United States District Court, M.D. Tennessee, Nashville Division
In re ENVISION HEALTHCARE CORPORATION SECURITIES LITIGATION This Document Relates To: ALL ACTIONS
FRENSLEY MAGISTRATE JUDGE
WILLIAM L. CAMPBELL, JR. UNITED STATES DISTRICT JUDGE
before the Court is Defendant Envision Healthcare Corporation
and the Individual Defendants' Motion to Dismiss the
Consolidated Amended Complaint (Doc. No. 125). Also pending
before the Court is a motion to dismiss filed by Clayton,
Dublier & Rice, LLC, CD&R Associations VIII Ltd.,
Clayton Dubilier & Rice Fund VIII, L.P., CD&R EMS
Co-Investor, L.P., CD&R Advisor Fund VIII Co-Investor,
L.P., and CD&R Friends and Family Fund VIII, L.P. (the
“CD&R Defendants”) (Doc. No. 122). Plaintiffs
filed a consolidated response in opposition to both motions
(Doc. No. 131). Defendant Envision Healthcare Corporation and
the Individual Defendants filed a Reply (Doc. No. 133) and
the CD&R Defendants filed a Reply (Doc. No. 132). For the
following reasons, the motion to dismiss by the CD&R
Defendants is GRANTED, and the motion to
dismiss by Envision and the Individual Defendants is
GRANTED in part, DENIED in
August 4, 2017, Plaintiff Terry W. Bettis filed an initial
complaint against Envision Healthcare Corporation and four
individual defendants: William A. Sanger, Randel G. Owen,
Christopher A. Holden, and Claire M. Gulmi (Doc. No. 1). That
initial complaint alleged violations of the Securities Act of
1933 (the “1933 Act”) and the Securities Exchange
Act of 1934 (the “1934 Act”). (Id.
¶¶ 63-78). The case brought by Beattis was
consolidated with two related cases: Carpenters Pension
Fund of Illinois v. Envision Healthcare Corporation,
Case No. 3:17-cv-01323 (M.D. Tenn., Sept. 29, 2017); and
Central Laborers' Pension Fund v. Envision Healthcare
Corporation, Case No. 3:17-cv-01397 (M.D. Tenn., October
23, 2017). (See Doc. Nos. 58 and 60). The Plaintiffs
filed a Consolidated Class Action Complaint on January 26,
2018 (Doc. No. 88), alleging violations of the 1933 Act and
the 1934 Act against Envision Healthcare Corporation, the
private equity firm, Clayton, Dubilier & Rice, LLP
(“CD&R”), four CD&R-associated companies
(together with CD&R, the “CD&R
Defendants”), and twenty-three (23) individual
bring this action on behalf of all entities or individuals
who purchased or acquired Envision's common stock between
February 3, 2014, and October 31, 2017 (the “Class
Period”). The Complaint identifies four institutional
investors as lead/named Plaintiffs: Laborers' Pension
Trust Fund for Northern California (lead Plaintiff);
Laborers' International Union of North America National
Industrial Fund (lead Plaintiff); Central Laborers'
Pension Fund (named Plaintiff); and United Food and
Commercial Workers Union Local 655 Food Employers Joint
Pension Fund (named Plaintiff). (Id. ¶¶
Envision Healthcare Corporation
(“Envision”) is headquartered in Nashville,
Tennessee. EmCare is a subsidiary of Envision and its largest
business unit - generating approximately 60% of
Envision's net revenue (Id. ¶¶ 1-2).
EmCare provides “facility-based physician services,
” which is essentially physician staffing for hospital
emergency rooms. (Id.) On December 1, 2016, Envision
merged with AMSURG Corp. (“AmSurg”).
(Id. ¶ 257). The combined company continued to
operate EmCare and other legacy Envision and AmSurg services.
(Id. ¶¶ 1-2).
Complaint identifies 23 Individual Defendants, which have
been grouped by Plaintiffs as follows:
1. The Envision Officer Defendants served as
officers of Envision prior to and at the time of the merger:
William A. Sanger, Randel G. Owen, Craig A. Wilson, and Todd
G. Zimmerman. William A. Sanger was President and CEO of
Envision from May 2011 until the AmSurg Merger in December
2016. He served as Chairman of the Envision Board from
November 2014 through the Merger, and as Executive Chairman
of the Board from December 2016 through December 2017.
(Id. ¶ 30). Randel G. Owen was CFO and
Executive Vice President (May 2011-November 2016) and Chief
Operating Officer (September 2012-November 2016) of Envision.
(Id. ¶ 31). Following the merger with AmSurg on
December 1, 2016, Owen was Executive Vice President and
President of Envision's Ambulatory Service Group.
(Id.) Plaintiffs allege Owen signed certifications
accompanying each of the annual reports (Form 10-K) and
quarterly reports (Form 10-Q) issued by Envision before the
merger with AmSurg. (Id.) Craig A. Wilson is Senior
Vice President, General Counsel, and Secretary of Envision.
(Id. ¶ 32). Todd G. Zimmerman was Executive
Vice President of Envision from May 2011 until the AmSurg
merger. (Id. ¶ 32). He also served EmCare as
President (April 2010 - April 2015) and CEO (February 2013 -
June 2017). (Id.)
2. The Envision Director Defendants, each of whom
served as a member of Envision's Board of Directors prior
to and at the time of the Merger: Carol J. Burt, Mark V.
Mactas, Leonard M. Riggs, Jr., Richard J. Schnall, James D.
Shelton, Michael L. Smith, Ronald A. Williams, and William A.
Sanger (also an Envision Officer Defendant). (Id.
¶ 35). The following directors joined the new Envision
Board after the AmSurg merger: Burt, Riggs, Schnall, Shelton,
Smith, and Williams.
3. The AmSurg Officer Defendants, each of whom
served as an officer of AmSurg at the time of the Merger and
an officer of Envision post-Merger: Christopher A. Holden,
Claire M. Gulmi, and Kevin D. Eastridge. (Id.
¶¶ 37-40). Christopher Holden has been President
and CEO of Envision since the December 1, 2016, merger with
AmSurg. (Id. ¶ 37). Following the merger,
Holden signed certifications accompanying each of the annual
reports (Form 10-K) and quarterly reports (Form 10-Q) issued
by Envision. Claire M. Gulmi was Executive Vice President and
CFO of Envision from December 1, 2016, to October 2, 2017.
(Id. ¶ 38). During that time, she signed
certifications accompanying each of the annual reports (Form
10-K) and quarterly reports (Form 10-Q) issued by Envision.
(Id.) Kevin D. Eastridge was Senior Vice President,
Finance and Chief Accounting Officer of Envision from
December 1, 2016, to October 2, 2017, and Envision's CFO
thereafter. (Id. ¶ 39).
4. The AmSurg Director Defendants, each of whom
served as a member of AmSurg's Board of Directors at the
time of the Merger: Christopher A. Holden, Claire M. Gulmi,
Kevin D. Eastridge, Thomas G. Cigarran, James A. Deal, John
T. Gawaluck, Steven I. Geringer, Henry D. Herr, Joey A.
Jacobs, Kevin P. Lavender, Cynthia S. Miller, and John W.
Popp, Jr. (Id. ¶ 41).
Complaint also names as defendants four CD&R funds, the
general partner of those funds, and an independent investment
advisor, Clayton, Dubilier & Rice LLC and refers to them
all as CD&R. (Id. ¶ 43). CD&R
includes CD&R LLC, CD&R Associated VIII Ltd.,
CD&R Fund VIII, L.P., CD&R EMS Co-Investor, L.P.,
CD&R Advisor Fund VIII Co-Investor L.P., and CD&R
Friends and Family Fund VIII L.P. According to Plaintiffs,
CD&R “formed Envision in May 2011 … and
owned over 97% of Envision at the time of [Envision's]
IPO” in 2013. (Id.) CD&R had the right to
designate the chairperson of Envision as long as they held
30% of the Envision stock, which was until March 2015, when
CD&R sold all of its remaining Envision stock.
(Id.) CD&R designated Envision Director
Defendants Schnall, Giurico, and Williams. (Id.)
Williams served as Chairman of the Board from May 2011 to
November 2014, and Schnall and Williams remained on the Board
until March and October 2017, respectively. (Id.)
The Alleged Fraudulent Scheme
overarching allegations of the Complaint are that Envision
artificially inflated its earnings through out-of-network
billing, illegal upcoding, and inflated facility spending,
and failed to disclose to investors that these business
practices were substantially responsible for EmCare's
revenue growth. Between 2013 and 2016, EmCare almost doubled
its annual revenue from $2.3 billion to $4.2 billion.
(Compl., Doc. No. 88, ¶ 3). Plaintiffs allege EmCare
intentionally staffed its emergency rooms with out-of-network
physicians, which allowed it to bill health insurers and
patients at “vastly higher rates” and reap the
associated profits. (Id. ¶ 5). Plaintiffs also
allege EmCare engaged in illegal upcoding - billing for
services using a billing code that is more expensive than the
code associated with services the patient actually received
or required. (Id. ¶ 6). In a similar vein,
Plaintiffs allege EmCare increased facility spending for its
hospital partners by increasing hospital admission and
imaging rates without regard to medical necessity.
(Id. ¶ 7). Increased facility spending had the
dual benefit of increasing EmCare's revenue and
increasing revenues for the hospitals with which it
contracted. As a result, Plaintiffs allege, EmCare was able
to parlay this increase in hospital revenue into more
contracts and thereby increase its own revenue. (Id.
¶¶ 4, 7, 64-65).
to Plaintiffs, EmCare's out-of-network billing, upcoding,
and increased facility spending were uncovered by a study
published by the National Bureau of Economic Research (the
“NBER study”) and brought to public attention by
a New York Times article (the “Article”)
published on July 24 (online) and 25 (print),
2017. (Id. ¶¶ 15, 16).
Article reported that the NBER study examined data provided
by one insurance company for the time period 2011 to 2015 and
found that many of the emergency rooms with the highest rate
of out-of-network billing were run by EmCare. (Doc. No.
127-39). The NBER study focused on 16 hospitals that EmCare
entered between 2011 and 2015 and found that in eight of
those hospitals, out-of-network billing rose “quickly
and precipitously.” (Id. at 5). The NBER study
also looked at a larger sample of EmCare operated emergency
departments and found an out-of-network billing rate of 62
percent, which it said was higher than the national average.
(Id.) The Article reported that “[t]he
before-and-after analysis [in the NBER study] was limited to
the small number of hospitals where researchers could find
public records of EmCare's entrance and was based on
claims from only one large insurance company. (Id.).
While the nationwide patterns are consistent with studies
that have looked at other insurance companies, the single
insurer in the study may not be typical in all cases: EmCare
does not participate in some insurer's networks, such as
Blue Cross of Texas.” (Id.). The article
reported that EmCare had reached agreements with additional
insurers since 2015. (Id.).
Plaintiffs' allegation of unlawful upcharging and
increased facility spending, the article gives an example of
one small hospital north of Spokane, Washington, where the
number of patients billed for the most complex level of case
increased from 6 percent to 28 percent when EmCare took over.
(Id. at 1). The Article also quotes a doctor at a
California hospital who claimed to have discovered a pattern
of “inflated bills and out-of-network bills.”
(Id. at 7). The Article also informed readers that
EmCare was named in a 2011 whistle-blower lawsuit (brought by
a former EmCare executive) alleging that EmCare and hospitals
pressured emergency doctors to increase admission and tests
without regard to medical necessity. (Id. at 6).
the Article and the NBER study acknowledge there are various
factors contributing to out-of-network billing, including
that some doctors are not willing to accept the rates offered
by insurance companies. (Id. at 5). Neither the
Article nor the NBER study suggests out-of-network billing is
illegal, only that patients were upset by “surprise
out-of-network billing” and that they complained about
it to hospitals. Although the NBER study itself broadly
analyzed out-of-network billing trends, the reasons
contributing to high levels of out-of-network billing, and
existing and potential policy responses to “surprise
out-of-network billing, ” the New York Times
article, which incorporated data from the NBER study, focused
specifically on EmCare. (See NBER Study, Doc. No.
127-38; New York Times Article, Doc. No. 127-39).
sold its $ 4.4 billion equity stake in Envision in four stock
offerings in February 2014, July 2014, September 2014, and
March 2015. (Compl., Doc. No. 88, ¶ 46). Plaintiffs
allege certain Envision officers and directors sold Envision
stock in 2014 and 2015: William Sanger ($80 million), Randel
Owen ($36 million), Todd Zimmerman ($18 million), Ronald
Williams ($4.3 million). (Id. ¶¶ 30, 31,
33, 35, 147).
and 2015 Envision entered into approximately 30 contracts
that underperformed expectations. In October 2015, Envision
issued drastically reduced earnings and projections and
attributed the earning miss to these underperforming
contracts. (Id. ¶¶ 133-134). The
contracts, which had been expected to produce revenue of $3.5
million instead resulted in a loss of $6.5 million - a
negative $10 million variance. (Id.). William
Sanger, speaking at a healthcare conference, revealed the
contracts at issue had been performing below expectations for
over a year and explained, “we kind of misread what the
cash per visit was … We ran into a set of frankly,
poor execution, poor decision about taking those
contracts.” (Id. ¶ 135). Sanger later
added that they relied heavily on incomplete data provided by
the hospital and made assumptions that were incorrect.
(Id. ¶ 137). At the same conference, Randel
Owen explained that the problems with the contracts were
largely due to unexpected challenges recruiting physicians
and that they had a “much higher cost of
staffing.” (Id. ¶ 139). Following the
October 22, 2015 announcement of reduced earnings and
guidance, Envision's stock price fell 30%. (Id.
15, 2016, Envision and AmSurg announced a merger agreement
between the two companies. (Id. ¶ 13). On
August 5, 2016, Defendants sent shareholders the Joint Proxy
Registration Statement (“Registration
Statement”), which estimated revenue growth of 14
percent (to $1.5 billion) in 2017 and revenue growth of 13
percent (to $1.7 billion) in 2018. (Id. ¶ 254).
Following shareholder approval, the merger was completed on
December 1, 2016. (Id. ¶ 257). The merged
company issued stock to Envision shareholders - 0.334 shares
of new stock for each share of pre-merger Envision stock
(approximately $4.26 billion). (Id.)
Transition from Out-of-Network to In-Network
February 28, 2017, Envision announced it planned to
transition its out-of-network business in-network over the
next 18-24 months. (Id. ¶ 99). At the time,
out-of-network business was valued at approximately $1
billion and constituted somewhere between 17 and 35 percent
of post-merger physician services revenue. (Id.
¶¶ 14, 94, 102). Envision said it believed the
transition would be “revenue neutral” and that
the “stated objective is to move the majority of our
out-of-network revenue to in-network status within the next
12-18 months” (Id. ¶ 99-104). Envision
representatives continued to discuss the transition to
in-network billing at healthcare conferences and on investor
conference calls in the spring and summer of
2017. (Id. ¶¶ 101-108). The
New York Times article acknowledged Envision's
plan to move most of its business in- network: “EmCare
said in early February that it planned to reach agreements
with insurers for most of its doctors.” (Doc. No.
127-39 at 7).
Final Stock Price Declines
the publication of the New York Times article,
Envision's stock value declined 6 percent by close of
market on July 25, 2017. (Compl., Doc. No. 88, ¶ 199).
September 18, 2017, Envision announced the resignation of the
Physician Services Division President. (Id.
¶¶ 172, 200). That day, Envision's stock
declined an additional 10% on substantial volume of 11.2
million shares. (Id. ¶ 201).
October 31, 2017, Envision released its 2017 third-quarter
results and decreased earnings and revenue projections for
2017 and 2018. (Id. ¶ 19). The revised
projections anticipated 2017 reduction in revenue of 50
percent from predictions made at the time of the merger and a
25%-30% reduction in 2018 revenue predictions. (Id.)
Envision said the miss and guidance reduction were
“essentially all attributable to Physicians
Services” specifically to losses caused by Hurricanes
Harvey and Irma (approximately $22 million) and reduction in
volumes for emergency medicine and anesthesia. (See
Transcript: Q3 2017 Envision Healthcare Corp. Earnings Call,
Nov. 1, 2017, Doc. No. 127-37 at 6; Compl. Doc. No. 88,
¶¶ 195, 203). Envision's stock price fell over
41%. (Compl. Doc. No. 88, ¶¶ 19, 202).
Consolidated Complaint alleges eight counts under the 1933
Act and the 1934 Act:
Count I - claims alleging securities fraud in violation of
Section 10(b) of the 1934 Act and Securities and Exchange
Commission (“SEC”) Rule 10b-5 brought by all
Plaintiffs against Envision, the Envision Officer Defendants
(Sanger, Owen, Wilson, and Zimmerman), and the AmSurg Officer
defendants (Holden, Gulmi, and Eastridge);
Count II - claims for control person liability under Section
20(a) of the 1934 Act brought by all plaintiffs against the
Envision Individual Defendants and the AmSurg Defendants
(except Ciggaran, Herr, and Popp) alleging these defendants
controlled the dissemination of the alleged false and
misleading statements at issue in Claim I;
Count III - insider trading in violation of Section 20A of
the 1934 Act brought by the UFCW Pension Fund against
Williams, Sanger, Owen, and Zimmerman, and the CD&R
Counts IV and V - strict liability and negligence claims
under Sections 11 and 12(a)(2) of the 1933 Act brought by all
Plaintiffs against Envision and the Envision Individual
Defendants, alleging these defendants were responsible for
false and misleading statements in the Joint Proxy
Count VII - negligence based claims under §14(a) of the
1934 Act and SEC Rule 14a-9 brought by all Plaintiffs against
Envision, the Envision Individual Defendants, and the AmSurg
Defendants for false and misleading statements in the Joint
Proxy Registration Statement;
Counts VI and VIII - claims for control person liability
under Section 15 of the 1933 Act and Section 20(a) of the
1934 Act. Claims for violation of Section 15 of the 1933 Act
are brought against the Envision Individual Defendants.
Claims under Section 20(a) of the 1934 Act are brought
against CD&R and four associated CD&R companies, the
Envision Individual Defendants, and the AmSurg Defendants.
Standard of Review
deciding a motion to dismiss under Rule 12(b)(6), a court
must take all the factual allegations in the complaint as
true. Ashcroft v. Iqbal, 556 U.S. 662 (2009). To
survive a motion to dismiss, a complaint must contain
sufficient factual allegations, accepted as true, to state a
claim for relief that is plausible on its face. Id.
A claim has facial plausibility when the plaintiff pleads
facts that allow the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged.
Id. In reviewing a motion to dismiss, the Court
construes the complaint in the light most favorable to the
plaintiff, accepts its allegations as true, and draws all
reasonable inferences in favor of the plaintiff. Directv,
Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007).
considering a Rule 12(b)(6) motion, the Court may consider
the complaint and any exhibits attached thereto, public
records, items appearing in the record of the case, and
exhibits attached to defendant's motion to dismiss
provided they are referred to in the Complaint and are
central to the claims. Bassett v. National Collegiate
Athletic Assn., 528 F.3d 426, 430 (6th Cir. 2008). In
support of their motion to dismiss, Envision and the
Individual Defendants have included numerous documents
referenced in the Complaint. (See exhibits to Doc.
No. 127). These include copies of numerous SEC filings,
conference and teleconference transcripts, and the New
York Times article and NBER study. The CD&R
Defendants included a number of public filings in support of
their motion to dismiss. (See exhibits to Doc. No.
124). For purposes of the pending motions to dismiss, the
Court will consider these documents.
Securities and Exchange Act Claims: Section 10(b) and Rule
bring claims for securities fraud under Section 10(b) of the
Securities and Exchange Act and Rule 10b-5 against Envision
and seven individual defendants who were officers of Envision
and AmSurg: William A. Sanger, Randel G. Owen, Craig A.
Wilson, Todd G. Zimmerman, Christopher A. Holden, Claire M.
Gulmi, and Kevin D. Eastridge.
10(b) and Rule 10b-5 prohibit fraudulent, material
misstatements in connection with the sale or purchase of
securities. Indiana St. Dist. Council of Laborers and Hod
Carriers Pension and Welfare Fund, 583 F.3d
935, 942 (6th Cir. 2009) (citing Zaluski v. United Am.
Healthcare Corp., 527 F.3d 564, 570 (6th Cir. 2008)).
Section 10(b) of the Exchange Act makes it unlawful to
“use or employ, in connection with the purchase or sale
of any security … any manipulative or deceptive device
or contrivance in contravention of such rules and regulations
as the Commission may prescribe as necessary or appropriate
in the public interest for the protection of
investors.” 15 U.S.C. § 78j(b). Rule 10b-5,
promulgated by the SEC to implement Section 10(b), makes it
unlawful for any person, directly or indirectly, “[t]o
make any untrue statement of a material fact or to omit to
state a material fact necessary in to make the statement
made, in light of the circumstances under which they were
made, not misleading.” 17 C.F.R. § 240.10b-5(b).
To state a claim for violation of § 10(b) and Rule 10b-5
a plaintiff must allege: (1) a material misrepresentation or
omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase or
sale of a security; (4) reliance upon the misrepresentation
or omission; (5) economic loss; and (6) loss causation.
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta,
552 U.S. 148, 157 (2008).
the Section 10(b) claims sound in fraud, the pleading
strictures of Federal Rule of Civil Procedure 9(b) apply.
Frank v. Dana, 547 F.3d 564, 569-70 (6th Cir. 2008).
At a minimum, the complaint must: (1) specify the statements
that the plaintiff contends were fraudulent, (2) identify the
speaker, (3) state where and when the statements were made,
and (4) explain why the statements were fraudulent.
Id. at 570. The PSLRA imposes additional
requirements. Id. The complaint must “specify
each statement alleged to have been misleading” along
with “the reason or reasons why the statement is
misleading.” 15 U.S.C. § 78u-4(b)(1). In addition,
plaintiffs must “with respect to each act or
omission alleged to violate this chapter, state with
particularity facts giving rise to a strong
inference that the defendant acted with the required
state of mind.” 15 U.S.C. § 78u-4(b)(2) (emphasis
added); see Frank, 547 F.3d at 570.
purposes of Rule 10b-5, the ‘maker' of a statement
is a person or entity with ultimate authority over the
statement, including its content and whether and how to
communicate it.” Janus Capital Group, Inc. v. First
Derivative Traders, 564 U.S. 135, 143 (2011). The
Supreme Court reasoned that “[o]ne ‘makes' a
statement by stating it, ” comparing a corporate
statement to a speech drafted by a speechwriter - even when
drafted by someone else, the content of the speech is
entirely within the control of the person who delivers it.
Id. After Janus, courts have consistently
held that corporate officers who sign documents on behalf of
the corporation “make” the statements in those
documents. See Zwick Partners, LP v. Quorum Health
Corp., No. 3:16-cv-2475, 2018 WL 2933406, at * 3 (M.D.
Tenn. Apr. 19, 2018).
allege Defendants are liable for false or misleading
statements that fall generally into three categories: (1)
statements regarding “critical drivers” of
revenue growth (including quality of care) that failed to
disclose EmCare's high rate of out-of-network billing;
(2) statements about the transition from out-of-network to
in-network status; and (3) statements about the due diligence
conducted in connection with certain 2014-15 contracts and
the performance of those contracts.
Omitting Out-of-Network Billing and Upcoding as Basis of
Factual Support for the Allegations
the class period, Envision made numerous statements about
what it considered to be the basis for the company's
revenue growth and general success. To summarize, Envision
stated that it believed its revenue growth was due to factors
such as integrated service offerings, meeting consumer
service expectations, and providing quality care. Plaintiffs
argue these statements, even those couched as statements of
opinion, were misleading because Defendants knew that
Envision's revenue was due in large part to EmCare's
reliance on out-of-network billing and upcoding, as well as a
strategy of increasing facility spending by increasing
admission rates and procedures without regard to medical
necessity. Defendants argue that the facts alleged by
Plaintiffs do not show out-of-network billing was a
“prime driver” of revenue or that Envision
“inflated” revenue through illegal upcoding and
improperly increased facility spending.
Court must first assess whether Plaintiffs allege facts
sufficient to create a plausible inference that Envision
actually engaged in these practices or that revenue growth
was reliant on them. Defendants cannot be held responsible
for failing to disclose that which is not plausibly alleged.
See Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009)
(“Where the well-pleaded facts do not permit the court
to infer more than the mere possibility of misconduct, the
complaint has alleged - but it has not ‘show[n]' -
‘that the pleader is entitled to relief.'”
(alterations in original) (citing Fed.R.Civ.P. 8(a)(2))).
regard to out-of-network billing, Defendants claim the
practice is neither illegal nor illicit and argue that the
NBER study uses too limited a data set to substantiate
allegations of a company-wide business practice of
out-of-network billing. Plaintiffs respond with evidence of
high levels of out-of-network billing, and corresponding
revenue, from the NBER study and from Envision's own
disclosures. Plaintiffs contend that because EmCare generates
approximately 60 percent of Envision's revenue, its
business practices and sources of revenue necessarily have an
effect on overall revenue. (Compl., Doc. No. 88, ¶ 2).
Plaintiffs cite evidence that out-of-network billing at
hospitals managed by EmCare was significantly higher than
other hospitals (62% on average) and that out-of-network
billing at hospitals managed by EmCare increased when EmCare
took over. During the transition to in-network billing,
Envision disclosed that out-of-network billing represented
upwards of 35 percent and $1 billion of EmCare's revenue.
(Compl., Doc. No. 88, ¶¶ 102, 110; Doc. No. 127-33
at 4). The Court finds Plaintiffs have sufficiently alleged
facts that raise a plausible inference that out-of-network
billing was a significant source of revenue.
other hand, the allegations of upcoding improper hospital
admissions and procedures are based entirely on one statistic
from the NBER study, which showed the likelihood of a patient
being coded as “most severe” increased by 42%,
and the likelihood of a patient being admitted to the
hospital increased by 23% when EmCare took over management of
the emergency department. The NBER study relied on data from
one insurer and covered 16 of EmCare's 900
hospitals. (Compl., ¶¶ 63, 67; Article,
Doc. No. 127-39). Neither the NBER study nor the Article made
accusations of upcoding. In fact, the Article said Envision
explained that admissions increased because EmCare
“allows hospitals to treat sicker patients.”
(Article, Doc. No. 127-39).
question then is whether evidence cited by Plaintiffs
indicating that admissions rates and coded severity (as
reported by one insurer) increased at eight emergency
departments when EmCare took over, supports a reasonable
belief that the company was engaging in systemic, illegal
upcoding in an effort to improperly boost revenue. The Court
finds the evidence insufficient to plausibly raise this
inference. The sample size given is too small to suggest a
company-wide policy or practice of unlawful upcoding. Without
more, Plaintiffs have not raised a plausible inference of
upcoding or improperly increased admissions rates. The
statements cannot be considered misleading for failure to
discuss that which is not plausibly alleged. See In re
Career Educ. Corp. Sec. Litig., No. 03C8884, 2006 WL
999988, at * 8 (N.D. Ill., Mar. 28, 2006) (granting motion to
dismiss when plaintiffs' allegations of conduct in six of
defendants' 78 campuses did not “raise an inference
of fraud on a nation-wide level such that  statements and
omissions” regarding company-wide statistics were false
or misleading); In re Plains All Am. Pipeline, L.P. Sec.
Litig., 245 F.Supp.3d 870, 897 (S.D. Tex. 2017)
(allegations of specific problems with pipes comprising a
small fraction of the overall network do not give rise to an
inference that statements about pipeline integrity management
are false and misleading); Metzler Inv. GmBH v.
Corinthian Colleges, Inc., 540 F.3d 1049, 1063 (9th Cir.
2008) (disclosure of an investigation at one of the schools
88 colleges raised only the “potential” of
widespread fraudulent conduct which was insufficient to state
a claim under Section 10(b)).
these reasons, the Court will consider whether the alleged
representations are misleading for failure to disclose
Envision's alleged out-of-network billing
can be established by proof of a “substantial
likelihood that the disclosure of the omitted fact would have
been viewed by the reasonable investor as having
significantly altered the ‘total mix' of
information made available.” Zaluski, 527 F.3d
at 571 (quoting Basic Inc. v. Levinson, 485 U.S.
224, 240 (1988)). “Section 10(b) and Rule 10b-5(b) do
not create an affirmative duty to disclose any and all
material information. Disclosure is required under these
provisions only when necessary ‘to make …
statements made, in the light of the circumstances under
which they were made, not misleading.'” Matrixx
Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011)
(quoting 17 C.F.R. § 240.10b-5(b)). In order to be
actionable, a misrepresentation or omission must pertain to
material information that the defendant has a duty to
disclose, and generally this duty does not apply to
forecasts, or soft information. Zaluski, 527 F.3d at
571. However, “once a company chooses to speak, it must
‘provide complete and non-misleading information with
respect to the subjects on which [it] undertakes to
speak.'” Id. at 572.
identified as statements of opinion are actionable if it was
subjectively false (i.e. not honestly held) or omits material
facts about the basis or reliability of the opinion.
Omnicare, Inc. v. Laborers Dist. Council Const. Indus.
Pension Fund, 135 S.Ct. 1318, 1329 (2015). To state a
claim for an omission resulting in a misleading opinion
statement, “the investor must identify particular (and
material) facts going to the basis for the issuer's
opinion … whose omission makes the opinion statement
at issue misleading to a reasonable person reading the
statement fairly and in context.” Id. at 1332.
addition, liability does not attach to mere corporate puffery
or statements of corporate optimism. In re Ford Motor Co.
Sec. Litig., 381 F.3d 563, 570 (6th Cir. 2004). Courts
have consistently found immaterial “a certain kind of
rosy affirmation commonly heard from corporate managers and
numbingly familiar to the marketplace - loosely optimistic
statements that are so vague, so lacking in specificity, or
so clearly constituting the opinions of the speaker, that no
reasonable investor could find them important to the total
mix of information available.” Id. at
570-71. Vague predictions of positive future results
cannot engender reasonable reliance by investors. Indiana
State Dist. Council, 583 F.3d at 944
(“continuation of outstanding earnings growth” is
a vague forward-looking statement entitled to safe-harbor).
Court finds that a reasonable investor could view a
significant level of out-of-network billing as material
information. See Zaluski, 527 F.3d at 571 (material
information is that which significantly alters the
“total mix” of information made available).
Materiality alone, however, does not impose an affirmative
duty to disclose. Rather, a company must disclose material
information when necessary “to make statements made, in
the light of the circumstances under which they were made,
not misleading.” Matrixx Initiatives, 563 U.S.
Complaint includes a long list of alleged misleading
statements. These are gathered from what appears to be every
quarterly and annual filing during the class period and
numerous statements made by Envision officers during
teleconferences with shareholders and at various healthcare
conventions. (See Compl., Doc. No. 88, ¶¶
71-91; 112-121). Defendants allege these statements are not
actionable because they are accurate financial statements,
statements of opinion, forward-looking statements, or
Court now turns to the statements themselves.
Accurate Financial Statements
have included each and every statement of revenue and
EBITDA filed with the SEC during the class
period and have not alleged these statements of revenue were
inaccurate. Instead they claim, “[I]t is the
combination of the reported financial results and metrics
together with defendants' explanations of the bases for
those purportedly extraordinary results that gives rise to
plaintiffs' claims.” (Pl. Br., Doc. No. 131 at 31).
Plaintiffs it seems do not contest the general rule that
“a violation of federal securities law cannot be
premised upon a company's disclosure of accurate
historical data.” In re Almost Family, Inc.
Securities Litig., No. 3:10-cv-00520, 2012 WL 443461, at
*3 (W.D. Ky. Feb. 10, 2012) (quoting In re Sofamor Danek
Group, Inc., 123 F.3d 394, 400 (6th Cir. 1997)).
Instead, they argue that the accurate financial statements
provide context for the other alleged misstatements.
Envision's reports of historical income and EBITDA growth
are not themselves actionable statements. However, the Court
will consider Envision's historic revenue growth as
context for the other allegedly misleading statements.
Statements Regarding “Drivers of Revenue and
argue Envision's statements regarding the drivers of
revenue and growth were materially misleading because they
attributed EmCare's growth to new contracts obtained as a
result of “differentiated service offerings and ability
to deliver efficient, high-quality care, ” and failed
to disclose that out-of-network billing was a significant
factor contributing to the company's revenue and growth.
Plaintiffs cite statements published in quarterly and annual
filings to the SEC and in the preliminary prospectus filed in
conjunction with the 2014 secondary stock offering and
statements made at healthcare conferences and during investor
phone calls by individuals on behalf of Envision. The Court
will address them in turn. a. Statements in Envision
Filings Pursuant to the Supreme Court's decision in
Janus, only the “maker” of the
statements can be liable under 10(b) and Rule 10b-5.
Janus Capital, 564 U.S. at 143. In addition to the
corporation itself, corporate officers who sign documents on
behalf of the corporation “make” the statements
in those documents. See Zwick Partners, 2018 WL
2933406, at *3. Plaintiffs allege the SEC quarterly and
annual filings made through December 1, 2016, the date of the
AmSurg merger, were signed by William Sanger and Randel Owen;
and that the 2016 Annual Report, filed in March 2017, was
signed by Christopher Holden and Claire Gulmi. Accordingly,
there can be no liability for alleged misstatements in these
filings against the other individual defendants.
statements are reviewed in context to determine whether a
reasonable investor would have found them misleading in light
of the circumstances in which they were made. See 17
C.F.R. § 240.10b-5(b) (providing liability for failure
to “state a material fact necessary in order to make
the statement made, in light of the circumstances in which
they were made, not misleading”); Omnicare,
135 S.Ct. at 1327 (“[W]hether a statement is
‘misleading' depends on the perspective of a
reasonable investor.”). In Omnicare, the
Supreme Court emphasized the importance of context
specifically noting that a reasonable investor expects
statements in a registration statement to have been
“carefully wordsmithed to comply with the law.”
Omnicare, 135 S.Ct. at 1328.
following are a representative sample of the allegedly
misleading statements regarding drivers of growth that were
published in Envision's quarterly and annual filings in
2013, 2014, and 2015:
• Growth is “primarily driven by revenue increases
from net new contract wins and same store revenue
growth.” • “We believe that our significant
new contract revenue growth has been driven by our
differentiated service offerings and ability to deliver
efficient, high-quality care.”
• “[N]ew contract growth has been accelerating
since 2011 as a result of our integrated service offerings
and the success of each of EmCare and AMR in cross- selling
services to their respective customers.”
• “We believe that EmCare is well-positioned to
continue to generate significant organic growth due to its
integrated service offerings, differentiated, data-driven
processes to recruit and retain physicians, scalable
technology and sophisticated risk management programs.”
• “We believe these factors have driven
EmCare's strong track record in obtaining new contracts
and retaining existing customers.”
• “We have developed strong brand recognition and
competitive advantages in clinician recruitment as a result
of our market position, clinical best practices and ...