On April 10, 2018, U.S. District Judge Allison D. Burroughs preliminarily approved a settlement requiring American Renal Associates Holdings, Inc. (ARAH) to expand its compliance department in response to a shareholder derivative class action against ARAH’s officers and directors alleging that ARAH induced patients to abandon their Medicare and Medicaid coverage in exchange for private plans to inflate ARAH’s profits, and alleged that the officers and directors refused to investigate such fraudulent conduct.
In October, ARAH shareholders filed a complaint in Massachusetts district court against ARAH officers and directors. The shareholders alleged that ARAH persuaded its patients to terminate their coverage under the Medicare and Medicaid programs and instead enroll in private insurance plans, such as those offered by UnitedHealth Group. By switching from the government-funded health plans to private plans, the shareholders argued, ARAH could receive reimbursement rates up to 20 times higher and inflate their revenue and profits. The plaintiffs alleged that ARAH convinced patients to switch carriers by offering to waive patients’ copays, coinsurance, and deductibles. The lead shareholder plaintiff also alleged that he demanded ARAH’s directors to investigate the alleged fraudulent conduct, but the directors refused to do so after performing an internal investigation with the assistance of outside counsel and thus breached their fiduciary duties.
The court preliminarily approved a settlement agreement requiring ARAH to implement several changes related to its compliance department and accounts receivable department. First, ARAH must hire a Deputy Compliance Officer with at least 17 years of experience. Second, ARAH must restructure its accounts receivable to separate the government-fund plan collections division from the commercial insurance collections division. Additionally, the two divisions must be supervised by independent senior directors who report directly to the CFO. Third, ARAH must create a senior management position to oversee the Patient Insurance Education program and train the program employees. ARAH indicated that it has already implemented these changes. The agreement also indicates that ARAH will be required to amend its charter to allow the CFO to call compliance committee meetings and allow the compliance committee to hire independent counsel when necessary. Judge Burroughs has yet to approve a separate deal that would have awarded plaintiff’s counsel $350,000 in attorneys’ fees. The judge scheduled a settlement hearing for May 31.
Separately, UnitedHealth Group sued ARAH and its subsidiary (American Renal Associates, LLC) in 2016 in the United States District Court of the Southern District of Florida for the alleged fraudulent scheme claiming that ARAH “converted [patients] to pawns in a scheme to maximize ARAH profits.” ARAH was dismissed from the suit, but the lawsuit is ongoing against the subsidiary. Also in 2016, two securities class actions were filed alleging that ARAH engaged in the aforementioned fraudulent scheme which was in violation of federal and state laws and thus ARAH was in violation of securities laws by not disclosing the issue in its IPO and related filings with the SEC. One class action was voluntarily dismissed by the plaintiff, while ARAH recently settled the remaining class action for $4 million.
