries without historic claims data available a “new enrollee” score.

In other words, Kennell did not run the model prospectively. The term “Prospective Error” will

be used herein to refer to Kennell’s failure to run the CMS Model prospectively.

28
 iii. The Significance of the Two Errors

115. Both the Filtering Error and Prospective Error were truly errors or mistakes.

Running the CMS Model with either error (or both errors) was not justified by any mathematical

or logical principle, nor were these actuarially sound ways to run the model.

116. Calculating the USFHP risk scores with either the Filtering Error or Prospective

Error, or with both, caused the USFHP beneficiary populations as a whole to appear sicker than

they actually were, which caused the average risk scores for the USFHP populations to be higher

than they would have been had Kennell run the model correctly.

117. The significance of these errors was magnified when the risk scores Kennell

calculated with the Filtering Error and Prospective Error were compared to Medicare risk scores

that CMS had calculated by running the model correctly (i.e., without making the Filtering Error

or the Prospective Error). Kennell’s practice of calculating the USFHP risk scores with both the

Filtering Error and Prospective Error, and then comparing those risk scores to Medicare risk

scores that CMS had calculated and published online in the Base Period, OP1, OP2, and OP3

will be referred to as the “HSA Errors.”

118. The HSA Errors caused the HSAs calculated for each DP in the Base Period,

OP1, OP2, and OP3 to be higher than they would have been had Kennell run the CMS Model

correctly.

119. Using an HSA that was higher than it should have been in turn caused the ceiling

rates paid to the DPs in Base Period, OP1, OP2, and OP3 to be higher than they would have been

had Kennell run the model correctly. In 2012, the Plans’ actuary performed calculations that

indicate that the HSA Errors caused the ceiling rates to be overstated for each DP by between 9.5

percent and 14.4 percent.

29
 120. Because the HSA Errors caused such a significant overstatement of the HSAs,

and the resulting ceiling rates, those resulting ceiling rates were set at a level far in excess of the

costs that the government would have incurred had the enrollees received their health care

services through a military treatment facility, the TRICARE program, or the Medicare program.

121. For these reasons, the HSA Errors caused the ceiling rates TMA paid to each of

the DPs in the Base Period, OP1, OP2, and OP3 to exceed the limitation imposed by Section

726(b) of the NDAA (i.e., to exceed the statutory limit).

122. The HSA Errors also caused the ceiling rates TMA paid to each of the DPs in the

Base Period, OP1, OP2, and OP3 to not be actuarially sound, as required by the NDAA (i.e., to

violate the actuarial soundness requirement).

123. The HSA Errors also meant that the HSAs used for the Base Period, OP1, OP2,

and OP3 ceiling rates did not accurately compare the health status of the DPs’ enrollees to the

Medicare beneficiaries in the DPs’ service areas. Indeed, when Kennell calculated the HSAs

with the HSA Errors, it did not actually use Medicare’s method of measuring health status to

calculate those HSAs. This meant that the HSAs were not calculated consistent with the Parties’

intent and understanding regarding calculation of the HSAs and were not calculated in

accordance with contractual provision 9.2.2.3.e (i.e., they violated the health comparison

requirement).

124. Because the HSA Errors caused the ceiling rates TMA paid to each of the DPs in

the Base Period, OP1, OP2, and OP3 to be higher than they would have been had the ceiling

rates been calculated in compliance with the material requirements, those rates will be referred to

herein as “improperly inflated.”

30
 125. When the HSAs used for the Base Period, OP1, OP2, and OP3 ceiling rates were

calculated, however, no one realized that Kennell had made the HSA Errors or that the ceiling

rates violated any of the material requirements.

D. Defendants Eventually Learned of the Two Errors (But TMA Did Not).

126. The HSA Errors first came to light in 2012 when TMA attempted to change how

the ceiling rates were being calculated. During the process of making this change, the actuaries

at Kennell and Milliman uncovered the HSA Errors. The actuaries informed Defendants of these

errors, but not TMA.

i. Rates Paid in 2008-2012: As a Result of the HSA Errors, the Plans

Had Been Earning Profit Margins on the USFHP Program
for Years.

127. When they were being paid ceiling rates in Base Period, OP1, OP2, and OP3

(i.e., 2008 through 2012), the USFHP program was extremely lucrative for all of the Designated

Providers.

128. As the Designated Providers acknowledged in proposals they submitted to TMA

in 2008 prior to being awarded the USFHP Contracts, a profit margin in the range of 4% to 6%

would be reasonable and consistent with industry benchmarks for large health plans.

129. Yet, Brighton Marine, Christus, Martin’s Point, PacMed, and St. Vincent’s all

consistently recorded profit margins on their USFHP plans that

130. For example, St. Vincent’s annual operating gain for its USFHP plan in calendar

year 2008 was a %. In 2009, that number was %. In 2010, 2011, and 2012,

those numbers were %, %, and %, respectively.

131. Johns Hopkins also realized profit margins on its USFHP plan during the

entire 2008 through 2012 period. This is illustrated by comparing Johns Hopkins’s USFHP plan

31
to another managed care health plan Johns Hopkins operated, called Priority Partners. Johns

Hopkins’s USFHP plan was .

For the year ending June 30, 2012 (during which Johns Hopkins had been paid at the OP2 rates

for part of the year and the OP3 rates for the remainder of the year), Johns Hopkins recorded

profits per member per month of $ on its USFHP plan. , for that same year,

Johns Hopkins recorded profits per member per month of $ for the Priority Partners plan.

132. Indeed, long before the HSA Errors came to light, Johns Hopkins expressed

discomfort with how favorable the ceiling rates seemed to be. In April 2009, after receiving the

initial draft ceiling rate package from TMA proposing OP1 rates that would have resulted in

approximately $11 million less in revenue for Johns Hopkins for fiscal year 2010 than what

Johns Hopkins had projected (for reasons wholly unrelated to the HSA Errors), the President of

Johns Hopkins HealthCare LLC remarked to a colleague: “Gravy train is over!! (Well, not quite.

I am actually glad this is happening. The rates were just getting too lucrative for comfort.).” Her

colleague replied to the President that she was “right to say that it was getting too good.”

133. Upon information and belief, neither Johns Hopkins nor any other Designated

Provider attempted to figure out why it was earning such profit margins on its USFHP

plan (e.g., whether the lucrative ceiling rates might be the result of an error or other anomaly). In

addition, upon information and belief, none of the Designated Providers ever informed TMA of

32
the profit margins they were earning on their USFHP plans or even advised TMA that their profit

margins were the profit margins the DPs themselves

had identified to TMA as reasonable and consistent with industry benchmarks. Rather, the DPs

were content to quietly reap these profits and to continue to find ways to advocate for

higher ceiling rates.

ii. Rate Discussions in 2011: The Switch to the TFL Methodology Was
First Attempted.

134. TMA was unaware of the profit margins the Plans were earning on the

USFHP program; indeed, TMA was not authorized to obtain information about the Plans’ costs

or profits. TMA, however, had observed that the government’s payments to the Plans had

seemed high.

135. Partially in an effort to address this, in 2011, when the process for setting the OP3

rates began, TMA proposed a change in how the ceiling rates would be calculated. Specifically,

TMA expressed an interest changing the baseline population from all Medicare beneficiaries

living in a DPs’ service area to only those Medicare beneficiaries who were also receiving

supplemental benefits from TRICARE because of current or prior military service (through a

program called TRICARE for Life or “TFL”). In their communications, the Parties sometimes

referred to this new method of calculating the ceiling rates as the “TFL Methodology,” the

“proposed methodology,” the “OP4 methodology,” or the “new methodology.” The term “TFL

Methodology” will be used herein to refer to this method.

136. TMA wanted to move to the TFL Methodology because Kennell advised TMA

that using the TFL Methodology was a better way to calculate the ceiling rates. Using the TFL

Methodology instead of the Medicare Methodology would require Kennell to make fewer

assumptions, would allow use of more recent data, and would involve comparing the USFHP

33
population to a more similar baseline population (i.e., TFL beneficiaries instead of the entire

Medicare population).

137. TMA also understood (and was told by Kennell) that using the TFL Methodology

might help to lower the costs of the USFHP program and reduce the ceiling rates paid to the DPs.

138. In fact, the original draft ceiling rates developed by Kennell in 2011 using the

TFL Methodology would have represented a significant reduction in the ceiling rates.

139. To avoid any confusion, when it began using the TFL Methodology, Kennell

started referring to what had been called the HSA as the Selection Adjustment or SA. Despite

the name change, this factor was intended to perform the same function in the TFL Methodology

as the HSA had when the Medicare Methodology was used.

140. Under the TFL Methodology, Kennell continued to calculate the average risk

scores for the USFHP beneficiaries (which made up the numerators of the SA fractions).

However, rather than using published risk scores calculated by CMS for the baseline population,

Kennell started calculating the average risk scores for the baseline population of TFL

beneficiaries (which made up the denominators of the SA fractions).

141. Kennell thus now calculated the risk scores that would go into both parts of the

SA fractions. As a result, any errors made in running the CMS Model affected both the

numerators and denominators. And it was not necessarily clear in advance of performing any

particular calculation whether any errors made in running the CMS Model would have a greater

impact on the numerators or denominators of those SA fractions and thus it was not clear

whether any errors would cause the resulting SAs to be over- or understated.

142. In 2011, the Designated Providers objected to using the TFL Methodology for the

OP3 rates. The DPs objected because the proposed OP3 rates calculated using the TFL

34
Methodology were much lower than the OP2 rates they were being paid at the time, and neither

Milliman nor Kennell could explain the reason for the steep reduction in rates. The DPs also

objected because Milliman was unable to get access to the TFL data in time to validate it and

make sure it was being used in an actuarially sound manner.

143. In August 2011, because of those objections, TMA agreed to continue using the

Medicare Methodology to set the OP3 ceiling rates. Those OP3 rates were eventually set using

the Medicare Methodology and the same HSAs that had been used for the OP2 rates.

iii. Rate Discussions Begin in 2012: The TFL Methodology Was

Actually Implemented and the HSA Errors Were Discovered.

144. When the discussions about the OP4 rates began in early 2012, TMA indicated it

intended to move to using the TFL Methodology for those rates.

145. In an effort to facilitate this switch, in early 2012, Kennell and Milliman both

started examining the TFL Methodology and the underlying TFL data more closely in an effort

to understand and explain why that methodology produced lower rates than those produced using

the Medicare Methodology. During this examination, and the examination that continued

throughout 2012, Kennell and Milliman uncovered the HSA Errors. Defendants were made

aware of the existence and impact of the HSA Errors in 2012, but TMA was not.

146. In the spring of 2012, Dave Kennell and Geof Hileman of Kennell & Associates

spoke with individuals at TMA and DOD about Kennell’s development of the USFHP rates and

use of the TFL data.

147. As part of this process, Dave, Geof, the Contracting Officer (Bea), the Program

Manager (Danielle), and other individuals at TMA participated in a call on April 4. On this call,

a TMA analyst, who was otherwise not involved in the USFHP rate-setting process, brought up

guidance about excluding certain claims when running the CMS Model (i.e., filtering). On that

35
call, however, neither Dave nor Geof informed TMA that they had not been filtering claims

when calculating the HSAs used in OP3 and earlier periods (or when calculating the SAs that

they had initially developed in 2011), or had made any error or mistake that would have

impacted prior HSAs or ceiling rates.

148. After the call, that analyst sent Dave and Geof (copying others) the guidance to

which he was referring (i.e., the RAPS Guide, see paragraph 88, supra). When Geof received

and reviewed the RAPS Guide, he realized for the first time that he had been making the

Filtering Error when calculating risk scores, including the risk scores that went into the HSAs

used to determine the ceiling rates for OP3 and earlier periods.

149. Within a few hours of receiving the RAPS Guide, Geof also understood that the

Filtering Error might have at least partially explained why the HSAs were as high as they had

been in the past. Geof shared this understanding with Dave the same day he received the RAPS

Guide. In the following months, Dave and Geof also realized that the Filtering Error explained

why the ceiling rates calculated using the Medicare Methodology had been higher than the rates

Kennell initially developed using the TFL Methodology.

150. Although Kennell quickly understood the impact the Filtering Error had on the

ceiling rates paid to the DPs in OP3 and earlier periods, Kennell’s statements to TMA throughout

2012 that referenced filtering were incomplete and misleading. See Section V.F.ii., infra. For

example, shortly after the April 4 call, Dave sent Bea and Danielle an email saying he was happy

that the TMA analyst who joined that call (and later sent the RAPS Guide) did not identify any

issues that would cause Kennell to redo any of the rates. No one at Kennell sent a follow up

email to TMA to clarify, supplement, or correct that email after Kennell recognized that the

36
HSAs used in OP3 and earlier periods (and the resulting ceiling rates for those periods) had been

overstated due to the Filtering Error.

iv. Rate Discussions Continued Throughout 2012: Defendants Were

Informed of the Errors.

151. On April 11, Kennell sent the initial draft ceiling rate packages for OP4 to the

Designated Providers. Those proposed ceiling rates had been calculated using the TFL

Methodology, but the packages contained a placeholder for the SA calculations that were to

follow.

152. On April 20, Kennell sent the initial memos calculating the SAs for OP4 to the

Designated Providers. The memos stated that Kennell had excluded claim types identified in the

RAPS Guide and explained that it was excluding claims from both the USFHP risk score

calculation and the TFL risk score calculation.

153. Around this time, Kennell told Tim Wilder that Kennell had identified a potential

error in the SA calculations Kennell had performed in the prior year (when Kennell first

attempted to calculate rates using the TFL Methodology). This error involved Kennell’s

inclusion of all claims when running the CMS Model to calculate the USFHP and TFL risk

scores that were used in the SAs (i.e., Kennell had made the Filtering Error in 2011 when

calculating preliminary SAs). Additionally, Kennell told Tim that this potential error also would

have impacted the HSA calculations that had been used to develop the ceiling rates paid to the

DPs for OP3 (i.e., Kennell had made the Filtering Error when calculating the HSAs used in OP3)

and that Kennell would correct this error in any updates to the Medicare Methodology.

154. On April 22, Tim emailed the Finance Committee Chair, who represented

Brighton Marine on the Finance Committee, about his efforts to model possible rates for OP4.

He observed that the Designated Providers may be “better off” financially if the ceiling rates

37
were calculated using the TFL Methodology rather than the Medicare Methodology. This was

because he recognized that, if the Medicare Methodology was used in OP4, Kennell would factor

in the excluded claims—i.e., fix the Filtering Error—when recalculating the HSAs. This would

cause those HSAs, and the resulting ceiling rates, to be lower than they had been in OP3 and

earlier periods.

155. In response, the Finance Committee Chair calculated a preliminary breakdown of

how much the monthly amount paid to Brighton Marine would change if the Medicare

Methodology was retained and the HSAs were reduced. This response demonstrates an

immediate understanding by the Finance Committee Chair that, in prior years, the Filtering Error

had caused the HSAs to be higher than they would have been absent the Filtering Error and that

the Filtering Error had caused the DPs to be paid more than they otherwise would have been.

156. On April 23, the Finance Committee had a call to prepare for the OP4 ceiling rate

discussions. On this call, Tim provided some highlights concerning the most recent

developments related to the OP4 rates. During this portion of the call, Tim reported that Kennell

made adjustments to the risk score calculations.

157. When the minutes from that April 23 meeting were distributed to the Finance

Committee, Steve Weiner instructed the recipients that due to the “sensitive nature of the

information” contained within those minutes that they “should be maintained as extremely

confidential.” An instruction like this was not typically provided when Finance Committee

meeting minutes were circulated.

158. The following week, on May 2, Tim informed the Finance Committee via email

that he had begun estimating the ceiling rates for OP4 using the Medicare Methodology, as

requested. Tim stated he would anticipate several updates to that methodology if it were used

38
again. One of those updates concerned filtering. Tim explained he would expect, among other

things, for Kennell to update the HSAs. He explained that Kennell had identified a potential

error in the SA calculation developed in the prior year when TMA first attempted to use the TFL

Methodology: when claims were run through the CMS Model, all claims were included, which

led to overstated risk scores (i.e., Kennell made the Filtering Error). Tim also reported that

Kennell asserted that this error not only impacted the SA calculations performed in 2011, when

TMA first attempted to switch to the TFL Methodology, but that this error also impacted the

“original Health Status Adjustment calculation used in the OP3 ceiling rates.” Tim believed that

Kennell would correct this in any update to the Medicare Methodology.

159. In his email, Tim further observed that the impact of correcting this error would

be larger on the HSAs developed using the Medicare Methodology than on the SAs developed

using the TFL Methodology. This was because, under the Medicare Methodology, only the

USFHP risk scores (in the numerator) had been calculated with the Filtering Error, whereas the

published Medicare risk scores (in the denominator) were calculated correctly (i.e., with filtering

performed).

160. Later that day, Tim discussed the contents of his May 2 email on a phone call

with the Finance Committee. The Alliance’s Executive Director later wrote to the Finance

Committee Chair that she kept the meeting minutes from that May 2 call “very broad,” given the

“sensitive nature of the discussions.” None of the topics discussed in the May 2 minutes were

sensitive other than Tim’s analysis of the OP4 rates.

161. After a visit to Kennell’s offices on or around May 7, Tim recognized that

Kennell had failed to correct the Filtering Error completely in the April 20 SA packages. Tim

39
also discovered that Kennell had not been running the CMS Model prospectively (i.e., had been

making the Prospective Error).

162. On May 30, Tim wrote an email to the Finance Committee in preparation for a

call later that day. In that email, he shared with the Finance Committee his projection of the OP4

ceiling rates using the Medicare Methodology. Once again, when calculating potential OP4 rates

using the Medicare Methodology, Tim noted that the HSAs would need to be updated because

Kennell had inadvertently included all claims when calculating the USFHP risk scores (i.e.,

made the Filtering Error), which overstated the HSAs. Tim’s email was clear that Kennell’s

failure to filter was an error. Tim said that correcting this error would reduce the ceiling rates

between 4 and 10 percent, depending on the Designated Provider.

163. In this email to the Finance Committee, Tim also referenced the Prospective Error

for the first time. He wrote that, when using the TFL Methodology, Kennell was running the

CMS Model using members (i.e., enrollment data) and diagnosis codes (i.e., claims data) from

the same year.1 Tim further explained that the CMS Model was a prospective model, intended to

be run with member data from one year and diagnosis codes from the prior year. For the OP4

calculations, 2009 member data should have been input into the model along with those

members’ 2008 diagnosis codes.

164. Tim discussed the contents of his May 30 email on a phone call with the Finance

Committee. According to a draft of the Finance Committee Meeting Minutes that memorialized

1
This portion of Tim’s May 30 email to the Finance Committee contains a typo. The email says that the CMS
Model is being run “as if it were a prospective model.” Tim has stated that he meant to say “as if it were a
concurrent model” in this sentence. To the extent anyone on the Finance Committee was confused, this was most
likely clarified on the May 30 Finance Committee call and it was certainly clarified by Tim in his June 6 email,
discussed in paragraphs 165-166, infra.

40
that May 30 call, Tim characterized Kennell’s failure to filter as a “major area” that would have a

“significant impact on all plans.”

165. On June 6, Tim informed the Finance Committee, both in writing and over the

phone, that Kennell had failed to correct fully the Filtering Error when it calculated the most

recent iteration of the Selection Adjustments. Kennell had properly excluded impermissible

sources of claims, but it had failed to fully remove all claims that had impermissible service

types. Tim stated that the biggest issue with Kennell’s efforts at filtering was that Kennell had

failed to filter out diagnostic radiology claims.

166. Tim also explained to the Finance Committee that the CMS Model was a

prospective model, designed to be run using diagnosis codes (i.e., claims data) from one year and

a membership file (i.e., enrollment data) from the following year. The purpose of this design

was to project costs for a current set of beneficiaries. Tim stated that Kennell was running the

model as if it were a concurrent model, inputting claims data and enrollment data from the same

year.

167. According to contemporaneous handwritten notes taken by the Alliance’s

Executive Director during the June 6 Finance Committee meeting, the following was stated by

participants on that June 6 call:

 [Kennell] had not been filtering in past, now they are for SA, would
impact on HSA

 Don’t think they understand what they are supposed to do – don’t

understand it

 Not applying filter to our scores

 SA Calculation – risk: doing it wrong prior – benefit from doing it right

 Feel uncomfortable not disclosing it

41
  DOD used wrong model

 Is D[ave] K[ennell] focusing on new methodology only? Yes – Tim

 Retro options – raised issue of [illegible word] Dept’s ability to reach back

168. According to another set of contemporaneous notes taken during this meeting

(this time by one of Johns Hopkins’s representatives on the Finance Committee), the group also

discussed the fact that “Medicare presumably already applied filter + prospective.” And “Risk:

DOD using concurrent 2009 data/membership for our current HSA. ? retro refund.”

169. In other words, by June 6, the Finance Committee had been informed that the

Filtering Error and the Prospective Error were both “errors,” that Kennell had made both errors

when computing the HSAs used for OP3, and that Tim did not think Kennell understood how to

properly filter claims. The only reasonable conclusion that could be drawn from Kennell’s

failure to filter in the past, and its lack of understanding of how to properly filter claims in 2012

once it became aware of the Filtering Error, is that Kennell had not been correctly filtering

claims in OP3 or in any earlier period.

170. Thus, by no later than June 6, Tim had informed Defendants of the existence of

the Filtering Error and Prospective Error. (At this time, neither Kennell nor TMA had

discovered or been informed of the existence of the Prospective Error.)

171. In his communications, Tim made it clear to Defendants that these errors were in

fact mistakes, and not merely differences of opinion or competing (but actuarially legitimate)

options for how to calculate risk scores when using the CMS Model.

172. In fact, in his communications, Tim never attempted to provide any justification

or advance any argument that it would be appropriate to calculate risk scores using a method that

contained either the Filtering Error or the Prospective Error, let alone both errors. Nor did he

42
ever try to explain or justify Kennell’s practice of making the HSA Errors, whereby Kennell used

one method to calculate the risk scores used in the numerators of HSAs (i.e., made the Filtering

and Prospective Errors) and then compared those erroneous scores to risk scores in the

denominator that had been calculated correctly.

173. Indeed, no actuary involved in the USFHP program has ever offered any

justification for calculating the HSAs with the HSA Errors.

E. By June 2012, Defendants Knew the HSA Errors Impacted the Base Period,
OP1, OP2, and OP3 Rates and Caused the DPs To Be Overpaid in Those
Periods.

174. Defendants were not simply informed about the existence of both the Filtering

Error and the Prospective Error in the TFL Methodology being discussed in 2012. They were

also made aware, via various emails, memos, and calls, that these same errors also occurred in

OP3 and earlier periods and that the HSA Errors had caused TMA to significantly overpay the

DPs in those periods.

i. Milliman Provided the Plans with a Detailed Analysis of the HSA

Errors.

175. In June 2012, Defendants were deliberating about whether to try to convince

TMA to continue to use the Medicare Methodology to calculate the ceiling rates in OP4 (as they

had successfully done in 2011) or whether to acquiesce to the switch to the TFL Methodology

for OP4. Accordingly, it became important for Defendants to understand the financial

implications of switching from the Medicare Methodology to the TFL Methodology.

176. To help inform this decision, Milliman prepared a detailed written analysis and

summary chart attempting to project the ceiling rates for OP4 using both the Medicare

Methodology and the proposed TFL Methodology.

43
 177. On June 11, Milliman’s memo estimating the potential OP4 rates using both

methodologies was sent to the Finance Committee. In this memo, each estimate started with the

actual ceiling rates TMA had agreed to pay the Designated Providers for OP3. From there, the

memo described a series of adjustments that would need to be made to transform the OP3 rates

into OP4 rates using each methodology. For each adjustment, Milliman estimated the average

percentage impact on revenue the particular change would have, as aggregated across all six

Designated Providers. Attached to the memo was a table, called Table 1, listing the same

adjustments described in the memo and showing their impact on aggregate revenue.

178. Under Milliman’s projection of the OP4 rates using the TFL Methodology, the

memo explained that the government would need to update the Selection Adjustment to fully fix

the Filtering Error (which had only been partially fixed by Kennell at that point in time) and to

fix the Prospective Error (which Kennell did not yet know about and thus had not attempted to

address in any way). The combined impact of fixing these errors, beyond the adjustments

Kennell had already made, would cause the revenue generated by the rates to increase by several

percentage points.

179. Under Milliman’s projection of the OP4 rates using the Medicare Methodology,

the memo explained that both the Filtering Error and the Prospective Error would need to be

fixed. The memo further noted that, because the HSAs compared the USFHP risk scores to risk

scores published by CMS, these corrections would only impact the USFHP risk scores, and not

the published Medicare risk scores. Thus, fixing the Filtering Error and the Prospective Error

when using the Medicare Methodology would cause revenue to decrease in the aggregate, across

all six Plans. Per Table 1, fixing the Filtering Error would cause aggregate revenue to decrease

44
by 5.6 percent and fixing the Prospective Error would cause aggregate revenue to decrease by

7.7 percent.

180. The Finance Committee discussed the substance of the June 11 memo on a June

11 call. After that call, Tim sent representatives for each Designated Provider a table similar to

the Table 1 that was attached to the June 11 Milliman memo. This second table, however,

contained ceiling rate projections specific to that particular Plan and showed the impact of each

change on that Plan’s annual revenue. In emails transmitting those Plan-specific tables, Tim

stated that he believed the impacts provided were reasonable.

181. In each Plan-specific table, the bottom of the table listed (as percentages) the

current OP3 HSA, as well as a projected, recalculated HSA for OP4 using the Medicare

Methodology. The table also listed (as percentages) a current SA, as initially proposed by

Kennell for OP4, as well as a projected, recalculated SA for OP4.

182. Each Designated Provider’s Plan-specific table showed that fixing the Filtering

Error and Prospective Error under the TFL Methodology would cause the SA originally proposed

by Kennell to increase (and thus the ceiling rates originally proposed by Kennell for OP4 would

also increase). By contrast, each Plan-specific table showed that fixing the HSA Errors under

the Medicare Methodology would cause the HSA to decrease as compared to the HSA used in

OP3 (and thus the ceiling rates would decrease between OP3 and OP4 if the Medicare

Methodology was maintained).

183. Defendants considered the results of this analysis when deciding on their strategic

approach in 2012 with respect to the OP4 rates. As discussed in more detail below, Defendants

ultimately agreed to recommend that TMA switch to the TFL Methodology for OP4 because

45
they recognized that doing so would be more lucrative for them, in the aggregate, than

maintaining the Medicare Methodology once the HSA Errors had been corrected.

184. Not only did Tim’s charts help guide Defendants during the OP4 negotiations, but

Tim’s charts also indicated that the HSA Errors had led to overpayments in OP3 and earlier

periods. The Medicare Methodology portion of the chart began with the OP3 rates being paid to

the DPs at the time they received this memo. Tim then made adjustments that he believed would

be necessary if the Medicare Methodology was used again. Those adjustments included fixing

the HSA Errors. Thus, the June 11 memo was premised on the understanding that both the

Filtering Error and the Prospective Error had been made when Kennell calculated the OP3 rates

and that those errors had resulted in rates that were significantly higher than they would have

been absent the errors. The chart further showed that, if the HSA Errors were fixed, the ceiling

rates would decrease. This meant that the OP3 rates the Designated Providers were being paid at

the time they received the June 11 memo were improperly inflated due to the HSA Errors (and

that the OP2 rates, which used the same HSAs that had been used in OP3, were similarly

impacted by the same errors). This Table 1 and the memo to which it was attached were

provided to the Defendants, but neither the memo nor tables was ever provided to the

Contracting Officer, Program Manager, or anyone else at TMA.

ii. The Plans Received Additional Information Indicating That the

HSA Errors Had Inflated the OP3 Rates.

185. Despite this detailed memo, throughout the summer the Designated Providers

continued to ask Milliman why the ceiling rates proposed by Kennell for OP4 were so much

lower than the rates they were being paid for OP3.

186. Tim continued to explain to the Designated Providers that prior rates had been

impacted by the Filtering Error and Prospective Error. Because prior rates contained those

46
errors, those prior rates were inflated. Thus, once accounting for the correction of the Filtering

and Prospective Errors, the difference in rates between the TFL Methodology and the Medicare

Methodology was not as dramatic as it first appeared. In fact, by switching to the TFL

Methodology for OP4, all but one of the Designated Providers would experience a smaller

decrease in rates than they would have seen if the Medicare Methodology were used again (with

the HSA Errors fixed). See paragraph 210, infra.

187. On June 20, for example, Tim informed the Finance Committee that, if the

Medicare Methodology was used again for OP4, all Plans would see a reduction in rates of

between 15 and 18 percent, and perhaps as much as 20 to 24 percent. He further explained that

the reason for this decrease would be the corrections to the HSA, namely the need to correct the

Filtering Error and the Prospective Error. By contrast, if the Plans agreed to use the TFL

Methodology, the OP4 rates would only decrease by between 7 and 18 percent.

188. On August 15, Tim informed the Finance Committee of what he had learned

during his on-site visit to Kennell’s office. Tim recounted how, during that visit, he had asked

Geof Hileman to change his approach to running the CMS Model and calculating the Selection

Adjustments in a number of ways to ensure that Kennell was running the model and calculating

risk scores correctly. The only reasonable conclusion to draw from Tim’s continued suggestions

and corrections, and Kennell’s failure to fully correct the Filtering and Prospective Errors in the

Selection Adjustments by August, was that Kennell did not know how to correctly use the CMS

Model in 2012 or in any prior year. Tim also recounted that, during this visit, Geof

acknowledged to Tim that the prior HSAs were incorrectly calculated. Tim did not report that

Geof said anything to him about making a similar disclosure to TMA.

47
 189. And, if Defendants had any doubt that Kennell had been making the Prospective

Error when it had calculated the HSAs in OP3 and earlier periods, those doubts should have been

put to rest early in 2013. At this point in time, Geof continued to have questions for Tim about

how to properly run the CMS Model prospectively. The questions Geof posed to Tim, which

were passed along to some members of the Finance Committee, re-emphasized that Geof did not

understand how to correctly run the CMS Model prospectively, thus, once again, supporting the

conclusion that Kennell had never correctly run the model in the past.

iii. Internal Communications within the Plans Show That They

Understood the Erroneous HSAs Caused Them to Be Overpaid in
OP3 and Earlier Periods.

190. Internal communications within the various Designated Providers further

demonstrate that the DPs understood that the HSA Errors had been made in OP3 and earlier

periods, and that those HSA Errors had led to each of the DPs being paid inflated ceiling rates.

See also paragraph 225, infra.

191. On June 29, Finance Committee members from Martin’s Point provided their

CEO with an update on the USFHP rate negotiations. That one-page update began with a brief

summary that explicitly stated that the “Health Status Adjustment in previous rates was flawed to

the benefit of MPHC,” i.e., Martin’s Point.

192. In July, PacMed’s leadership was discussing specific components of the ceiling

rate calculations with Bob Cosway, a Milliman actuary who worked with Tim on the USFHP

rate discussions. On July 16, Bob wrote to PacMed and stated that Milliman had estimated a big

reduction in ceiling rates under the Medicare Methodology if Dave corrected the error in the

HSA calculation. Bob told PacMed’s leadership that he had confirmed with Tim that the

estimated reduction in rates reflected the correct way to calculate the risk scores. Bob’s email to

PacMed continued by saying that the TFL Methodology produced better results for the DPs than
48
the Medicare Methodology, unless Defendants could get TMA to use the Medicare Methodology

without fixing any of the errors. But Bob told PacMed he had gotten the impression that such an

outcome was unlikely.

193. On July 19, Milliman sent a memo to Martin’s Point estimating the OP4 ceiling

rates using the methodology that had been used during the Base Period. In this memo, Tim said

his best guess was that TMA would argue that even under the methodology used during the Base

Period, the HSA would need to be updated because there were errors in the prior calculations

that would need to be corrected.

194. On July 24, a Senior VP at Steward prepared a quarterly report for the board of

Brighton Marine. In that report, the Senior VP wrote that “DoD introduced methodological

changes in how the over 65 rates are being calculated and also identified issues with their

calculations of prior methods.” He stated that rates would decrease by 11 or 12 percent in OP4

and that most of that reduction “is related to correction of prior calculations of the over 65 health

status adjustment.”

195. On October 2, that same Steward Senior VP provided an update on the resolution

of the USFHP rate negotiations to Brighton Marine’s CEO. In this email, the Senior VP stated

that Martin’s Point was still considering trying to convince the government to maintain the

Medicare Methodology. See paragraph 246, infra. But he again pointed out that the Medicare

Methodology “contains the health status adjustment error.” He did not provide any more detail

about the error, presumably because the CEO of Brighton Marine was already generally familiar

with “the health status adjustment error” from prior communications.

196. In October, the leadership of Martin’s Point received the results of a survey that

had been administered to its employees. That survey asked employees what was “ONE thing

49
 F. TMA Did Not Become Aware of the Historic HSA Errors or Their Impact
Until This Qui Tam Lawsuit Was Filed.

200. Once Defendants became aware of the HSA Errors and the impact of those errors,

they attempted to thread a needle: they affirmatively combined, conspired, and agreed to

disclose the Filtering Error and Prospective Error to TMA in the context of the TFL

Methodology being proposed for OP4 (in order to get the errors fixed, so the rates would

increase), but they sought to do so without telling TMA that the same two errors had been made

in the past when the Medicare Methodology was used (in order to obscure the fact that due to

those errors, the ceiling rates had been improperly inflated and, as a result, the Plans had

received substantial overpayments in OP3 and earlier periods and were still being overpaid for

OP3). By doing so, Defendants sought to maximize their profits under the USFHP Program

without having to part with the overpayments they received in OP3 and prior periods.

201. Defendants were successful. TMA agreed to fix the Filtering Error and

Prospective Error for OP4. But TMA never understood that those same two errors had caused

the rates paid to the DPs for the Base Period, OP1, OP2, and OP3 to be in violation of the

material requirements or that those errors caused the rates for those periods to be improperly

inflated.

i. Defendants Had Several Opportunities to Inform TMA of the

Historic HSA Errors, Their Impact, and the Resulting
Overpayments, But They Never Did.

202. Defendants had several opportunities to disclose to TMA that the HSA Errors had

occurred in OP3 and earlier periods, that those errors had caused the ceiling rates to be

improperly inflated, and that the errors caused TMA to overpay the Plans. Defendants did not

take these opportunities to be open, honest, forthcoming, and transparent with TMA. Instead,

Defendants carefully crafted their communications with TMA such that any disclosure or

51
discussion of the Filtering Error or Prospective Error was made only in the context of discussing

OP4 rates and the new TFL Methodology. Upon information and belief, Defendants deliberately

avoided making statements they thought might prompt TMA to appreciate that the HSA Errors

were made when the Medicare Methodology was used to calculate the ceiling rates paid for OP3

and earlier periods.

a. Some Defendants considered not telling TMA about the

Prospective Error (and certain aspects of the Filtering Error) at
all.

203. Shortly after Defendants learned of the HSA Errors, they became concerned that

if TMA also became aware of these historic errors, then TMA might attempt to recoup the prior

overpayments. As a result, throughout June, Defendants discussed how to approach the OP4 rate

discussions in light of what they understood about the two errors and their impacts.

204. Defendants had two important decisions to make: whether to agree to the switch

to the TFL Methodology and what, if anything, to say to TMA about the Filtering and

Prospective Errors.

205. At the June 6 Finance Committee meeting, Defendants discussed whether Dave

Kennell was focusing only on the TFL Methodology. This may have been because Defendants

wanted to assess the risk of telling TMA about the Prospective Error and the remainder of the

Filtering Error. It benefited the Plans to tell TMA about the errors in the context of the TFL

Methodology (where fixing the errors would result in an increase in the proposed rates), but that

benefit might not be worth the risk of TMA realizing that these same two errors had improperly

inflated the rates and resulted in substantial overpayments when the Medicare Methodology was

used in OP3 and earlier periods. As part of their deliberations, the Plans also discussed what

TMA’s “retroactive” options were, and whether it had the ability to “reach back” or receive a

“retro refund” from the Designated Providers. Some individuals in attendance at this meeting
52
also claim that a Finance Committee member asked Steve Weiner for advice on these topics, and

that Steve provided an answer several weeks later. See paragraph 222, infra.

206. Despite assurances that Dave was focusing only on the TFL Methodology, certain

Finance Committee members were apparently concerned about what might happen if TMA

realized that prior rates had been impacted by the HSA Errors. As a result, they openly

discussed doing something that, absent such a concern, would have been illogical: not saying

anything to TMA about the Filtering Error and the Prospective Error. This would have been a

curious choice to make because, if the TFL Methodology were used, correcting these two errors

would meaningfully increase all of the DPs’ OP4 rates, both individually and in the aggregate.

This discussion was also notable because, according to the Plans, Steve had advised them for

years that, if they identified errors in the ceiling rate calculations before the ceiling rates were

finalized and incorporated into a contract modification, the Plans were obligated to disclose those

errors to TMA.

207. This concern was discussed on a June 2012 Finance Committee call. The

discussion focused on lines 10 and 11 of Table 1 in Tim’s June 11 memo—i.e., the two lines that

showed the estimated impact of fixing the remainder of the Filtering Error and the Prospective

Error in the context of the TFL Methodology. See Section V.E.i., supra. As lines 10 and 11

showed, correcting the Filtering and Prospective Errors when the TFL Methodology was used to

calculate the OP4 rates would increase those rates for all DPs. Indeed, fully correcting the

Filtering Error and correcting the Prospective Error in the context of the TFL Methodology

would have increased the DPs’ annual revenue in the aggregate by 3.8 percent and 2.6 percent,

respectively (as shown in lines 10 and 11 of the TFL section of Table 1 in the June 11 Milliman

53
memo) and would have increased each DP’s revenue overall (as shown in those same two lines

in the Plan-specific tables Tim sent later that day).

208. Nevertheless, some of the Finance Committee members suggested that they could

live with the OP4 rates TMA had recently proposed even if the Filtering and Prospective Errors

were not disclosed and corrected. They thus seemed inclined to not push further on the issues

captured in lines 10 and 11 of Table 1 (i.e., not disclose anything to TMA about the remainder of

the Filtering Error and the Prospective Error). In other words, those Finance Committee

members would have preferred to conceal those errors from TMA rather than disclose them and

benefit from an increase in OP4 rates. It was rare for the DPs to be aware of a justifiable way to

argue for a change that would significantly increase rates for all DPs but to consider not making

that argument to TMA. The willingness of some DPs to potentially walk away from more

lucrative OP4 rates by not asking TMA to correct the Filtering and Prospective Errors that year is

further evidence of their desire to conceal the past overpayments they had received due to these

errors.

209. At around the same time, Defendants were also considering whether to agree to

TMA’s proposal to use the TFL Methodology for OP4 or whether to push TMA to continue

using the Medicare Methodology, as they had done in the prior year.

210. For all of the Designated Providers, there would be a significant decrease in rates

between OP3 and OP4, regardless of which methodology was used for OP4. For five of the

Designated Providers, using the TFL Methodology for the OP4 rates (once the Filtering Error

and Prospective Error were fixed) would result in higher rates than if the Medicare Methodology

was used again (with the HSA Errors fixed). For Martin’s Point, the rates would be higher if the

Medicare Methodology (with the HSA Errors fixed) was used again.

54
 211. Representatives acting on behalf of some Defendants encouraged Martin’s Point

to agree to recommend switching to the TFL Methodology, even though the switch would not

result in the highest possible rates for Martin’s Point for OP4.

212. Upon information and belief, those representatives were concerned that if any DP

continued to advocate for use of the Medicare Methodology for OP4, Kennell might try to

calculate the OP4 rates using the Medicare Methodology (with the Filtering Error and the

Prospective Error fixed). Defendants were concerned that, if Kennell performed such

calculations, TMA might realize that the HSA Errors had caused the rates calculated under the

Medicare Methodology to be overstated and TMA would then seek to recoup those

overpayments.

213. The majority of the Plans prevailed, and Martin’s Point agreed to allow the

Alliance to unanimously recommend to TMA that the TFL Methodology be used to calculate the

OP4 rates.

214. Once these June discussions concluded, Defendants agreed on an approach: the

Alliance would disclose the Filtering and Prospective Errors to TMA in the context of the TFL

Methodology as proposed for use in OP4, but the Alliance would make no mention of these

errors in the context of the Medicare Methodology and would say nothing about these errors’

presence in, or impact on, the rates for OP3 or earlier periods.

b. When Defendants did disclose the two errors to TMA, they did so
exclusively in the context of the TFL Methodology.

215. To effectuate that agreement, Steve Weiner (on behalf of the Alliance and the

Designated Providers) sent TMA an email on June 27 attaching a memo Milliman had prepared

and a copy of the RAPS Guide. The Milliman memo did exactly what Defendants had agreed: it

discussed the Filtering and Prospective Errors in the context of the TFL Methodology as

55
proposed for use in OP4 but made no mention of the Medicare Methodology and said nothing

about these errors’ presence in, or impact on, the rates for OP3 or earlier periods.

Representatives acting on behalf of each DP and the Alliance reviewed this memo and did not

object to sending it to TMA.

216. The Milliman memo was a highly technical document. It was written by

actuaries, and its intended audience was actuaries. Any non-actuary readers would need to be

advised by their own actuaries or other qualified professionals to properly interpret the memo’s

material.

217. The June 27 Milliman memo only discussed the TFL data and the TFL

Methodology. The memo recommended that TMA move forward with using the TFL

Methodology for OP4. The memo contained no discussion whatsoever of the Medicare

Methodology.

218. The June 27 Milliman memo discussed both the Filtering Error and the

Prospective Error, but only as they affected the TFL Methodology. The two errors were

described in highly technical terms on the fourth and fifth pages of a ten-page memo. The memo

recommended fixing both errors if the TFL Methodology was used.

219. The June 27 memo did not mention or imply that the HSA Errors had occurred in

prior years or impacted prior rates. Nor did the memo mention or imply that fixing the HSA

Errors under the Medicare Methodology would have resulted in significant reductions to the

rates TMA paid the DPs in OP3 and earlier periods.

220. The first time either TMA or Kennell learned about the Prospective Error was

when they received and read the June 27 Milliman memo.

56
 221. The June 27 memo suggested that Milliman and Kennell work together to address

the Filtering Error and Prospective Error in connection with the OP4 rate calculations. Aside

from discussion of one specific issue, the memo did not contemplate any role for TMA to play in

resolution of the two calculation issues. And, indeed, throughout the summer, Milliman worked

directly with Kennell (not TMA) to fully address and resolve both the Filtering Error and

Prospective Error in the OP4 SA calculations.

222. Later that day, after the Milliman memo had already been sent to TMA, there was

a meeting of the Finance Committee. No one who represented St. Vincent’s attended this

particular Finance Committee meeting. Recollections differ about what was said, but some

attendees claim that Steve Weiner orally conveyed during the meeting that the Plans were not

overpaid due to the HSA Errors and that TMA had no legal right to reclaim money due to those

errors. (Steve never communicated any legal advice regarding these topics to the Plans in

writing, and the minutes from the June 27 Finance Committee meeting say nothing about these

topics.)

c. Defendants abandoned a proposal to highlight the decrease in

rates between OP3 and OP4 because they feared this would also
highlight the overpayments TMA had made in OP3 and earlier
periods.

223. Throughout the remainder of 2012, Defendants continued to limit their

discussions with TMA to the new TFL Methodology and avoided any discussion that might alert

TMA to the fact that the Designated Providers had been overpaid when the Medicare

Methodology was used.

224. For example, at the June 27, 2012 Finance Committee meeting, a Vice President

at Johns Hopkins suggested that Milliman prepare a slide for use at an in-person meeting the DPs

had scheduled with TMA for July 11, 2012. Johns Hopkins’ Vice President suggested that this

57
suggested), thereby increasing the risk that TMA would come to realize that there had been such

an overstatement and take some action to recover the overpayments from the DPs.

d. Defendants failed to say anything about the HSA Errors or their

impact when TMA extended the OP3 rates for two months.

228. The OP4 rate-setting discussions between Defendants and TMA were contentious

and extended longer than usual. TMA was supposed to begin paying the OP4 rates to the

Designated Providers on October 1, but it needed to have those rates finalized before October 1

to ensure it was prepared to begin paying the new rates on time. But, as August came to a close,

the Parties still had not agreed on ceiling rates for OP4.

229. In mid-August, Steve explained to the Board of the Alliance, which contained a

representative from each Plan, the options available to TMA if the Parties reached an impasse.

One option was that TMA could extend the DPs’ contracts (for up to six months), during which

time the DPs would be paid at the OP3 rates. Steve also relayed that, although his law firm

colleague disagreed, the Program Manager believed that at the end of any extension period,

TMA could perform a “retrospective reconciliation” between the OP3 rates and OP4 rates, as it

had in prior years when the rates were not finalized on time. See paragraph 237, infra. The

Alliance’s Executive Director communicated something similar to the Finance Committee.

230. Even after Defendants became aware of the possibility that TMA might continue

to pay the Plans at the erroneous OP3 rates for several additional months, Defendants said

nothing to TMA about the HSA Errors that had inflated the OP3 rates.

231. The Designated Providers sent TMA a letter asserting that the Parties had reached

an impasse in their negotiations. In response, on August 31, unaware of the HSA Errors in the

OP3 rates, the Contracting Officer extended the OP3 rates by two months to give the Parties

additional time to conclude their discussions regarding the OP4 rates.

59
 232. In mid-September, when providing an update to his boss, a representative for

Brighton Marine explained that there would be an increase in projected revenue because “we got

the government to delay the effective date of the [OP4] rates.”

233. At no point either before or after the OP3 rates were extended for two months did

any Defendant inform TMA that those rates contained the HSA Errors.

234. Not only did the Plans fail to inform TMA of the errors in the OP3 rates that were

extended, but some Plans also made sure they would be paid at the improperly inflated OP3 rates

for those extra two months. Indeed, some Plans demanded this as a condition of accepting the

OP4 rates.

235. When describing this OP3 extension to her boss, a Vice President at Johns

Hopkins (and one of Johns Hopkins’s representatives on the Finance Committee) stated that it

was not clear whether the Contracting Officer fully understood the financial implications of her

decision. The Vice President recognized there was a chance TMA would take action to “back

peddle” on the extension. But Johns Hopkins did not alert TMA that the OP3 rates it had just

extended were improperly inflated due to the HSA Errors or otherwise take steps to make the

Contracting Officer aware of the financial implications of her decision.

236. St. Vincent’s representative on the Finance Committee expressed that he was

encouraged by the extension, and even mused that it would be better to have the (erroneously

inflated) rates extended for a total of six months, instead of just the two.

237. In prior years, when the rates were not finalized by the time the Plans submitted

their first invoices for the start of a new period (which they typically did 45 or more days before

the start of that period), the Plans would continue invoicing TMA at the old rates, TMA would

pay those invoices, and then, when the new rates were finalized, TMA would adjust the

60
payments to the DPs during the regular reconciliation process. Typically, the rates increased

year to year. Thus, in those instances, the Plans were happy to accept the increased payments

from TMA as part of the reconciliation process. By the fall of 2012, however, it was clear that

the OP4 rates were going to be lower than the OP3 rates had been. Notably, once the OP4 rates

were finalized, Johns Hopkins and Brighton Marine only agreed to accept the proposed OP4

rates if those rates became effective on December 1, 2012 (i.e., if TMA continued to pay these

Plans the erroneous OP3 rates for the full duration of the two-month extension, without any

adjustment in TMA’s favor).

238. Shortly thereafter, PacMed and St. Vincent’s also accepted the proposed OP4

rates, effective December 1, 2012. PacMed’s acceptance was expressly described as acceptance

of a “Proposed Economic Package” that included the two-month extension of the OP3 rates that

PacMed knew contained the HSA Errors. Neither PacMed nor St. Vincent’s took any action to

make TMA aware that it was going to be overpaying them for those two additional months.

e. Defendants failed to correct TMA when it asserted that there had

not been any significant actuarial validity issues in OP3 or earlier
periods.

239. Defendants also failed to correct the Contracting Officer, or in some instances to

even respond, when she made statements demonstrating she did not understand that the HSA

Errors had impacted prior rates or that those errors caused the Designated Providers to be

overpaid.

240. On or around September 10, TMA sent letters to Brighton Marine and Johns

Hopkins as part of the ongoing rate discussions. The third point in those letters related to the

“health status adjustments that have been applied to the ceiling rates in previous years” and the

CMS Model. The letters stated that “[t]o our knowledge, there have not been any significant

actuarial validity issues raised by the plans in applying the results of [the CMS Model] in the
61
calculation of the ceiling rates in previous option periods.” A copy of Brighton’s letter was

shared with all members of the Finance Committee, and this same language later appeared in

letters or emails TMA sent directly to other DPs.

241. These statements reflected that TMA did not understand that the Filtering or

Prospective Errors had any application to prior option periods or that those errors called into

question the validity of any prior rates. The statements also strongly suggested that TMA was

not, in fact, aware of the HSA Errors or any other “significant actuarial validity issues” with how

prior HSAs had been calculated.

242. After Brighton Marine and Johns Hopkins received the September 10 letters,

Defendants discussed the responses these two DPs ultimately sent to TMA. Brighton Marine

and Johns Hopkins responded to TMA’s letters by eliding the “third” point in those letters and

arguing that the CMS Model was used in the past because published Medicare scores calculated

using that model were part of the rates. In other words, the communications from Brighton

Marine and Johns Hopkins did include responses to the “third” point in TMA’s September 10

letters, but those communications were misleading because they did not alert TMA to the fact

that the HSA Errors had raised significant actuarial validity issues with respect to the calculation

of the ceiling rates in previous option periods (i.e., they did not correct TMA’s apparent

misunderstanding about the actuarial validity of the HSAs used for OP3 and earlier periods).

Brighton Marine and Johns Hopkins sent their responses to TMA only after all Defendants were

informed of, and agreed to, the language that would appear in these responses.

243. The other DPs that received communications from TMA containing the same

“third” point either made similarly misleading statements to TMA or did not respond to TMA at

62
all—a reaction that itself is misleading, especially in the context of those DPs’ subsequent

communications with TMA.

f. During their individual negotiations, Christus and Martin’s Point

encouraged TMA to pay them at the inflated OP3 rates for another
full year without disclosing to TMA that those rates were
erroneously inflated.

244. As discussed above, not long after the OP3 rates were extended by two months,

four of the Designated Providers accepted the OP4 rates being proposed by TMA. Two of the

Designated Providers—Christus and Martin’s Point—however, continued to engage in

discussions with TMA about the OP4 ceiling rates. In those individual conversations, Christus

and Martin’s Point continued to conceal the impact the HSA Errors had on the rates paid in OP3

and earlier periods. And, despite the fact that the other Plans were not directly involved in these

conversations, Christus and Martin’s Point informed the other members of the Alliance of the

arguments they each were making to TMA and the positions they were taking in these individual

negotiations.

245. During those discussions, both Plans complained about the large decrease in rates

between OP3 and OP4, even though they knew the OP3 rates had been inflated by the HSA

Errors. Each suggested that the Medicare Methodology, as it was used to calculate the OP3 rates

(i.e., with the HSA Errors), was actuarially sound and could be used again for OP4 (without any

changes to the HSA), even though both Christus and Martin’s Point knew by this time that the

OP3 rates were flawed and the Medicare Methodology could only be used again if the HSA

Errors were corrected.

246. In its individual exchanges with TMA, Martin’s Point complained that it was very

concerned about the proposed switch to the TFL Methodology because it would result in

“dramatically lower” rates for OP4. For example, in one letter, Martin’s Point stated that it was

63
important that it “be assured that the rates are based on an actuarially sound methodology and

reasonably established.” In that same letter, Martin’s Point then asserted that the “fair and

reasonable approach” would be to revert back to the Medicare Methodology, as it was the last

approach agreed to by the Parties and this methodology had been found actuarially sound.

Martin’s Point’s letter emphasized that the rates needed to be “fair, reasonable, and transparent.”

But, in that letter, Martin’s Point made no mention of the fact that it had learned that the

Medicare Methodology had not in fact been executed in an actuarially sound manner in OP3 and

earlier periods. Nor did the letter discuss updating the HSA or fixing the HSA Errors if the

Medicare Methodology was used again. And in fact, in that same letter, Martin’s Point proposed

rates that were calculated using the OP3 HSA, which by this time Martin’s Point knew was

erroneously inflated due to the HSA Errors.

247. Christus had similar exchanges with TMA. In one such letter, Christus stated that

it was struck by the huge discrepancy between the rates calculated using the Medicare

Methodology and the TFL Methodology and asked TMA to justify the change in methodology,

even though Christus knew by this point that the HSA Errors explained much of the discrepancy.

In another, Christus pointed out that, as a result of the shift to the TFL Methodology, the ceiling

rates were going to decrease by eighteen percent. Christus claimed that this decrease was

“suspect on its face,” even though Christus knew that, in large part, the decrease occurred

because the HSA Errors had improperly inflated the rates in the past (and led to Christus’s

profit margins on its USFHP plan). Christus continued to state that TMA had no basis

for considering the Medicare Methodology to be unsound for OP4, because the methodology had

been found to be actuarially sound before. Christus also suggested that it would be reasonable

64
for TMA to continue paying the OP3 rates, despite Christus knowing by this time that there were

significant actuarial flaws in those rates.

* * *

248. Neither Defendants, nor anyone from Milliman or Mintz, nor anyone else acting

on behalf of Defendants acknowledged in any communications with TMA in 2012 (or in any

year thereafter) that they knew (or had reason to believe) that either the Filtering Error or

Prospective Error affected the ceiling rates paid for OP3 or for any earlier period. Indeed,

neither Defendants, nor anyone from Milliman or Mintz, nor anyone else acting on behalf of

Defendants so much as notified TMA that there was a potential issue with the OP3 ceiling rates

so an open discussion of the issue and any possible remedies could be discussed.

249. Neither Defendants, nor anyone from Milliman or Mintz, nor anyone else acting

on behalf of Defendants told TMA what they knew about the HSA Errors’ impact on the ceiling

rates paid for OP3 and earlier periods. For example, they never told TMA that fixing the two

errors decreased rates when the Medicare Methodology was used, even though fixing the errors

increased rates when the TFL Methodology was used. See paragraphs 178, 179, 182-184, supra.

Nor did Defendants, Milliman, or Mintz say anything to TMA about how the HSA Errors would

impact rates if the Medicare Methodology were used again in OP4.

250. Neither Defendants, nor anyone from Milliman or Mintz, nor anyone else acting

on behalf of Defendants notified the Contracting Officer (or anyone else at TMA) that the

government had overpaid the Designated Providers in OP3 or earlier periods due to the HSA

Errors (or even that the rates paid in OP3 and earlier periods were higher than they would have

been if the HSA Errors had not been made).

65
 251. None of the Designated Providers, nor anyone else acting on their behalf, returned

any of the overpayments they received due to the HSA Errors to TMA or requested instructions

from TMA for disposition of any overpayment.

ii. Kennell, TMA’s Actuarial Consultant, Also Did Not Tell TMA
About the Historic HSA Errors, Their Impact, or the Resulting
Overpayments.

252. It was against Kennell’s interest to inform TMA that it had made the HSA Errors.

Kennell had been making the HSA Errors for years and years, costing the government hundreds

of millions of dollars (money that TMA would not have paid to the DPs in the absence of

Kennell’s inexcusable errors). TMA was Kennell’s biggest client—and had been since

Kennell’s founding—and virtually all of Kennell’s clients since its founding have been

government entities.

253. Similar to Defendants’ communications with TMA, Kennell’s communications

were inadequate to inform TMA that it had been dramatically overpaying the Plans for years. In

its oral and written communications with TMA, Kennell did not describe the Filtering Error or

Prospective Error as “errors” or “mistakes.” Similar to Defendants, Kennell discussed the need

to filter claims and run the CMS Model prospectively only when communicating with TMA

about the TFL Methodology as it would be used for OP4. Kennell never explained that it had

also made the HSA Errors when using the Medicare Methodology in OP3 and earlier periods,

nor did Kennell explain the impact of those errors on the rates paid to the plans in OP3 and

earlier periods or the overpayments that resulted from those errors. Indeed, several of Kennell’s

communications with TMA affirmatively obscured these key facts.

254. Kennell did not describe the need to filter claims or run the model prospectively

as changes that needed to be made to fix an error or mistake. Instead, Kennell repeatedly used

euphemisms when referring to the Filtering and Prospective Errors. Kennell referred to the
66
errors as “technical issues,” thus minimizing their significance. And instead of referring to the

HSAs and SAs they calculated after correcting the Filtering and Prospective Errors as ones that

were now fixed or corrected, Kennell referred to such HSAs and SAs as ones that had been

updated, revised, refined, recalculated, or adjusted. This language not only failed to signal the

existence of any past errors or mistakes, but it also left TMA with the impression that the

changes Kennell was making to the HSAs and SAs throughout 2012 were routine, akin to the

types of updates and refinements that occurred each year.

255. Kennell also always discussed the Filtering Error and Prospective Error as they

concerned the TFL Methodology being used in OP4. Kennell never told TMA that these two

errors had been made when calculating the rates for OP3 and earlier periods. In fact, Kennell’s

communications gave the impression that neither the Filtering Error nor the Prospective Error

had impacted the Medicare Methodology.

256. Because Kennell never even informed TMA that it had been making the HSA

Errors in OP3 and earlier periods, it follows that Kennell also failed to explain to TMA that the

HSA Errors caused rates developed using the Medicare Methodology to be overstated.

257. Kennell’s failure to inform TMA about the nature, scope, and impact of the HSA

Errors in OP3 and earlier periods is exemplified by its communications with the Program

Manager in April of 2012, after Kennell had learned of the Filtering Error (but before it learned

of the Prospective Error).

258. On April 10, Kennell had a call with the Program Manager. On that call, Dave

and Geof informed the Program Manager that they would need more time to prepare the OP4

Selection Adjustments (and accompanying SA memos) as a result of the guidance about

excluding claims (i.e., filtering) raised by the TMA analyst on the April 4 call, see paragraph

67
147, supra. This portion of the April 10 call focused only on the proposed OP4 rates being

developed using the TFL Methodology and the related SAs; nothing was said about the HSAs

used for OP3 and earlier periods, and neither Dave nor Geof used the word error or mistake.

(Dave and Geof believe that one of them said something on the April 10 call that they thought

may have caused the Program Manager to understand that Kennell had not been filtering out the

excluded claims when calculating the HSAs used in OP3 and earlier periods. But they are

wrong. The Program Manager never had this understanding.)

259. On that April 10 call, Dave and Geof also discussed a paper Kennell had prepared

in response to a question from the Senate Armed Services Committee inquiring about USFHP

costs compared to TMA’s military health system costs. That is significant because the response

Kennell had prepared for the Senate Armed Services Committee predicted that the USFHP rates

would decrease between OP3 and OP4—not because Kennell planned to fix any error, but rather

because of the switch to the TFL Methodology. The paper acknowledged that the USFHP rates

were 29 percent higher than average costs for TFL beneficiaries; stated that the “key reason” the

USFHP rates were so much higher than the average TFL costs was that the USFHP rates were

based on Medicare data, as opposed to TFL data; and predicted that switching from the Medicare

Methodology to the TFL Methodology would lead to lower rates. The response made no

mention whatsoever of the Filtering Error or its role in inflating the USFHP rates in the past, and

neither Dave nor Geof recalls discussing the Filtering Error with the Program Manager in

relation to that draft response.

260. Even if the Program Manager had been left with the impression after April 10 that

the Filtering Error had impacted OP3 and earlier periods—which she had not been—such an

impression would have been undone just days later. On April 20, Kennell sent the Program

68
Manager a memo purporting to describe the changes Kennell would make to the ceiling rates for

OP4. The purpose of the memo was to help the Program Manager explain to her bosses why the

ceiling rates were expected to decrease between OP3 and OP4, in case they asked. The portion

of the memo discussing the 65-and-over rates contained two sections. The first section described

how much the ceiling rates would decrease if Kennell used the Medicare Methodology to

develop the OP4 rates and listed several factors contributing to the decrease. This first section of

the memo made no reference whatsoever to revising the HSA in any way (and thus it did not

quantify the impact of fixing the HSA Errors). The second section of the memo described how

much further the rates would decrease if Kennell used the TFL Methodology to develop the OP4

rates. In this second section, the memo concluded that rates developed using the TFL

Methodology would decrease, in part, because of “revised methods of measuring health status of

the USFHP and non-USFHP populations.”

261. This memo was insufficient to inform a reader about the Filtering Error’s

existence. The memo’s brief reference to “revised methods of measuring health status” was

vague and misleading. The memo did not explain precisely what needed to be revised (or why),

and it provided no description of (or any allusion to) either the Filtering Error or Prospective

Error (nor could it have said anything about that latter error, as Kennell had not yet become

aware of its existence). The memo also did not indicate that the change was being made to

correct an error; rather, the memo downplayed the significance of this change by labeling it a

revision.

262. Additionally, the memo was insufficient to inform a reader about the impact of

the Filtering Error on the rates paid to the Plans for OP3 and earlier periods. The first section of

the memo (discussing the changes that would need to be made if Kennell were to use the

69
Medicare Methodology again) said nothing whatsoever about “revised methods of measuring

health status,” let alone anything about needing to revise or recalculate the HSAs if the Medicare

Methodology were to be used again. By mentioning the need to revise the SAs in the section of

the memo describing the TFL Methodology, but not the need to revise the HSAs in the section

discussing the Medicare Methodology, the memo implied that any revisions only needed to be

made when using the TFL Methodology, and not when using the Medicare Methodology.

Finally, Kennell failed to quantify the impact of revising the HSAs when using the Medicare

Methodology (such a quantification would have revealed that the Filtering Error had grossly

overstated the ceiling rates in OP3 and earlier periods).

263. The Program Manager did not come away from the communications related to the

April 20 memo (or any other communications in 2012) with the understanding that Kennell had

made the Filtering Error in OP3 and earlier periods, let alone that this error had inflated the

resulting ceiling rates in OP3 and earlier periods. Rather, her understanding throughout 2012

was that the decrease in the ceiling rates between OP3 and OP4 was the result of the switch to

the TFL Methodology, not the result of correcting any prior error.

264. Kennell did not learn about the existence of the Prospective Error until June 27,

2012, thus it could not have said anything to TMA about this error in April. See paragraph 220,

supra. Moreover, in 2012, Kennell did not fully understand the impact the Prospective Error had

on ceiling rates developed using the Medicare Methodology. Indeed, Kennell did not fully fix

the Prospective Error when calculating the SAs in 2012. As a result, in 2013, when Kennell was

updating the SAs, it continued to ask Tim Wilder questions about how to properly run the CMS

Model prospectively. At one point, Tim remarked to representatives from Brighton Marine and

Johns Hopkins, as well as the Alliance’s Executive Director, that he was not sure what else to tell

70
Kennell, other than “do it the correct way!” Consequently, it would have been impossible for

Kennell to accurately and completely explain the scope of the Prospective Error or its impact to

TMA, as Kennell did not fully understand that error in 2012.

265. Kennell’s failure to explain the impact of the HSA Errors on past rates persisted

throughout 2012. As a result of Martin’s Point’s zealous advocacy, see paragraph 246, supra

and paragraph 281, infra, Kennell was tasked with calculating an OP4 rate for Martin’s Point

using the Medicare Methodology. Instead of explaining to TMA that it was correcting errors in

the HSA that had been calculated for OP3, Kennell informed TMA that it was recalculating

Martin’s Point’s HSA because it was an “out-of-date measurement.” Kennell’s language did not

indicate to TMA that the previous HSA was incorrect, erroneous, or flawed. That is especially

true because, when it recalculated the rates each year, Kennell often used updated data and made

tweaks or slight refinements to the methodology—moving from one actuarially valid approach to

another (arguably better) actuarially valid approach. Moreover, when it updated the HSAs,

Kennell often did so in order to use more up-to-date data.

266. At no point did anyone at Kennell inform the Contracting Officer, Program

Manager, or anyone else at TMA that either or both of the HSA Errors had caused the HSAs, and

the resulting ceiling rates, to be overstated in the Base Period, OP1, OP2, or OP3.

267. At no point did anyone at Kennell inform the Contracting Officer, Program

Manager, or anyone else at TMA that the government had overpaid the Designated Providers for

years because of the HSA Errors.

iii. At No Point Prior to the Filing of this Qui Tam Did TMA Know
About (Or Even Suspect) That the HSA Errors Had Impacted Past
Rates and Resulted in Overpayments.

268. At no point prior to August 2016 did anyone at TMA (or anyone else in the

government, for that matter) understand that the HSA Errors had affected the ceiling rates for
71
OP3 and earlier periods; that the HSA Errors had caused the ceiling rates to be in violation of the

material requirements and improperly inflated in those periods; or that the government had

overpaid the Designated Providers for years because of the HSA Errors.

269. Statements made by Defendants and Milliman did not alert TMA to the impact

the HSA Errors had on the ceiling rates developed under the Medicare Methodology. All of

Defendants’ and Milliman’s communications were focused on OP4 and the TFL Methodology.

There was nothing in those communications that stated, suggested, or even hinted that any errors

discussed in the context of the TFL Methodology also had been made in the past when the

Medicare Methodology was used. See Section V.F.i., supra.

270. Similarly, Kennell’s communications did not alert TMA to the impact the HSA

Errors had on the ceiling rates developed under the Medicare Methodology. Kennell’s

communications only discussed the impact of the Filtering Error and Prospective Error in the

context of the TFL Methodology. Kennell never explained to TMA that it also had made those

same errors when it was using the Medicare Methodology to calculate rates in OP3 and earlier

periods. Nor did Kennell ever inform TMA of the impact the HSA Errors had on the ceiling

rates developed using the Medicare Methodology. Kennell never even described the Filtering or

Prospective Errors as errors or mistakes. As a result, Kennell’s oblique references to the need to

filter claims or run the CMS Model prospectively in OP4 did not raise any red flags at TMA

about the validity of the ceiling rates in OP3 or earlier periods or cause anyone at TMA to

question whether past rates violated any of the material requirements or were improperly

inflated. See Section V.F.ii., supra.

271. And TMA never discovered the HSA Errors on its own, nor should it have been

expected to do so. TMA appropriately relied on its consultants at Kennell to raise and explain

72
significant actuarial issues that arose regarding the rate-setting process and to promptly notify it

if an error had caused past ceiling rates to be improperly inflated or in violation of any of the

material requirements. And it expected Defendants to make truthful, accurate, complete, and

non-misleading statements to it during the rate-setting process and to promptly notify it if an

error had caused past ceiling rates to violate a material requirement or to be improperly inflated

(as well as to comply with all contractual provisions and FAR provisions incorporated in the

USFHP Contracts, including 48 C.F.R. § 52.212-4). Nothing that Kennell or Defendants said or

wrote caused TMA to understand or infer that the HSA Errors had impacted the ceiling rates

TMA paid the Plans in OP3 or earlier periods.

272. The substantial decrease in the ceiling rates between OP3 and OP4 also did not

alert TMA to the HSA Errors or the fact that the rates had been overstated in OP3 and earlier

periods. Before the HSA Errors were discovered, Kennell had repeatedly informed the

Contracting Officer, Program Manager, and others at TMA that it expected the rates to decrease

in OP4 because of the switch from the Medicare Methodology to the TFL Methodology.

Kennell never corrected or supplemented this explanation after it learned of the HSA Errors.

Indeed, throughout 2012, Kennell continued to attribute the decrease in rates to the switch to the

TFL Methodology and never attributed the decrease to the HSA Errors, which had improperly

inflated the rates in OP3 and earlier periods. See paragraph 280, infra.

273. In sum, no one ever informed TMA that the rates calculated using the Medicare

Methodology in OP3 and earlier periods contained the HSA Errors. Or that the HSA Errors

resulted in ceiling rates that were in violation of any of the material requirements. Or that the

ceiling rates paid to the Plans in OP3 and earlier periods were improperly inflated or higher than

they would have been absent the errors. Or that fixing those errors was the major reason for the

73
significant decrease in ceiling rates between OP3 and OP4. Or that the HSA Errors had resulted

in HSAs (and thus ceiling rates) that were not calculated consistent with the Parties’ intent or

understanding.

274. If an error had been made in the past—especially one that resulted in rates that

violated the material requirements and had cost TMA millions of dollars—the Contracting

Officer and Program Manager would have expected Defendants and Kennell to promptly

communicate to TMA what had happened in clear, detailed, and unequivocal terms. The

Contracting Officer and Program Manager similarly would have expected Defendants and

Kennell to promptly inform TMA if and when they realized any of the facts described in

paragraph 273.

275. If either the Contracting Officer or Program Manager had been told any of the

facts in paragraph 273, they would have recalled such a disclosure. Neither the Contracting

Officer nor Program Manager recalls such a disclosure from Kennell. Neither individual recalls

such a disclosure from Defendants or anyone acting on their behalf. And, prior to August 2016,

neither individual recalls such a disclosure from anyone else.

276. If either the Contracting Officer or Program Manager had been told any of the

facts in paragraph 273, they also would have taken some action. The Contracting Officer and

Program Manager never took any action.

iv. Defendants Were Acutely Aware of TMA’s Ignorance and Took

Steps to Maintain It.

277. Not only was TMA unaware that the HSA Errors impacted prior rates, but

Defendants knew this. TMA’s actions, as well as its communications with Defendants,

demonstrated that TMA was unaware of the impact of the HSA Errors.

74
 278. For example, as discussed in paragraphs 202-243, supra, Defendants took great

pains not to inform TMA of the existence of either the Filtering Error or Prospective Error in the

Medicare Methodology or the impact of either error on the HSAs used for (or ceiling rates paid

in) OP3 and earlier periods. Such caution would not have been necessary if Defendants believed

that TMA knew that the HSA Errors had improperly inflated the rates for OP3 and earlier

periods.

279. As discussed in paragraph 240, supra, in September 2012, TMA sent Brighton

Marine a letter stating that it was unaware of any actuarial validity issues raised by the Plans in

using the results of the CMS Model to calculate rates in prior option periods. That letter to

Brighton Marine was shared with all Defendants, and TMA sent letters containing that same

language to several other DPs directly. This statement put all Defendants on notice that TMA

was unaware that the HSA Errors impacted rates calculated using the Medicare Methodology.

280. Later in September, PacMed asked TMA to provide it with an estimate of how

much TMA expected the ceiling rates to be adjusted or change in the future. In response to this

request, on September 26, TMA shared with PacMed a memo prepared by Kennell. In this

memo, Kennell stated that there were three primary reasons the rates decreased from OP3 to

OP4. Kennell identified the use of TFL data to calculate the rates as the biggest reason for the

decrease. It also stated that a small part of the decrease was due to the use of a Selection

Adjustment. The memo says nothing about the HSA Errors. It does not explain or acknowledge

that the HSA Errors had inflated the OP3 rates, or that the decrease in rates from OP3 to OP4

was due to the fact that Kennell was no longer making the HSA Errors. This memo—which

purported to explain the primary reason for the decrease in rates between OP3 and OP4 but said

75
nothing about the HSA Errors—should have put PacMed on notice that TMA remained unaware

of the HSA Errors or their impact on the rates it had been paid in OP3 or earlier periods.

281. And, in November 2012, TMA made statements to Martin’s Point that should

have put it on notice of this as well. As discussed in paragraphs 245-246, supra, Martin’s Point

suggested that TMA calculate its OP4 rates using the Medicare Methodology and the OP3 HSA.

Instead of telling Martin’s Point that it could not adopt its suggestion to use the OP3 rates again

because of the HSA Errors, TMA simply noted that the OP4 approach was superior in a number

of ways and was more consistent with the NDAA. When TMA finally acquiesced to Martin’s

Point demand that it once again use the Medicare Methodology, TMA sent Martin’s Point letters

describing how it had arrived at an OP4 rate for Martin’s Point. Those letters did not ever

mention “fixing” or “correcting” the HSA Errors. Instead, TMA stated it could not use the rates

proposed by Martin’s Point because they used an “out-of-date measurement of the HSA.” TMA

described Martin’s Point’s OP4 HSA as having been “recalculated.” These communications put

Martin’s Point on notice that TMA had not fully understood the nature or impact of the HSA

Errors.

282. TMA also conspicuously failed to make the kinds of statements that it would have

made had it known that the HSA Errors caused prior rates to be inflated. These omissions put

Defendants on notice that TMA did not understand the impact of the HSA Errors.

283. For example, for OP4, TMA continued to propose switching to the TFL

Methodology and never suggested returning to the Medicare Methodology. If TMA understood

the impact of fixing the HSA Errors on the OP3 rates or if it had seen the kind of analysis

prepared by the Plans’ actuary, see paragraphs 177-182, supra, it would have recognized that the

Medicare Methodology (with the HSA Errors fixed) produced lower OP4 rates than the TFL

76
Methodology for five of the six Plans. Yet TMA never suggested to the Plans that it continue

using the Medicare Methodology for the OP4 rates.

284. Additionally, during the OP4 rate discussions, when Christus and Martin’s Point

complained about the decrease in rates between OP3 and OP4, see paragraphs 245-247, supra,

TMA never responded to those complaints by pointing out that the OP3 rates had been

overstated due to the HSA Errors.

285. Nor did TMA ever try to use the past overpayments as leverage during the OP4

negotiations to argue against adopting positions advanced by the Designated Providers. In

addition, TMA never mentioned doing any reconciliation, offsets, or otherwise recouping from

the Designated Providers any of the overpayments that resulted from the HSA Errors.

286. In fact, as discussed in paragraph 231, supra, at the end of August, TMA extended

the improperly inflated OP3 rates for an additional two months. At the time, Johns Hopkins

observed that it was not clear whether the Contracting Officer fully understood the financial

implications of extending the OP3 rates for two months. See paragraph 235, supra. Johns

Hopkins’s observation was accurate. If TMA had known that the OP3 rates were inflated due to

the HSA Errors, it would not have paid those rates for an additional two months.

287. All of these facts, see paragraphs 279-286, supra, also support the inference that

Defendants knew Kennell had not told TMA about the impact the HSA Errors had on prior rates.

288. Defendants knew that Kennell did not always inform TMA about all of the

changes being made to the rates, especially if those changes were technical or complex. See

paragraph 310, infra. Defendants also knew that it was against Kennell’s interest to inform

TMA that Kennell had been making the HSA Errors. Defendants knew that Kennell had been

making the HSA Errors for years and that there was no excuse to justify calculating the HSAs

77
with these errors. Defendants also knew that the HSA Errors had caused TMA to substantially

overpay the Designated Providers. Some DPs also were aware that TMA was Kennell’s biggest

client. The only reasonable conclusion from these facts is that it was not in Kennell’s interest to

inform TMA that it had made mistakes that could jeopardize its relationship with its largest

client.

G. Had TMA Been Aware of the HSA Errors and Their Impact, TMA Would
Not Have Paid the Plans at the Improperly Inflated Ceiling Rates and Would
Have Taken Steps to Recoup Any Overpayments.

289. If TMA had been aware that the HSA Errors had inflated past ceiling rates, then

TMA would have had the opportunity to exercise one of the various legal remedies available to it

in order to recoup the hundreds of millions of dollars it had overpaid the Designated Providers.

For example, TMA could have withheld the amount of the overpayments from future payments

to the DPs until the overpayments were recouped. And if TMA had been aware that the HSA

Errors had inflated ceiling rates it was currently paying the Plans, then it would have stopped

paying those inflated rates.

290. In fact, after the government eventually learned of the HSA Errors (via the filing

of relators’ qui tam complaint), it opened an investigation into Kennell & Associates. As a result

of that investigation, the United States and Kennell settled claims arising from allegations that

Kennell made errors in calculating the rates. As part of this settlement, Kennell agreed to make a

series of financial payments to the United States in an amount that, according to a qualified

expert, is likely the maximum Kennell has the ability to pay.

78
 i. TMA Was Not Legally Permitted to Pay Rates That Violated the
USFHP Program’s Governing Statute and Would Not Have Paid
Rates That Violated the Health Comparison Requirement.

291. TMA would have treated the HSA Errors, which were truly mistakes and ones

that resulted in rates that violated the material requirements, differently than other routine

changes that were made to the rates year-to-year.

292. TMA recognized that an error in executing the agreed-upon ceiling rate

methodology was distinguishable from making a deliberate change in the methodology because

of changes to the Medicare or TRICARE program or in an effort to improve the methodology.

293. TMA also recognized that an error in executing the ceiling rate methodology was

distinguishable from the use in that methodology of an actuarially sound assumption (e.g., an

assumption that health care costs would rise at a rate of 2 percent per year based on data

suggesting that was a reasonable assumption) that did not ultimately match the actual experience

(e.g., if it turned out health care costs rose at 1 or 3 percent in a particular year instead).

294. The HSA Errors caused the ceiling rates TMA paid to the DPs in the Base Period,

OP1, OP2, and OP3 to exceed the statutory limit and violate the actuarial soundness requirement.

TMA was not legally permitted to pay the DPs at rates that violated the statute, i.e. at rates that

exceeded the limitation set forth in Section 726(b) or were not actuarially sound.

295. Defendants were aware that Section 726(b) specified that the ceiling rates could

not exceed the costs the government would have incurred if the USFHP beneficiaries had

received their care through Medicare or TRICARE. Additionally, Defendants were also aware

that the NDAA required that the ceiling rates be actuarially sound. In fact, Defendants would

regularly cite or allude to these requirements when explaining to TMA why it needed to adopt or

reject proposed changes to the ceiling rate methodology.

79
 296. The HSA Errors also caused the ceiling rates to violate the health comparison

requirement. TMA would not have paid rates that were in breach of Section 9.2.2.3.e of the

USFHP Contracts or that were not consistent with the Parties’ intent and understanding

regarding calculation of the HSAs.

297. Violations of the material requirements that caused TMA to overpay the DPs by

hundreds of millions of dollars were significant; they were not minor or insubstantial.

ii. When TMA Had Knowledge of Other Errors or Violations of

Material Requirements, It Took Action to Remedy Them.

298. In fact, shortly before the USFHP Contracts at issue in this litigation took effect,

both TMA and Defendants learned of other errors that impacted already agreed-to ceiling rates.

When those other errors caused the ceiling rates to violate a material requirement, TMA took

corrective action, including recouping money from the DPs.

299. Significantly, many of the same individuals who worked for Defendants in 2012,

when the HSA Errors came to Defendants’ attention, were also personally involved in resolving

the errors described below. Thus, Defendants were aware that TMA could and would take action

to correct errors and recoup money from the DPs when it discovered errors that had caused (or

could cause) the DPs to be overpaid.

a. Health Net

300. Health Net Federal Services, Inc. is another TMA contractor. In the early 2000s,

Health Net was responsible for processing and paying managed care claims on behalf of

TRICARE for beneficiaries who lived in TRICARE’s “North Region” and who were not

enrolled in the USFHP program.

301. In 2004 and 2005, as a result of an unintentional administrative error, Health Net

was mistakenly billed for (and then processed and paid) healthcare claims for USFHP

80
beneficiaries who were under 65 years old. Those claims should not have been billed to, or paid

by, Health Net; instead, the claims should have been paid by the Designated Providers in the

North Region (Brighton Marine, Johns Hopkins, Martin’s Point, and St. Vincent’s). The ceiling

rates TMA paid to those DPs were calculated and paid to cover the cost of that care.

302. Thus, as a result of HealthNet’s error, TMA essentially paid for this care twice:

once via the ceiling rates it paid to those four Designated Providers and a second time via the

erroneous payments made by Health Net (using TMA’s funds). Additionally, the claims paid by

Health Net were included in ceiling rate calculations for the 2007-2008 under-65 ceiling rates

paid to all six of the DPs, even though those claims should not have been included.

303. This Health Net error, however, only came to light after the ceiling rates for the

2007-2008 time period had been finalized, the contract modifications had been signed, and those

2007-2008 rates had taken effect and had resulted in payments to the North Region DPs.

304. In February 2008, TMA informed Brighton Marine, Johns Hopkins, Martin’s

Point, and St. Vincent’s of the erroneous Health Net payments and demanded that the Designated

Providers reimburse TMA.

305. As the four Designated Providers considered how to respond to TMA, they

discussed this issue during Finance Committee meetings. During those discussions, Tim Wilder

acknowledged that the erroneous Health Net payments had impacted the ceiling rates for the 65-

and-under beneficiaries. Tim recognized that, to determine the impact of this error, the

government would need to recalculate the ceiling rates after removing the Health Net claims and

then would need to use those revised figures to calculate an overpayment.

306. Ultimately, Brighton Marine, Johns Hopkins, Martin’s Point, and St. Vincent’s

each settled this dispute with TMA. The settlement agreements signed by these four DPs

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specifically stated that the ceiling rates were not being adjusted. Nevertheless, those four DPs

agreed to repay a total of almost one million dollars to TMA.

b. Re-aging

307. In 2008, TMA changed the start of its fiscal year, and thus the start of the rate-

year, from June 1 to October 1. In order to implement this change, TMA and Defendants agreed

to calculate “gap” ceiling rates that would be paid between June 1, 2008 and September 30,

2008, until the next USFHP Contracts—the ones at issue in this matter—went into effect.

308. To develop these gap ceiling rates, the Parties agreed to start with the rates used

during the June 1, 2007 to May 31, 2008 time period and make a number of adjustments. One

such adjustment was to account for the fact that the DPs’ beneficiaries would have gotten one

year older since the ceiling rates were last calculated.

309. To account for this, Defendants and Kennell recognized that Kennell could either

apply an “aging factor” to the rates or TMA’s data contractor could “re-age” the population (for

example, a 69-year-old person would be moved into the 70-74 age band and the DP would be

paid at the ceiling rate assigned to that age-gender band for that person, as opposed to the rates

for the 65-69 band). Either of these options could be used; but not both. Implementing both

fixes would result in the beneficiaries’ increased ages being accounted for twice.

310. Dave Kennell and Defendants’ actuary from Milliman discussed these two

options and agreed that some age adjustment would need to be made. Dave asked the actuary to

send him an email regarding that issue. But Dave suggested that Milliman not copy TMA on this

email because TMA would not understand the issue and Dave could handle it himself.

311. Dave ultimately chose the first of these options, i.e., he applied an aging factor,

and this decision was communicated to the Plans. But Dave failed to clearly communicate this

82
decision to the Program Manager, so she instructed the TMA data contractor to re-age the

population as of June 1, 2008.

312. The gap ceiling rates were finalized in May 2008. Brighton Marine’s contract

modification incorporating those rates was signed in late May with an effective date of May 30,

2008, and, upon information and belief, the other Plans’ contract modifications were signed and

took effect on or around that same date.

313. On June 10, 2008, the Finance Committee Chair, a Steward Vice President,

realized that Brighton Marine’s USFHP population had been re-aged as of June 1, even though

Kennell had used an aging factor to develop the gap ceiling rates. Actuaries at Milliman

confirmed that either an aging factor should have been used or the beneficiary population should

have been re-aged, but both of these steps should not have been taken.

314. This issue was discussed by Defendants at the next Finance Committee meeting.

The Finance Committee Chair suggested that the DPs bring this issue to TMA’s attention, and

the other members of the Finance Committee agreed.

315. Once this issue was brought to the Program Manager’s attention, she agreed it

needed to be corrected. She agreed with the Finance Committee Chair to correct it by undoing

the re-aging of the beneficiaries.

316. But, in their discussions, the Finance Committee Chair and the Program Manager

both acknowledged that they could instead have fixed this issue by correcting the DPs’ ceiling

rates. No one suggested that the rates could not be corrected to remedy an error, let alone that

such a correction could not take place simply because the contract modifications had already

been fully executed.

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 H. The Plans Retained Overpayments and Submitted False Claims.

317. As a result of the foregoing, by June 2012, the Designated Providers knew that the

ceiling rate payments they had been receiving since October 2008 were inflated because of the

HSA Errors. Notwithstanding this knowledge, the Designated Providers did not report or return

any of the overpayments they received between October 2008 and June 2012.

318. In addition, between June 2012 and November 2012—when the erroneous OP3

rates remained in effect while the rate discussions for the upcoming year continued—the DPs

continued to submit claims to TMA for payment at these inflated rates even though they had

become aware that the rates they were being paid were improperly inflated.

319. Each invoice (submitted on DD Form 250 and sent to [email protected])

identified the TMA contract number under which it was being submitted (e.g., H94002-09-C-

0001, which was Brighton Marine’s USFHP Contract number) and included, among other

information, the name of the Designated Provider, the month and year for which the invoice was

being submitted (e.g., September 2012), and the total amount the Designated Provider claimed it

was entitled to be paid for insuring its USFHP beneficiaries for the specified month and year.

i. The Plans Retained Overpayments

320. By June 11, 2012, at the latest, the Designated Providers learned that the HSA

Errors had caused the ceiling rates for the Base Period, OP1, OP2, and OP3 to be overstated. At

no point after June 11, 2012, did the DPs take any actions whatsoever to report or return to TMA

any of the overpayments they had received. Instead, the DPs combined, conspired, and agreed

not to disclose the overpayments they had received in prior periods.

321. Prior to June 11, 2012, each DP submitted monthly invoices to TMA under its

USFHP Contract seeking payment for the beneficiaries enrolled in their Plans. TMA paid each

of these invoices, and the DPs received and retained those invoice payments. All of these

84
invoices sought payment at ceiling rates that contained the HSA Errors. Thus, all of the invoices

sought payment at ceiling rates that were improperly inflated. Each of these invoices was

eventually paid by TMA. The Designated Providers received and retained these invoice

payments.

322. The Designated Providers agreed to take no action, and took no action, to rectify

the fact that they had sought and received payments from TMA that violated the material

requirements and were improperly inflated. The Designated Providers agreed not to notify the

Contracting Officer, Program Manager, or anyone at TMA, that the government had been

overpaying the Designated Providers for years. None of the Designated Providers requested

instructions for disposition of the past overpayments. And none of the DPs remitted any

overpayment amounts to TMA. Indeed, none of the Defendants so much as told TMA that the

HSA Errors had been made in OP3 and earlier periods, so TMA could consider what to do.

ii. The Plans Submitted False Claims

323. By June 11, 2012, at the latest, the Designated Providers knew that the HSA

Errors caused the OP3 ceiling rates to be improperly inflated. After this date, however, they

continued to submit claims to TMA for payments at those improperly inflated OP3 rates. In

other words, the DPs knowingly submitted claims to TMA after June 11, 2012 for payment at the

OP3 rates even though the DPs knew those rates violated the material requirements.

324. Brighton Marine, via Steward, submitted invoices for payments at the improperly

inflated OP3 rates on June 26, July 20, August 3, and October 3, 2012.

325. Christus submitted invoices for payments at the improperly inflated OP3 rates on

or about June 12, on or about July 13, in August 2012, and on or about September 17, 2012.

326. Johns Hopkins submitted invoices for payments at the improperly inflated OP3

rates on June 28, July 23, September 18, and September 24, 2012. Along with each invoice,
85
Johns Hopkins submitted a letter in which its President certified that “to the best of my

knowledge . . . the enclosed invoice is a true, fair, and accurate representation and is in

accordance with contractual requirements.”

327. Martin’s Point submitted invoices for payments at the improperly inflated OP3

rates on June 14, July 12, August 10, and September 12, 2012.

328. PacMed submitted invoices for payments at the improperly inflated OP3 rates on

or about July 19, August 15, and September 13, 2012. On each of these submitted invoices,

PacMed certified that its invoice was “true and accurate and in accordance with contractual

requirements.”

329. St. Vincent’s submitted invoices for payments at the improperly inflated OP3

rates on or about July 5, August 7, and September 7, 2012.

330. By submitting each invoice, the Designated Providers implicitly certified that the

amounts they were seeking in payment complied with their USFHP Contract and all relevant

terms therein, including the “terms and limitations contained in” the NDAA (including Section

726(b) and the actuarial soundness requirement) and Section 9.2.2.3.e, as well as the Federal

Acquisition Regulation (FAR) provisions that were incorporated by reference.

331. Each Designated Provider knew these representations were false because they

were aware that the ceiling rates calculated for OP3 violated the material requirements.

332. Each Designated Provider also submitted these invoices knowing that each

invoice sought payment at an amount that was improperly inflated by the HSA Errors.

333. TMA paid each of the invoices described in paragraphs 324-329, supra.

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 VI. CAUSES OF ACTION

Count I: False Claims

(False Claims Act, 31 U.S.C. § 3729(a)(1)(A))
(All Designated Providers)

334. The United States repeats and re-alleges paragraphs 1 through 333 above.

335. By virtue of the acts described above, after June 11, 2012, the Designated

Providers knowingly presented, or caused to be presented, claims for payment or approval to the

United States in violation of the False Claims Act, 31 U.S.C. § 3729(a)(1)(A); that is, the

Designated Providers knowingly presented, or caused to be presented, to TMA invoices seeking

payments based upon ceiling rates that the DPs knew were in excess of the limitation in Section

726(b), not actuarially sound, and/or in violation of Section 9.2.2.3.e of the USFHP Contracts

regarding the health status adjustments.

336. Because of the foregoing, the United States suffered actual damages in an amount

to be determined at trial, and therefore is entitled to treble damages under the False Claims Act,

plus civil penalties.

337. The United States is also entitled to its costs prosecuting this litigation against

Defendants, pursuant to 31 U.S.C. § 3729(a)(3).

Count II: False Records or Statements

(False Claims Act, 31 U.S.C. § 3729(a)(1)(B))
(All Defendants)

338. The United States repeats and re-alleges paragraphs 1 through 333 above.

339. By virtue of the acts described above, after June 11, 2012 Defendants knowingly

made, used, or caused to be made or used, false records or false statements that were material to

claims for payment or approval to the United States in violation of the False Claims Act, 31

U.S.C. § 3729(a)(1)(B); that is, Defendants knowingly made statements that were either express

87
falsehoods, contained misleading half-truths, and/or contained misleading omissions regarding

the HSA Errors and past ceiling rates that concealed that the prior rates were in excess of the

limitation in Section 726(b), not actuarially sound, and/or in violation of Section 9.2.2.3.e of the

USFHP Contracts regarding the health status adjustments.

340. Those false statements include, but are not necessarily limited to, statements

made: in the June 27 Milliman Memo forwarded to TMA on Defendants’ behalf, see paragraphs

215-220, supra; in connection with the OP3 extension, see paragraphs 228-238, supra; in

responses to TMA’s letter dated September 10, which were approved by all Defendants, see

paragraph 242, supra; and in Martin’s Point and Christus’ individual communications with TMA

in the fall of 2012, see paragraphs 245-247, supra.

341. Because of the foregoing, the United States suffered damages in an amount to be

determined at trial, and therefore is entitled to treble damages under the False Claims Act, plus

civil penalties.

342. The United States is also entitled to its costs prosecuting this litigation against

Defendants, pursuant to 31 U.S.C. § 3729(a)(3).

Count III: Reverse False Claims

(False Claims Act, 31 U.S.C. § 3729(a)(1)(G))
(All Designated Providers)

343. The United States repeats and re-alleges paragraphs 1 through 333 above.

344. By virtue of the acts described above, for claims submitted prior to June 11, 2012

pursuant to the USFHP Contracts, the Designated Providers knowingly made or used a false

record or statement material to an obligation to pay or transmit money to the United States, in

violation of the False Claims Act, 31 U.S.C. § 3729(a)(1)(G), as the term “obligation” is defined

in 31 U.S.C. § 3729(b)(3); that is, each Designated Provider knowingly made false statements

88
about the HSA Errors and past ceiling rates that concealed that the prior rates were in excess of

the limitation in Section 726(b), not actuarially sound, and/or in violation of Section 9.2.2.3.e of

the USFHP Contracts regarding the health status adjustments, which were material to the

Designated Providers’ obligation to repay TMA for the overpayments it received as a result of

the HSA Errors—a repayment duty that arose from the NDAA, the Designated Provider’s

USFHP Contract (including the FAR provisions incorporated therein), and/or the Designated

Provider’s retention of the overpayment.

345. By virtue of the acts described above, for claims submitted prior to June 11, 2012

pursuant to the USFHP Contracts, the Designated Providers knowingly concealed and/or

knowingly and improperly avoided or decreased an obligation to pay or transmit money to the

United States, in violation of the False Claims Act, 31 U.S.C. § 3729(a)(1)(G), as the term

“obligation” is defined in 31 U.S.C. § 3729(b)(3); that is, each Designated Provider knowingly

concealed and/or knowingly and improperly avoided its obligation to repay TMA for the

overpayments it received as a result of the HSA Errors—a repayment duty that arose from the

NDAA, the Designated Provider’s USFHP Contract (including the FAR provisions incorporated

therein), and/or the Designated Provider’s retention of the overpayment.

346. Because of the Designated Providers’ acts, the United States suffered damages in

an amount to be determined at trial, and therefore is entitled to treble damages under the False

Claims Act, plus civil penalties.

347. The United States is also entitled to its costs prosecuting this litigation against the

Designated Providers, pursuant to 31 U.S.C. § 3729(a)(3).

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 Count IV: FCA Conspiracy
(False Claims Act, 31 U.S.C. § 3729(a)(1)(C))
(All Defendants)

348. The United States repeats and re-alleges paragraphs 1 through 333 above.

349. By virtue of the acts described above, Defendants conspired to violate the False

Claims Act. Defendants reached an agreement to defraud the government and took at least one

overt act in furtherance of that conspiracy.

350. Defendants reached an agreement to violate the False Claims Act by, inter alia,

agreeing not to inform TMA that the HSA Errors had impacted the ceiling rates in OP3 and

earlier periods and that those errors had caused the rates in OP3 and earlier periods to be

improperly inflated.

351. The overt acts in furtherance of the conspiracy include, but are not necessarily

limited to: agreeing to send, and sending, the June 27 Milliman Memo to TMA; see paragraphs

215-220, supra; failing to notify TMA at any point that it was extending improperly inflated

rates, see paragraphs 228-238, supra; responding to TMA’s letter dated September 10 and failing

to alert it to the fact that there had been significant actuarial validity issues in applying the results

of the CMS Model in the calculation of the ceiling rates in pervious option periods, see

paragraph 242, supra; Martin’s Point and Christus’ statements to TMA in the fall of 2012, see

paragraphs 245-247, supra, and continuing to submit invoices to TMA at improperly inflated

rates, see paragraphs 323-329, supra.

352. Because of the Defendants’ acts, the United States suffered damages in an amount

to be determined at trial, and therefore is entitled to treble damages under the False Claims Act,

plus civil penalties.

353. The United States is also entitled to its costs prosecuting this litigation against

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Defendants, pursuant to 31 U.S.C. § 3729(a)(3).

Count V: Breach of Contract

(All Designated Providers)

354. The United States repeats and re-alleges paragraphs 1 through 333 above.

355. Each Designated Provider breached its USFHP Contract when it became aware

that TMA had overpaid on one or more invoice payments and failed to immediately notify the

Contracting Officer and request instructions for disposition of the overpayment, as required by

48 C.F.R. § 52.212-4(i)(5) (Feb. 2007) (which was incorporated into each USFHP Contract).

356. Each Designated Provider breached its USFHP Contract when it became aware

that the ceiling rates had been calculated in violation of one or more of the material requirements

and were improperly inflated, and it continued to submit invoices to TMA at those rates

nevertheless.

357. Each Designated Provider is liable to the United States for the damages caused by

its breach of contract.

Count VI: Unjust Enrichment

(All Designated Providers)

358. The United States repeats and re-alleges paragraphs 1 through 333 above.

359. This is a claim for the recovery of monies by which the Designated Providers

have been unjustly enriched.

360. The USFHP Contracts between TMA and the Designated Providers, and the

various contract modifications thereto, that memorialized ceilings rates for Base Period, OP1,

OP2, and OP3 contained a mutual mistake and were each void ab initio or need to be reformed.

361. By obtaining government funds to which they were not entitled—i.e., the portions

of the payments the DPs received in the Base Period, OP1, OP2, and OP3 that were in excess of

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the payments they would have received had the ceiling rates for those periods complied with the

material requirements—the Designated Providers were unjustly enriched and are liable to

account and pay such amounts, or the proceeds therefrom, which are to be determined at trial, to

the United States.

Count VII: Payment by Mistake

(All Designated Providers)

362. The United States repeats and re-alleges paragraphs 1 through 333 above.

363. This is a claim against the Designated Providers for the recovery of monies paid

by the United States to the Designated Providers as a result of a mistaken understanding of fact.

364. The USFHP Contracts between TMA and the Designated Providers, and the

various contract modifications thereto, that memorialized ceilings rates for Base Period, OP1,

OP2, and OP3 contained a mutual mistake were each void ab initio or need to be reformed.

365. The invoices the Designated Providers submitted to TMA based on the Base

Period, OP1, OP2, and OP3 ceiling rates, which violated the material requirements and were

improperly inflated, were paid by the United States because of a mistaken understanding of a

material fact.

366. The United States, acting in reasonable reliance on the Base Period, OP1, OP2,

and OP3 ceiling rates being compliant with the material requirements and not being improperly

inflated, paid the Designated Providers certain sums of money to which they were not entitled,

and the Designated Providers are thus liable to account and pay such amounts, which are to be

determined at trial, to the United States.

PRAYER FOR RELIEF

Wherefore, the United States demands and prays that judgment be entered in its favor on

Counts I through VII as follows:

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 1) On the First and Third Counts, against the Designated Providers, under the

False Claims Act, for the amount of the United States’ damages, trebled as required by

law, and such civil penalties as are permitted by law, as well as its costs pursuing this

action, together with all such further relief as may be just and proper.

2) On the Second and Fourth Counts, against Defendants, under the False

Claims Act, for the amount of the United States’ damages, trebled as required by law, and

such civil penalties as are permitted by law, as well as its costs pursuing this action,

together with all such further relief as may be just and proper.

3) On the Fifth Count, against the Designated Providers, for breach of

contract, for the amounts by which the United States was damaged by that breach, plus

interest, costs, and expenses, and for all such further relief as may be just and proper.

4) On the Sixth Count, against the Designated Providers, for unjust

enrichment, for reformation of the contract, and/or for the amounts by which the

Designated Providers were unjustly enriched, plus interest, costs, and expenses, and for

all such further relief as may be just and proper.

5) On the Seventh Count, against the Designated Providers, for payment by

mistake, for reformation of the contract, and/or for the amounts the United States paid to

the Designated Providers by mistake, plus interest, costs, and expenses, and for all such

further relief as may be just and proper.

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Respectfully submitted

BRIAN M. BOYNTON
Principal Deputy Assistant Attorney General

CRAIG M. WOLFF
Attorney for the United States
Acting under Authority Conferred by 28 U.S.C. § 515

/s/ Andrew K. Lizotte

Andrew K. Lizotte
Assistant U.S. Attorney
202 Harlow Street
Bangor, ME 04401
(207) 262-4636
[email protected]

Sheila W. Sawyer
Assistant U.S. Attorney
100 Middle Street
East Tower, 6th Floor
Portland, Maine 04101
(207) 771-3246
[email protected]

JAMIE ANN YAVELBERG

EDWARD CROOKE
DIANA K. CIESLAK
EVAN J. BALLAN
Attorneys, Civil Division
Commercial Litigation Branch
P.O. Box 261, Ben Franklin Station
Washington, D.C. 20044
Telephone: (202) 353-1336

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